Simon and Brookfield Pursue Kohl’s to Join Rival J.C. Penney

The Kohl’s “takeover saga” continues. Institutional Shareholder Services Inc. a prominent shareholder advisory firm, on Friday urged Kohl’s investors to back two of Macellum Advisors’ board candidates. Such a move counters Kohl’s board’s objectives. Meanwhile, Kohl’s on Friday mailed a letter written by incoming Kohl’s board chair Peter Boneparth to shareholders, urging them to vote for all 13 of Kohl’s current director nominees, ahead of Kohl’s May 11, shareholders meeting. The backdrop of this rancor is activist investor Macellum’s attempt to take control of Kohl’s, including replacing ten of its directors.

While this drama continues, Goldman Sachs, at the direction of the Kohl’s board is continuing its due diligence, engagement with “over 25 parties” some of whom have put forward preliminary, non-binding proposals for the purchase of Kohl’s. Meanwhile, the board emphasizes its key role is choosing a path that “maximizes shareholders value.”

This could be interpreted as “keeping the company structure intact” versus “parting out the assets” which many believe is baked into the plans of several of Kohl’s suitors. I, like others, believe that this kind of “financial engineering” would undermine Kohl’s survival, even if it provides short-term shareholder benefits.

Simon and Brookfield Are Reimagining the Industry

Multiple news sources ran a story which first appearing in the New York Post, on April 25^th reporting that Simon Property Group
SPG
in partnership with Brookfield Asset Management, have thrown their very handsome hat into the ring, with a $68-a-share offer. This values Kohl’s at more than $8.6 billion, and may well be their best option in insuring the department store’s long-term viability.

Simon, together with Brookfield are “reimagining” the role of the shopping center owner in this era of unified commerce. They have managed to become a “truly vertical” retail/real estate entity, owning not only both sides of the “lease line” but many of the brands that live in their stores and online.

Working Both Sides of the Lease Line

When Simon and Brookfield bought J.C. Penney out of bankruptcy in 2020, it was after Simon and the SPARC Group had secured ownership of Aeropostale, Forever 21, Brooks Brothers, and Lucky Brands. The SPARC Group, LLC is a consortium of Simon Property and Authentic Brands Group (ABG), the owner of one of the largest stables of world-class brands on the planet.

In February David Simon told analysts that the company’s “platform investments” including J.C. Penney’s, SPARC Group, ABG and Rue Gilt Groupe produced “terrific results in 2021.” He went on to state “Penney’s results were impressive. 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.”

Kohl’sPenney’s or Kohl’s and Penney’s?

It has been reported that the Simon/Brookfield consortium have proposed a single management team that would operate J.C. Penney and Kohl’s. They would merge the information technology systems so that one unit oversees the chains. It is believed the merger could strip out about $1 billion from Kohl’s operations over three years. While Penney’s is clearly mall based, which was one of the drivers behind Simon and Brookfield’s purchase of the brand, Kohl’s is primarily off mall. However, their demographics have clear overlaps.

As the economic bifurcation in the U.S. continues unabated, retailing is reacting and adjusting. J.C. Penney’s best hope for survival might be to become the quasi “Dollar General
DG
of department stores.” And I do not mean that in a pejorative way. The fact remains that Dollar General is the fastest growing and one of the most efficient retailers going. Placer.ai named them among the top Q1 2022 Top Performers. One could also argue, they cater to the same customer that had been the focus of “Sam’s old Walmart
WMT
.”

A Penney Saved?

Penney’s new CEO Marc Rosen, himself a veteran of Walmart, went on record with the Wall Street Journal recently stating “J.C. Penney’s is done chasing new customers. We are loving those that love us.” Reading between the lines, he may also be implying those “that used to love us.” Perhaps “not chasing new customers” also throws shade on past JCP CEO’s who saw themselves as change agents, but came up short.

Rosen by contrast appears to be a seasoned operative and facilitator versus a change agent, which is JCP’s best hope for survival. It also suggests why Simon anointed him. He understands that their brand positioning must be all about “basic good looks” and price, price, price.

Statement versus Stagnant

But “basic good looks” doesn’t rule out JCP making a “statement.” Case in point, JCP media promotion featuring SNL comedian Melissa Villaseñor as “Penny James.” It speaks humorously, if not a bit off-beat, to this” basic good looks” brand positioning. It is wacky enough to get noticed, whether it will “speak” to the intended audience is yet to be determined.

Another sign of the impact that Simon/SPARC Group is having on JCP’s brand was Women’s Wear Daily’s (WWD) news of Penney’s collaborating with Authentic Brands on the introducing of a 12-piece capsule collection called “Marilyn Monroe by J.C.Penney.” Bottom line, JCP is beginning to look like it will be around longer than many of us (myself included) thought. And with that in mind, there may well be interesting synergies with Kohl’s.

So, what might come of a Simon/Brookfield Kohl’s buyout? Besides efficiencies in management, it puts Kohl’s on a more sustainable trajectory. Kohl’s clearly trends younger than JCP, and is in need of supercharging its store brand offerings. The paring enables both Kohl’s and JCP the ability to draw from the same private label development teams and manufacturing resources.

From a real estate standpoint, it would make sense to downsize some of the Kohl’s footprints and perhaps use excess square footage for automated micro-warehousing. This would enable Kohl’s to increase last-mile fulfillment efficiency and reduce e-commerce costs.

Not Sears & Kmart

Before any critics liken this move to “Fast Eddie” Lampert’s Sears, K-mart fiasco, I would caution about making such comparisons. The once hedge fund golden boy was never really a retailer. Some have aptly called Lampert a practitioner of “predatory capitalism.” Its a whole different ballgame.

Simon, Brookfield, and SPARC Group have demonstrated not only the ability to survive in a radically changing retail environment, but become transformative change agents, and industry survivors. It is anybody’s guess where all these talks will end up, but I am hoping that the private jet flights between Plano, Texas and Menomonee Falls, Wisconsin will become routine.