Kohl’s Corp. has some strong words for the activist shareholders stepping up pressure on the retailer for dramatic change.
On Tuesday, Macellum Advisors sent a letter to shareholders criticizing Kohl’s for losing market share, for having insufficient expertise on its board, and describing 2021 as “a lost year” for the retailer.
But Kohl’s responded quickly, stating that its board has the right mix of expertise and fresh perspectives; that its strategy to be the leading omnichannel destination for the active and casual lifestyle continues to gain traction, and that Macellum’s letter is “filled with unfounded speculation.”
Macellum Advisors, which owns nearly 5 percent of Kohl’s common shares, in its letter called for Kohl’s to add more retail expertise to its board, explore strategic alternatives including selling to a financial sponsor, or cashing in on much of the $7 billion to $8 billion in its real estate assets with sale-leasebacks.
In characterizing 2021 as a lost year for Kohl’s, Macellum noted the retailer’s share price dropped more than 20 percent since Macellum reached a settlement with Kohl’s in April 2021 reorganizing the board with new members. Kohl’s shares are trading at around $50, and traded as high as $63 at times last year. On Tuesday, the stock closed at 49.75, up $1.98 or 4.1 percent on the NYSE. But Macellum contends that Kohl’s could trade at up to $100 per share “with an optimized balance sheet and improved execution.”
Kohl’s said it has continued to engage with Macellum since the settlement and is “disappointed with the path they have taken and the unfounded speculation in their announcement and letter,” Kohl’s stated. “Our recently refreshed board has the right mix of fresh perspectives, industry and financial expertise and institutional knowledge. As part of our agreement with the investor group, which included Macellum, following last year’s proxy contest, we added three independent directors to the board, each with retail experience. In total, six new independent directors have joined Kohl’s board in the last three years. These directors bring highly relevant experience from top roles at leading retail companies including Lululemon, Walmart, Burlington and Kroger.
“Looking ahead, we believe the continued execution of our strategy will position us to further improve our overall performance.”
Macellum is also pushing Kohl’s to consider splitting up its brick-and-mortar stores and e-commerce businesses into separate companies, which is what the Hudson’s Bay Co. has already done with its Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay divisions, and what Macy’s Inc. is also being pushed to consider by Jana Partners. The separation strategy is controversial, with some industry experts thinking it’s only good for short-term profits and not necessarily good for companies, their customers and shareholders in the long term.
Last December, Engine Capital LP, which owns about 1 percent of Kohl’s stock, sent a letter to the Kohl’s board, contending that a stand-alone e-commerce business could be “conservatively” valued at $12.4 billion or more, compared to the retailer’s market cap of about $6.7 billion. As an alternative to separating the dot-com and stores businesses, Engine Capital urged Kohl’s to consider a “market test” to see how much the company could be sold for to “well capitalized” financial sponsors.
Last April’s board shake-up at Kohl’s saw Margaret Jenkins and Thomas Kingsbury joining as directors. Kingsbury formerly ran Burlington Stores, the off-price retailer, and years ago worked at Kohl’s, and Jenkins was a chief marketing officer at Denny’s and El Pollo Loco. An additional independent director identified by Kohl’s and agreed to by the activist investors, former Lululemon chief executive officer Christine Day, also joined the board.
Macellum on Tuesday said it plans to nominate a slate of director candidates if the status quo persists. “We intend to nominate a slate of highly qualified and independent candidates for election at the 2022 annual meeting of shareholders unless the board decides to collaborate with us on a director refresh and promptly implement changes to improve operational execution and optimize the balance sheet. Even using a historically low P-E multiple of ~7x-8x, our analysis indicates a properly optimized balance sheet (e.g. by monetizing $4 billion of its real estate and returning the proceeds to shareholders through a buyback program) could translate to at least $100 per share.”
Macellum also said: “There are well-capitalized strategic and financial buyers that could pay a meaningful premium to acquire Kohl’s. We also have heard that the board and its representatives have been approached and rebuffed overtures from credible buyers. This is unacceptable and, if true, would seem to constitute a meaningful breach of the board’s fiduciary responsibilities. We also see value-creation potential in separating the company’s e-commerce and brick-and-mortar businesses.”
Macellum Capital Management, founded in 2009 by Jonathan Duskin, invests in undervalued companies that it believes can appreciate significantly in value through changes in corporate strategy or improvements in operations, capital allocation or corporate governance. Macellum has run proxy contests to force changes at several companies, including The Children’s Place Inc., Citi Trends Inc., Bed Bath and Beyond Inc. and Big Lots Inc.
Macellum said it prefers to “constructively engage” with management to improve its governance and performance for the benefit of stockholders.
But Kohl’s said Macellum “has been unwilling to constructively engage,” adding: “As recently as this weekend, Macellum refused to enter a confidentiality agreement to hear about the company’s progress across operating performance metrics, strategic initiatives and capital allocation plans, and provide input on these matters as a shareholder. The board and management remain focused on sustained value creation. Distracting the company from this focus does not benefit shareholders.”
Last April’s settlement with Kohl’s included a standstill agreement prohibiting Macellum from publicly communicating with shareholders until January of this year.
Kohl’s did have a solid third quarter, reporting total revenues for the three-month period ending Oct. 30 rose nearly 16 percent to $4.36 billion, and profits totaled $243 million compared with losses of $12 million during 2020’s third quarter. For the first half of 2021, revenues rose 42.8 percent, and profits were $396 million versus a $494 million loss in the 2020 first half.
Management has not sat idle, seeking to gain market share in activewear, casual and outdoor apparel, having recently added such brands as Lands’ End, the FLX athleisure private brand, and Calvin Klein Inc., as well as Sephora beauty shops. The retailer has also pumped up offerings with Adidas AG, Under Armour Inc. and Nike Inc., among other brands.
“Our strategic plan to transform Kohl’s into the leading omnichannel destination for the active and casual lifestyle continues to gain traction,” Kohl’s said in its response to Macellum. “Our third-quarter 2021 performance demonstrates continued progress.…We launched several transformational brand partnerships and opened 200 Sephora at Kohl’s shops [last] fall. These initiatives are off to a great start, attracting new customers and increasing sign-ups for our best-in-class rewards program. Further, through our focus on inventory management, pricing and promotion optimization, sourcing cost savings, and SG&A efficiencies, we are structurally improving the long-term profitability of our business.
“Based on our performance in 2021, we are positioned to exceed our key 2023 financial goals two years ahead of plan. We remain confident in our future and have accelerated our share repurchase activity. In 2021, we continue to expect to repurchase $1.3 billion in shares, reinforcing our commitment to driving shareholder value,” the company stated.
Kohl’s 2021 results will be discussed in more detail during its earnings call on March 1.
Yet Macellum in its letter to shareholders pointed out that Kohl’s failed to grow 2021 revenue versus 2019 levels and that its stock performance lags its retail peers.
“While the board has spent a significant amount of shareholders’ capital vigorously defending itself and pointing to the momentum the business was experiencing in early 2021, it now seems clear that Kohl’s was only benefiting from the economy reopening from the depths of the pandemic,” Macellum wrote.