Activist investors attempt to take control over Kohl’s board

A group of Kohl’s activist investors attempted to take control of the department store chain's board, The Wall Street Journal reported. Yahoo Finance’s Brian Sozzi, Julie Hyman and Myles Udland discuss.

Video Transcript

JULIE HYMAN: Now we got to turn to Kohl's. And I know Brian Sozzi's fired up to talk about this story. Activist investors coming in, taking a stake in Kohl's, and nominating nine directors to the company's board. And they came out with, what, a 27-page presentation, Brian. Really-- and I think you were expecting something even more thorough. But really criticizing a lot of different aspects of Kohl's operations from its product assortment to the way it compensates its executives. So what stands out to you? You also pointed out to us, this team has been here before, in terms of an activist targeting a retailer.

BRIAN SOZZI: I'm going to contain my enthusiasm for the rest of the week, because this is going to be a long, drawn out battle. And this is not the first rodeo for these activist investors-- McCallum and Core, Legian Partners, and 40-10 Capital-- this is the group that really led to the complete, complete overhaul of Bed Bath and Beyond in 2019. So this is their second rodeo, and they're attacking Kohl's with very good reason in a 27-page letter that was first reported by the "Wall Street Journal" on Sunday night. That letter came out this morning, here.

And they point to a couple things. Really, long term under-performance in the stock price. I have a story right now on Yahoo Finance looking at Kohl's share price the past five years, only up 18%. The S&P 500 up about 90%, target shares up about 161%. So a lagging stock price, pressured operating margins, an [INAUDIBLE]. I tweeted a chart of the presentation point that these activists put out there. On the stock price of Kohl's is-- during Kohl's is-- the board members during that long term tenure. I mean, we have the chairman at Kohl's that's been the chairman Kohl's for 33 years. You just don't hear that story very often. So there's a lot of underperformance here, a lot of concern brought to light by these active investors.

One thing that is interesting here, among many in this presentation, they would like Kohl's to explore the spin-off of some of their assets, some of the real estate assets, which they value at close to $7 billion to $8 billion. That is something very, very interesting to point out. They are looking at a, maybe, potential leaseback transaction. That's what they would like to see. But-- and two other points here.

I did talk to a source familiar with the matter this morning, they said that this is not a, quote, "catch and kill" as it pertains to the CEO. Meaning, in activist lingo, they would like to work with the CEO. That is Michelle Gass, she joined the company in 2013. She took over as CEO in 2018. They would like to work with her to help turn the company around. Julia, but this is going to be a situation that's not going anywhere anytime soon. The next shoe to drop, according to the source that I talked to, potentially a very large presentation inside the inner workings of Kohl's. This is what this group did to Bed Bath and Beyond. They dropped on legendary 168-slide presentation on Bed Bath and Beyond when they attacked them. I wouldn't be surprised to see something that similar drop very, very soon.

MYLES UDLAND: Sozzi, I remember quite well the star board presentation on Darton back in the day. I had a great time uploading all 300-some-odd slides to the "Business Insider" CMS back in the day. Three things on this Kohl's letter that really stood out to me. One, the bonus targets were hit for lower revenue year-over-year growth. So basically, the company shrank. You were seeing executives meet their bonus targets, and there's a lot of conversation--

BRIAN SOZZI: Good job.

MYLES UDLAND: --there about comp. Yeah, there's a lot of conversation there about executive comp, which is up from $20 to $30 million over the last 10 years while sales have been flat over that same period. To that point, the letter notes how much sales, I guess, which that's not really English. But, you know, the sales declines, how about that, that Kohl's has seen in a number of its competitors. And to that revenue being stagnant over the last decade, they've picked up, basically, none of those sales. They have not gained market share within a declining market. And there are some interesting charts in there-- or an interesting table showing that the share price performance for a basket of Kohl's peers actually hasn't been as terrible as maybe the retail trade would broadly seem. Yet, Kohl's specifically has been quite an under-performer there.

And then just one thing in this letter that I understand the point-- and look, I understand that the entire letter is creating a certain argument-- but they made-- they had a complaint in here about the financing that Kohl's did back in April. The terms were terrible, the 9.5% coupon on some debt that matures in five years. Obviously, those are horrific terms considering where the market has gone. I would just say, it feels a little like hindsight-y to be like, a bad job raising capital at that price in April of 2020. Though, they did note, there was plenty of cash on the balance sheet.

So they didn't really need to go out and raise the capital. But if we go back in time to March and April of 2020, the world did seem like it was ending. And so, I think taking unfavorable financing terms is perhaps not a terrible-- not, like, the worst thing that this management team has ever done. Though, it does build the case, Sozzi, as you know through this presentation, that the management of the balance sheet has just not been very good with this particular management group, this executive class. And I'll be very interested to see, kind of, how this relationship goes, especially with you noting, it's not going to be a rip and run situation, most likely.

BRIAN SOZZI: No, and it's going to be a situation that plays out for a while and the source I did talk to familiar with the matter say the two sides remain very far apart. And I can't say I'm surprised. I mean, I've covered Kohl's for so many years. I think they operate in their own land, in their own mind. And this is really the first wake up call that this management team has gotten, perhaps, over the past 10 years. And I do think they're very ill equipped internally to handle this type of activist campaign.

But at the end of the day, go into stores, go into Kohl's stores, it looks like a flea market. So I'm not surprised. There's a lot of waste in the company. And I'm not surprised to see this activist group, here, try to step up and boost shareholder value. And worth noting, they now own 9.5% of Kohl's.

JULIE HYMAN: To be fair, Sozzi, 10 seconds-- is there any department store chain that has done well over the last year or five years, for that matter?

BRIAN SOZZI: TJ Maxx, [INAUDIBLE].

JULIE HYMAN: Sure, discount too. So, yes. But I guess Kohl's falls into that category. All right.