For Kohl’s Corp., there’s no let up in pressure, though the company just ended its exhaustive strategic review process, with exclusive negotiations with The Franchise Group collapsing.
The Menonomee Falls, Wisc.-based retailer is looking for ongoing strategies — among them reflowing the mix in its stores, bolstering active and casual offerings, rolling out Sephora shops and adding new services and conveniences — to kick in and generate healthier sales. Yet there’s softening consumer spending due to inflation and economic worries, particularly among Kohl’s target middle and lower income audiences, and that’s dampening the outlook.
In a joint interview Friday, just after the company disclosed that takeover talks with The Franchise Group ended, Michelle Gass, chief executive officer, and chairman Peter Boneparth told WWD that Kohl’s will further explore ways to raise shareholder value (other than selling the company) and is now considering monetizing real estate after earlier rejecting that strategy. Not long ago, Kohl’s owned real estate was valued at around $8 billion by activist investor Macellum Advisors, though Kohl’s has not disclosed the value of its real estate. Kohl’s owns about 400 of its more than 1,100 stores.
They also said Kohl’s has reduced its second-quarter sales guidance with inflation impacting consumer spending, and that going forward, it will be “flexing pricing” and is prepared to “amplify” promotions. Kohl’s said Friday that due to inflation, the company is seeing a softening in consumer spending and now expects sales to be down high-single digits for the second quarter, as compared to prior expectations of down low-single digits relative to last year.
Last month, a small store format was opened in Bonney Lake, Wash., and in the fall, four additional small-format stores will open in San Angelo, Texas; Morgantown, W.Va.; Tacoma, Wash., and Lenox, Mass. These new stores will also be among the first to test Sephora at Kohl’s in smaller store formats, and provide “a hyper-localized experience to cater to the community’s needs.” For example, the Tacoma store’s merchandise will cater to the active lifestyle customer in that market by offering a more focused assortment of outdoor gear.
The 100 smaller formats envisioned over time represent a more than $500 million sales opportunity as they ramp to full productivity, according to Kohl’s.
Meanwhile, Kohl’s is introducing what it calls “zones” for diverse, female-owned and emerging brands; testing self-serve return drop-offs; testing self-checkout, and reflowing key active and casual brands such as Calvin Klein, Draper James RSVP and Under Armour, in proximity to the in-store Sephora shops, for better exposure.
The company is also continuing to roll out self-serve stations for picking up online orders and already offers the ability to drive up and pick up packages and make Amazon returns.
Kohl’s has a capital expenditures budget of $850 million for 2022, with more than two-thirds related to opening Sephora shops and refreshing stores. To date, there are nearly 600 Sephora shops inside Kohl’s, and 850 should be operating in 2023.
“While there has certainly been a lot of activity around Kohl’s for the last six months, the organization has continued to stay focused on the business and on our people. That has not wavered,” Gass said.
Asked what’s next for Kohl’s, she answered, “We are on a dual path navigating an uncertain environment and continuing to execute on our long-term strategy. The pressures on consumers have only grown, considering what they are paying for gas, for food and the uncertainty overall. We are flexing and adjusting to make sure we can be relevant.” As the year progresses, Kohl’s will continue to be “adjusting pricing and amplifying promotions,” Gass added.
“We are trying new things. It’s really important at this time that we stay relevant,” the CEO said. “We have navigated difficult times in the past. We are full-on in executing our strategy, investing in stores, in digital and Sephora.” Kohl’s has also been working to build its appeal as a destination for casual and active apparel for the family.
“Sephora is working. We are seeing new customers,” Gass told WWD. “We are on our way to being a $2 billion beauty business by 2025.” Kohl’s total business generated $19.43 billion in sales last year.
“Sephora will certainly help as its penetration at Kohl’s expands, but the overall fleet remains oversized,” said Craig Johnson, president of Customer Growth Partners, the market research and consulting firm. “The elevated focus on casual and athleisure is on target, but Kohl’s still needs to upgrade its denim and footwear.”
“We continue to like Kohl’s long-term strategy around the Sephora partnership and women’s assortment refreshes, but key risk factors include potential rising unemployment, the health of the lower income consumer, declining savings rates, and the promotional environment,” Oliver Chen, managing director and senior equity research analyst at Cowen & Co., wrote in a report.
“The power of Kohl’s balance sheet allows us to be confident in the future. Kohl’s generates lots of free cash flow,” Boneparth told WWD. The company reported generating $646 million in cash and cash equivalents at the end of the first quarter this year.
Between the inflationary environment and stock market declines, “Clearly this was not the optimal time to sell the business. The sale environment has absolutely changed,” Boneparth said.
The Franchise Group made a $60 a share offer, which was subsequently revised to $53 a share. According to Boneparth, “The current financing and retail environment was reflected in the price and the terms of FRG’s most recent proposal, which was not fully executable or complete.”
Boneparth said the changing interest rate environment has encouraged the company to now reconsider monetizing some real estate through sale-leasebacks of store properties. Months ago, the board rejected that strategy, which was being advocated by activist investors, including Macellum Advisors, to raise shareholder value. Macellum also pressured Kohl’s to consider selling the company and has been vociferous in criticizing Kohl’s management of the business and its strategic review.
Boneparth said that shareholder value could also be increased through dividends and share repurchases which could accelerate monetizing real estate. A $500 million accelerated share repurchase, part of the previously announced $3 billion share repurchase authorization, is scheduled to commence immediately following the company’s second-quarter earnings results to be released Aug. 18. At that time, executives will disclose strategies to navigate the inflationary environment.
By the end of trading Friday, on news of no deal with The Franchise Group, as well as Kohl’s lowering its sales guidance for the second quarter, the retailer’s share price sunk 19.4 percent, or $7.01, to $28.68.
When one company buys another, it often leads to management changes, layoffs and other cost-saving maneuvers, so it’s possible that by not selling to The Franchise Group, jobs at Kohl’s may have been saved. “What would have happened under a new buyer is not something I could speculate on,” Boneparth said. “Associates here have done a wonderful job over a number of years.”
“The associates are the backbone of the business. Our secret sauce,” Gass said. During the process of reviewing takeover offers, “They all never lost focus on our customers.”
Asked if the review process distracted her from the daily operations, Gass replied, “There are times when there are a few balls to juggle, and that’s fine. But I never lost focus on what my day job is. It’s been a highly unusual and challenging time, but we continue to drive a very compelling strategy forward.”
Last month, two key Kohl’s executives, chief merchandising officer Doug Howe and chief marketing officer Greg Revelle, left the company in the wake of the company’s disappointing first-quarter performance. Their responsibilities were taken over by team members, though there is a search in progress to find successors for the executives who left.
Kohl’s reported net income in the first quarter ended April 30 at $14 million, or $0.11 a share, which was flat to the year-ago period. First-quarter net sales and comparable sales decreased 5.2 percent to $3.47 billion, from $3.66 billion in the year-ago quarter.
There was wide industry sentiment that bringing The Franchise Group and Kohl’s together would not be a good fit, considering The Franchise Group has no experience in fashion or department stores; operates franchises, which Kohl’s does not, and because The Franchise Group is a much smaller company than Kohl’s.
“Good fit or bad fit, that was not particularly relevant from our point of view as directors,” Boneparth said. “The fact was simply at the end of the day, Franchise Group was the strongest bidder with a $60 a share offer.” But with the reduced offer, and the capital structure presented to do the deal, “there was a low likelihood it could actually close,” Boneparth said.
At this point, considering more than two dozen parties came forward expressing interest in Kohl’s, and the company’s review of them, the field of potential buyers has been exhausted, making it highly unlikely another bid would emerge anytime soon.
“Throughout this process, the board has been committed to a deep and comprehensive review of strategic alternatives with the goal of selecting the path that maximizes value for shareholders,” Boneparth said in a statement Friday. “After engaging with more than 25 parties in an exhaustive process, FRG emerged as the top bidder and we entered into exclusive negotiations and facilitated further due diligence.
“Despite a concerted effort on both sides, the current financing and retail environment created significant obstacles to reaching an acceptable and fully executable agreement,” Boneparth added. “Given the environment and market volatility, the board determined that it simply was not prudent to continue pursuing a deal. As always, the board remains open to all opportunities to maximize value for shareholders, and we look forward to actively engaging with our shareholders as we move forward to ensure we are considering their perspectives in our plans.”
Boneparth characterized Kohl’s as “a financially strong company with a clear plan to enhance its competitive position and improve performance over the long term.”