Kohl’s Shareholders Face a Difficult Choice

The junkmen are coming for Kohl’s (NYSE:KSS) stock.

Image of Kohl's (KSS) logo on a Kohl's store
Source: Sundry Photography/Shutterstock.com

Since December, activist investors have been pushing the company to sell or at least spin-off its real estate and e-commerce units. The board reacted by rejecting two takeover offers and adopting a “poison pill” aimed at preventing a “hostile takeover.”

The pressure increased last month when Jonathan Duskin’s Macellum Group nominated a replacement set of directors.

The multi-year turnaround plan by Chief Executive Officer Michelle Gass could now prove all for nothing, even though the stock is up 121% over the last two years.

Why They Want It

Retail stocks, like KSS stock, have become hot commodities lately as investors pick through the pandemic’s survivors, separating winners from almost-winners.

Discounters like Walmart (NYSE:WMT), Costco Wholesale (NASDAQ:COST) and Dollar General (NYSE:DG) all look like winners. Kohl’s looks increasingly like an almost-winner, which to activists, means it is a loser.

Placer.Ai, which tracks retail visitors, says Kohl’s foot traffic quickly rebounded to within 10% of its pre-pandemic level. Kohl’s earned $938 million, $6.32 per share, on sales of $19.5 billion during the year ending in January. It said its Christmas quarter earnings of $2.20 per share exceeded expectations.

That is not good enough for Macellum, which says stock in Target (NYSE:TGT) and TJX (NYSE:TJX) are outperforming Kohl’s. Kohl’s stock rose nearly 30% after Macellum announced its board challenge and has held half that gain even against the board’s resistance.

Can Beauty Save KSS Stock?

Before Gass, Kohl’s was known as an off-price department store focused on suburban strip malls. Gass’s hiring in 2018 was always meant to change that formula. Industry analysts now call Kohl’s an “anti-mall” for its shops-within-a-shop strategy.

Under Gass, some of Kohl’s real estate has been leased out as Planet Fitness (NASDAQ:PLNT) locations or Amazon.Com (NASDAQ:AMZN) pick-up locations. Kohl’s has also become home for full-priced retailers that had lost distribution, like Under Armour (NYSE:UAA) and LVMH’s (OTCMKTS:LVMUY) Sephora unit, which had previously been at JC Penney.

Gass now hopes the Sephora connection can save her strategy. Placer.AI says shops specializing in beauty have been a retailing bright spot lately. At an “Investor Day” event this month, Gass said she is planning to open 400 Sephora shops within Kohl’s stores in 2022. Placer.Ai says Kohl’s is seeing increased sales in the rest of its stores as a result. Gass wants to make Sephora a $2 billion business for Kohl’s. But she is still just predicting low single-digit growth for the chain.

The Bottom Line on KSS Stock

When Macellum announced its slate, Kohl’s reportedly sent its corporate jet to Seattle, the home base of Amazon. There has since been speculation Amazon might make a bid, seeing it as a cheap way to jump-start its physical retail ambitions.

Analysts said they were unimpressed by Kohl’s Investor Day, but it is unclear whether Macellum’s strategy is any better.

The only buyers to step up so far have been private equity companies who want to break up Kohl’s. Starboard Value reportedly offered $9 billion, but that is not a huge premium to Kohl’s current market cap of $7.6 billion.

Starboard’s plan seems to be to get debt financing, then finance the purchase with Kohl’s own real estate through a sale-and-leaseback. This would lock Kohl’s into long-term rental agreements, which to critics like Bank of America (NYSE:BAC), looks like what killed Sears.

Gass has acknowledged some mistakes. She wants to open 100 new stores in the next few years, but admits they will be smaller than current locations.

The choice for investors is now between a risky strategy and a breakup of the company. If I owned the stock now, my heart would prefer the strategy, but my head would be looking to see Starboard’s money.

On the date of publication, Dana Blankenhorn held a long position in AMZN, BAC and DG. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.


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