Analysis: Kohl's Downhill Road To Seeking A Buyer

Zinger Key Points
  • CEO Michelle Gass cited "an inflationary consumer environment" as working against the retailer.
  • Still, Gass predicted Kohl's business would "improve as the year progresses."

The news from earlier this week that Kohl’s Corp. KSS was in advanced talks to be acquired by Franchise Group Inc. FRG marked the beginning of the end for a financially troubled department store chain whose leadership vainly attempted to ignore concerns that it was leading the company in the wrong direction.

What Happened: Kohl’s operates 1,100 stores in every state except Hawaii. On Monday, the Menomonee Falls, Wisconsin-based company entered a three-week exclusivity period to hammer out an acquisition deal with Franchise Group, a holding company whose retail portfolio includes franchise-driven brands including The Vitamin Shoppe, Pet Supplies Plus, Sylvan Learning and Buddy’s Home Furnishings.

The Wall Street Journal, citing unnamed “people familiar with the matter,” reported that Franchise Group offered approximately $60 a share for Kohl’s, a more generous bid than the mid-$50 per share bid put forth by the private equity firm Sycamore Partners.

Kohl’s shares spiked by 13% when the Franchise Group news broke – it had been in a 15% slide since the beginning of the year and has been trading between $34.64 and $64.38 over the past 52 weeks; shares opened today at $45.09.

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Prelude To Acquisition Talks: The coronavirus pandemic had a harsh impact on traditional brick-and-mortar retailers, but unlike other company’s Kohl’s leadership was called to task by a section of shareholders that accused it of strategies that resulted in the company being steered away from profitability.

In early 2021, the company swatted away efforts by a coalition of activist investors who sought to take control of the 12-person board of directors. That group – which included Macellum Advisors GP LLC, Ancora Holdings Inc., Legion Partners Asset Management LLC and 4010 Capital LLC – held a combined 9.5% stake in the retailer and blamed its leadership for creating what they viewed as a dismal retail strategy that resulted in evaporating profits and flaccid stock performance.

But their effort to take over the board fell far short, with Kohl’s leadership accusing them of being “focused on short-termism and financial engineering at the expense of sustainable operating and financial success.” The company claimed this effort was meant to “disrupt Kohl's strong business momentum.”

However, there was little in the way of “strong business momentum” by the end of 2021, and by year’s end Engine Capital LP – which owns about a 1% stake in Kohl’s – called on the company to either spin off its e-commerce business or begin to consider selling the company. Engine Capital was not part of the attempt to remake the board earlier in that year.

One month after Engine Capital’s complaint, Macellum Advisors revived its concerns by calling on the company’s leadership to either bring in new directors to its board or begin consultations with bankers on the sale of the company.

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A Broken Quarter: Last month, Kohl’s presented a first quarter earnings report that could charitably be described as dismal, with first quarter net sales and comparable sales down 5.2% year-over-year and total revenues dropping from $3.88 billion in Q1 2021 to $3.71 billion in Q1 2022. The company also whittled down earlier optimism for its financial outlook, with a new forecast of net sales in the range of 0% to 1% as compared to the prior year.

Whereas Kohl’s shouldered on through most of 2020 and into 2021 dealing with the pandemic’s impact on the retail economy, 2022 brought record-high inflation that put a chokehold on the spending habits of many consumers.

In announcing the quarterly results, Kohl’s CEO Michelle Gass stated, that while the company recorded a “strong start to the quarter with positive low-single digits comps through late March, sales considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment.”

Gass also told the Associated Press that the company was also fighting wage inflation and was studying how to use automation to offset the costs created by paying its workforce higher wages.

But despite insisting that the company’s business will "improve as the year progresses," Gass acknowledged the first quarter earnings signaled the beginning of the end of an independently operated company.

“Regarding our review of strategic alternatives, we continue to engage with multiple interested parties,” she said.

Photo: Mike Mozart / Flickr Creative Commons

Posted In: acquisitionInflationkohl'sPandemicretailAnalyst ColorM&ANewsSmall CapOpinionAnalyst Ratings

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