Macellum “remains skeptical” of Kohl’s outlook following company’s 2021 earnings report

Asks retailer to address concerns over lagging sales, increasing costs ahead of investor day

A Kohl's storefront featuring its new Sephora shop-in-shops. Credit: Kohl's Corp.

Last updated on March 7th, 2022 at 02:36 pm

In response to the report of Kohl’s fiscal 2021 results and ahead of its annual investor day next week, activist investor Macellum Capital Management is voicing criticism about the retailer’s current turnaround strategy. 

Macellum, which owns a 5% stake in Menomonee Falls-based Kohl’s Corp., issued a press release Friday morning with seven “key questions” directed at Kohl’s management. It’s the group’s latest move in an ongoing campaign to take over the company’s board of directors.

Kohl’s on Tuesday reported earnings of $299 million for the fourth quarter of fiscal 2021, down 13% from the same period in 2020, citing pandemic-related supply chain disruption. Earnings for the full year totaled $938 million, coming back from a loss of $163 million in 2020 – a direct result of the COVID-19 pandemic. Compared to pre-pandemic 2019, earnings were up 35%, but net sales were down 5% for the quarter and 2% for the full year. It also reported a record-setting $7.33 earnings per share in 2021, topping the previous high of $5.60 in 2018.

Chief executive officer Michelle Gass said Kohl’s remains “extremely confident in the future growth and cash flow generation of our business.” During the company’s earnings conference call, she assured analysts and investors that the board is committed to its fiduciary duty to act in the best interest of shareholders. 

Kohl’s board recently approved a 100% increase in its dividend, which boosts its quarterly dividend from 25 cents to 50 cents per common share. The last time the company’s dividend was 50 cents was 2016. Prior to the pandemic, Kohl’s increased its dividend 5% to 70 cents per share.

“While management celebrated its success and made dismissive excuses about the company’s considerable loss of market share to its retail peer group, we see the fourth quarter fiscal year 2021 results through a different lens,” said Macellum managing partner Jonathan Duskin in the news release Friday. 

He cited the group’s central concerns, which have been well documented through open letters and proxy filings: stagnant sales compared to 2019; gross margin gains that appear short-lived; increasing costs; and poor capital allocation and balance sheet optimization. The group urged Kohl’s management to address their questions in advance of investor day, to be held virtually on March 7, from 8 to 11 a.m.

Macellum questioned Kohl’s lagging sales performance in comparison to industry peers Dillard’s and Macy’s, which both posted better results for the year and quarter. And as inventory costs increase, they asked: how will Kohl’s continue expanding its gross margin without also increasing sales?

“Although we acknowledge that inflationary cost pressures exist today, we believe the company needs to do more to offset them through higher gross margins or by cutting costs in other areas,” according to the release. 

It also poked holes in Kohl’s newly launched partnership with beauty retail giant Sephora. Kohl’s said Sephora’s shop-in-shops, now in 200 of its stores and growing, contributed to a mid-single digit sales boost at those locations. But Macellum argues the partnership comes at too high of a cost. A major chunk of Kohl’s $605 million in capital expenditures in 2021 went toward the build out of Sephora shops, and with 400 more opening this year, Kohl’s expects to spend $850 million in 2022. 

“With additional staffing necessary to support the Sephora experience … it is possible each shop only generates $100,000 or less of incremental profit. That would imply almost a 10-year payback. Also, assuming five to 10 years for amortization of the capital expenditures, it is difficult to envision these shops being accretive to EBIT (earnings before interest and taxes) – or just breaking even. Further, we observe that most companies’ remodel benefits peak early – not grow over time,” said Macellum. 

Additionally, the firm made another push 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. 

“We view this as a substantial missed opportunity, especially given that very few retailers own their real estate … We believe the opportunity to monetize these assets will not exist forever, particularly in what is likely a rising rate environment,” the firm said. 

Macellum urged fellow shareholders to call on Kohl’s to stop increasing expenses and capital expenditures “while it should be objectively evaluating credible sale offers from well-capitalized buyers.”

Kohl’s did not immediately respond to a request for comment Friday.

Macellum has nominated a slate of 10 director nominees for election at the retailer’s 2022 annual meeting this spring, on a date yet-to-be-announced, when shareholders will cast their vote on who will lead the department store operator going forward.

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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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