Do Kohl’s activists have a point?

Many investors have left department stores for dead. But a coalition of activists sees potential in one such retailer — Kohl’s Corp. — as it overhauls its board.
A group consisting of Macellum, Ancora, Legion Partners and 4010 Capital said that it aims to install a slate of nine new directors at the struggling retailer, attributing years of weak sales and eroding profit margins to strategic failures. The coalition is calling for a wide range of changes, including generating cash through sale-leaseback agreements and improving its merchandising capabilities and inventory management.
The presentation makes a compelling case that Kohl’s, a chain with more than 1,000 stores, has not been managed to its fullest potential in recent years. But I question whether the timing is right for this kind of campaign. The activists note that Kohl’s operating margin shank from 11.5% in 2011 to 6.1% in 2019. They also estimate that diminished rivals such as Sears and JC Penney Co gave up $12 billion in sales between 2015 and 2019, which should have represented an easy opportunity for Kohl’s to pick up market share.
Instead, the chain lost $300 million in sales in that time. That’s a damning portrait, especially when you consider Kohl’s built-in advantages, such as stores that are not located in moribund enclosed malls and its extensive efforts to drive traffic, including adding more active wear to its shelves and allowing Amazon.com Inc purchases to be returned to its stores.
One idea in the presentation, for Kohl’s to monetise its real estate, has particular merit. The activists estimate Kohl’s could generate $3 billion through sale-leaseback transactions. Kohl’s has tried in the past to get creative with its real estate portfolio, in some cases making its stores smaller and leasing the remaining square footage to the likes of Aldi and Planet Fitness. But a more traditional sale-leaseback approach might make more sense now, and not just because it could provide a quick infusion of cash after a devastating year.
The pandemic has revealed the importance of being able to fulfill online orders within local markets, leading retailers to experiment with creating micro-distribution centers in back rooms. Kohl’s might be better off designating the space it was leasing to others for its own digital efforts.
The activists are also correct to say that Kohl’s has serious work to do on its merchandising. Kohl’s leaders always say the right things about how their women’s apparel needs to improve, but they don’t have much to show for it. The company said in its October investor presentation that sales in the women’s business have declined at a 1.8% compound annualised rate over the past three years.
That said, will a board overhaul make a difference? Kohl’s just put forward a fresh medium-term strategy in October; it is too early to know if it’s bearing fruit.

—Bloomberg