Kohl’s opposes activist investors’ attempt to overhaul board

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Menomonee Falls-based Kohl’s Corp. is pushing back against a group of activist investors who want to shake up the retailer’s board of directors in an effort to improve performance.

The group Monday morning released a 27-page open letter, which nominates nine replacement candidates for Kohl’s 12-person board and includes plan to grow sales, cut expenses, adjust executive compensation and proposes a large-scale sale-leaseback program for the company’s real estate assets.

Kohl’s issued a response hours later:

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“We reject the investor group’s attempt to seize control of our board and disrupt our momentum, especially considering that we are well underway in implementing a strong growth strategy and accelerating our performance, and we have refreshed half our board with six new independent directors since 2016.”

According to the company’s statement, Kohl’s board and management team have been in talks with the investor group since early December, and Monday was the first time the group had shared any details about its proposed plan.

The investor group, which includes Macellum Advisors GP LLC, Ancora Holdings Inc., Legion Partners Asset Management LLC and 4010 Capital LLC, owns approximately 9.5% of the Company’s outstanding common stock. The cohort is known for its role in the turnaround of Bed, Bath & Beyond in 2019.

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The group’s open letter criticizes Kohl’s performance over the past decade, prior to the global COVID-19 pandemic. It raises several key issues, including stagnant sales, noting Kohl’s net sales in 2019 virtually mirrored those reported in 2011. Meanwhile the industry  grew 17% during that time, despite a streak of mass closures and bankruptcies of competitors. The group also accuses Kohl’s of having “shiny object syndrome” as it relates to recent execution of brand partnerships, some of which have failed shortly after launch.

“They are exciting to talk about, but often are too small to move the needle and/or ultimately distract the management team from the bigger picture issues,” the letter reads.

Kohl’s said it’s “open to new ideas” and plans to continue working with the investor group to come up new ideas “that could enhance shareholder value.”

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However, the company doubled down on its ongoing long-term strategic plan, which launched last October. Kohl’s said several initiatives in the plan align with what the investor group has suggested, but “other ideas they propose would not be accretive to shareholder value.”

Kohl’s current plan focuses on growing the active/outdoor and lifestyle categories, as well as expanding operating margin to 7% to 8%. Kohl’s said its new strategic partnership with Sephora — the most significant in company history — will make its department stores “leading beauty destinations” and help drive growth.

Kohl’s said it is already making progress with its new strategy. In a business update on Feb. 4, the retailer said comparable sales for the fourth quarter of 2020 were down 11%, but expects earnings to show a “significant improvement” from last quarter. It projects Q4 earnings, set to be released March 2, will exceed expectations.

The investor group is skeptical of Kohl’s ability to follow through on its growth aspirations without major changes to the board. It pointed out that many of the company’s current initiatives were the same as those presented to investors in the “Greatness Agenda” in 2014.

“The agenda called for $21 billion in sales and $1.9 billion in operating profit by 2017. Those targets were missed by 9% and 25%, respectively, by 2017. By 2019, the operating profit target was missed by 36%,” according to the letter.

Another complaint of activist investors is Kohl’s board has “failed to capitalize” on its real estate assets, which have an estimated value of $7 billion to $8 billion “that’s been trapped on the balance sheet.”

“We are aware of at least one private equity real estate investor that has approached the Company on multiple occasions about executing more sizable sale-leaseback transactions, but has been turned away each time,” according to the letter.

The investor group claims that Kohl’s could generate $3 billion through through sale-leaseback transactions. Combining those proceeds with an “effectively executed share repurchase program” could increase earnings per share by at 25%, according to the letter.

Kohl’s said it “regularly evaluates” sale-leaseback transaction opportunities, but hasn’t found it to be the best option. The company said it did a sale-leaseback transaction during the pandemic when the cost of capital was lowest.

“In addition to the inefficiency of this approach for Kohl’s at this time, our indenture written in 1995 currently restricts further sale-leaseback transactions,” the company said.

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