After Kohl’s and Genesco, Could There Be an Uptick in Retail Activist Investor Battles?

Kohl’s and Genesco have both become targets of shareholder activism over the past couple months — and experts predict that the number of proxy campaigns across the sector could increase in the months ahead.

Apparel and footwear companies are facing a vastly different retail environment as a result of the global health crisis. Now, as the economy continues to reopen and markets appear to be in recovery mode, experts say activist investor groups might be convinced that now is the time to strike.

“There are three key operating factors that drive shareholder activism: One, declining profitability and/or rising costs; two, plateauing or declining growth; and three, underperforming non-core assets — brand and/or real estate,” explained Kristin Kohler Burrows, senior director at management consultancy Alvarez & Marsal’s consumer and retail group and a former top executive at Keds and Converse. “COVID accelerated the exposure of many underlying issues that were already there pre-pandemic — being over-stored, [having] too big of store footprints and, in some cases, assortment challenges given shifting customer preferences.”

The motive behind the motion

In late February, Macellum Advisors GP LLC, Ancora Holdings Inc., Legion Partners Asset Management LLC and 4010 Capital LLC announced that they had nominated nine candidates in an attempt to take over Kohl’s board of a dozen directors. Altogether, the investors held a 9.5% stake in the retailer.

After weeks of testy back-and-forth discussions between Kohl’s and the activist investor group, a deal was struck to add three directors to the Menomonee Falls, Wis.-based retailer’s board. At the close of the company’s shareholder meeting in mid-May, two independent directors nominated by the investors, Margaret Jenkins and Thomas Kingsbury, will join the board, as well as Christine Day, who was selected by the chain and approved by the group.

In a bid to shake up the board, the activist investors called out Kohl’s “egregious” executive compensation as well as suggested that the retailer wasn’t adequately addressing stagnant sales and declining operating margins. Kohl’s retorted 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” as part of a previously announced strategic plan.

But for Genesco, the battle might be just beginning. Just last week, Legion — which owns about 5.6% of outstanding common shares of Genesco — proposed a controlling slate of seven individuals for election to the Journeys parent’s eight-member board.

Genesco’s board, plus the nominating and governance committee, indicated that it would review the proposed nominees and present the recommendation in its definitive proxy materials ahead of its upcoming annual shareholder meeting. (The date of the meeting has yet to be announced.)

According to Legion, the chain has “failed to build on the momentum we helped establish, and the company is now on a concerning, downward trajectory that could result in the permanent impairment of value.” Meanwhile, Genesco wrote that it “disagree[d] with many of Legion’s assertions” and were “surprised” with the takeover attempt “after not responding to our repeated requests for their input and ideas or sharing their proposed candidates in advance.”

Speaking with FN, John Ruth, co-founder and CEO of investment management firm Build Asset Management, said, “I think you’re going to see various underlying motives that drive each of these groups and what their end game may look like … Are they looking out for their own interests for short-term gain or a longer-term play for the three key stakeholder bases: shareholders, employees and customers?”

The next target

Beyond their response to the COVID-19 pandemic, retailers will likely also be scrutinized for their responses to macro issues that could impact stakeholders — think climate change, social justice and cybersecurity, among others. As such, experts have suggested that corporate boards and top management should determine whether existing vulnerabilities could make them the next target of activist activity.

“What the pandemic has taught us is that businesses with a clear ability to sell online, while rightsizing or adapting their offline offering have managed to be quite successful, and that is likely what shareholders are going to want to see,” added Taleeb Noormohamed, CEO of online deals marketplace Jane. “They’re going to be interested in seeing whether businesses are maximizing potential, looking at the best ways to move and transform — and if they don’t see that, it wouldn’t surprise me if we saw more shareholder activism.”

Brian Ehrig, partner in the consumer practice of global strategy at management consulting firm Kearney, even put forth a “playbook” on how retailers could respond: First, by listening to the criticism of their corporate governance; second, by doing their own analysis and assessing whether the activist investor’s or investors’ claims have merit; and third, by implementing goals and policies that address those challenges, particularly ahead of a crucial shareholder meeting.

“We’re more than a year into this pandemic, and it’s starting to become clearer which companies are going to be around for the long term,” he said. “Some of them are pointing to changes that they need to make to unlock value … There needs to be a concrete plan with a concrete timeline — or it risks becoming a distraction, which is the last thing both parties want.”

At least some companies that have faced activist attention are now thriving.

Just over three years ago, Deckers Outdoor Corp. concluded an intense 10-month battle with activist shareholder Marcato Capital Management —which owned an 8.5% stake in the company — when the company’s stockholders voted to reelect all of its directors. More recently, the Ugg and Hoka One One parent has posted consistently better-than-expected profits and sales and was named FN’s 2020 Company of the Year.

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