Activist Spotlight: What’s behind the campaign to force change at Kohl?

A view outside of a Kohls store in Miramar, Florida.

Johnny Louis | Getty Images

Company: Kohl’s Corp (KSS)

Kohl’s operates as a retail company in the United States. The stores and website sell apparel, shoes, accessories, beauty products, and household products. The company mainly sells its products under the Apt brand name. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life as well as Food Network, LC Lauren Conrad and Simply Vera Vera Wang. As of February 1, 2021, the company operated 1,160 department stores; a website Kohls.com; and 12 FILA sales outlets. Kohl’s Corporation was founded in 1962 and is headquartered in Menomonee Falls, Wisconsin.

Market value: $ 8.7 billion ($ 55.59 per share)

Activist: Macellum Capital

Percentage ownership: 9.48%

Average cost: $ 43.73

Activist Comment: Macellum is not an activist investor but is willing to take activist action if they believe change is necessary. They have extensive experience with consumer retail businesses and that experience is evident in their extensive letter to the board of directors. While Macellum prefers to work constructively with a company, it has historically been successful at The Children’s Place, Christopher & Banks, Citi Trends, Bed Bath, and Beyond and Big Lots, and has been represented on the board through settlements. In this situation, Macellum has partnered with Legion Partners, Ancora Advisors and 4010 Capital (collectively the “Group”). The Group’s 9.48% stake consists of Macellum (5.53%), Ancora (2.59%), Legion (1.34%) and 4010 Capital (0.02%).

What’s happening:

On February 22, 2021, the Group sent a letter to the company’s shareholders announcing that it had nominated the following nine candidates for election to the Board of Directors on January 11 at the 2021 Annual Meeting: (i) Marjorie L Bowen, a former investment banker at Houlihan Lokey; (ii) James T. Corcoran, former principal at Highfields Capital Management; (iii) David A. Duplantis, Past President, Global Marketing, E-Commerce, CRM and Customer Experience at Coach; (iv) Jonathan Duskin, CEO of Macellum Capital; (v) Margaret L. Jenkins, former Marketing Director at Denny’s and El Pollo Loco; (vi) Jeffrey A. Kantor, former chief merchandising officer at Macy’s; (vii) Thomas A. Kingsbury, Past President and CEO of Burlington Stores; (viii) Margenett Moore-Roberts, Chief Inclusion & Diversity Officer of IPG DXTRA; and (ix) Cynthia S. Murray, former Brand President of Chico’s FAS.

(Check out the latest battle news here.)

Backstage:

The group sent the company a very detailed letter and analysis highlighting the reasons for a change at Kohl’s and nominating nine directors for election to the board of directors. The group’s letter begins with a clear reference to Kohl’s extreme long-term underperformance against the market and his peers. The Group believes this is because the Board of Directors has not developed and monitored a strategic plan in response to a rapidly changing retail environment, and bases this statement on many detailed issues they are experiencing across the company, such as: B. stagnating sales and falling margins. The group notes that the company’s sales are essentially the same as in 2011, with sales of the same business declining 0.6% since then, while the industry has grown 17%. This is particularly worrying given the many competitive store closures and bankruptcies in the industry during this time that resulted in $ 12 billion in sales that could have accrued to Kohl’s. The group believes the causes of stagnant sales are repetitive and oversorted collections, disappointing private label launches and failures, loss of market share in the home category, confusing gimmicks, and confusing loyalty programs.

The company’s operating margins were also an issue, declining from 11.5% in 2011 to 6.1% in 2019. The group identifies the reasons for the company’s falling gross margins, including several factors including low inventory sales resulting in large discounts, unproductive product and price mixing, failures to offset higher purchasing costs, inefficient sourcing agreements and failures in private label products, and poor e-commerce . The group also points to a bloated S, G&A as the culprit – a more than $ 450 million increase in SG&A expenses from 2014 to 2019 with sales unchanged. Macellum makes this attributable to a lack of cost-benefit analysis and cost discipline. For example, the activist claims the company has a full-time flight crew and two private jets.

This lack of discipline extends to capital allocation, where the Group believes the Board of Directors has not shown adequate discipline in overseeing a prudent investment program. In addition to these operational issues, which could take some time to resolve, the Group is making a capital allocation proposal that could create more immediate shareholder value. They state the company is valued at $ 7 billion to $ 8 billion trapped in non-core, non-making real estate assets. At least $ 3 billion of this could be unlocked in 60 to 90 days through sale-leaseback transactions. If the company uses the proceeds to buy back shares, it may have little to no annual cash flow impact depending on when and at what level the company reinstates the dividend.

While the group identifies many serious problems with the company, these problems are less of a problem than a symptom of the larger problem that the group also identifies – a culture in the company that lacks management cost discipline and a board of directors who Not prioritizing efficiency and cutting costs or that will hold management accountable. This is a multiple private jet culture where executives could get 100% of their target bonus when sales and net income drop. It is clear that the problem starts with the board, as the company has been run by several different management teams, but the board has largely remained the same. The group also has no hope of the company’s future under this board of directors and management team, as it points out that the company’s 2020 investor presentation appears “eerily familiar” to the 2014 plan, which it grossly missed.

The group appoints a majority of nine directors to the board, but just because they ask for a majority doesn’t mean they will insist on it. In Macellum’s 13D in Bed, Bath and Beyond, they initially nominated 15 directors (later reduced to 10) and decided on 4. In their 13D in Big Lots, they also nominated a majority of nine people, but opted for two. Both investments were made with a similar group of investors as Kohl’s, and in both cases Macellum has shown that they don’t need a majority of the seats to create value. Given the company’s terrible performance and business, and Macellum’s history in retailing for consumers, we would expect the company to really look into them. While Macellum is sensible and would likely settle for less than a majority, neither would they hesitate to have a full-fledged proxy battle if necessary and could very well get a majority of the seats in a shareholder vote.

Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.

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