Kohl’s Should Look Elsewhere For A Buyer

Franchise Group’s plan to acquire Kohl’s is similar to previous deals in retail that left companies such as Mervyn’s, Shopko and Toys”R”Us saddled with debt and selling off assets before eventually failing, reports The Wall Street Journal.

The owner of The Vitamin Shoppe, Pet Supplies Plus and other retail brands is looking to finance most of its $60 per share bid for Kohl’s by selling off the retailer’s real estate assets. Franchise Group, which will kick in $1 billion of its own money, last week entered into an exclusive three-week negotiation period with Kohl’s, which doesn’t presume a deal will be finalized.

“I don’t see how Franchise Group can add a lot of value to Kohl’s business and the financing approach is concerning,” wrote RetailWire BrainTrust panelist Mark Ryski, CEO of HeadCount Corporation, in an online discussion last week. “I understand that Kohl’s management needs to review every bona fide offer, but it seems to me that there are other opportunities for Kohl’s that present a more encouraging outcome. And notwithstanding poorer sales results, Kohl’s is not a distressed retailer and they don’t need to do a deal — they can bide their time for better/different offers.”

Many of the industry experts on the RetailWire BrainTrust agreed, and even those who saw Kohl’s as being in trouble were not fans of the prospect of Franchise Group owning the chain.

“Does Kohl’s need help?” wrote Dave Wendland, vice president of strategic relations at Hamacher Resource Group. “Yes. Is a franchise model or some play on real estate a feasible path forward? Maybe. Am I confident that Franchise Group is the best fit? Likely not.”

Franchise Group, as its name suggests, has built its business not on operating its own stores but finding franchisees to do that work. There hasn’t been any reporting to date indicating that it would apply the same business model to Kohl’s. Though the notion of applying that model to Kohl’s was particularly disconcerting to some of the BrainTrust.

“Unless Franchise Group has special and different plans than franchising Kohl’s, this is a questionable investment,” wrote Bob Amster, principal at Retail Technology Group. “There has been more than one example of businesses that were doing well after an acquisition, but for the fact that they just couldn’t service a huge debt, causing their demise. It would be sad if the same fate awaited Kohl’s as a result of this transaction. There has to be a better deal out there.“

“If, in fact, Franchise Group plans to implement some type of ‘franchise’ model on Kohl’s, and burden the deal with significant debt, then the probability of another retail disaster occurring is quite high,” wrote David Spear, senior partner, industry consulting, retail, CPG and hospitality at Teradata. “Frankly, Kohl’s ought to sit tight and wait for a better deal to come forward.”

The would-be owner of Kohl’s joins all publicly-named bidders for the chain in seeking to monetize its real estate holdings. It does not appear, however, that Franchise Group will seek to split off Kohl’s physical and digital operations as others, including Acacia Group, Hudson’s Bay, the parent of Saks Fifth Avenue, and Sycamore Partners, have done.

Simon Property Group and Brookfield Property Partners, mall operators and co-owners of JCPenney and other retailers, have also been among more than 25 companies that have reportedly expressed interest in acquiring Kohl’s. History suggests that neither of the two would split off Kohl’s online and physical store operations.

The retailer, like many others, lowered its annual sales and earnings forecast after its same-store sales fell 5.2 percent in the first quarter. Kohl’s adjusted its net sales forecast to be flat to up one percent over last year, compared with its previous guidance of a two to three percent gain. The chain is now looking for its adjusted earnings per share to come in between $6.45 and $6.85, compared to a range between $7.00 and $7.50.

Some on the BrainTrust pointed out another path for the retailer to pursue to improve its position.

“I hope they go unsold for now,” wrote Nicola Kinsella, SVP of global marketing at Fluent Commerce. “None of the players who are interested would add enough value to justify selling. Kohl’s should continue to innovate with new partnerships and offerings and wait for a more strategic, value based, offer that will help them drive long term growth.”

“Bootstrapping their way to success would still be the best option given how much they’ve pioneered with concepts like the Amazon returns — and more,” wrote Ananda Chakravarty, vice president of research at IDC.

The PE alternative represented, for a many, a well-trod trail heading in the wrong direction.

“The question of future operating model success notwithstanding, the history of retailer acquisitions through heavily leveraged buyouts has a really poor track record of success,” wrote Peter Charness, retail strategy at USTUST
Global.

“I have to say, it has grown wearying to see companies like Franchise Group come in and strip a company of its assets, burden it with debt and then say ‘oops — didn’t work.’,” wrote Paula Rosenblum, co-founder of RSR Research. “I don’t want to live through another Eddie Lampert Sears story. It’s tiresome and not particularly useful.”