Shares of Kohl’s Corp. jumped 5.4 percent on Monday after an activist investor urged the retailer to separate its e-commerce business from its legacy retail business or sell the company.
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 current 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.
Kohl’s Corp.’s stock price closed Monday on the NYSE up $2.62 to $51.07, settling down from a leap of 9.4 percent or $4.54 earlier in the day.
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“Our own diligence leads us to believe there are financial sponsors who will be able to pay a significant premium of 50 percent, or at least $75 per share,” Engine said in its letter to Kohl’s Monday.
Engine is seeking a meeting with the Kohl’s board.
Back in October, WWD reported that Kohl’s would fall under pressure for change from activist shareholders.
Kohl’s quickly responded to Engine on Monday, stating, “The Kohl’s board and management team continuously examine all opportunities for maximizing shareholder value. Our strong performance this year demonstrates that our strategy is gaining traction and driving results. We appreciate the ongoing dialogue we are having with our shareholders and value their input and perspectives.”
“This isn’t trivial,” said one financial source. “Engine has a real position in Kohl’s. To me, this is another sign that Kohl’s has to do something. Kohl’s has not created value. When are they going to do something?”
What Engine is pushing Kohl’s to do mirrors 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 do by Jana Partners. Macy’s hired AlixPartners to evaluate whether it’s good idea to spin off its e-commerce operations. 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.
“It’s financial engineering that is divorced from long-term, sound operational strategy. Omnichannel has been the name of the game in retail for at least a decade due to adoption of dot-com and the pandemic,” said Berna Barshay, editor and analyst at Empire Financial Research, which provides advice and research for investors. “Hedge funds are not looking to create the strongest company you can have in 2025. They are looking at making money in 2022.”
Barshay also pointed out that despite popular notions, margins could also be higher in stores rather than at stand-alone dot-coms because of the higher rate of returns and higher shipping costs associated with dot-coms, loss of synergies with stores, and new costs associated with accounting and going public. “Whether it’s Saks, Macy’s or Kohl’s, it doesn’t make sense,” to split up omnichannel retailers.
A stock price doesn’t always reflect the strength of a retailer’s operations. At Kohl’s, there have been significant merchandising advancements, including rolling out Sephora online and in stores this year as well as bolstering casual and active offerings with leading brands like Nike, Adidas, Cole Haan, Calvin Klein, Tommy Hilfiger and Lands’ End, and emphasizing inclusivity in the product offerings. They’re widely seen as positive maneuvers sharpening the Kohl’s brand identity and providing a simpler and more relevant shopping experience.
E-commerce at Kohl’s is estimated at around 30 to 35 percent of the total volume, though in the fourth quarter last year, it was north of 40 percent of sales. This year, with most Americans vaccinated against COVID-19, many are inclined to return to shopping in stores, meaning some business would shift back to brick-and-mortar retail.
Kohl’s generated $15.96 billion in total sales in 2020 and $19.97 billion in 2019.
Kohl’s could spin off its dot-com business through an initial public offering, or a carve out in some other way. The company could sell a big chunk of the e-commerce operation and use the money to buy back stock, pay down debt or invest in dot-com for growth.
As reported, Kohl’s entered into an agreement with activist investors led by Macellum Advisors GP LLC, along with Ancora Holdings Inc.; Legion Partners Asset Management LLC, and 4010 Capital LLC. fighting for fresh blood on the retailer’s board. Two independent directors nominated by the activist group — Margaret Jenkins and Thomas Kingsbury — were put on the board. An additional independent director identified by Kohl’s and agreed to by the investor group, former Lululemon chief executive officer Christine Day, also joined the board.
Macellum and its activist group is not involved with Engine’s action on Kohl’s. Macellum has a standstill agreement with Kohl’s that extends through the end of this year. The settlement would have to expire before the investors could act again.
“Even the most patient long-term shareholders cannot be expected to endure the punishing underperformance and perpetual value disconnect seen at Kohl’s. This is why we are urging the board to publicly commit to conducting a full review of strategic alternatives,” Engine said in its letter.
“Over the last 10 years, Kohl’s has underperformed the S&P 500 by 305 percent despite generating a cumulative $11.8 billion of free cash flow and spending $6.9 billion on share repurchases during that same period,” Engine wrote. Kohl’s past-year stock performance outperforming the S&P 500 Engine contended “is not a stamp of approval for the board’s strategy, but rather the result of good timing, simply because retailers’ stocks underperformed massively during the first phase of the pandemic and then outperformed during the recovery phase.
“In conclusion, it is the board’s job to drive value and the board has had ample opportunities to do so over long periods,” wrote in its letter. “We are not pushing for one of the aforementioned solutions over the other, but we — and other shareholders, clearly — do not believe the status quo is acceptable.”