A Defining Moment For Kohl’s

On Thursday of last week, Kohl’s sent a letter to shareholders, pushing back against activist investor Macellum Advisors campaign to add new directors to the retailer’s board. Macellum currently holds about 5% of Kohl’s stock and is among a group of activist investors attempting to take the company private. In January Kohl’s retained Goldman, Sachs & Co. as an advisor in response to the activist campaign launched by Macellum.

A common theme from all of the activist suiters is their alleged intent to “extract greater shareholder value” along with instigating a “course correction” away from the strategic rebuilding that CEO Michelle Gass has been leading since May of 2018. The August 31^st letter states “Macellum is promoting an ever-changing narrative, misinformed claims, and value-destructive proposals, all of which reveal a reckless and short-term approach that is not in the interest of driving long-term, sustainable value.”

In response to the letter, late Thursday, Macellum said that it was disappointed, although not surprised, by Kohl’s “inaccurate and misleading” letter. “We stand by our belief that Kohl’s can be a source of tremendous value if it is finally unshackled from the current board and placed in the right hands – whether that be in the public or private market,” a spokesperson said in a statement to CNBC.

The Letter

In excepts, the letter states “In January, the Board (including a designee from Macellum Advisors) began a process of “further engagement with select bidders who submitted indications of interest in Kohl’s, including assisting with further due diligence that may create opportunities to refine and improve proposals.” In short, we are pursuing a “different path, than Macellum.”

Besides Kohl’s decision to “stop dating” Macellum the letter made it clear to the shareholders why the Board feels Macellum was no longer a “desirable suitor.” The letter talks about past “Macellum inconsistencies” and states among other things:

• Macellum is demanding a large sale leaseback would also potentially limit Kohl’s flexibility to explore all avenues to create value for shareholders.
• Macellum praised the omnichannel approach as the future of the industry only months before calling on Kohl’s to spin-off its e-commerce business.
• Macellum’s push for a hasty sale at any price reveals a short-term approach that is not in the best interest of Kohl’s shareholders.
• Macellum criticized Kohl’s for rejecting an offer to acquire the Company at $64 per share (Macellum has stated Kohl’s stock could be worth $100 per share.)

And its not just Kohl’s leadership that has been cool to Macellum’s advances. Wisconsin State Senator Tammy Baldwin recently sent a letter to Kohl’s, headquartered in Menominee Falls, Wisconsin which urged the company against accepting “any offers that propose a sale-leaseback, increase the risk of bankruptcy, or imperil the jobs and retirement security of thousands of Wisconsin workers.”

Short Term Gains Versus Long Term Value

Based on my colleague Walter Loeb’s recent reporting, Kohl’s apparently has five rumored suiters that include The Hudson’s Bay Company (HBC), Sycamore Partners, Leonard Green & Partners, Starboard Value, and Acacia Research Corp.

At the heart of this altercation is the belief that Kohl’s stock is undervalued relative to its asset value. Kohl’s currently has a market capitalization value of about $7.75 billion. Yet some estimate its real estate value alone is worth north of $8 billion. The other draw that has gotten these corporate raiders fomenting is the well-publicized estimate that the ecommerce business alone could be worth north of $12 billion, should it be spun off. This thinking is much akin to an auto chop shop, where the parts of a Porsche would yield big bucks in the underground economy. And as useless as the engineless Porsche would be for cruising the open road, Kohl’s would be similarly hampered without its ecommerce business in unified lockstep with its stores.

Critics of several of the suiters are quick to point out, at their heart they are real estate investors. In an excellent Robin Report podcast from Friday, April 1^st, Robin Lewis and Shelley Kohan double down on their belief (as well as mine and many others) that what motivates some of the activists is a “short-term, financial pureplay, and the losers will be the customers.” Lewis and Kohan suggest that another suiter, Richard Baker of the Hudson’s Bay Company (HBC) is a “real-estate mogul extraordinaire,” in which “all roads lead to unlocking value, or monetizing assets, including spinoffs, or sale and leaseback of real estate.”

Undervalued Stock Ploy

In the same podcast Robin Lewis and Shelley Kohan also side with the Kohl’s board in their belief that Macellum Capital Management group’s CEO Jonathan Duskin has a short-term focus, which is anathema to the long-term strategic value that Michelle Gass has been building. And while Duskin continues to beat the drum of lifting Kohl’s low share price, his own record when it comes to maximizing shareholder value has been less than stellar.

Three years ago, on April 1, 2019, after Macellum bought a significant interest in retailer Citi Trends, Duskin’s company sent a similarly worded letter to their board stating “Macellum has a substantial amount of capital invested in Citi Trends. The only way for Macellum to make money and for the value of the stock to rise significantly is for there to be material change to the status quo on the Board.”

Macellum “reached an agreement with” Citi Trends and stock peaked at $107 on May 6, 2021. A short eight months later the stock plummeted, and as of this past Friday, April 1, the stock was at $28.90, having lost a staggering 74% of its value. So clearly Duskin had not brought a Midas touch to Citi, let alone insuring long-term shareholder value in the retail fashion space.

Is There a Win/Win Scenario for Kohl’s?

I have been critical of Kohl’s in the past, and their path to long-term sustainability is by no means guaranteed. But there is ample evidence that “Team Gass” is making headway. Their ongoing roll-out of a planned 850 Sephora units by 2023, designed to “down age” its core customer base, is spot on, and could become a $2 billion business, on its own. They show continued growth with named brand fashion partners, such as Tommy Hilfiger and Calvin Klein which is also favorable, as are their are plans for upwards of one hundred smaller “city stores” ala Target.

The problem for Kohl’s is that while they appear to be doing reasonably well compared to Macy’s and J.C. Penney, they have behemoth Target, taking share from the entire mid-market department store arena. Target is an over achiever in every category that Kohl’s touches, and lightyears ahead at merchandising and offering its guests a delightful, high value experience.

It will be essential for Kohl’s to pump some serious cash into upgrading their store’s décor, lighting, and visual merchandising to appeal to a younger, discriminating consumer. Additionally, while they are doing well growing their name brand fashion business, to increase margins and create a point of differentiation, they need to be building private label brands as Target has done so proficiently.

Regardless of who wins the fight over Kohl’s future (assuming one of the courters prevails) I agree with both Walter Loeb and Robin Lewis that Kohl’s long-term variability is contingent upon allowing Michelle Gass’s team to “stay the course” and give them the fuel to “pick up the pace.”