Activist investors seeking to take over the board at
Kohl's Corp. were not impressed by the company's recent earnings report and 2021 outlook.
On Friday, the group released an open
letter saying Kohl's fourth quarter results and guidance "substantiate the immediate need for change on the board" and indicates board leadership that lacks the "relevant retail expertise" to get the company back on track.
The Menomonee Falls-based retailer found itself in the middle of a public proxy war last month after the investor group, which owns 9.5% of Kohl's outstanding stock, released an open
letter, nominating nine replacement candidates for the company's 12-person board and proposing plans to improve performance.
In
response, Kohl's said it rejects the group's attempt to overhaul the board and doubled down on its own growth initiatives, which includes honing the active, casual and beauty categories. Michelle Gass, Kohl's CEO, has been
quoted in the media this week saying the company is "way ahead" of activist investors and its current strategy is producing results.
On Tuesday, Kohl's
reported a net loss of $163 million for 2020. Sales were down 20% for the year, and 10% for the fourth quarter, which Kohl's touted as an improvement over the previous quarter's 13.3% drop in sales.
In their open letter Friday, activist investors raised several concerns, building their case for a board refresh. They said the board's use of results during the COVID-19 pandemic as evidence that operations are improving is "a misleading characterization" of performance. Kohl's surpassed only three of nine peer group competitors in sales growth from the third to fourth quarter.
The group called Kohl's current strategy "best of the worst." It's off-mall locations gives the retailer an edge, but places it in a category with high-performing off-mall brands like Target, Old Navy and TJ Maxx. Still, according to the investor group, Kohl's settles for beating "troubled mall-based department stores."
"The board seems to be content performing just slightly better than the worst companies in retail," the letter reads.
Kohl's is working to expanding operating margin to 7% to 8% by 2023 as part of its strategic plan, but the investor group questioned the company's ability to achieve that goal without a concrete sales growth goal also in place. It also said Kohl's 2021 guidance is lackluster compared to 2019, which was an underperforming year in its own right with earnings down 13.7% - "not a meaningful yardstick for measuring a recovery."
"The activist investor group’s comparisons of 2019 results to expectations for 2021 are nonsensical given a continuing global pandemic," Kohl's said in a statement sent to BizTimes Friday afternoon.
The group argued again for a large-scale sale-leaseback program for the Kohl's real estate assets, even after the company shot down that suggestion due to a 1995 indenture that prevents further such transactions.
"This indenture was written in 1995 when the company had 125 stores and just over $1 billion in revenue. The investor group believes that the board’s failure to address the overly restrictive nature of this indenture is yet another example of the board’s ineffectiveness," the letter reads.
In addition, the investor group believes the cost of Kohl's Amazon returns program outweigh its immediate benefits, despite the company's statements otherwise and intentions to continue to the program. The group said it could be years before the program impacts the bottom line, and it suggests that Kohl's has failed to properly disclose Amazon "royalty payments" to investors.
Concluding its letter, the group said it fears "history will repeat itself in a series of failed initiatives," with Kohl's continuing to underperform.
In its statement, Kohl's said the group's comments indicate it's on focused on "
short-term payout at the expense of sustainable success." Under its current board and management, the company said it's headed for a multi-year improvement of both the top and bottom line.
"We reject the activists’ short-termism and their attempt to disrupt our momentum at this critical time," Kohl's said.
The company's board is set to present its recommendation of the nominated director replacements and shareholders will vote on the decision at the 2021 annual meeting.
