With 1,100 Stores, Does A Kohl’s Comeback Begin In The Boardroom?

Macy’s may sell more stuff, but when it comes to store count, Kohl’s is second to none, with 1,100 locations in its portfolio. It’s a real estate reality that has caught the eye of activist investors looking to ride the Wisconsin-based chain to new heights, beginning with a boardroom coup that would add nine new names to the list of directors, bringing the total to 21.

The move, which was announced over the weekend, is being backed by Macellum Advisors, Ancora Holdings and Legion Partners, a trio of activists that controls 9.5 percent of Kohl’s and has undertaken similar retail shake-ups at Big Lots and Bed, Bath & Beyond (in 2019).

In a 27-page open letter posted to its new Create Value at Kohl’s website, the group claims that poor retail strategy and execution have led to stagnant sales, declining operating margins and a 44 percent drop in operating profits between 2011 and 2019, as well as a chronically underperforming stock price. In addition, the group said the current board is “deeply entrenched with insufficient retail expertise and sees directors’ lack of meaningful stock ownership as an impediment to serving shareholder interests.”

What the letter did show is that from their COVID-era lows in April, shares of Kohl’s have already gone from $11 to $60 in the past 10 months, including a 10 percent gain on the latest activist report.

Department Store Wars

For its part, Kohl’s has not yet responded to the new activist efforts, but has recently pre-announced its preliminary Q4 earnings (due out March 2) that topped analysts’ sales and earnings estimates. In addition, Kohl’s announced last week that it had appointed Robbin Mitchell to its board, noting her role in the Fashion & Luxury team at Boston Consulting Group as well as prior executive positions at Ralph Lauren and Tommy Hilfiger. Current CEO Michelle Gass has held the top position since May 2018, having previously served as the chief customer officer and chief merchandising officer after joining Kohl’s in 2013 following a 16-year stint at Starbucks.

Further analysis of the Kohl’s present board roster shows members such as Michael Bende (previously COO of global eCommerce at Walmart), Peter Boneparth (the former CEO of Jones Apparel Group), and Steve Burd (former chairman and CEO of Safeway).

“Our fourth-quarter performance exceeded our expectations across all key metrics with sales strengthening,” Gass said in the Feb. 4 statement, noting a 20 percent increase in digital sales that accounted for more than 40 percent of total revenues. “As we carry this momentum into 2021, we are confident that our key strategic initiatives will accelerate our top-line growth and expand our operating margin,” Gass added, touting the impending launch of its partnership with Sephora, slated for this fall.

The Backdrop 

The entire department store segment had been struggling prior to the pandemic, as large, mall-based chain stores lacked the convenience, execution and assortment available online. However, the coronavirus has also slimmed the ranks of competition, with several large chains — including Kohl’s — announcing store closures, and others like Steinmart, Lord & Taylor, JCPenney and Sears filing for bankruptcy.

According to the activist group statement, the extensive real estate held by Kohl’s is at the center of its plans, which aim to “to unlock $7-8 billion of real estate value trapped on the company’s balance sheet” via a sale-leaseback process that it says would quadruple earnings and “drive the stock price over 2x higher than current levels.”

The group’s prior investment move on Bed, Bath & Beyond two years ago not only led to a new CEO and revitalized board, but most recently saw further streamlining in the houseware retailer’s portfolio via the sale of its Cost Plus World Market unit earlier this month.

Kohl’s is expected to report Q4 earnings of $0.95 per share on $5.9 billion in sales from its 1,100 stores in 49 states, which have more than 120,000 employees. By comparison, segment leader Macy’s, which will report its Q4 results on Tuesday (Feb. 23), has 30 percent fewer stores (~775 total) but does approximately 15 percent more revenue.