Last week’s disclosure that Hudson’s Bay Co. is bidding for Kohl’s Corp. came as a surprise, yet there appears to be plenty of rationale for a deal.
Richard Baker, the governor, chairman and chief executive officer of the Toronto-based HBC, is a risk taker, a shrewd dealmaker, and he knows real estate well and how to shine a light on the hidden values in a company. He’s been in the business of buying, operating and selling department store retailers and retail real estate.
“Richard Baker needs another revenue stream for Hudson’s Bay,” said one retail expert who requested anonymity. “There is only so much growth potential left in Saks and in Hudson’s Bay,” which operates strictly in Canada, while Saks operates in the U.S. and Canada.
“A deal for Kohl’s would give Baker something to play with other than Saks and Hudson’s Bay,” said another retail source. “You can bet Baker is looking at the Kohl’s real estate. He could sell off some of it. Amazon and others are looking for additional properties they could use for warehouses.” There could also be sale-leasebacks of store properties.
Some reports value Kohl’s real estate at $8 billion, higher than the company’s current market cap of around $7.8 billion. Bidding action on Kohl’s has pushed the stock price up.
Hudson’s Bay could bring the Menomonee Falls, Wisc.-based Kohl’s to Canada, though that market is roughly one-tenth the size of the U.S. and it’s limited, and Kohl’s, with its moderate prices, could cannibalize sales at The Bay department stores that are throughout Canada. Expanding U.S. retail into foreign countries is never easy, and most often unsuccessful. Target’s foray into Canada failed, and Nordstrom and Saks Fifth Avenue locations in Canada have reportedly not all lived up to expectations.
There could be back-of-the-house synergies obtained by integrating Kohl’s into HBC, and if a deal is consummated, HBC could consider splitting Kohl’s dot-com and brick-and-mortar stores businesses into separate companies. Kohl’s management has rejected that idea but has been under pressure from activist shareholders to consider the possibility and other strategic alternatives, including selling the company. Macellum Advisors, which has a 5 percent stake in Kohl’s, has been most critical of the retailer’s financial performance and management.
Baker, along with Marc Metrick, CEO of Saks.com, engineered the split up of the physical stores and dot-com businesses of HBC’s Saks, Saks Off 5th and Hudson’s Bay divisions. The moves enabled HBC to attract investors and improve assortments technology, and web experiences, and recruit some talent. HBC hopes to ultimately take Saks.com public, mirroring the IPO of Mytheresa.com a year ago.
There’s another reason why HBC would pursue Kohl’s: Baker’s ambition to grow HBC by obtaining the Neiman Marcus Group and combining it with Saks Fifth Avenue to create a luxury empire in the U.S., has not been realized, despite years of on-and-off talks between the companies. Last year’s bankruptcy of the Neiman Marcus Group and its restructuring out of Chapter 11 proceedings via a debt-for-equity deal gave NMG new owners, making the possibility of an HBC merger with NMG more remote.
HBC has had mixed success with retail operations. It was unable to turn around Lord & Taylor and Fortunoff’s, which were both shut down, though they were struggling prior to HBC’s ownership, and HBC pulled out of Europe after buying and selling Kaufhof in Germany. A handful of Hudson’s Bay and Saks Off 5th stores established in Europe were short-lived and closed after HBC pulled out of Germany.
Still, HBC made a $1 billion cash profit by buying Kaufhof for $2.5 billion and selling it for $3.5 billion. That money was used to take HBC private. HBC also profited from the sale of Lord & Taylor real estate, and sources close to HBC told WWD that there has been growth at Hudson’s Bay and at Saks Fifth Avenue, largely through expanding dot-com operations and better merchandising. Saks Off 5th is also growing its assortment and elevating its marketing.
Sources told WWD that the Kohl’s auction process has entered a second phase, and a few months will pass before a resolution. A deal is likely in the high $60 or $70 per share range. Bids received so far are said to be in the mid $60 range. Kohl’s stock is currently trading at just over $60.
HBC and other reported bidders — Sycamore Partners, a private equity firm that has Belk, Loft, Express, Hot Topic, Ann Taylor and other retailers in its portfolio; Leonard Green & Partners, a private equity firm that has been active in the retail sector, and Starboard Value’s Acacia Research Corp. — believe Kohl’s has potential for greater profitability and sales.
Kohl’s fourth-quarter net income declined 13 percent to $299 million and was impacted by inventory shortages, slowed traffic due to Omicron and some tax implication. Operating income, which eliminates the impact of the tax difference, was up 42 percent to $450 million in the last quarter.
For the year, the net reached $938 million, compared to a loss of $163 million in 2020, which was more heavily impacted by the pandemic. Revenues reached $19.43 billion, below the $19.97 billion generated in 2019, but ahead of the $15.96 billion generated in 2020.
Kohl’s generated about $6 billion in volume online, or just under 30 percent of its total volume in 2021, and has stated intentions to grow online revenue to $8 billion annually.
Under the leadership of CEO Michelle Gass, Kohl’s has implemented several growth strategies that haven’t fully kicked in yet and could bear fruit in the future, namely the rollout of Sephora shops inside Kohl’s, the addition of several high-profile brands such as Calvin Klein and Tommy Hilfiger, the plans to open 100 new stores over the next four years, on top of the 1,100 or so already operating, and digital growth. Kohl’s has about 200 Sephora shops installed in its stores, and plans to have Sephora in 850 stores by 2023.
“Kohl’s is going to blossom if you leave Michelle Gass alone,” said veteran retail analyst Walter Loeb. “They are going to get $2 billion out of Sephora. There is a clear direction to be an active and casual destination, and they are opening 100 stores. I think Kohl’s will try to have more locations in center cities, like Target has. There is so much space available in center cities so why not put a Kohl’s in there? Smaller stores in more urban areas would be more productive.”
Kohl’s stores aren’t the most exciting retail theater. Yet they are easy to shop with simple, one-level floor plans. They’re also accessible, having off-mall locations primarily in strip centers so you can drive right up to them. Kohl’s is also associated with offering value and discounts, and with its strong loyalty program and popular Kohl’s Cash rewards.
Speculation that HBC would partner with Sycamore on a deal for Kohl’s is believed to be false. Sources said HBC placed its own bid, as did Sycamore. Kohl’s has acknowledged there have been bids submitted but has not identified the bidders.
“I like Kohl’s as a company. I happen to think there is a lot of opportunity at Kohl’s,” said one former retail captain. “A lot of Michelle’s ideas and strategies are quite good. Sephora will be a home run. And there could be opportunities in the real estate market involving some financial re-engineering,” meaning monetizing the real estate to boost profitability while unloading some less profitable locations. “There is also still a lot of opportunity in product. I think it’s still too basic versus fashion. For HBC, this could be a great acquisition.”
“So far, I believe the bids are relatively low,” Loeb said. “It’s a question of whether someone wants to bid aggressively and spend more money. If a deal happens, it maybe could work but only if they keep Michelle and all the merchants in place, though typically the new owners try to put their people in.”
On Monday, Kohl’s characterized the bids received as “non-binding and without committed financing,” as reported. The retailer said it is engaged in a “robust” review of certain bids to acquire the company and is giving the bidders an opportunity to refine their offers.
Kohl’s said in a statement that Goldman Sachs has been authorized to “coordinate with select bidders who have submitted indications of interest to assist with further due diligence so that they have the opportunity to refine and improve their proposals and include committed financing and binding documentation.”
On Tuesday, Macellum issued a letter to shareholders urging them to vote for the 10 individuals Macellum has nominated for the Kohl’s board, which would wipe out the existing board and create a new one. Kohl’s, meanwhile, is urging shareholders to stick with the existing board. Shareholders will vote on the board at the Kohl’s annual meeting scheduled for May 11.
Macellum also expressed doubts about the company’s growth strategies, “We believe the board is allowing management to embark on a high-risk strategy that leaves little margin for error,” Macellum said in its letter. “While we agree having Sephora will help drive traffic to the stores, our concerns are centered around the cost required to do so and the ultimate earnings accretion of this initiative.”
Macellum wrote, “The board’s unwillingness to meaningfully monetize any of the company’s approximately $8 billion in real estate is clear evidence, in our mind, that the current directors are only concerned with maintaining the status quo, rather than creating meaningful shareholder value.”