Macellum Highlights Key Concerns With Kohl's Strategy Ahead of Analyst Day

Rhea-AI Summary

Macellum Advisors, holding nearly 5% of Kohl's Corporation (KSS), raised concerns about the company's strategies ahead of its analyst day on March 7, 2022. Key issues include Kohl's inability to boost sales versus 2019, declining gross margins, rising costs, and ineffective capital allocation. Macellum criticized the lack of growth and poor performance relative to peers, emphasizing the need for management to address several critical questions during the meeting. The firm advocates for a careful evaluation of expenses and potential sales offers from credible buyers to enhance shareholder value.

Positive

• Macellum supports the addition of Sephora shops, believing they can drive traffic to Kohl's stores.

Negative

• Kohl's sales fell 2.2% from 2019 levels, lagging peers like Macy's and Dillard's.
• Gross margin gains seem one-time due to prior pandemic disruptions, not sustainable improvements.
• The company's SG&A expenses increased, indicating inefficient cost management.
• Kohl's faces challenges in increasing inventory turns, contributing to high markdowns.
• The current Board's failure to leverage over $8 billion in real estate assets is seen as a significant missed opportunity.
• Kohl's has experienced zero same-store sales growth over the last decade, contrasting with a 33% growth in the industry.

NEW YORK--(BUSINESS WIRE)-- Macellum Advisors GP, LLC (together with its affiliates, “Macellum” or “we”), a long-term holder of nearly 5% of the outstanding common shares of Kohl’s Corporation (NYSE: KSS) (“Kohl’s” or the “Company”), today highlighted key concerns with the Company's strategy ahead of its analyst day on March 7, 2022.

Jonathan Duskin, Macellum’s Managing Partner, commented:

“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.¹ We remain skeptical of Kohl’s' future with the current Board of Directors and management configuration. The central issues in our mind remain: (1.) an inability to grow sales versus 2019 levels, (2.) gross margin gains that are looking increasingly one-time in nature due to dramatic deceleration and management’s plan to increase inventories, (3.) an inability to contain costs and (4.) poor capital allocation and balance sheet optimization. In advance of Monday’s analyst day, we believe there are several overarching questions that management must address.”

Key Questions for Kohl's Management:

1. Why were sales uniquely hampered by supply chain issues compared to many other retail peers? Kohl’s posted the worst full-year sales growth compared to its retail peer group, down 2.2% from 2019 levels with the gap growing in the fourth quarter fiscal year 2021 as the Company significantly lagged Macy’s and Dillard’s. We find it particularly worrisome that even Nordstrom – which is struggling with its own turnaround efforts – was able to post better sales results in the fourth quarter fiscal year 2021 than Kohl’s.
2. How does Kohl’s expect to increase gross margins over time, particularly when inventories are increasing? We have speculated that Kohl’s' gross margin gains were largely the result of lower markdowns caused by the pandemic's inventory disruptions rather than systematic changes in the merchandising process. Given that the gross margin change versus 2019 in the fourth quarter fiscal year 2021 sequentially declined ~310 basis points from the third quarter fiscal year 2021 – one of the largest declines among companies in its retail peer group that have reported so far – we believe shareholders' concerns are warranted.
3. When and how will Kohl’s see meaningful margin expansion in the absence of sales growth? While Kohl’s was able to leverage SG&A for the first three quarters of 2021 versus 2019 levels, that trend ended in the fourth quarter fiscal year 2021 with SG&A deleveraging by 50 basis points versus 2019. 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.
4. What assumptions are necessary to make the Sephora investment accretive? We are supportive of the addition of Sephora shops and believe they can drive traffic to Kohl's stores, but we remain concerned about the Company spending excessively and the ultimate accretion to the bottom line. It would appear from the increase in capital expenditures necessary to build out the Sephora shops that each shop is costing close to $1 million ($200 million of additional capital expenditures above their historic maintenance capital expenditure levels for 200 additional doors versus 2021).
   
   With an average store generating $16 million in sales, a mid-single-digit lift from Sephora shops should equate to $800K of sales. At a 50% margin (we assume a higher-than-average gross margin for cosmetics), that equates to $400K of gross margin that management disclosed the Company split 50/50 with Sephora. The result is $200K gross margin for Kohl’s. With additional staffing necessary to support the Sephora experience (part of the Company’s rationale for the increase in SG&A of ~$150–200 million implied in guidance), it is possible each shop only generates $100K 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 – or just breaking even. Further, we observe that most companies' remodel benefits peak early – not grow over time.
5. Given that the Company disclosed its plan to build inventories, what, if any, plan is in place to increase inventory turns? We believe Kohl's' slow inventory turn rate has been a root cause of high markdowns, cluttered stores and lack of fresh offerings.
6. Why has Kohl's failed to address its significant real estate opportunity? None of the Company's announced initiatives have addressed the more than $8 billion in real estate sitting idle on the balance sheet. We view this as a substantial missed opportunity, especially given that very few retailers own their real estate. Not only does Kohl’s trade at one of the lowest valuations in the sector, but it currently receives no credit for the value of its owned real estate. We believe the opportunity to monetize these assets will not exist forever, particularly in what is likely a rising rate environment.
7. What are the Company's new margin targets? With lower gross margins, increasing inventory, rising SG&A and increasing depreciation and amortization costs, we struggle to see a path to higher margins without meaningful sales growth. Unfortunately, the current Board and management team have not been able to deliver top-line growth. Over the last decade, Kohl’s has had zero same-store sales growth in an industry that has grown 33%.² Even if every Kohl's store had a Sephora during the fourth quarter fiscal year 2021, and those shops fueled a mid-single-digit lift as the Company just reiterated, overall sales would have been flat versus 2019 and still trailed Macy's, Dillard's and the vast majority of peers. We fear Kohl’s' guidance for 2022 leaves little margin for error and could result in meaningfully lower EBIT if sales don’t materialize.

We believe the Company's disappointing fourth quarter fiscal year 2021 results and plan to increase capital expenditures only serve to erode investors’ confidence in the ability of the current Board and management team to establish a credible plan to create meaningful shareholder value. We believe a properly refreshed Board can develop a superior strategic, financial and operating plan that targets stronger earnings and value creation, while also running a fair and robust strategic alternatives process that would determine what is the best risk-adjusted return for shareholders. We hope shareholders join us in calling on the Company to hit pause on increasing expenses and capital expenditures while it should be objectively evaluating credible sale offers from well-capitalized buyers.

About Macellum

Macellum Capital Management is an activist investment firm, with deep expertise in the retail and consumer sectors, founded in 2009 by Jonathan Duskin. Macellum invests in undervalued companies that it believes can appreciate significantly in value as a result of a change in corporate strategy or improvements in operations, capital allocation or corporate governance. Macellum’s investment team, advisors and network of industry experts draw upon their extensive strategic, operating and boardroom experience to assist companies in designing and implementing initiatives to improve long-term shareholder value. Macellum prefers to constructively engage with management to improve its governance and performance for the benefit of all stockholders. However, when management is entrenched, Macellum has run successful proxy contests to effectuate meaningful change. Macellum has run successful election contests to effectuate meaningful change at many companies, including at The Children’s Place Inc., Citi Trends, Inc., Bed Bath and Beyond and Big Lots, Inc. Learn more at www.macellumcapitalmanagement.com.

Certain Information Concerning the Participants

Macellum Badger Fund, LP, a Delaware limited partnership (“Macellum Badger”), together with the other participants named herein, has filed a preliminary proxy statement and accompanying WHITE proxy card with the Securities and Exchange Commission (“SEC”) to be used to solicit votes for the election of its slate of highly-qualified director nominees at the 2022 annual meeting of shareholders of Kohl’s Corporation, a Wisconsin corporation (the “Company”).

MACELLUM BADGER STRONGLY ADVISES ALL SHAREHOLDERS OF THE COMPANY TO READ THE PROXY STATEMENT AND OTHER PROXY MATERIALS AS THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. SUCH PROXY MATERIALS WILL BE AVAILABLE AT NO CHARGE ON THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. IN ADDITION, THE PARTICIPANTS IN THIS PROXY SOLICITATION WILL PROVIDE COPIES OF THE PROXY STATEMENT WITHOUT CHARGE, WHEN AVAILABLE, UPON REQUEST. REQUESTS FOR COPIES SHOULD BE DIRECTED TO THE PARTICIPANTS' PROXY SOLICITOR.

The participants in the proxy solicitation are anticipated to be Macellum Badger, Macellum Badger Fund II, LP, a Delaware limited partnership (“Macellum Badger II”), Macellum Advisors, LP, a Delaware limited partnership (“Macellum Advisors”), Macellum Advisors GP, LLC, a Delaware limited liability company (“Macellum GP”), Jonathan Duskin, George R. Brokaw, Francis Ken Duane, Pamela J. Edwards, Stacy Hawkins, Jeffrey A. Kantor, Perry M. Mandarino, Cynthia S. Murray, Kenneth D. Seipel and Craig M. Young.

As of the date hereof, Macellum Badger directly beneficially owns 216,204 shares of Common Stock, $0.01 par value per share, of the Company (the “Common Stock”), including 1,000 shares in record name. As of the date hereof, Macellum Badger II directly beneficially owns 6,338,528 shares of Common Stock. As the investment manager of Macellum Badger and Macellum Badger II, Macellum Advisors may be deemed to beneficially own the 216,204 shares of Common Stock beneficially directly owned by Macellum Badger and 6,338,528 shares of Common Stock beneficially owned directly by Macellum Badger II. As the general partner of Macellum Badger, Macellum Badger II and Macellum Advisors, Macellum GP may be deemed to beneficially own the 216,204 shares of Common Stock beneficially owned directly by Macellum Badger and 6,338,528 shares of Common Stock beneficially owned directly by Macellum Badger II. As the sole member of Macellum GP, Mr. Duskin may be deemed to beneficially own the 216,204 shares of Common Stock beneficially owned directly by Macellum Badger and 6,338,528 shares of Common Stock beneficially owned directly by Macellum Badger II.

As of the date hereof, none of George R. Brokaw, Francis Ken Duane, Pamela J. Edwards, Stacy Hawkins, Jeffrey A. Kantor, Perry M. Mandarino, Cynthia S. Murray, Kenneth D. Seipel or Craig M. Young own beneficially or of record any securities of the Company.

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¹ Retail peer group includes: AEO, BBBY, BKE, BURL, CTRN, DDS, DKS, GPS, HIBB, JWN, M, PLCE, ROST, TGT, TJX, URBN, WSM.
² Source: U.S. Census Bureau, Advance Monthly Retail Trade Survey, Clothing & Clothing Accessories Stores.

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Source: Macellum Advisors GP, LLC

FAQ

What are Macellum Advisors' concerns regarding Kohl's (KSS)?

Macellum Advisors raised several concerns about Kohl's including stagnant sales growth since 2019, declining gross margins, rising SG&A costs, and inadequate capital allocation strategies.

How did Kohl's (KSS) perform compared to its retail peers?

Kohl's reported a 2.2% decline in sales from 2019, underperforming compared to retail peers like Macy's and Dillard's.

What specific financial metrics worry Macellum Advisors about Kohl's (KSS)?

Macellum highlighted concerns such as declining gross margins, increasing SG&A expenses, and zero same-store sales growth over the past decade.

What is Macellum Advisors proposing to improve Kohl's (KSS) situation?

Macellum suggests pausing on increasing expenses and capital expenditures while exploring potential sale offers from well-capitalized buyers to enhance shareholder value.

What was Kohl's (KSS) gross margin performance in the fourth quarter of fiscal year 2021?

Kohl's gross margin declined approximately 310 basis points sequentially from the third quarter of fiscal year 2021, one of the largest declines in its retail peer group.