What Went Wrong With Kohl’s And How It Can Get Back on Track

Kohl’s was almost there.

After entering into exclusive negotiations in early June with a suitor to discuss a potential sale of its business, the Menomonee Falls, Wis.-based retailer said on Friday that it had withdrawn from the process of selling itself to Franchise Group. With the move, the Kohl’s board put the retailer back on the market and is continuing to look to maximize value for shareholders.

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Even before entering talks with The Vitamin Shoppe-owner, things were on the downswing for Kohl’s and its deal to sell itself, the value of which had already dwindled significantly.

Franchise Group had reportedly placed a $9 billion offer to acquire Kohl’s in April at a deal priced at $69 per share. That bid was tweaked to around $60 per share on June 6 and revised again to $53 per share on June 29, at which time the board decided not to move forward. Private-equity firm Sycamore Partners reportedly also dropped its initial $65 per share bid to a deal priced in the mid-$50s per share.

The diminished bids came as Kohl’s reported disappointing results for Q1, with a decrease in net sales and comparable sales. Net income came in flat compared to the same period last year at $14 million in the first quarter of 2022.

On Friday, the outlook worsened. Kohl’s downgraded its guidance for Q2, citing “macroeconomic issues” such as inflation and a slowdown in consumer spending. Kohl’s expects sales to be down in the high-single digits for Q2, compared to its previous expectation of down in the low-single digits compared to last year.

Kohl’s stock was down 18% after the news broke on Friday.

Morgan Stanley analysts estimated that this revenue cut could mean a 25 to 40% hit to EPS for Q2 and a 10% cut to EPS for the full year of 2022.

Like other department store retailers, Kohl’s has not been immune to the supply chain problems, inflation and inventory excesses facing the industry. As an added bonus, Kohl’s stores tend to occupy more than 70,000 square feet, making its underperforming stores even more problematic.

A recent report from Morningstar analysts that analyzed Kohl’s properties found that the retailer could be hit with some store closures in the not-so-distant future as 10 of its property leases near expiration before fiscal year 2023.

“Unlike Macy’s and Nordstrom, which have been closing hundreds of underperforming stores over the past few years, Kohl’s large fleet of stores has remained relatively stable because the majority of its locations, roughly 95%, are outside of malls,” Morningstar analysts, led by VP Steven Jellinek, wrote in a note. “But that might change.”

While the analysts said they do not predict “a slew of store closures in the short term,” they outlined the potential risk for certain stores in underperforming locations like malls or stores with upcoming lease expirations.

Since closing 18 stores in 2016, Kohl’s has generally opened more stores than it has shuttered. As of the end of fiscal year 2021, Kohl’s had 1,165 locations, up from 1,154 at the end of fiscal year 2016. And the company recently announced a plan to open 100 new, smaller format stores in markets previously untapped by its physical presence over the next four years. Kohl’s is also on track to have 850 Sephora at Kohl’s shops by 2023, with 600 locations in place by August.

At the same time, Kohl’s continues to field pressure from activist investor Macellum Advisors, which owns nearly 5% of shares at Kohl’s and has asked Kohl’s to consider taking an offer to sell its business while remaining skeptical about its future.

Despite the issues plaguing the retailers, management said it is focused on bringing the company’s performance up to snuff. For example, Kohl’s outlined in a Friday press release that it would evaluate opportunities to make money via its real estate portfolio in addition to exploring other opportunities.

“Investors will still call for change and disruption at the business — and possibly for a sale,” said managing director of GlobalData Neil Saunders in a statement. “However, with tighter market conditions such calls will be harder to justify. Kohl’s management must use this time to start rebuilding the business so that when the economy picks up they can point to some better results and show that they are the right team to be running the show.”

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