Insights

Why Kohl’s Tumbled 13% This Week

What happened
Kohl’s (NYSE: KSS) can’t win for losing. Shares of the department store chain fell 13.1% this week from where they closed last Friday, according to data from S&P Global Market Intelligence, after shareholders beat back an attempt by activist shareholders to gain a presence on the board of directors.
The same trio of activist investors that tried to execute a turnaround at Bed Bath & Beyond — two of whom that are taking on management at grocery store chain SpartanNash — also tried to shake things up at Kohl’s, but all 13 existing directors were reelected by shareholders.
Image source: Kohl’s.

So what
Macellum Advisors, Ancora Holdings, and Legion Partners Asset Management sought to have nine directors elected to the department store’s board, alleging management and the board were not doing enough to turn the retailer’s business around.
They had acquired a 9.5% stake in the company and wanted to install directors who had more retail experience to work alongside CEO Michelle Gass. Among the ideas they had, which included growing sales and cutting costs — two favorites few can argue with — was for Kohl’s to engage in sale-leaseback arrangements for its real estate.
Of Kohl’s 1,100 or so properties, though, it owns just 410 of them as of the end of its fiscal year, or 35%. The remainder are leased or subject to ground lease arrangements, which has a tenant lease the ground a building is built on, but it builds and owns the structure afterwards and pays rent only for the property. Recently, the fast-growing coffee shop Dutch Bros. announced it was switching from build-to-suit leases to ground leases because they are a more favorable arrangement.
The activist investors, however, point out that under the current directors, Kohl’s has exhibited “poor retail strategy and execution” that has led to “stagnant sales, declining operating margins, a 44% drop in operating profits between 2011 and 2019 and a chronically underperforming stock price.”
Gass responded that Kohl’s is already implementing many of the ideas the activist investors are calling for.
Now what
Typically, calls to shake up a board by activist investors spark investor enthusiasm for the stock, and Kohl’s stock was no different, surging on the prospects of fresh blood coming on board. There was already a flood of interest in Kohl’s getting bought out by other private equity firms, but the vote by shareholders (often mostly made up of institutional investors, not small retail investors), shut the idea down and reelected the existing board.
Without that catalyst for potential growth on the table anymore, the shares folded.
Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. –

What happened

Kohl’s (NYSE: KSS) can’t win for losing. Shares of the department store chain fell 13.1% this week from where they closed last Friday, according to data from S&P Global Market Intelligence, after shareholders beat back an attempt by activist shareholders to gain a presence on the board of directors.

The same trio of activist investors that tried to execute a turnaround at Bed Bath & Beyond — two of whom that are taking on management at grocery store chain SpartanNash — also tried to shake things up at Kohl’s, but all 13 existing directors were reelected by shareholders.

Image source: Kohl’s.

So what

Macellum Advisors, Ancora Holdings, and Legion Partners Asset Management sought to have nine directors elected to the department store’s board, alleging management and the board were not doing enough to turn the retailer’s business around.

They had acquired a 9.5% stake in the company and wanted to install directors who had more retail experience to work alongside CEO Michelle Gass. Among the ideas they had, which included growing sales and cutting costs — two favorites few can argue with — was for Kohl’s to engage in sale-leaseback arrangements for its real estate.

Of Kohl’s 1,100 or so properties, though, it owns just 410 of them as of the end of its fiscal year, or 35%. The remainder are leased or subject to ground lease arrangements, which has a tenant lease the ground a building is built on, but it builds and owns the structure afterwards and pays rent only for the property. Recently, the fast-growing coffee shop Dutch Bros. announced it was switching from build-to-suit leases to ground leases because they are a more favorable arrangement.

The activist investors, however, point out that under the current directors, Kohl’s has exhibited “poor retail strategy and execution” that has led to “stagnant sales, declining operating margins, a 44% drop in operating profits between 2011 and 2019 and a chronically underperforming stock price.”

Gass responded that Kohl’s is already implementing many of the ideas the activist investors are calling for.

Now what

Typically, calls to shake up a board by activist investors spark investor enthusiasm for the stock, and Kohl’s stock was no different, surging on the prospects of fresh blood coming on board. There was already a flood of interest in Kohl’s getting bought out by other private equity firms, but the vote by shareholders (often mostly made up of institutional investors, not small retail investors), shut the idea down and reelected the existing board.

Without that catalyst for potential growth on the table anymore, the shares folded.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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