By David Moin
with contributions from Evan Clark
 on March 9, 2021
Michelle Gass

There’s potential disruption by activist investors, but Kohl’s Corp. chief executive officer Michelle Gass is against their main proposals and believes the real “game changers” for the retailer will be Sephora, the FLX private brand, activewear, casual and outdoor apparel.

The company is also undergoing a “significant transformation in marketing,” reducing the spend overall, reducing print, increasing digital and email, and simplifying the loyalty program.

And as far as Gass is concerned, “The opportunity for stores is being underestimated,” she said during her talk at the BofA consumer and retail technology conference Tuesday.

As the pandemic dissipates, “People are going to feel like, ‘I’ve been in my house for a year, I want to get out. I want to shop, and I want to experience things. I want discovery.'” Being “conveniently” located off-mall, and with a tighter, more focused brand lineup enables Kohl’s to capture greater market share, Gass said.

According to Jill Timm, chief financial officer, during the pandemic, 95 percent of Kohl’s stores were cash flow positive and the vast majority generated over $1 million.

Activist investors Macellum Advisors, Ancora Holdings Inc., Legion Partners Asset Management and 4010 Capital, which together control 9.5 percent of the company, are pushing for real estate sale-leasebacks and an overhaul of the board.

“We’re looking forward to continuing to have dialogue with them and find common ground,” Gass said. “The recent news about the nine director slate — the takeover of the board — is not something we support. Our board has been an agent of positive change,” driving strategies and investments. “That said, we continue to look forward to engaging in dialogue to drive shareholder value…We’re aligned with many of the ideas that they put forth.

“The sale-leaseback idea, we’re not in favor of. We have other alternatives that are more accretive to the value of the company. We’re not opposed to sale leaseback. You saw us do that last year when we needed access to capital,” to navigate the pandemic. “But with interest rates where they are today, it just really doesn’t make sense to implement a sale leaseback. And as you know, we generate a lot of cash so we have a strong balance sheet.”

Kohl’s did state Tuesday that “the activist investors’ campaign for board control threatens continued progress and momentum” and that the retailer has “outperformed during the pandemic and third-quarter and fourth-quarter results demonstrate improved performance.”

Gass said Kohl’s has been under-represented in beauty for a long time, and that 70 percent of the store’s  customers are female and want a better beauty experience at the retailer.

She said Kohl’s will help Sephora reach new customers given that 95 percent of Kohl’s store fleet is off-mall, where Sephora has limited presence. For Kohl’s, it’s about building a big beauty business and attracting younger customers. “And we fully expect that we will see a halo effect across the store,” said Gass.

Sephora launches on kohls.com in August, where it will be the entire beauty experience on the website, and in 200 stores next fall. Kohl’s intends to “rapidly” roll out Sephora to 850 stores over the next few years. “We are going to be very loud and open about this,” said Gass.

“I had the opportunity to walk [through] a mock-up last week in one of our local labs here. It is going to be a real Sephora store. Make no mistake. It’s 2,500 square feet. A lot of thought is being put into the brands, the merchandising, the balance of categories from color to skin to fragrance, etc…We have secured all the brands we want. More than 100 brands debut when the curtains go up. It will be very consistent with what you find in a stand-alone Sephora shop — a very immersive, high-touch experience with trained beauty associates.”

Kohl’s active business has more than doubled in the last five years, currently represents 20 percent of the total volume, and Kohl’s wants it at 30 percent. Gass said Kohl’s has been testing for a couple of years an expanded assortment in over 150 stores, and is leaning on its top three selling brands — Nike, Adidas and Under Armour — with expanded assortments in big and plus sizes, girls and kids. “At a time where they have actually pulled back and along their wholesale distribution, they’re leaning forward with us,” observed Gass.

The CEO called out FLX, the private athleisure brand already selling online and coming to Kohl’s stores this week.

FLX offers apparel for women and men including joggers, chino pants, ankle pants, high-waisted leggings and shorts; packable jackets in crop and bomber styles; mock neck dresses and jumpsuits, and performance blazers, among other styles.

“It’s really in that kind of athleisure, you can even wear it to work. It’s very comfortable. The products are made with sustainable materials. And so it’s comfort and function at the same time, and that’s white space for us,” said Gass.

She said FLX, in the making for a year, complements Kohl’s outdoor apparel offering with brands like Columbia, Lands’ End, which was recently introduced, and Eddie Bauer, which is launching soon at Kohl’s.

Gass said that the private Sonoma brand is going to be “bigger and more relevant” and Nine West at Kohl’s has been “casualized in the spirit of our vision.” Also, Calvin Klein intimates will launch at Kohl’s later this year. On the other hand, certain fashion ares, such as dresses and fine jewelry, are being downsized.

A proxy statement filed with the Securities and Exchange Commission indicates Gass’ compensation grew to $12.9 million last year, up from $9 million in 2019. Her salary this past year included a $939,422 bonus and stock awards valued at $8.9 million, although the value of share-based compensation ebbs and flows with the market.

Timm’s total compensation slipped to $3.2 million (including a $330,00 bonus) last year from $4.4 million in 2019. Chief merchandising officer Doug Howe’s pay rose to $4.7 million (with a $562,500 bonus) from $3.1 million.

The filing noted that the board’s compensation committee met to set incentive opportunities in March of last year when all of the company’ stores were closed. So the committee set up “a two-part 2020 annual incentive plan with 50 percent based on Kohl’s comparable sales relative to the comparable sales of the performance peer group and 50 percent based on an assessment of management’s ability to lead through the crisis and manage financial liquidity and profitability, as determined by the committee in its discretion,” the filing said.

Kohl’s has yet to set a date for its annual meeting when a showdown with the activist investors will occur.

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