Activist company

Macellum ‘remains skeptical’ of Kohl’s outlook after company’s 2021 earnings report

A Kohl’s storefront with its new Sephora shop-in-shops. Credit: Kohl’s Corp.

In response to the report of Kohls financial year 2021 results and ahead of its annual Investor Day next week, the activist investor Macellum Capital Management voices criticism of the retailer’s current turnaround strategy.

Macellum, which owns a 5% stake in Menomonee Falls-based Kohl’s Corp., issued a press release Friday morning with seven “key questions” for Kohl’s management. This is the group’s latest move in an ongoing process countryside take over the company’s board of directors.

Kohl’s reported fourth-quarter fiscal 2021 profit of $299 million on Tuesday, down 13% from the same period in 2020, citing pandemic-related supply chain disruption. Profits for the full year totaled $938 million, after a loss of $163 million in 2020 – a direct result of the COVID-19 pandemic. Compared to 2019 before the pandemic, profits were up 35%, but net sales were down 5% for the quarter and 2% for the full year. It also reported record earnings per share of $7.33 in 2021, surpassing the previous record of $5.60 in 2018.

Chief Executive Michelle Gass said Kohl’s remains “extremely confident in the future growth and cash flow generation of our business.” During the company’s earnings conference call, she assured analysts and investors that the board is committed to fulfilling its fiduciary duty to act in the best interests of shareholders.

Kohl’s board of directors recently approved a 100% increase in its dividend, raising its quarterly dividend from 25 cents to 50 cents per common share. The last time the company’s dividend was 50 cents was in 2016. Before the pandemic, Kohl’s raised its dividend by 5% to 70 cents per share.

“While management celebrated its success and made a dismissive apology about the company’s significant loss of market share to its retail peer group, we see the results for the fourth quarter of fiscal 2021 under a different angle,” Macellum managing partner Jonathan Duskin said in the Friday press release. .

He cited the group’s main concerns, which have been well documented through open letters and proxy filings: flat sales compared to 2019; gross margin gains that seem short-lived; increased costs; and poor capital allocation and balance sheet optimization. The band urged Kohl’s management to answer their questions before investor daywhich will be held virtually on March 7, from 8 a.m. to 11 a.m.

Macellum questioned Kohl’s lagging sales performance compared to industry peers Dillard’s and Macy’s, which both posted better results for the year and quarter. And as inventory costs rise, they wondered: How will Kohl’s continue to increase gross margin without also increasing sales?

“While we recognize that inflationary cost pressures exist today, we believe the business needs to do more to offset them through higher gross margins or by reducing costs in other areas,” the statement said. .

He also poked holes in Kohl’s recently launched partnership with beauty retail giant Sephora. Kohl’s said Sephora’s in-store boutiques, now in 200 of its stores and growing, contributed to a single-digit sales increase in those locations. But Macellum argues the partnership comes at too high a cost. A significant portion of Kohl’s $605 million in capital spending in 2021 has gone into building Sephora stores, and with 400 more openings this year, Kohl’s expects to spend $850 million in 2022.

“With the additional staff needed to support the Sephora experience… each store may only generate $100,000 or less in additional profit. This would imply a return on investment of nearly 10 years. Also, assuming five to 10 years for capital expenditure amortization, it’s hard to envision these stores being accretive to EBIT (earnings before interest and taxes) – or just breaking even. Furthermore, we observe that most of the benefits of business renovation peak early – not increase over time,” Macellum said.

Additionally, the company made another push for a large-scale sale-leaseback transaction of Kohl’s store properties as a way to create shareholder value. Kohl’s has opposed the suggestion since it was proposed by Macellum and other activist investors as part of a similar overhaul campaign last year. Kohl’s owns more than 400 of its 1,162 department stores across the United States, and Macellum estimates that represents between $7 billion and $8 billion in real estate value.

“We see this as a substantial missed opportunity, especially since very few retailers own their real estate…We believe the opportunity to monetize these assets won’t exist forever, particularly in what is likely to be an environment of rate hike,” the company said.

Macellum urged other shareholders to ask Kohl’s to stop increasing spending and capital spending “when it should objectively evaluate credible offers to sell from well-capitalized buyers.”

Kohl’s did not immediately respond to a request for comment on Friday.

Macellum named a slate of 10 director nominees for election at the retailer’s 2022 annual meeting this spring, on a date yet to be announced, when shareholders will vote on who will lead the company. operator of the department store in the future.