Kohl’s Corp. executives will lay out its past successes and strategies for the future at its annual investor day on Monday, though it’s likely not all shareholders will like what they hear.
Kohl’s for months has been under fire by certain activist investors, in particular Macellum Advisors, a long-term holder of nearly 5 percent of the outstanding common shares of Kohl’s. Macellum is seeking to control the board with its own slate of 10 proposed directors that is subject to shareholder approval. Engine Capital has also been putting pressure on Kohl’s.
Last Tuesday, the Menomonee Falls, Wisc.-based Kohl’s reported that its fourth-quarter net income — impacted by inventory shortages, slowed traffic due to Omicron and some tax implications — declined 13 percent but noted that its operating income, which eliminates the impact of the tax difference, was up 42 percent, and that for all of 2021, the company swung into profitability.
Kohl’s chief executive officer Michelle Gass said the company has “fundamentally restructured to be more profitable. That will be sustained. It’s really important that we delivered record earnings per share of $7.33 in 2021, which far surpassed our previous high of $5.60 in 2018. Our business is healthy.”
Jonathan Duskin, Macellum’s managing partner, doesn’t think so.
On Friday, just three days before Kohl’s investor day, Duskin stated, “We see the fourth-quarter fiscal year 2021 results through a different lens. We remain skeptical of Kohl’s’ future with the current board of directors and management configuration. The central issues in our mind remain an inability to grow sales versus 2019 levels, gross margin gains that are looking increasingly one-time in nature due to dramatic deceleration and management’s plan to increase inventories, an inability to contain costs and poor capital allocation and balance sheet optimization.”
He’s hoping that the Kohl’s team addresses his concerns at the investor day, which will be virtual and include a Q&A component.
Duskin pointed out that Kohl’s 2021 sales performance, down 2.2 percent from 2019 levels, lagged Macy’s, Dillard’s and Nordstrom, and speculated that Kohl’s’ gross margin gains were largely the result of lower markdowns caused by the pandemic’s inventory disruptions rather than systematic changes in the merchandising process
While expressing support for the rollout of Sephora shops inside Kohl’s, as traffic builders, Duskin wrote, “We remain concerned about the company spending excessively and the ultimate accretion to the bottom line. It would appear from the increase in capital expenditures necessary to build out the Sephora shops that each shop is costing close to $1 million, $200 million of additional capital expenditures above their historic maintenance capital expenditure levels for 200 additional doors versus 2021.
Duskin also cited a “slow inventory turn rate” as being “the root cause of high markdowns, cluttered stores and lack of fresh offerings” and criticized Kohl’s for not evaluating offers to buy the company and not monetizing real estate. He said the company is letting $8 billion in real estate “sit idle.”
“We hope shareholders join us in calling on the company to hit pause on increasing expenses and capital expenditures while it should be objectively evaluating credible sale offers from well-capitalized buyers.”
The Kohl’s board has already rejected at least two bids to take over the company, though more could arise, and has much support from the vendor community. Over the past couple of years, Kohl’s, led by Gass, has sharpened its assortment to become more of a destination for active, casual, outerwear and special sizes offerings, adding such brands as Calvin Klein, Lands’ End, Cole Haan, Eddie Bauer, while building up offerings of Nike, Adidas, Champion, Under Armour, as well as Sephora.
In addition, Kohl’s is spending $3 billion on a share repurchasing program, and expects sales to be up 2 to 3 percent this year. “We are feeling very confident there,” Gass said on Tuesday. “The biggest driver there will be Sephora and that’s been proved based on having Sephora open in 200 doors today.” Kohl’s expects to open another 400 Sephora shops this year, and 250 more in 2023.