Kohl’s Activist Investors’ Latest Attack Makes No Sense

This week, Kohls (NYSE: KSS) is the subject of a new militant campaign. Macellum Advisors – which teamed up with several other investment funds to challenge Kohl’s board in 2021 before settling with the company – has just launched a fresh attack on the department store giant’s management .

On one level, shareholder impatience is understandable: Kohl’s shares have sat flat for more than two decades. Still, Macellum’s militant campaign doesn’t make sense in light of the company’s rapidly improving results and solid future prospects.

Performance of Kohl’s shares, data by YCharts.

Somehow underperforming

In a letter to Kohl’s shareholders, Macellum argues that Kohl’s financial performance lags that of its rivals. While most apparel-focused retailers easily topped 2019 sales levels over the past year, Kohl’s revenue was down slightly from 2019 in the first three quarters of fiscal 2021. .

Additionally, Macellum notes that while Kohl’s profitability has improved from 2019, other retailers have seen even greater margin expansion.

These reviews miss the forest for the trees. Kohl’s is on track for record earnings in fiscal 2021. In November, it raised its full-year earnings per share (EPS) guidance by more than 20% to a range from $7.10 to $7.30. This would represent a 27% to 30% increase from the previous record EPS of $5.60 set in fiscal 2018. Other retailers may achieve even more extraordinary profits, but it is difficult to say that a company making record profits needs a great board or management. -at the top.

As for Kohl’s superior results, supply chain issues have weighed on sales in recent quarters. Kohl’s has made big changes to its merchandise assortment over the past two years, particularly in the women’s clothing category, which has exacerbated its inventory shortages.

Finally, Kohl’s just launched its new beauty partnership Sephora in August. Adding Sephora boutiques to most Kohl stores could bring a significant revenue boost, but the company won’t complete that rollout until 2023. In short, it’s far too early to call the retail growth strategy a failure. management income.

The exterior of a Kohl's store featuring the Sephora brand.

Image source: Kohls.

Desperate for “value creation”

Macellum’s suggestions for what Kohl should do also underscore the fund’s impatience. While Macellum’s letter contains some vague suggestions for operational improvements, the fund spends much more time promoting various financial engineering strategies.

First, Macellum recommends selling billions of dollars of owned real estate and renting it out to raise cash that can be used for stock buybacks. Second, it jumps on the bandwagon by calling on department store chains to spin off their e-commerce operations to get better ratings. Third, the fund wants Kohl’s to hire advisers to explore a possible sale of the business.

Considered separately, these recommendations seem dubious, and taken together, they make even less sense. For example, Macellum claims that its sale-leaseback strategy alone would double the stock price to at least $100. If that’s true, there would be no reason to try to sell the business. Even in the best-case scenario, a sale wouldn’t yield much.

Focus on fundamentals, not stock price

Ultimately, Macellum’s main criticism of Kohl’s has little to do with how the company is run. The fund is simply frustrated with the poor performance of the stock. Yet, in the short term, the stock price is largely beyond management’s control.

In the long term, if management’s revenue and earnings growth strategies are successful, Kohl’s stock should rise well above $100, particularly as the company uses its prodigious cash flow to buy back many shares. . The longer the stock remains mired in a crisis, the more Kohl’s will be able to buy back shares at a discount, increasing the stock’s upside potential.

Macellum might counter that Kohl’s stock has been struggling not just for a few years, but for two decades. But Kohl’s CEO Michelle Gass took the top job less than four years ago, and the pandemic has eclipsed half of her tenure.

Target emphasizes the importance of patience. For two decades, the stock price barely budged. However, Target stock has surged in recent years on a string of strong results and growing investor confidence in the company’s long-term prospects.

Chart showing Target's price rise from 2020.

Performance of target stocks, given by YCharts.

Rather than betting on desperate financial engineering strategies, Kohl’s shareholders should give management at least two more years to finish implementing its growth strategy. If it succeeds, Kohl’s shareholders will likely reap handsome rewards before too long.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

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