KSS shareholders face a tough choice

The junkmen come for Kohls (NYSE:KSS) Inventory.

Source: Various Photographs/Shutterstock.com

Since December, activist investors have been pushing the company to sell or at least divest its real estate and e-commerce units. The board responded by rejecting two takeover offers and adopting a “poison pill” aimed at preventing a “hostile takeover”.

The pressure increased last month when Jonathan Duskin Macellum Group appointed a set of replacement directors.

Managing Director Michelle Gass’ multi-year turnaround plan may now prove unnecessary, even though the stock has risen 121% in the past two years.

why they want it

Retail stocks, like KSS shares, have become hot commodities of late as investors pick survivors of the pandemic, separating the winners from the near winners.

Discounters love walmart (NYSE:WMT), Wholesale Costco (NASDAQ:COST) and General dollar (NYSE:CEO) all seem to be winners. Kohl’s is looking more and more like a near-winner, which activists say means he’s a loser.

Placer.Ai, which tracks retail visitors, says Kohl’s foot traffic quickly rebounded to less than 10% of its pre-pandemic level. Kohl’s earned $938 million, $6.32 a share, on sales of $19.5 billion in the year ending January. It said its Christmas quarter earnings of $2.20 per share beat expectations.

It’s not enough for Macellum, who says stock in Target (NYSE:TGT) and TJX (NYSE:TJX) perform better than Kohl. Kohl shares rose nearly 30% after Macellum announced his challenge to the board and held half of that gain even against board resistance.

Can beauty save KSS stocks?

Prior to Gass, Kohl’s was known as a discount department store focused on suburban malls. Gass’ hiring in 2018 was always meant to change that formula. Industry analysts now call Kohl’s “anti-mall” for its stores-within-a-store strategy.

Under Gass, some of Kohl’s real estate was leased as Planet Fitness (NASDAQ:PLNT) locations or Amazon.Com (NASDAQ:AMZN) pick-up locations. Kohl’s also became home to full-price retailers who had lost distribution, such as under protection (NYSE:UAA) and LVMH (OTCMKTS:LVMUY) Sephora unit, which was previously at JC Penney.

Gass now hopes the Sephora connection can save his strategy. Placer.AI says beauty specialty stores have recently been a bright spot for retail. At an “Investor Day” event this month, Gass said she plans to open 400 Sephora stores in Kohl stores in 2022. Placer.Ai says Kohl’s sees an uptick in sales in the rest as a result. of its stores. Gass wants to make Sephora a $2 billion business for Kohl’s. But she still predicts low single-digit growth for the channel.

The basics of KSS shares

When Macellum announced its slate, Kohl’s reportedly sent its business jet to Seattle, Amazon’s home base. Since then, there has been speculation that Amazon might make an offer, seeing it as a cheap way to kick-start its brick-and-mortar retail ambitions.

Analysts said they weren’t impressed with Kohl’s investor day, but it’s unclear whether Macellum’s strategy is any better.

The only buyers to step in so far are private equity firms that want to break up Kohl’s. Starboard Value would have offered $9 billion, but that’s not a huge premium to Kohl’s current market cap of $7.6 billion.

Starboard’s plan appears to be to secure debt financing and then finance the purchase with Kohl’s own real estate through a sale-leaseback. This would lock Kohl’s into long-term leases, which for critics like Bank of America (NYSE:BAC), looks like what killed Sears.

Gass acknowledged some mistakes. She wants to open 100 new stores in the next few years, but admits they will be smaller than current locations.

The choice for investors is now between a risky strategy and a dissolution of the company. If I owned the stocks now, my heart would prefer the strategy, but my head would seek to see Starboard’s money.

As of the date of publication, Dana Blankenhorn held a long-time position with AMZN, BAC and DG. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.

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