Photo: Kohl’s
Activist investors attempt takeover of Kohl’s board of directors
A group of activist investors that control 9.5 percent of Kohl’s stock want to see big changes from the retailer, beginning with its board of directors.
The group, which includes Macellum Advisors GP, Ancora Holdings, Legion Partners Asset Management and 4010 Capital, sent a letter to fellow shareholders claiming Kohl’s has “chronically underperformed against its peers” and that the board has failed “to help develop and oversee a strategic plan” to keep up with changes in the marketplace. The activist investors want to replace nine of Kohl’s 12 directors.
The letter pointed to a net decline of 0.6 percent in same-store sales for the years 2011 through 2019. The retailer is expected to report another decline for 2020. In an update earlier this month in advance of its fourth quarter announcement, Kohl’s said that sales comps fell 11 percent during the period, an improvement over the previous two quarters.
The activist investors also took issue with a decline in earnings at the chain, with operating profits steadily moving downward from 11.5 percent in 2011 to 6.1 percent in 2019. Last year’s number, which factored in the discounting of merchandise when Kohl’s was forced to close stores due to the pandemic, is expected to be underwhelming, as well.
Kohl’s did say that it was expecting to post “a significant” improvement in its earnings for the fourth quarter over preceding quarters, saying that it would “exceed company expectations.”
The investor group called out Kohl’s merchandising assortment that it says “has resulted in too many choices, too much overlap and little differentiation between the ‘good, better, best’ price schemes.”
It further claimed that new brand relationships and an increased emphasis on athletic/athleisure categories had failed to lift sales. The group also faulted Kohl’s private label efforts, which “have failed to connect with customers, leading to declining results and frequent exits.”
Kohl’s has rejected the attempt by the activist investors to gain control of its board. While it is open to input, Kohl’s said that it was already taking some of the actions proposed in the letter but rejecting others because they “would not be accretive to shareholder value.”
Discussion Questions
DISCUSSION QUESTIONS: Do you agree with activist investors that Kohl’s is underperforming its competition? Do you think current leadership is on the right track or does it need to seriously change its approach?
Poll
BrainTrust
It’s easy to be an armchair critic and that’s what some activist investors are. That said, they are also substantial shareholders and with ownership comes to right to voice your opinion. I think the timing of these actions makes me question their true motive. Why challenge management’s actions as they come through the pandemic, which had a significantly negative impact on results? These aren’t normal operating conditions and the results are certainly a reflection of this. Back to my original question, why now?
Do I see an LBO in the offing?
Kohl’s is not a badly run business and Michelle Gass and her team have done a lot to stabilize the company and boost performance. This is evident in the fact that Kohl’s consistently outperforms many of its department store peers. However there is a sense that the business plays it safe and a lot of investors want more radical and far-reaching change. Given the extensive disruption in retail and the fact Kohl’s is engaged in a battle for survival, that’s not an unreasonable ask. Some new directors may help drive the pace of change, but it’s not a silver bullet – you need the right mix of people with the right levels of experience and vision. If the play is simply to slash costs then it won’t work; if it’s to reinvent the business and make it relevant then it has a chance.
I wrote a blog on this which will be published today.
Kohl’s has made some terrible decisions in the past, but I think the company is on the right track. Finally.
I also think the phrase “stay in your lane” is appropriate here. Look at the fine job activist investors did with J.C. Penney. Or Sears.
I suppose what galls me most is the demand to reduce inventory while increasing sales. This is not a retail mindset, and it doesn’t even use retail terms like “improve sell-through.”
Thankfully, Kohl’s management is fighting back. Let management do its job and (I’ll say it again), everyone should stay in their own lane.
A local reporter called me yesterday (because I live in Milwaukee and used to work for Kohl’s) and I pointed out the checkered history of activist investors — especially as you note, JCP and Sears. I also questioned why Kohl’s or any retailer would put a competing retail CEO on its own board (one of the activist investors’ demands). Is Target’s CEO likely to sit on Kohl’s board, or vice versa? Kohl’s board as composed today seems to have relevant background in some retail disciplines like e-commerce, technology, HR management, etc. — not just traditional backgrounds of “running the store” or “buying goods.”
Activist investor — Sears? One of those words doesn’t belong there (I’ll leave it to people to guess which one).
From real estate plays to inventory reductions, these are indeed reminders of opportunities presented at Sears or J.C. Penney.
The peer group that the activist investors are comparing is the Russell 2000, and the stock performance. That is an irrelevant comparison in terms of positioning and performance. It is true that from an investor’s point of view, there are far better places to park money than Kohl’s.
The report is mainly about cutting the SG&A and other expenses to shore up the profitability. Profitability may improve in the short term and stock price may bounce back for a while, but it will not cure the headwinds and structural challenges that Kohl’s and other peers (J.C. Penney, Macy’s etc.) face.
This isn’t a management issue. It is a market issue and Kohl’s is positioned largely in “no man’s land.” This is a perfect set-up for an LBO and we all know how they end up.
Very interesting theory, Gene. You very well may be right, and the timing of this action supports your thesis. Historically, LBOs generally happen when the retailer is financially dimished or compromised. Kohl’s is still in good financial shape despite the pandmic’s impact, but certainly dimished relative to their pre-pandemic situation.
Investors have a voice and they tend to help correct the course for many companies with a strong “outside-in” view. However I’m not sure which “peers” the investors are referring to. Kohl’s peers in the eyes of the consumer are other department store retailers. Kohl’s has reported better annual performance and key metrics such as e-commerce penetration than Macy’s and a far better performance than J.C. Penney. The department store business is losing its customer relevance and needs a big overhaul. In COVID-19 times and beyond, as department store retailers struggle for relevance, short term financial metrics aren’t a good indicator of long term investor value.
It wasn’t long ago that Kohl’s had many retail admirers. Kohl’s Cash, hot promotions and available product drew them in. When the virus hit, it scared people from going to stores, obviously. That pressured stores to take many measures they didn’t prefer. Think of all the brick and mortar stores we lost. At that point the safe option was certainly digital. That powered many great opportunities for those in that arena, and they rightly took advantage of that. Now the waters are clearing, and we are seeing an enthusiasm of shoppers going social again, right into brick and mortar facilities. And in time more will come. It is easy to slam Kohl’s performance throughout the pandemic, but I am betting on the fact that they will return with new aggressive retail tactics and presentations that will certainly lure their base back. I certainly hope everyone involved moves with wisdom.
I’d have to agree with the statement, “…too many choices, too much overlap and little differentiation…” as I observed the last three holiday seasons. And I would add inventory management that bordered on chaos in 2018 and 2019 that improved vastly in 2020. So real estate opportunities aside, I’d say that there are certainly lots of opportunities for improved product content and presentation immediately available to Kohl’s. When you add the potential for leveraging the Amazon relationship and developing a grocery partner of some kind, I’d say there is tremendous upside for Kohl’s. The announcement regarding a partnership with Eddie Bauer is another clue about an evolving strategy for both brands. Eddie Bauer escapes the confines of the mall and Kohl’s gets a beefed up presence in a lifestyle category that will continue to get stronger. Kohl’s may not need an activist investor partner to execute all of the above, but the stakes certainly just got a little higher. And the investor group picked a target (no pun intended) that certainly has a lot of upside whether they get nine seats or not.
Kohl’s represents a low hanging fruit opportunity for the activist group as well as current management.
These activist investors are conveniently mixing their message to serve their own needs rather than the needs of Kohl’s. What competitors are they comparing? Target? OK, yes, Kohl’s underperforms Target but, then again, they also lack grocery and anything that classifies them as “essential” during the pandemic. And yes, Kohl’s does not have the same private label success that Target has. But do Kohl’s customers see them that way? No, they compare Kohl’s to other department stores like J.C. Penney and Macy’s. Does Kohl’s underperform them? No. In fact, Kohl’s is much better positioned than either of those two retailers, and I believe they are better positioned than any other regional department store as well.
If an investor wants to suggest a course of action for a retailer to improve their retail sales, then you would expect them to offer actual retail-relevant advice. Asking them to cost-cut their way to success and growth does not work in retail long-term. we’ve seen this story play out many times before – let’s all say Sears and J.C. Penney together now.
If anything, this statement leads me to believe there is a hidden desire for a leveraged buyout – and we’ve seen how well that turns out for most retailers (again, reference Sears and J.C. Penney).
I think the problem is that during the government mandated business closures in certain states (which led Kohl’s to close 100 percent of its store base while the store bases of Target and Walmart were allowed to remain open and in most cases selling clothing) many customers left Kohl’s (and Macy’s, and J.C. Penney) and decided to start purchasing clothing at Target (and to a lesser extent Walmart).
And once Kohl’s reopened their stores turned into understocked unappealing places to shop with fewer promotions to draw in customers as before. It also appears more customers have noticed the off-price retailers located closer to their neighborhoods such as Ross, TJ Maxx/Marshalls, and Burlington since everything reopened as well, as those stores seem to be packed with customers.
Frankly people learned to live without these department stores during the government mandated closures, many found other options, and getting them back won’t be easy. I won’t say it is impossible, but — I do wonder. But if any chain can get customers back, it is Kohl’s. Kohl’s knows how to merchandise and draw traffic.
I agree with your comments – the fact is, it is difficult to train consumers to build a new shopping habit, but it’s even harder to break a shopping habit once it is formed. More reason to question the “advice” the activist investors are trying to push on Kohl’s as they are offering reactive options rather than proactive ones that would help Kohl’s produce increased sales conversions. Cost-cutting your way to success doesn’t work.
We need to separate the investors’ criticism(s) – which may or may not have validity – from the idea that the people pointing them out are particularly able to solve them (beware of people who claim to be uniquely able to solve problems). Of course the fact that someone who owns less then 10 percent of the stock is being listened to points out the continued perils of (what is essentially) absentee ownership.
Exactly Craig. It’s not that thoughtful investors don’t have good ideas, in fact their objectivity can give them a valuable vantage point. However the lack of a detailed understanding of the day-to-day operations and challenges of running the enterprise (especially one the size of Kohl’s), can make suggestions that look obvious from the outside, absolutely bad ideas with inside knowledge.
Activist investors do not have a great history of improving operations at a company. But I agree with their observations about Kohl’s. I’d rather let Kohl’s handle its affairs on its own though and have these activist investors go away.
As far as Kohl’s goes, to everyone here, think back on your purchases in 2020. Did you purchase from Kohl’s in 2020? More or less than in the past? If less, why? Just because you did not need stuff, or due to other reasons resulting from Kohl’s execution (or lack thereof)?
Kohl’s seems like it has strong leadership that completely rolled over in 2020. It was like they just didn’t even try after being allowed to re-open. Their holiday effort was a complete bust — understocked stores, fewer promotions, low staffing levels (not even half of the registers were open even when they had lines stretching to the back wall – obviously those lines looked longer than they were due to the six feet in between customers thing).
I assessed that Kohl’s decided to just “blow” 2020 so they could have a “blow out” 2021 and get back to their old rather aggressive ways of merchandising and promoting. So far we are two months into 2021 and the stores continue to be understocked, promotions continue to be weak, store hours have been cut to less than much of the competition (Macy’s, Ross, TJ Maxx/Marshalls, Walmart, and Target all have longer store hours), and I am not real clear where this chain is heading but it does not seem to be anywhere good.
Coming out of the pandemic, Kohl’s represents low-hanging fruit for these activists – and the current board and management. The argument presented by the activist group is proper at a high level but provides broad brush platitudes on actual specifics for the way forward. The real estate sale and leaseback proposal is a steroid for the balance sheet but diminishes future flexibility and enterprise value. The assortment criticism is valid, but Kohl’s management does not need a new board to rectify it.
Kohl’s has an opportunity to do better as long as they consider and selectively act on some of the inputs.