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Why Kohl’s Rejected an Activist Investor Group’s Takeover Attempt

Kohl’s Corp. has rejected an activist investor group’s attempt to take control of its board.

In a statement today, the department store explained that the seizure of its board would “disrupt our momentum, especially considering that we are well underway in implementing a strong growth strategy and accelerating our performance.” It added that it has refreshed half of its board with six new independent directors since 2016.

“Our new strategic plan already includes several initiatives they propose, and we have also determined that other ideas they propose would not be accretive to shareholder value,” the retailer wrote in a statement. “The company’s board and management will continue to engage with the investor group with the goal of identifying new ideas that could enhance shareholder value.”

As part of its strategic plan announced in October, Kohl’s aims to achieve better operating margins at a level of between 7% to 8%. It has also forged a long-term partnership with beauty giant Sephora, expanded its contactless offerings and delivered sequential sales improvement in the past couple quarters. The company is set to report its next financial quarter before market open on March 2.

What We Reported Earlier: Kohl’s Stock Jumps as Activist Investor Group Tries to Take Control of Board (Feb. 22, 2021, 9:56 a.m. ET)

Shares for Kohl’s Corp. jumped in Monday morning trading as an activist investor group attempted to take control of the retailer’s board.

In an open letter to shareholders, the group — including Macellum Advisors GP LLC, Ancora Holdings Inc., Legion Partners Asset Management LLC and 4010 Capital LLC — announced that it had nominated nine candidates to the company’s board of directors. Altogether, the investors hold a 9.5% stake in Kohl’s. They suggested that the chain wasn’t adequately addressing stagnant sales and declining operating margins — issues, they said, that preceded the COVID-19 health crisis.

As of 9:30 a.m. ET, Kohl’s stock was up 8% to $57.

According to the group, Kohl’s board “lacks relevant retail expertise” and collectively owns just 0.5% of the department store’s outstanding shares, which it said was “an impediment to serving shareholder interests.” It added that the company’s top five executives have seen their compensation increase from $20 million to $30 million over the past decade despite relatively flat sales and a drop in operating profit by 42% over the same period.

“The investor group believes Kohl’s stock price has chronically underperformed against its peers and relevant indices because the board has failed to help develop and oversee a strategic plan to respond to a rapidly changing retail landscape,” wrote the investors. “The investor group’s belief that change is necessary stems from performance of the business over the decade leading up to 2020, prior to the pandemic, and the implication for future performance, once the economy reopens, based on the systemic inability of the company to execute a plan that creates shareholder value.”

What’s more, the investors called out Kohl’s “poor retail execution and strategy,” which they said contributed to a decline in its operating income margins from 11.5% in 2011 to 6.1% in 2019. They also suggested that excess inventory, private label “failure” and a “repetitive and over-assorted” collection were some of the issues that have contributed to sluggish revenues.

“The company’s inability to gain market share despite spending approximately $1 billion a year on marketing and hundreds of millions of dollars on e-commerce fulfillment capabilities is highly disappointing,” they added. “The investor group believes that this is caused by a dated approach to merchandising and marketing that does not resonate in today’s retail landscape.”

In the 27-page letter, the group indicated that the addition of new board members can help improve sales and margins through changes in merchandising, inventory management, customer engagement and expense rationalization, as well as provide the “potential to unlock $7 billion to $8 billion of real estate value trapped on the company’s balance sheet.” It also said it hopes to drive Kohl’s stock price more than two times higher than current levels through a sale-leaseback program and a major share repurchase program.

In a statement to FN, Kohl’s wrote that it had been in discussions with the investor group since early December. “We remain open to hearing new ideas,” a spokesperson said. “Kohl’s is deeply committed to enhancing shareholder value and is confident the company’s new strategic framework … will accelerate growth and profitability. Since we published the new strategy, Kohl’s has received seven equity analyst upgrades, and our stock price has appreciated more than 150%.”

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