Activist investors explode Kohl’s management in a sharp letter

Kohl’s (CSS) begins its week with activist investors knocking on the door.

Kohl and CEO Michelle Gass – who joined the client as chief executive officer in 2013 and replaced the CEO in May 2018 – were blown up by a group of activist investors for ‘poor retail performance’, ‘excessive compensation of the executive ‘, a’ long management board with insufficient trading experience ‘, and a’ systemic inability to achieve stated objectives. “

The activist group includes Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. They now have a combined 9.5% stake in Kohl’s, according to a new letter published Monday. The news was first reported by The Wall Street Journal.

Kohl’s shares rose 4% with early trading.

The group nominated nine people in the already enormous council of 12 people of Kohl. The activists are urging Kohl’s to lower inventory levels to reduce costs, conduct a repurchase transaction for some stores to increase cash and lower costs, and make promotions easier for customers to understand.

“The board has overseen a long list of sales and margin initiatives that have created no meaningful value for shareholders,” the activists wrote in a scathing new letter to management. The full letter is below.

A source familiar with the matter tells Yahoo Finance that the campaign is not an ‘attack and kill’ on the CEO. Rather, they want to work with Gass to turn the business around.

Kohl has fallen back on the activists and clearly has a different view of how things are going at the moment.

“Kohl’s board and management team have been in talks with the Investor Group since early December and we are still open to hearing new ideas. Kohl’s is very committed to improving the value of shareholders and trusts that the new strategic framework of the company, which was published in October 2020, will accelerate growth and profitability. Since we published the new strategy, Kohl’s has upgraded seven stock analysts and our share price has been valued at more than 150%, ‘a Kohl spokesman said. email told Yahoo Finance.

The story continues

The activists – who last collaborated in 2019 to defraud Bed Bath & Beyond (BBBY) and then perform terribly – appear to be well placed in their efforts. Although Kohl’s received favorable news for its partnerships with Amazon (AMZN) (for store returns) and the recent cosmetics giant Sephora, the company simply did not deliver in several areas.

The operating performance is more disappointing, as Kohl’s competitors of pure gaming such as JC Penney and Macy’s have closed hundreds of stores over the past five years. Theoretically, it should have driven market share to Kohl’s.

That did not happen.

Here are some statistics from Yahoo Finance on Kohl’s outlook over the past five years. We found it important to look at the pre-pandemic results (Kohl’s sales and profits fell off a cliff during the pandemic, as did other retailers):

• Share price last five years: 18% higher than 92% for the S&P 500. Target shares rose 161%.

• Sales in the same store last five years (excluding 2020): sales have declined in two of the past five years, with only small gains in the other three. Source: Bloomberg data

• Operating margin last five years (2020 excluded): reached 5.5% in 2019, lower than 8.09% in 2015. Source: Bloomberg data. Management’s target was 7% to 8%.

• Sales in the same store in the fourth quarter: the company appeared on February 4, saying that the same stores’ sales for the fourth quarter fell by 11%.

Here’s a look at the full letter the activist group sent to Kohl.

Macellum Advisors GP, LLC (with its subsidiaries, Macellum), Ancora Holdings, Inc. (with its subsidiaries, “Ancora”), Legion Partners Asset Management, LLC (with its subsidiaries, “Legion Partners”), and 4010 Capital, LLC (with its subsidiaries, “4010 Capital” and, with Macellum, Ancora and Legion Partners, the “Investor Group”), today issued an open letter to shareholders of Kohl’s Corporation (NYSE: KSS) (“Kohl’s” Or the “Company”) and the nomination of nine highly qualified, independent candidates for the election to the Board of Directors (the “Board”) was announced at the 2021 Annual General Meeting of Shareholders (the “2021 Annual General Meeting”) The investor group is deemed to own a total of 14,950,632 shares of the company’s ordinary share, including 3 481,600 shares among the call options that can currently be exercised, representing approximately 9.5% of the company’s outstanding ordinary shares.

In the letter, the investor group emphasizes the following:

∙ Poor execution and retail strategy have led to stagnant sales and declining operating margins. The board oversaw a long list of sales and margin initiatives that created no meaningful value for shareholders. As a result, Kohl’s suffered from stagnant sales, loss of market share, declining gross margins and inflated SG&A – all of which contributed to operating income declining from 11.5% in 2011 to 6.1% in 2019. In 2019, Kohl’s earned nearly $ 1 billion less in operating profit, or ~ 44%, less than in 2011, despite similar total sales and $ 6.6 billion in cumulative capital expenditure.

∙ Long-term advice with insufficient retail experience and lack of material shareholding is an obstacle to serving the interests of shareholders. Until the recent addition of a new director last week, probably in response to our recent private involvement, the Council’s average term of office was about ten years. We also believe that the board does not have appropriate retail expertise. Despite this long average tenure, the board collectively owns only ~ 0.5% of Kohl’s outstanding shares, which according to the Investor Group prevented proper management oversight and showed a lack of consistency with shareholders’ interests.

∙ Excessive remuneration of executives and poor connection between payment and performance. The board developed and implemented a remuneration plan that increased total remuneration despite deteriorating results. From 2010 to 2019, Kohl’s five top executives increased their total remuneration from $ 20 million to $ 30 million, despite relatively low sales and a decrease in operating profit of ~ 42% during the same period.

∙ Systemic inability to achieve set goals. Many of the initiatives Kohl is currently pursuing to improve performance have been the focus of the “Greatness Agenda” that Kohl delivered to investors in 2013. The agenda called for $ 21 billion in sales and $ 1.9 billion in operating profit by 2017. The targets were missed by 9% and 25% respectively by 2017. By 2019, the operating profit target was missed by 36%.

• Kohl’s has tremendous potential with the right Board and leadership in place. Kohl’s has a valuable and dedicated workforce of more than 120,000 employees who can thrive under the right strategic plan. The Investor Group has identified significant opportunities for improvement in sales and margins through changes in merchandise, inventory management, customer engagement and rationalization of expenses, as well as the potential to unlock $ 7-8 billion in real estate value captured in the company’s balance sheet. .

• The Investor Group proposes a strong list of directors with extensive retail, turnover, capital allocation and strategic experience, well positioned to create significant value for shareholders. The Investor Group’s diverse retail experts will focus on repositioning Kohl’s for profitable growth and efficient capital allocation, and establishing the best corporate governance in their class.

· With the right board and strategic plan, the Investor Group believes that the company has the potential to generate more than $ 10 annual earnings per share (EPS) within the next few years. In the coming months, the Investor Group looks forward to sharing a detailed plan, developed with its nominees, which he says could lead to a substantial increase in Kohl’s share price. A $ 3 billion real estate repurchase program, combined with a well-executed major share repurchase program, can be attributed to APS at least 25%.

Brian Sozzi is a general editor and anchor by Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and so on LinkedIn.

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