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Kohl’s may be the next target for activist investors a la Dell

Melody Hahm
Senior Writer

The words “failed turnaround” seem to go hand-in-hand with discount retail. First Sears (SHLD) was under siege by hedge fund manager Eddie Lampert (who subsequently became CEO in 2013) and continues to be met with investor scrutiny. And then there’s J.C. Penney (JCP), which has endured the two-year war that billionaire Bill Ackman waged against its leadership. Even highly revered Terry Lundgren of Macy’s (M) is being pressured by activist firm Starboard to strike real estate deals. And now Kohl’s (KSS) is the latest to face the harsh glare of underperformance.

On Sunday The Wall Street Journal reported that Kohl’s is considering taking the company private or even the possibility of a breakup.

Kohl’s has been criticized for its heavy reliance on its owns brands (that haven’t been popular) and slowness to adapt to the ecommerce space, Morningstar equity analyst Bridget Weishaar wrote in a research note about the company. In an attempt to address some of these concerns, CEO Kevin Mansell launched the Greatness Agenda in the fall of 2014, particularly focusing on a new customer loyalty program and an expanded beauty department (the store didn’t really have one before). And it boasted what it called a clear purpose: “To inspire and empower families to lead fulfilled lives.” Investors weren’t impressed -- shares are down 17% over the past 12 months -- but have climbed more than 2% since the reports about going private and are now at about $50.

In her research note, Weishaar points out that the discount retail space has been “flooded with competition, most notably through growth of TJ Maxx, Marshalls, Ross, and Nordstrom Rack.”

She has a price target of $60 on the stock, which is based on average annual revenue growth of about 1.5% over the next five years.

In the face of increased competition, a major draw for companies like Sears to go private is their belief that the business is undervalued and they can make changes as they see fit -- without being under the watch of activist shareholders.  

This reasoning is reminiscent of Dell’s $24.9 billion deal to take itself private in 2013. A year after the deal was completed, Michael Dell penned an op-ed that is essentially one big sigh scream of relief. He wrote: “Privatization has unleashed the passion of our team members who have the freedom to focus first on innovating for customers in a way that was not always possible when striving to meet the quarterly demands of Wall Street.”

Though Dell didn’t name names, it’s hard to forget that Carl Icahn was the lead hijacker among the “small group of vocal investors” Dell mentioned. The outspoken activist investor even created a Twitter account (and used some poetic license) to make his lambasting of Michael Dell as public as possible.

In an interview with CNBC in November 2013, Dell said, “They were just trying to talk the price up...The person in question didn’t own a share of the stock until after the deal was announced and had no long-term intentions or good intentions for the company or its shareholders.”

So did the arduous path to privatization pay off? From Dell’s perspective, a definitive yes. In December 2015 the company publicly disclosed its quarterly financial results for the first time since going private. Though revenue declined by 6% year-over-year in its quarter ended in July, revenues were up 5% for fiscal year that ended January 2015. Notably, it included the details of a $67 billion deal to buy cloud computing company EMC, which Dell noted “might not have been feasible in today’s environment for public companies.”

Michael Dell teamed up with private equity firm Silver Lake to take the company private at $13.65 a share, which was a 25% premium over its closing price before news leaked of a potential buyout. That means for average investors, despite Icahn’s disgruntlement, the price should have been palatable. Dell ultimately says the bid was the highest price available for its buyout.

Dell’s saga could be a snapshot look into the future of Kohl’s. If and when the deal is actually announced, how much would Kohl’s be worth? In a research note, Stifel Nicolaus retail analyst Richard Jaffe said Kohl’s could be worth up to $95 a share, which represents about an 89% premium to its current price.

If that were to be the case, shareholders would be satisfied, though hungry activists might find it a prime target to pursue.