Under investor pressure, Kohl’s earnings fell 13% in Q4 amid industry headwinds

Ongoing proxy fight was largely excluded from earnings discussions

Kohl’s headquarters
Kohl’s headquarters in Menomonee Falls.

Supply chain delays, rising freight costs and the COVID-19 omicron variant made for a slower-than-expected fourth quarter for Kohl’s Corp., but the Menomonee Falls-based retailer continues to tout its growth strategy and efforts to boost shareholder value. 

Kohl’s on Tuesday reported earnings of $299 million for the fourth quarter of fiscal 2021, down 13% from the same period in 2020. Earnings for the full year totaled $938 million, compared to 2020’s loss of $163 million, as a result of the COVID-19 pandemic, and $691 million in 2019. 

Net sales were up about 6% in the fourth quarter and about 23% for the full year, which missed the mark for Kohl’s previously projected mid-20s percent increase for full-year net sales. Compared to pre-pandemic 2019, net sales were down 5% for the fourth quarter and 2% for the full year. Q4 also marks a slowdown in significant sales growth from quarter to quarter in 2021 – 15% in Q3, 31% in Q2 and 69% in Q1. 

During Tuesday’s earnings conference call, Kohl’s CEO Michelle Gass shed light on the impact of global supply chain delays on holiday performance. 

“Following a strong sales start to the (fourth) quarter, we experienced significant additional inventory receipt delays and were unable to fulfill all of the customer demand during this critical holiday time,” she said. 

During November and December, average available for sale inventory was down nearly 40% to 2019. Inventory levels began to recover in January, but the month saw slow store traffic due to a surge in COVID-19 cases.

Kohl’s claims it has worked to restructure its business in the name of profitability, and the company now has an 8.6% full-year operating margin to show for it, surpassing its goal of 7% to 8% operating margin by 2023. Gross margin for the fourth quarter was 33.2%, up slightly from 32% in 2020. Also in 2021, Kohl’s returned $1.5 billion in capital to shareholders, and it plans to repurchase at least $1 billion in 2022 through a recently approved $3 billion share repurchase program.

Kohl’s board also approved a 100% increase in its dividend, which equates to an annual dividend of $2.00 per share. 

The improvement in profitability was driven by higher inventory turn, regular price selling, reduced sourcing costs, and pricing and promotion optimization strategies, but was offset by higher transportation costs. Freight expenses in Q4 were $40 million higher than expected, said chief financial officer Jill Timm. 

The company reported a record-setting $7.33 adjusted diluted earnings per share in 2021, up from a $1.21 loss per share in 2020 and previous high of $5.60 in 2018. Adjusted diluted earnings per share in Q4 totaled $2.20, which exceeded the company’s expectations despite slightly lagging behind Q4 of 2020.

Digital sales continued to grow in 2021, having increased 30% from 2019 and accounting for 32% of total sales. But Kohl’s says its brick and mortar stores are just as important: more than 40% of digital sales were fulfilled by stores in Q4. And Gass said Q4’s sales boost, albeit minor, was driven by a double-digit jump in in-store sales.

Some of that additional in-store traffic is attributed to Kohl’s partnership with beauty retail giant Sephora, which deputed in 200 stores and online last fall. Kohl’s recently said the partnership is on track to reach its goal of 850 stores by 2023. Gass said 25% of customers shopping Sephora at Kohl’s stores are brand new to Kohl’s and represent a younger demographic.

The company also touted growth in its active category, which saw a 25% overall sales increase in the fourth quarter. 

The beauty, active-casual, and women’s categories are central to Kohl’s long-term growth strategy, which the company claims is working but has come under fire by activist investors seeking to overhaul Kohl’s board. 

Macellum Capital Management, which owns a 5% stake in Kohl’s, recently nominated a slate of 10 director candidates for election at the retailer’s 2022 annual meeting this spring. The move followed Kohl’s rejection last month of two purchase offers, one for $64 per share and the other for $65 per share, and adoption of a shareholder rights plan or “poison pill” to prevent a hostile takeover. 

Macellum managing partner Jonathan Duskin wrote in an initial Feb. 10 letter to shareholders that Kohl’s decision indicates its current board is “no longer operating with impartiality and objectivity” and “no longer prioritizing shareholders’ interests.” Kohl’s fought back, calling Macellum’s overhaul effort “unjustified and counterproductive.” Kohl’s also highlighted the recent appointment of its independent finance committee to lead a review of any purchase offers, as well as its engagement with financial advisors Goldman Sachs and PJT Partners. 

In a Feb. 24 press release, Macellum doubled down on criticism of Kohl’s current board of directors and accused the retailer of “anti-shareholder actions and poor corporate governance” following the firm’s nomination. It claimed the board had not yet authorized its bankers to initiate an open review of sale opportunities like it said it would. The release also noted concerns about the shareholder rights plan, an unanswered request for a universal proxy card to be used at the annual meeting, and a possible shift in the shareholder record date. 

“Given that the company’s share price has deflated in recent weeks to approximately 17% below Acacia Research Corporation’s disclosed initial offer of $64 per share and even further compared to a reported offer price of $65 per share from Sycamore Partners, it seems we are already witnessing the negative effects of the board’s attempts to chill a normal course sale process,” wrote Duskin. “We do not believe investors can trust this board to oversee a transparent and rigorous process to maximize shareholder returns.” 

Neither the proxy fight with Macellum nor the sale review process was discussed in detail during Kohl’s Q4 conference call, but Gass made the following statement prior to taking questions from analysts. She said she wanted to address the “inaccurate and uniformed commentary regarding the board’s openness to maximizing value.” 

“We have a strategic and financial plan that will deliver substantial value. The board is testing and measuring that plan against other alternatives. As we announced on Feb. 4, the company retained Goldman Sachs to engage with interested parties. That effort continues and has included engaging with unsolicited bidders as well as proactive outreach. Engagement with those parties is ongoing. Our proxy, when filed, will provide more detail.

“The board is committed to fulfilling its fiduciary duties and will choose the path if believed will maximize value to shareholders. So contrary to what others may say, the board’s approach is robust and intentional,” said Gass.

Duskin responded to Kohl’s earnings in a statement Tuesday afternoon, calling the results “disappointing” and saying they “validate why Kohl’s should engage with us to meaningfully refresh the board and evaluate credible sale offers.” He specifically picked apart the company’s plans to increase capital expenditures from $605 million in 2021 to $850 million in 2022, which Kohl’s says is as part of the expansion of Sephora at Kohl’s and other efforts to improve store layout.

“After decades of not being able to create shareholder value while spending billions, the company now plans to accelerate capital expenditures rather than focus on the core issues related to its assortment and value proposition,” said Duskin. “Even if every Kohl’s store had a Sephora during the fourth quarter, and those shops fueled a mid-single-digit lift as the company disclosed last quarter, overall sales would have been flat vs. 2019 and still trailed Macy’s Dillard’s and the vast majority of peers.”

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Maredithe has covered retail, restaurants, entertainment and tourism since 2018. Her duties as associate editor include copy editing, page proofing and managing work flow. Meyer earned a degree in journalism from Marquette University and still enjoys attending men’s basketball games to cheer on the Golden Eagles. Also in her free time, Meyer coaches high school field hockey and loves trying out new restaurants in Milwaukee.

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