Will Kohl’s Be An Acquisition Prize?

The race is on; five companies are vying for the privilege to own Kohl’s. There is going to be blood spilled before the contest is over. Here is why I think a battle is ahead:

· The current price is too low for management to accept any of the bids. The valuation of Kohl’s ongoing business is higher. Consider the future upside for the lucky winner: $2 billion more sales because of the addition of Sephora, plus 100 small stores formats that are planned to open in the next 4 years. (See below)

· 100 new small stores are, in my opinion, ideal stores in the center of cities. There is ample vacated space in the midtown of many cities since the pandemic caused massive bankruptcies. These new small stores could produce a cumulative sales increase between an estimated $500 and $800 million.

· Management has indicated that it will strive to have 30% its sales from active wear in the stores. With the strength of Sephora, which will attract young people, this mix should be a growth driver.

· Specifically, prom dresses, formerly an attraction in JCPenney stores, could add to the sales volume in Kohl’s if the dresses are properly promoted in stores, through fashion shows, and on social media.

· Special occasion wear is also an opportunity. Wedding dresses and formal wear for men could be added. Formal wear could ether be rented or bought. It might need the cooperation of a retailer like Men’s Warehouse to manage the men’s aspect but it would give Kohl’s additional growth.

There are five companies who are rumored to be bidders. They are listed here without confirmation from the company. They include: The Hudson’s Bay Company, Sycamore Partners, Leonard Green & Partners, Starboard Value, and Acacia Research Corp.

The Hudson’s Bay Company owns and operates Saks Fifth Avenue and Saks Off 5^th in the U.S., and the Bay department stores in Canada. They are primarily luxury stores and their interest in bidding may be to accelerate their sales volume through this potential acquisition that competes in a different segment of the market. Sycamore Partners is a private equity firm. It operates several notable retailers, including Belk Stores, the Loft, Ann Taylor, Express, and Hot Topics. Sycamore Partners appears to have working knowledge of specialty retailing.

While all of this is going on, Kohl’s has mailed out its annual proxy and shareholder letter in addition to the voting form for directors. This will certainly be challenged by activist group Macellum Advisors who wants to submit its own slate of directors to be voted on.

As stated earlier, I believe that management should stay in place to execute its plan for the future. The plan is solid and, among other things, focuses on Sephora as a draw for young people to visit the store. Young branded active wear brands will have to speak for themselves.

Certainly, the fact that Kohl’s accepts Amazon’s returns is also a positive factor, since it brings customers to the store. They get a discount coupon if they shop Kohl’s on the day they return merchandise. That is a good incentive to go shopping; it also provides Kohl’s with a source of new customers to market to in the future.

POSTSCRIPT: 200 Sephora shops are now open, 400 more will be added this year, and at least another 250 are planned for next year. During this process, the stores are torn up to make room for the Sephora @ Kohl’s presentation. Despite that distraction, the direction of Kohl’s operation is good and potentially profitable. 90% of the 964 stores are four- wall cash flow positive. I believe with the initiatives discussed above, greater profitability is likely.