Activist investors land at Kohl’s

News of note for fans of D-list celebrity clothing brands: Changes could be coming to Kohl’s department store, at least if activist investors get what they want. In a December letter sent to the retailer’s board, activist investor Engine Capital urged management to consider either selling the retailer to a private equity firm “that can pay a significant premium” or parting ways. of the e-commerce division, “given Kohl’s unacceptable long-term stagnation.

According to Engine, Kohl’s private market value is “far above” what it is currently trading for and the activist investor is eager for Kohl’s to test the market and see how high one or more private buyers might bid. Kohl’s is expected to pay around $75 per share (Kohl’s closed at $47.98 per share on Jan. 12). The other option on the table involves Kohl separating its digital business from its bricks-and-mortar operation, which Engine says could be “cautiously valued” at $12.4 billion, well above of the brand’s current market capitalization of $6.7 billion. Either option allows Kohl’s investors to line their pockets with even more cash.

The push is part of a larger trend in retail: Macy’s is considering an e-commerce spinoff that could nearly double its market capitalization, according to activist investors pushing for the breakout. And Nordstrom recently jumped into the conversation when Bloomberg reported that it may consider spinning off its Rack discount chain from the rest of the business. All retailers have their eyes on Saks which spun off its e-commerce business in 2021.

Saks CEO Marc Metrick boasted that the e-commerce spinoff of the iconic department store was a wise move. Since Saks has been privately held for two years, many of the company’s financials are unknown. Saks’ split isn’t exactly apples to apples with Kohl. Saks sells high fashion and Louboutins in its 40 brick-and-mortar stores across North America, while budget-friendly Kohl’s has more than 1,100 locations in the United States. If Saks’ e-commerce unit goes public — as it apparently will in the first half of 2022 — other retailers will get a bit more visibility into the impact of the spinoff on the retailer’s bottom line.

If Saks’ numbers are as good as Metrick has suggested, that might make Engine’s case even more compelling. In its letter to Kohl’s board, Engine lashed out at the retailer’s CEO Michelle Gass, pointing out that total shareholder return is down 10.5% since her appointment in May 2018. Engine analysis also noted that the stock underperformed the S&P 500 by 90% during this period and lagged competitors Macy’s, Dillard’s and Nordstrom.

Kohl’s Cash (those coupons that make your thrifty aunt’s heart sing) and Lauren Conrad’s exclusive line are draws for stores, but they weren’t enough to roll the retailer into the cash. In the first year of the pandemic, Kohl’s opted out of paying dividends to shareholders, but in 2021 it announced it would redistribute between $500 million and $700 million to investors through stock buybacks. . Kohl’s also raised prices, which led to increased profits.

“Kohl’s e-commerce business might be more valuable on its own, but the additional complexity the fallout adds to strategy, logistics, omnichannel integration, and customer experience may hurt that value. “said Ava Buechel, retail consulting analyst at McMillanDoolittle. Brew. Services such as online purchase and in-store pickup or curbside pickup, and mobile wallet usage are tied to both.

(Engine Capital did not respond to requests for comment, and Kohl’s largest institutional investors, BlackRock and Vanguard, declined to say whether they agreed with Engine’s assessment.)

Engine only owns about 1% of Kohl’s stock, but Gass told CNBC on Dec. 8 that she was listening. “As we would with any great idea, we put a lot of resources into understanding what this means for our business,” she said. She noted that the “number one priority” for herself and for Kohl’s board “is to drive shareholder value.” Kohl’s board and management team released a statement echoing Gass’ comments.

Macy’s faces similar questions about its future. On Nov. 18, 2021, during a third-quarter earnings call, Macy’s Chairman and CEO Jeff Gennette acknowledged that the company was considering “a whole range of things,” such as cost and performance analyses. operation of the business continuing to operate as it is and dividing into two businesses. Macy’s hired AlixPartners as a third party “to really pressure test all of our analytics.” In that same quarter, Macy’s posted $5.4 billion in revenue, a third of which came from digital. What’s more, the department store’s bricks-and-mortar doesn’t have a particularly strong foundation: In February 2020, Macy’s announced it would be closing 125 stores over three years.

According to Jana Partners, the activist investor who lobbied Macy’s in October to consider an e-commerce spinoff, if Macy’s separated its physical stores from its online presence, its value could double from its market cap of $6.9 billion at the time. at $14 billion. But some analysts need more conviction. “To some degree, you still need stores,” Jessica Ramirez, retail research analyst for Jani Hall & Associates, told Morning Brew. Kohl’s and Macy’s customers are now “trained” to log into the physical store when shopping online and returning merchandise to the store, she said.

Nordstrom has its own twist on how to thrive. Bloomberg reported that Nordstrom also hired AlixPartners, the same firm retained by Macy’s, to solve its Rack dilemma. It’s not an exact replica of Kohl’s, but it could lead to the same results – increasing company value. Home to clearance shelves filled with designer handbags, smelly candles and slightly uneven-hemmed tops, Rack was once seen as a key growth driver for the retailer, but sales have fallen from lows. before the pandemic. It accounted for nearly $1.2 billion of the company’s $3.5 billion in total net profit sales in the third quarter. CEO Erik Nordstrom said on a Nov. 23 earnings call that the company was taking steps to improve Rack’s performance. Nordstrom declined to comment on what he called “rumors.”

Consumer and retail analyst Faye Landes thinks splitting the rack is “probably less complicated” than splitting Nordstrom’s e-commerce business. She’s skeptical that the “quasi-fad” business case for an e-commerce spinoff makes sense for Kohl’s and Macy’s, given shared resources and expenses.

Some of the answers to whether an electronic communications fallout scenario would be in Kohl’s or Macy’s best interest could come with a Saks IPO. Saks CEO Metrick previously said that had doubled the number of eyeballs (1 million visits per day) from two years ago. At the same time, in-store sales and online sales are up. According to the Wall Street Journal, Saks is hoping for a $6 billion valuation in an IPO this year. Last March, the luxury retailer was valued at around $2 billion. Through a spokesperson, Saks declined to comment on the potential IPO, saying the company “does not comment on rumors or speculation.”

McMillanDoolittle’s Buechel warns retailers considering these e-commerce spin-offs that they “could be helpful in the short term”, but it remains to be seen what the impact would be on the so-called omnichannel customer experience that connects all the dots when a the customer interacts online and in-store, like those who browse on their phone and then collect nearby.

At Kohl’s, more foot traffic is coming through the door since it partnered with Amazon for in-store returns and Sephora to offer mini-stores to its customer base, 70% of whom are women. Future supplier partnerships and contracts should be restructured or duplicated to meet the needs of both companies, Buechel said.

“Kohl’s online and in-store experiences are more integrated than ever, and the decision to separate them could negatively impact the customer experience,” Buechel said. “While Saks has seen some initial success in spinning off its e-commerce business, it has yet to be proven as a viable long-term solution and their upcoming IPO will be more telling.”

If the price of a standalone e-commerce business turns out to be worth it, Kohl’s could attract wealthier investment, or at least some C-list celebrities.

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