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Activist investors blast Kohl's management in scathing letter

Brian Sozzi
·Editor-at-Large
·7 min read
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Kohl's (KSS) is starting its week with activist investors knocking on its door.

On Monday, Kohl's and CEO Michelle Gass — who joined as chief customer officer in 2013 and assumed the CEO role in May 2018 — were blasted by a group of activist investors for "poor retail execution," "excessive executive compensation," a "long-tenured Board with insufficient retail experience," and a "systemic inability to achieve stated goals."

The activist group includes Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. They now control a combined 9.5% stake in Kohl’s, according to a new letter published Monday. The news was first reported by The Wall Street Journal.

Kohl's shares rose 8% in afternoon trading.

The group nominated nine people to Kohl's already enormous 12-person board, the letter says. The activists are pushing for Kohl's to slash inventory levels to cut costs, do a sale-leaseback transaction for some stores to boost cash and lower costs and make promotions easier for customers to understand.

"The Board has overseen a long list of sales and margin driving initiatives which have created no meaningful value for shareholders," the activists wrote in a scathing new letter to management. The full letter is below.

A source familiar with the matter tells Yahoo Finance the campaign is not a "catch and kill" attack on the CEO. Rather, they would like to work with Gass to turn the company around.

A view of Kohl's during the coronavirus pandemic on May 12, 2020 in Queens borough of New York City. (AP)
A view of Kohl's during the coronavirus pandemic on May 12, 2020 in Queens borough of New York City. (AP)

Kohl's fired back at the activists, and clearly has a different view of how it's doing right now.

"Kohl’s is committed to maintaining constructive engagement with all shareholders regarding the Company’s strategies and prospects. The Kohl’s Board and management team have been engaged in discussions with the Investor Group since early December, and we remain open to new ideas that will improve our operating performance and capital allocation. However, we reject the Investor Group’s attempt to seize control of our Board and disrupt our momentum, especially considering that we are well underway in implementing a strong growth strategy and accelerating our performance, and we have refreshed half our Board with six new independent directors since 2016," Kohl's said in a new statement released Monday afternoon

The activists — who last teamed up in 2019 to shake up then dreadfully performing Bed Bath & Beyond (BBBY) — appear to be well-placed in their efforts. While Kohl's has garnered favorable headlines for its partnerships with Amazon (AMZN) (for store returns) and more recently cosmetics giant Sephora, the company simply has not delivered on several fronts.

The operating performance is more disappointing considering Kohl's pure-play rivals such as J.C. Penney and Macy's have closed hundreds of stores the past five years. Theoretically, that should have pushed market share to Kohl's.

That hasn't happened.

Here are some stats from Yahoo Finance on Kohl's looking out over the past five years. We felt it important to look at the results pre-pandemic (Kohl's sales and profits have fallen off a cliff during the pandemic, just like other retailers):

  • Stock price last five years: up 18% versus a 92% gain for the S&P 500. Target shares up 161%.

  • Same-store sales last five years (excluding 2020): sales declined in two of the last five years, with only minor gains in the other three. Source: Bloomberg data

  • Operating margin last five years (excluding 2020): hit 5.5% in 2019, down from 8.09% in 2015. Source: Bloomberg data. Management's goal has been 7% to 8%.

  • Fourth quarter same-store sales: company came out on Feb. 4 and said same-store sales for the fourth quarter plunged 11%.

Here's a look at the full letter sent to Kohl's by the activist group.

Macellum Advisors GP, LLC (together with its affiliates, “Macellum”), Ancora Holdings, Inc. (together with its affiliates, “Ancora”), Legion Partners Asset Management, LLC (together with its affiliates, “Legion Partners”), and 4010 Capital, LLC (together with its affiliates, “4010 Capital” and, together with Macellum, Ancora and Legion Partners, the “Investor Group”) today issued an open letter to shareholders of Kohl’s Corporation (NYSE: KSS) (“Kohl’s” or the “Company”) and announced the nomination of nine highly-qualified, independent candidates for election to the Company’s Board of Directors (the “Board”) at the 2021 annual meeting of shareholders (the “2021 Annual Meeting”). The Investor Group is deemed to beneficially own, in the aggregate, 14,950,632 shares of the Company’s common stock, including 3,481,600 shares underlying call options currently exercisable, constituting approximately 9.5% of the Company’s outstanding common stock.

In the letter, the Investor Group highlights the following:

∙ Poor retail execution and strategy have led to stagnant sales and declining operating margins. The Board has overseen a long list of sales and margin driving initiatives which have created no meaningful value for shareholders. As a result, Kohl’s has suffered from stagnant sales, market share loss, declining gross margins and bloated SG&A – all of which has contributed to operating income margins declining from 11.5% in 2011 to 6.1% in 2019. In 2019, Kohl’s earned nearly $1 billion less in operating profit, or ~44%, less than it did in 2011, despite similar total sales and $6.6 billion in cumulative capital expenditures.

∙ Long-tenured Board with insufficient retail experience and lack of any material share ownership is an impediment to serving shareholder interests. Until the recent addition of a new director last week, likely in response to our recent private engagement, the Board’s average tenure was approximately 10 years. We also believe the Board lacks relevant retail expertise. Despite this long average tenure, the Board collectively owns just ~0.5% of Kohl’s outstanding shares, which the Investor Group believes has prevented proper oversight of management and shows a lack of alignment with shareholders’ interests.

∙ Excessive executive compensation and poor alignment between pay and performance. The Board has developed and implemented a compensation plan that has increased total compensation despite deteriorating results. From 2010 to 2019, Kohl’s top five executives have increased their total compensation from $20 million to $30 million, despite relatively flat sales and a decline in operating profit by ~42% over the same period.

∙ Systemic inability to achieve stated goals. Many of the initiatives Kohl’s is currently targeting to improve performance were the focus of the “Greatness Agenda” Kohl’s delivered to investors in 2013. The agenda called for $21 billion in sales and $1.9 billion in operating profit by 2017. Those targets were missed by 9% and 25%, respectively, by 2017. By 2019, the operating profit target was missed by 36%.

  • Kohl’s has tremendous potential with the right Board and leadership in place. Kohl’s has a valuable and dedicated workforce of more than 120,000 employees that can thrive under the right strategic plan. The Investor Group has identified significant opportunities to generate improvements in sales and margins through changes in merchandising, inventory management, customer engagement and expense rationalization, as well as the potential to unlock $7-8 billion of real estate value trapped on the Company’s balance sheet.

  • The Investor Group proposes a strong slate of directors with extensive retail, turnaround, capital allocation and strategic experience, who are well-positioned to create significant shareholder value. The Investor Group’s diverse slate of retail experts will be focused on repositioning Kohl’s for profitable growth and efficient capital allocation, and instituting best-in-class corporate governance.

· With the right Board and strategic plan in place, the Investor Group believes that the Company has the potential to generate more than $10 in annual earnings per share (EPS) within the next few years. In the coming months, the Investor Group looks forward to sharing a detailed plan, developed together with its director nominees, that it believes could drive a material increase in Kohl’s stock price. A sale-leaseback program for $3 billion of real estate, combined with a properly executed large share repurchase program, could be at least 25% accretive to EPS

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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