A Bid for Kohl’s: What’s Simon Thinking?

If there’s a deal to made for acquiring Kohl’s Corp., the Simon Property Group would probably be the frontrunner.

The nation’s largest developer and operator of shopping centers has the wherewithal to outbid others; confidence in managing retail chains, having invested in J.C. Penney Co. Inc., Forever 21 and Aéropostale in recent seasons, and, according to sources, lots of ideas of how to turn around the fortunes of J.C. Penney through consolidations with Kohl’s.

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“One hundred percent, Simon put in a bid for Kohl’s,” said a source close to the Kohl’s auction process, which has continued for the past three months. “No one will outbid David Simon (chairman, president and chief executive officer of SPG) if he really wants it. He wants to bolster J.C. Penney by merging it with Kohl’s. I think he is going to keep both nameplates, have one team do it all. There could be a tremendous amount of cutting, even closing down Kohl’s Wisconsin headquarters.”

Neither Simon nor Kohl’s has confirmed media reports this week, first appearing in the New York Post, that Simon, in partnership with Brookfield Asset Management, put in a $68-a-share offer valued at more than $8.6 billion for Kohl’s.

If David Simon does manage to seal the deal and buy Kohl’s, it would mark a significant step in his evolution from landlord to multifaceted retail force.

Simon has had to repeatedly walk Wall Street through his company’s growing investments in retail — from the SPARC joint venture with Authentic Brands Group, which owns Reebok, Forever 21, Eddie Bauer, Brooks Brothers, Aéropostale and more, to J.C. Penney, which Simon owns with Brookfield Asset Management. Brookfield Asset Management is the parent of Brookfield Properties, the second-largest U.S. shopping mall owner, next to Simon.

While many of the investments came at low prices, rescued companies out of bankruptcy and helped avoid a wave of store closures in Simon properties, Kohl’s is clearly a different case, since it’s stronger and has a large base of off-mall stores.

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But where some analysts appeared skeptical of the company’s adventures in retail at first, Simon has been crowing over the investments lately.

And he, in effect, was already doubling down, touting this as a transitional and investment year, setting up bigger gains in retail for the future.

Simon told analysts in February that the company’s “platform investments,” including Penney’s, SPARC, ABG and Rue Gilt Groupe produced “terrific results in 2021.”

“J.C. Penney’s results were impressive,” he said. “Their liquidity position is growing, now $1.6 billion. [The] company de-levered their balance sheet [and] has no borrowings on their line of credit. CEO Marc Rosen strengthened his management team with a new [chief information officer] and chief digital officer. RGG [Rue Gilt Groupe], including our Shop Premium Outlet marketplace growth, continues, and we expect continued investment in 2022 to drive customer acquisition and sales growth. SPARC Group will be the operating partner for Reebok in the U.S. There’s a tremendous opportunity for SPARC to develop sportswear and footwear expertise. The Reebok integration will require additional investment by SPARC as it expands its capability and reach.”

J.C. Penney, in particular, seems to be a source of pride.

“Penney’s success is an excellent example of how to better understand our company,” Simon told analysts in November. “We appointed Stanley Shashoua as the interim CEO nearly a year ago and look at the results. Much like the variety of our investments, no other company or industry has the capability to put an executive in an interim role and produce these results. This is a testament not only to Stanley but to the Simon culture.”

Simon seems to have caught the retail bug.

And while he is still very much in the real estate game, he has encouraged investors to look at his company more broadly as well.

“We have growth levers beyond our real estate assets that are unique attributes of our company,” Simon said. “We have proven to be astute investors. We have unique business models and diversity of income streams.”

That being said, Simon Property still gets something like 80 percent of its cash flow from its U.S. property business as dynamic as the retail business, generally speaking, has been.

“It’s more it’s a tail wagging the dog,” Simon told analysts. “But you know, it’s an important tail and it’s a beautiful tail and it wags nice and is very friendly.”

Bringing Kohl’s on board would give that tail even more heft.

Among the others said to have bid for Kohl’s are the Hudson’s Bay Co., which operates the Saks Fifth Avenue, Saks Off 5th and The Bay brands; 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.

Representatives for Simon, Brookfield and Goldman Sachs, which is running the Kohl’s sale process, did not reply to WWD queries. Kohl’s said in March that Goldman had talked with more than 20 potential buyers.

The bidders each believe that Kohl’s, which operates more than 1,100 stores and generated $19.4 billion in volume last year, has the potential for greater profitability, shareholder value and sales, and that they each know how to help the retailer improve its financial performance.

However, the Kohl’s board and management also believe they have a strategy in place that will generate improved results over time, making it conceivable that Kohl’s decides against being acquired.

The Simon-Brookfield bid for Kohl’s came as a surprise despite the developers’ recent track record of buying up retail.

“This doesn’t make sense to me,” said one retail source. “Other acquisitions and joint ventures Simon has done with other retailers and brands and with Jamie Salter [CEO of ABG] made sense, but Kohl’s is not a mall-driven retailer. Kohl’s is an off-the-mall retailer. The question is what economies of scale would Simon and Penney’s bring to Kohl’s?

“There could be back-office efficiencies, but this reminds me of what Eddie Lampert tried to do with Sears and Kmart. He did fine for himself, but the concept of Kmart and Sears, bringing two struggling retailers together, didn’t work,” added the source. Both chains are on the verge of extinction.

Kohl’s, the source suggested, could be best off staying independent.

“Kohl’s is a great operation. Michelle Gass [the CEO] has done a wonderful job of moving the business forward and trying to attract different customers as an off-mall retailer and navigating the business the last couple of years through COVID[-19].”

Under the leadership of 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 its stores; 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 units by 2023. Before Kohl’s partnered with Sephora, Penney’s had a 10-year run with the beauty retailer.

“I’m wondering if David Simon is thinking of bringing Kohl’s to the mall. But everybody is talking about how off-mall and open-air centers are more attractive in the COVID[-19] environment, and Kohl’s whole concept is being closer to the consumer and situating in neighborhood and strip malls. Do you come up with some sort of hybrid for Kohl’s?” the source wondered. “Everyone is testing smaller formats, so would you bring Kohl’s down to 30,000 square feet,” from its average of about 80,000 square feet.

Kohl’s competes directly with Penney’s. The retailers have similar customer demographics. It’s believed that Kohl’s, which expanded aggressively in the ’80s and ’90s, took market share from Penney’s.

But Kohl’s has been under pressure from Macellum Capital Management, which is seeking to take control of the company’s board and has been highly critical of the company’s management and strategies.

On Tuesday, Morgan Stanley & Co. in a report indicated that Kohl’s has been underperforming its peers, and reduced its share price target to $42 from $50. On the Simon-Brookfield bid for Kohl’s, Morgan Stanley wrote that “media reports on the $68[-a-share] bid would imply a value within 6 percent of our $72 bull case….Kohl’s appears to be significantly lagging department store peers, with first-quarter-to-date traffic down 1 percent, while Nordstrom, [at] plus 32 percent; Macy’s, plus 25 percent and Nordstrom Rack, plus 14 percent, are all experiencing a meaningful year-over-year recovery.

“Further, our store checks throughout the quarter show a recent increase in clearance activity, a potential early indicator of margin pressure to come. We are slightly trimming our [first-quarter 2022] revenue estimate from plus 1.5 percent to plus 0.5 percent and lowering our [first-quarter 2022] EPS down 10 percent to 70 cents, slightly below consensus’ expectation of 72 cents.

“In a bull case, Kohl’s stock could rise to $72 if its financial targets prove achievable. Should management deliver its long-term targets over the next three years, we see upside potential to a $72 price target. However, given that Kohl’s has struggled to deliver on its long-term targets for the past 13 years, we see a low probability of the bull case playing out.

“Is the board serious about a sale? Or are they just buying time? There is always scope for shareholder value to be maximized in the event of a sale to the highest bidder. That said, there has been no announcement by Kohl’s regarding a potentially binding agreement,” Morgan Stanley indicated.