Kohl’s should spin off its online business or find a buyer to take the whole company private, an activist investor said Monday.
“The public market is not appreciating Kohl’s in its current form,” Engine Capital, an activist fund, said in a letter to Kohl’s board of directors. “There is no excuse for the Board to cling to the status quo.”
Shares of Kohl’s (KSS) jumped 7% Monday following the news that the activist was urging the company to make changes.
This is the second push from activist groups this year. In April, Kohl’s settled with another group and agreed to appoint three new members to its board.
Amazon (AMZN), brick-and-mortar giants such as Walmart (WMT) and Target (TGT), and discount chains like TJX (TJX) and Burlington (BURL) have pressured department store chains for years. Some, such as Sears and Neiman Marcus, have been driven into bankruptcy.
But Kohl’s has taken creative steps to draw shoppers in recent years, including partnering with Amazon to accept returns on Amazon purchases at its own stores. Kohl’s has also added new clothing and homegoods brands, expanded its sportswear and beauty merchandise, and leased out space at a handful of stores to Planet Fitness (PLNT) and Aldi.
Still, Kohl’s sales stagnated from 2016 to 2019 and plunged 20% to $15 billion in 2020, with Covid-19 restrictions forcing many stores to close in the spring, summer and early fall.
Kohl’s has rebounded in 2021, however. During the latest quarter ending October 30, sales at stores open for at least one year increased 14.7% compared with the same stretch last year.
Spinoff or sale
Despite Kohl’s success in recent months, Engine Capital believes that Kohl’s stock price should be doing better, arguing its strategy isn’t working.
Since CEO Michelle Gass took over in 2018, Kohl’s stock has dropped 10.5%, trailing the S&P 500 by 90% and Kohl’s competitors by 19%.
“Even the most patient long-term shareholders cannot be expected to endure [Kohl’s] punishing underperformance and perpetual value disconnect,” the fund said in the letter.
It believes that a spinoff or sale would benefit shareholders much more than Kohl’s current plans.
Investors are eager to put money behind fast-growing online and technology companies, and Saks and Macy’s (M) are both exploring spinning off their online businesses.
Engine Capital predicts that Kohl’s e-commerce business would be valued at $12.4 billion as a separate company — higher than Kohl’s current overall valuation — and would be able to grow faster on its own. Digital sales make up around 40% of Kohl’s revenue.
It also believes that a buyer, possibly a private equity firm, would pay a 50% premium to purchase all of Kohl’s.
“The private market value of Kohl’s is far superior to where it currently trades,” Engine Capital said.
It wants to meet with the board quickly to discuss these options and work with it “cooperatively.”
In a statement Monday, Kohl’s said its “strong performance this year demonstrates that our strategy is gaining traction and driving results.” The retailer said it is having ongoing dialogue with investors and appreciated their input.