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Kohl’s Corp.: Are Separate Dot-com and Store Companies in the Cards?

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Will Kohl’s Corp. be the next retailer pushed to spin off its dot-com into a separate company?

Financial sources say Kohl’s, with its underperforming stock, is expected to fall under pressure from activist investors later this year to spin off its e-commerce operation, mirroring what the Hudson’s Bay Co. has already done with its Saks Fifth Avenue, Saks Off 5th and Hudson’s Bay divisions, and what Macy’s Inc. is also being pushed to do.

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“Nothing is actually happening now at Kohl’s, but will later this year,” one financial source told WWD. “It makes a ton of sense for Kohl’s.”

“Shareholders are in contact with the board of Kohl’s to at least evaluate a spin-off for the same reasons that Jana Partners is pressuring Macy’s to spin off its e-commerce. It’s just as viable with Kohl’s.”

Investors have seen Kohl’s stock price languish recently and believe that taking the dramatic and complicated step of separating the dot-com and brick-and-mortar store operations would bring greater value to the business.

Kohl’s stock is trading at around $47, was over $64 last spring, and has ranged from around $30 last year to more than $80 in the fall of 2018. The stock wasn’t helped in September when Bank of America slashed its investment recommendation for the retailer by two levels, citing supply chain issues. Bank of America placed an “underperform” rating on the stock, down from “buy.” Bank of America reduced its price target for Kohl’s stock down to $48 from $75.

Still, a stock price doesn’t always reflect the strength of a retailer’s operations. At Kohl’s, there have been significant merchandising advancements, including rolling out Sephora online and in stores this year as well as bolstering casual and active offerings with leading brands like Nike, Adidas, Cole Hahn, Calvin Klein, Tommy Hilfiger and Lands’ End, and emphasizing inclusivity in the product offerings. They’re widely seen as positive maneuvers sharpening the Kohl’s brand identity and providing a simpler and more relevant shopping experience.

E-commerce at Kohl’s is estimated at around 30 to 35 percent of the total volume, though in the fourth quarter last year, it was north of 40 percent of sales. This year, with most Americans vaccinated against COVID-19, many are inclined to return to shopping in stores, meaning some business would shift back to brick-and-mortar retail.

Kohl’s generated $15.96 billion in total sales in 2020 and $19.97 billion in 2019.

Kohl’s, a public company, could spin off its dot-com business through an initial public offering, or a carve out in some other way. The company could sell a big chunk of the e-commerce operation and use the money to buy back stock, pay down debt and invest in dot-com for growth.

In April, Kohl’s entered into an agreement with activist investors fighting for fresh blood on the retailer’s board. Two independent directors nominated by the activist group — Margaret Jenkins and Thomas Kingsbury — were put on the board. An additional independent director identified by Kohl’s and agreed to by the investor group, former Lululemon chief executive officer Christine Day, also joined the board.

The activist group was led by Macellum Advisors GP LLC, along with Ancora Holdings Inc.; Legion Partners Asset Management LLC, and 4010 Capital LLC. At the time, the group collectively owned 9.3 percent of Kohl’s outstanding common stock, including options.

On Thursday, Macellum would not comment on Kohl’s and Kohl’s did not return a request for comment.

Along with last spring’s pact, the investor group agreed to abide by certain customary standstill provisions until 30 days prior to the close of the nomination window for the company’s 2022 annual shareholder meeting. The settlement would have to expire before the investors could act again.

Opinions are mixed on whether separating a retailer’s dot-com and store operations into separate companies is a good strategy. Pureplay e-tailers have generated larger stock market valuations than those with online and brick-and-mortar operations, but the long-term value of separating the two remains to be seen.

“The only crazy thing about this idea is that Saks is the only one who thought of it,” said one retail expert. “It is the most logical thing for a retailer to do at the moment. You get fresh capital, a chance to invest in a high-growth digital business, money to hire new people, and you expand the business, and can still invest in the slower growth store business. You don’t have to neglect it.

However, it’s not a simple process. “It requires months of difficult work, up to a year,” to execute, the expert said. The process involves participation by store executives, lawyers and accountants, the development of a feasibility study, new legal identities, and creating scores and scores of operating and service agreements between the store and dot-com businesses.

“This is not a solution for every retailer, but it is a solution for a number of stuck-in-the-middle retail businesses with legacy stores,” said the source.

It would not be considered a solution for companies such as Costco Wholesale Corp. and Walmart Inc., which have higher stock prices than Macy’s Inc. and Kohl’s. Costco and Walmart also have huge and dominant store operations, and dot-com revenues that are relatively small in comparison to their businesses overall, unlike Kohl’s and Macy’s.

Separating a retailer from its dot-com operations flies in the face of a decade’s worth of omnichannel coming together, where the industry at large pushed to eliminate the divisions between their bricks and clicks to focus more squarely on their relationships with shoppers and providing “seamless” shopping experiences, channel to channel.

“Traditional retailers bristle at the idea, but shareholders care about generating value, and Richard Baker cares. He is trying to make value,” said another source, referring to the Toronto-based HBC’s chairman, governor and CEO who, along with Marc Metrick, now CEO of Saks.com and formerly CEO of both Saks stores and saks.com, came up with the idea of the Saks separation.

On Thursday, Cowen Equity Research issued a Macy’s report indicating that it does not believe a spin-off of macys.com is likely in the near term.

“We believe a spin-off could be possible, and management and the board have and are analyzing this possibility along with other value-generating initiatives. However, we acknowledge that there have not been many successful long-term proof points, and there are significant risks to destabilizing the business and slowing momentum.”

Before a spin-off could occur, there are several considerations, Cowen reported, notably “the viability of margin and growth profile of a Macy’s stores-only business and related unit economics, execution and creation of hundreds of essential service agreements, and dis-synergies and overhead which may need to be created across two new companies.”

On the key risks of a separation, Cowen cited “the need for Macy’s to drive an integrated and frictionless customer experience, cross-channel supply chain and inventory management, dis-synergies from separation and risk management loses focus of operations during the separation, customer acquisition considerations and cost sharing. Also, the need to drive speed and agility and manage ever-evolving ‘customer-centric’ priorities.

On the positive side, Cowen cited “the potential ability to accelerate digital investments, improve talent acquisition, along with a greater focus on digital marketing efforts, and removing the capital intensity of physical stores.”