Macellum launches criticism, details plans for Kohl’s in 168-page presentation

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Its latest move to glean support from fellow Kohl’s Corp. shareholders, activist investor Macellum Capital Management released a 168-page presentation with more detail on its already well-documented criticism of Kohl’s management and turn-around vision for the Menomonee Falls-based retailer.

Macellum, which owns about 5% of Kohl’s stock, is running a slate of 10 director candidates against 13 incumbent board directors. The current, months-long campaign to take control of the company is predicated on years of stagnant sales, lagging stock performance in comparison to industry peers, shrinking market share and increasing costs, the firm says.

The proxy fight will culminate in a vote at the company’s annual shareholders meeting, taking place virtually on May 11. That’s unless the two parties can reach a settlement before then, but Michelle Gass, chief executive officer at Kohls’, recently said that scenario is unlikely.

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In its recent presentation, available in full here, Macellum continues to build a “case for urgent and meaningful change” at Kohl’s. It uses numerous graphs and charts to highlight the company’s financial shortcomings, such as a 60% increase in distribution and fulfillment costs from 2011 to 2021 while total revenue dropped 35%.

Macellum then shifts to the customer’s “likely” point of view. Citing customer feedback on “limited product assortment, confusing promotional discounts, poor service and an inaccessible website, Macellum argues that Kohl’s is missing the market on customer service and losing business because of it. The presentation picks on the in-store experience, using images of disorganized merchandise displays and ambiguous pricing signage.

Furthermore, Macellum questions Kohl’s marketing and advertising strategy using screen grabs of google searches for “jeans” and “Sephora” without Kohl’s appearing in the results.

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“With more than $850 million in advertising expenses, we believe Kohl’s should be producing better search results for its core products, which it has in abundance,” Macellum says.

Kohl’s has plans to grow its partnership with Sephora, now in 200 of its stores with 400 more opening this year, to a $2 billion line of business. Macellum has criticized the partnership for its weak return on such a significant investment. Adding fuel to that argument, a screen grab in its presentation shows JC Penney, which has a similar partnership with Sephora, toward the top of the search results.

While Macellum does not hint at the possibility of store closures in its presentation, it once again pushes for a large-scale sale-leaseback transaction of Kohl’s store properties as a way to create shareholder value. Kohl’s has stood in opposition to the suggestion since it was proposed by Macellum and other activist investors through a similar overhaul campaign last year. Kohl’s owns more than 400 of its 1,162 department stores locations across the U.S., and Macellum estimates that adds up to $7 billon to $8 billion in real estate value.

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With a sale-leaseback transaction, Macellum estimates Kohl’s could churn $25.90 adjusted earnings per share by the full year of fiscal 2024. Last year, the company reported a record-setting $7.33 adjusted diluted earnings per share.

Macellum also lays out a timeline of how its board slate would implement a strategy if elected. The first one to four weeks focuses on high-level assessments of company culture, strategic alternatives and profitability, followed by deeper analysis and development of new and improved growth strategies over a total of 14 weeks.

On the financial side, a key part of the plan calls for larger share repurchases. That’s despite Kohl’s returning $1.5 billion in capital to shareholders in 2021, with plans to repurchase at least $1 billion in 2022 through a recently approved $3 billion share repurchase program.

In a statement Wednesday morning, Kohl’s claimed Macellum’s presentation is “riddled with inaccuracies” and called its proposed strategy “hollow.” The company specifically pushed back on calls for larger share repurchases and sale leasebacks.

“Macellum’s empty agenda clearly shows that their ideas are not additive and will not create value for Kohl’s shareholders. Kohl’s high caliber board of directors clearly outmatches the inexperienced slate of candidates proposed by Macellum,” the company said.

Commenting on the impact of Macellum’s latest move, Morningstar analyst David Swartz said the purpose of the 168-page presentation is to remind smaller shareholders that the proxy fight is ongoing.

“If Macellum is going to win, it needs to get the other institutional holders on its side,” said Swartz in an email. “According to the proxy, Vanguard, Blackrock, and JPM own about 27% of the shares. Macellum owns another 5%. If all the institutional owners vote for Macellum’s group, then they only need a minority of the small shareholders to vote with them to win.”

Kohl’s stock was trading at $60.65 Wednesday afternoon, up from $57.24 about a week ago.

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