Kohl’s activist investors ‘were looking for a big change in the CEO’: Analyst

Morningstar Equity Analyst David Swartz joins Yahoo Finance Live to discuss the resignation of the Kohl's CEO amid pressure from activist investors.

Video Transcript

SEANA SMITH: Big leadership changes for retailers and apparel brands. Kohl's CEO Michelle Gass stepping down in December for a new role at Levi Strauss in January. She'll come on as president of Levi's and is expected to gain the CEO title within 18 months. Meanwhile, Adidas naming a new CEO just weeks after the fallout over Kanye West's anti-Semitic comments. Puma CEO Bjorn Gulden will get the job effective January 1. Gulden worked for Adidas for seven years in the 1990s.

For more on this, let's bring in Morningstar equity analyst David Swartz. David, it's great to have you here. So let's start with Kohl's and the shakeup there. So Michelle Gass stepping down. You can see from the Wall Street's reaction, they were encouraged by this news. What's your read on the new situation and what this means for the retailer?

DAVID SWARTZ: Yeah, she's really been embattled over the last few months with the activist pressure, with the proxy battle, and then with the botched acquisition. There were a lot of problems for Kohl's. And she was really under a lot of pressure from the activists to step down. And they were looking for a big change in CEO, and that's what they got today. And so I think that's why the market reaction is generally positive because it looks like there is some activity going on with the activists and with a different strategy for Kohl's, which has struggled throughout the year.

DAVE BRIGGS: Yeah, shares up more than 8%. So what's the future look like for Kohl's?

DAVID SWARTZ: Well, it depends on who Kohl's decides to choose as the permanent CEO. So Mr. Kingsbury, who was chosen as the interim CEO, used to be the CEO of Burlington. However, he is basically retired, so I don't know that he's really the option for the long-term. If he is the permanent CEO, you know, I think that would be positive as far as the activists are concerned because he was an activist choice last year. He was the guy that the activists had actually tabbed to be potential CEO.

So I think that that's a possibility. But if they do go outside and bring in a different CEO, which I think is also very likely, it's really going to depend on what kind of person they hire. It could be that we could face another proxy battle next year with Kohl's, or possibly that the company will be sold.

SEANA SMITH: Yeah, David, are there any names specifically that you think would be right for this job? And also just in terms of a potential sale for Kohl's down the road, do you think that could potentially be on the table in the future once again?

DAVID SWARTZ: Yeah, I wouldn't want to speculate on who Kohl's might hire. They would look for somebody with a strong retail background, with a merchandising background. Michelle Gass, you know, she came to Kohl's from Starbucks. So she wasn't really in the fashion and retail business before going to Kohl's. And I think that Kohl's would be looking for someone with stronger retail experience.

As for whether the company will be sold, I still think it's a distinct possibility. Kohl's owns significant real estate, which is potentially worth more than the entire company right now. The board and Michelle Gass had really put a damper on the acquisition earlier this year. They really made it known to potential acquirers that they did not want to be sold. So a new CEO could potentially open it up to getting back to acquisitions.

DAVE BRIGGS: Yeah, there's a deal out there that they might regret, in hindsight, not taking. It's been a revolving door overall in the C-suite in the retail inventory. Some of the names that have moved on, Bed, Bath & Beyond, UnderArmour, Glossier, Gap, Old Navy. That's the who in terms of CEOs, 20 of them, exiting in 2022. Why? What is it about the sector that has it so active in terms of the exit?

DAVID SWARTZ: It's certainly been a difficult year for the apparel sector. You know, 2021 was an extremely strong year. So coming back this year, a lot of the comparisons are really tough. The inventory situation has completely reversed, and it's gotten to be very difficult. The shipping situation, the pandemic, there have just been a lot of headaches this year for CEOs and the apparel industry.

And so a lot of shareholders and board members have been looking to potentially make changes. Every situation is slightly different. For UnderArmoour, which you mentioned, Kevin Plank, who controls the company, wanted a CEO who was more focused on growth. In the case of Adidas, the whole Kanye West controversy and the problems they've had in China, there's been a lot of company specific problems this year because the industry itself has been troubled. And so a lot of boards have been looking to make CEO changes.

SEANA SMITH: David, you mentioned the change that we're seeing at Adidas. Just in terms of the problems that they have had in the past, what it would look like under Bjorn Gulden, are you a little bit more optimistic on their outlook from this point out?

DAVID SWARTZ: Yeah, it's been a steady stream of bad news for Adidas, so anything at this point would be considered positive. Bringing in the CEO from Puma, I think, is a huge step forward. This was a guy that has had a lot of success with Puma. He's in the same business, and he has experience at Adidas specifically. So that, I think, is a very strong hire and that's why the market reaction was positive. I do think that Adidas is quite undervalued in that there are strong reasons to actually want to invest in it right now.