Does this activist investor know what’s best for Kohl’s?

Discussion
Photo: Kohl’s
Dec 06, 2021

Kohl’s is the latest retailer to be feeling the heat from an activist investor looking to spin off its e-commerce operations from the rest of its business.

The chain has been urged to consider selling and leasing back its real estate assets by Engine Capital in an effort to unlock shareholder value in the near future, according to a Wall Street Journal report.

The hedge fund maintains that Kohl’s share price has consistently underperformed its retailer peers and the market in recent years and is in need of a shakeup. Engine maintains that Kohl’s online business would be worth $12.4 billion as a separate entity and that buyers would pay at least $75 a share to acquire the retailer’s real estate.

Kohl’s similarly faced pressure earlier in the year from an activist investor group made up of Macellum Advisors GP, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. The activist investors sought to force major changes to the retailer’s board of directors and areas of operation including its merchandising assortment. The group said in February that Kohl’s assortment “resulted in too many choices, too much overlap and little differentiation between the ‘good, better, best’ price schemes.”

Kohl’s found a compromise with the group when it announced in April that it was adding three new directors to the retailer’s board. The investors initially sought to replace nine of 12 Kohl’s board members.

The push for Kohl’s to split up its digital and physical operations goes against common wisdom that argues for delivering seamless commerce as demanded by consumers. Proponents of the approach posited by Engine Capital argue that consumers see little difference from the split and that doing so opens up a multitude of corporate partnership opportunities that wouldn’t take place otherwise.

Kohl’s rival Macy’s is facing similar pressure. The department store retailer announced last month that it had retained the consulting firm Alix Partners to evaluate separating its online business. The retailer did so in the face of pressure from Jana Partners, an activist investor, which in October delivered a letter to Macy’s board demanding that the company “de-omnify.”

Hudson’s Bay Company, which split its Saks Fifth Avenue stores and Saks.com into separate companies in March, has maintained that consumers’ experience with its brands have not been altered as a result of the change.

DISCUSSION QUESTIONS: Does it make sense in the long-term for Kohl’s to split its digital and physical businesses or sell off real estate in a leaseback situation? How likely are more companies to explore and act on these options?

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Braintrust
"I’m afraid these people are spreadsheet gazers who don’t actually understand how retail works."
"The future of retail is both online and in-store working in harmony. The answer to long-term growth isn’t more short-term thinking."
"Any activist investor movement has to consider the customer experience and maintain the fundamental brand promise."

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29 Comments on "Does this activist investor know what’s best for Kohl’s?"


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Neil Saunders
BrainTrust

First of all, this activist investor owns 1 percent of Kohl’s so isn’t really in a position to demand much. Second, this is another stupid attempt to extract short-term value by playing financial games. There is no way Kohl’s e-commerce business is rationally worth that much – and without stores it is worth even less. I’m afraid these people are spreadsheet gazers who don’t actually understand how retail works.

Bob Amster
BrainTrust

With an accent on the “stupid” part.

Paula Rosenblum
BrainTrust

Amen on all counts. It’s the new mantra. And a “stupid” one, indeed.

Gary Sankary
BrainTrust

My former employer Mervyn’s, a Kohl’s competitor, went the lease back route. I haven’t been in a Mervyn’s in 15 years because there aren’t any left. This was exactly the strategy that ended the very chain that inspired Kohl’s.

Gene Detroyer
BrainTrust

Exactly, Neil! Wring the money out of the only valuable asset, then quietly escape and leave the cupboard bare. That is what these guys do. Good for them, but there is no one else. And after they strip the company of assets, they will not invest in its future.

They think Kohl’s online business can be successful? Will they put as much investment into the online business as Amazon, Walmart or Target?

Dave Wendland
BrainTrust

You nailed it, Neil. The reality of retail is not well understood by some analysts.

William Passodelis
Guest

Amen! These guys don’t know what they are doing to the core business — NO! They do not CARE what they are doing to the core business!

Rick Watson
BrainTrust

I find it super ironic that in none of these conversations (Macy’s, Kohl’s, Saks) is there any discussion about the underlying consumer value proposition.

Investors feel cheated by holding the stock for so long and want to be rewarded for their “patience.”

What happens when these new digital entities start losing marketshare to Target and Walmart due to lack of differentiation and inferior experience?

Will investors at that point be happy to dig in and solve the true root cause problem with the CEO?

Nikki Baird
BrainTrust

Anyone proposing this kind of split is just a vulture circling over a limping zebra, much as Lampert circled Sears. Companies’ ability to resist this pressure is wholly dependent on presenting an alternative vision – the one thing that won’t happen in all of these situations is the status quo.

Bob Amster
BrainTrust

From the perspective of an ongoing business, it does not make sense. We have been through this with Saks, Macy’s and now Kohl’s. From the perspective of shareholder value, we don’t know unless we know the numbers that would drive that decision, and I don’t know the numbers. Sometimes investors, business, etc., rush to jump into the deep end of the pool without looking to see if there is water in it.

Gene Detroyer
BrainTrust

No Bob, they take any water in the pool out.

Paula Rosenblum
BrainTrust

Oy! Another one? Back in the day, I refused to participate in the stock market because I noticed it caused companies to make terrible decisions for the sake of a good quarter.

Then I watched the Allied/Campeau fiasco. Now we’re at it again? Retail isn’t disparate little enterprises that can accrue more value when broken into its pieces. Or merged up to levels that scarcely make sense.

As Neil said, these people have ZERO idea how retail works. But they’re great spreadsheet jockeys. You don’t like the results? Just tweak an assumption. Can’t get a good P&L? Take 20 hours of payroll out of the stores. What’s the harm? And soon you end up with nothing but dust and failure.

Cathy Hotka
BrainTrust

Pure greed and stupidity.

Liza Amlani
BrainTrust

This investor does not know what’s right for Kohl’s and retailers need to stop focusing on separating digital and physical businesses.

Separating physical and digital is truly shortsighted and driven by access to quick cash. These investors need to think about the impact of this strategy to their customers.

Until we understand the customer-centric loyalty, merchandising and marketing strategy that will align with this separation strategy, retailers should stick to learning what their customer wants vs. what makes sense for the investors looking to line their pockets with quick cash.

Carol Spieckerman
BrainTrust

What an unfortunate distraction at a time when Kohl’s is boldly innovating through new partnerships and business models. E-commerce split-offs have become the flavor (or threat) of the day yet the promise of monetizing bustling online marketplaces will prove elusive, or even deadly, for most mid-tier players in the long term. Retail doesn’t need more middling Amazon imitators, it needs clicks-to-bricks innovators.

Brandon Rael
BrainTrust

In some cases, activist investor actions may lead to positive and impactful company changes. However, as we have seen, it is a very misguided and unfortunate strategy to separate the digital and physical retail businesses. Any activist investor movement has to consider the customer experience and maintain the fundamental brand promise.

Kohl’s e-commerce business is completely intertwined and dependent on their brick-and-mortar experiences. It is a fundamentally flawed strategy to believe Kohl’s business operating model would be in better shape by separating their physical and digital shopping experiences. I agree with Neil Saunders that this is another stupid attempt to extract short-term value by playing financial games.

DeAnn Campbell
BrainTrust

Activist investors rarely have the interest of the company at the root of their demands. The move to uncouple Kohl’s from its e-commerce is especially troubling because they are at a delicate stage in their turnaround efforts. Kohl’s Q3 revenue outperformed market expectations, largely because of their partnership with Sephora. And these partnerships are a major factor in Kohl’s turnaround strategy. Kohl’s smaller store footprint allows them to live closer inside communities than their larger big box competitors, making them a more convenient option for shoppers to pick up and return online orders – something that is attractive to potential partners. At the end of the day, having a brick-and-mortar presence is not only essential to making e-commerce profitable by reducing shipping costs and improving customer experience, it is also a key reason why they have been able to attract strong retail partners. Sephora doesn’t need help with e-commerce selling, what they want is a partner with the ability to help add more brick-and-mortar face time with customers.

Jeff Sward
BrainTrust

The criticism of Kohl’s assortments are spot on accurate and fair. And the solutions proposed have absolutely nothing to do with solving those assortment problems. They could indeed magnify them.

Dick Seesel
BrainTrust

The push to spin off e-commerce assets from Saks may have made sense given its relatively small physical footprint outside of Manhattan, but not for Macy’s and certainly not for Kohl’s. (Again, my customary disclosure as a former Kohl’s executive and a current shareholder.) “Activist investors” like this one are totally misreading the impact of omnichannel, not to mention the importance of physical locations to the success of these companies’ e-commerce operations. Physical retail and e-commerce are one integrated business.

We’ve also seen activist investors pushing companies like Kohl’s, Target and others to leverage their real estate assets — again, a short term move to impact the balance sheet (and the stock price) without a thought given to these retailers’ long term strategies.

Lee Peterson
BrainTrust

Like Macy’s, Kohl’s has one brand with many ways of selling their goods. The idea makes no sense — other than to help the rich get richer — to the brand or the customer. BUT selling off poor performing spaces is more a matter of necessity. That initiative should be ongoing for all brands with heavy footprints. Having said that, we’ve learned not to decimate a market (all stores in Milwaukee for example) as that kind of deep cut hurts e-commerce sales to a great degree.

Patricia Vekich Waldron
Staff

It’s clear that none of these activist investors understand the retail business, and don’t have the customer top-of-mind.

Doug Garnett
BrainTrust
  1. Digital retail is a very hard way to make profit;
  2. Brick-and-mortar retail needs digital and digital does better from ares where there is a store.

Why does anyone ever think splitting is a good idea? It is mind boggling that this investor is so out of touch with reality. Sadly, they aren’t out of touch with the hype pushed 15 years ago about retail.

Dave Wendland
BrainTrust

Is there room for improvement within Kohl’s?
Yes. (And the same is true of every retailer in the country!)

Should Kohl’s separate the digital and physical businesses?
No. (Retail MUST be omnichannel and integrated — the notion is ludicrous.)

Could Kohl’s become stronger by selling all or some of its business?
No. (If anything, I would encourage Kohl’s to be on the acquisition hunt!)

Scott Benedict
Guest

Retailing is best left to professionals. Separating e-commerce from the physical retail operation is insane, and a bad long-term choice.

Dr. Stephen Needel
BrainTrust

Once you make the split, your e-business is in direct competition with Amazon. And you lose.

Brian Kelly
Guest
5 months 21 days ago

Isn’t this, “what does the future hold for Kohl’s?” Can its leadership deliver returns investors want? Is it in isolation? Will Macy’s and Kohl’s both, one or none succeed?

Stir in JCP, Belk and Dillard’s.

Do all go forward while Target continues unabated? “If hopes and wishes were horses beggars would ride.”

Craig Sundstrom
Guest

I won’t go into the points already covered, but it’s amazing that anyone would argue there’s some great value “locked” in real estate: the country is widely considered overstored — as is — and the movement online is steadily worsening that situation.

Then again maybe “amazing” isn’t the right word: troubling? disgusting? let’s settle on head shaking.

Trevor Sumner
BrainTrust

Another attempt at financial manipulation to boost short-term returns that will end up hampering long-term business prospects for Kohl’s. The future of retail is both online and in-store working in harmony. The answer to long-term growth isn’t more short-term thinking.

Anil Patel
BrainTrust
Many legacy retailers’ eCommerce operations compete with their brick and mortar. By spinning off eCommerce, retailers can embrace reality rather than fight the inevitable. But this spin-off needs to be so far away that the brick and mortar brand is not diluted. For example, luxury brand Saks Fifth Avenue separated its physical (SFA) and digital (Saks.com) businesses, a while ago. And according to the experts, customers haven’t felt any difference in their shopping experience since the separation. Similarly, The Home Depot spun off HDsupply.com to raise capital in 2007. Fast forward today, The Home Depot is regarded as one of the leading omnichannel retailers. I believe that it is easier to build anything from the ground up than to modify it. So for Kohl’s, a spin-off is justified as long as it leads to increased investment in the digital transformation of Kohl’s brick and mortar stores. About the real estate part, to sell off the real estate at a significantly higher valuation and then leaseback is a great way to lower the cost of capital.… Read more »
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Braintrust
"I’m afraid these people are spreadsheet gazers who don’t actually understand how retail works."
"The future of retail is both online and in-store working in harmony. The answer to long-term growth isn’t more short-term thinking."
"Any activist investor movement has to consider the customer experience and maintain the fundamental brand promise."

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