Criticisms by shareholder activists against Kohl’s don’t let up, but the retailer’s chief executive officer Michelle Gass and chief financial officer Jill Timm aren’t about to take it sitting down.
They believe the activists are wrong in asserting that Kohl’s is underperforming the industry, that real estate sale-leasebacks proposed by the activists to increase shareholder value will do exactly the opposite, and they are defending the company’s board of 12 directors up for reelection at the May 12 annual shareholder meeting. The activists are proposing a slate of five new members to the board.
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“Our board has been actively involved in overseeing our transformation and has made sure we have the resources and support to implement our strategy. We have a highly experienced and diverse board, and their collective retail, digital and operational expertise has been a critical resource for me and my executive team,” Gass said in a letter to shareholders Thursday, in the form of a question-and-answer session with Timm.
“Our board has overseen significant, targeted investments to strengthen our competitive positioning,” said Gass. “They have provided guidance that has enabled us to make significant shifts in our brand portfolio and forge new innovative partnerships such as Sephora,” which will roll out inside at least 850 Kohl’s stores by 2023, and launch later this year on kohls.com.
Gass said in comparison to the activists’ five nominees, “our board includes more current and former CEOs, superior retail industry experience, more technology and digital experience and more operations management capabilities. Meanwhile, their slate does not include a comparable depth and quality of experience and expertise and only one of their nominees brings any meaningful digital experience, an area now representing 40 percent of our business.”
The activists have nominated Jonathan Duskin, Margaret Jenkins, Jeffrey Kantor, Thomas Kingsbury and Cynthia Murray to the board.
Those on the Kohl’s board include Michael Bender, Peter Boneparth, Steven A. Burd, Yael Cosset, Robin Mitchell, Charles Floyd and Gass.
This week, the activist investors — Macellum Advisors GP LLC, Ancora Holdings Inc., Legion Partners Asset Management LLC and 4010 Capital LLC — sent a letter to shareholders slamming Kohl’s on several fronts, contending among other things that the retailer’s stock has consistently underperformed and that recent increases in the share price represent a function of how poorly the stock performed during the initial phases of the pandemic, have virtually nothing to do with the company’s new strategic plan revealed in October 2020 and more to do with how “a pathway out of the pandemic emerged.” The investor group owns 9.3 percent of Kohl’s outstanding common stock.
Responding to activists’ claims that Kohl’s has underperformed the industry, Timm said, “The activists are wrong on this point and their statements demonstrate a lack of understanding of the retail industry in which we compete. Kohl’s share price has outperformed, for example, our department store peers over a one, three, five and 10-year timeframe, even excluding the peer retailers that have filed for bankruptcy.…Since our new strategy was unveiled in October, our share price has grown more than 200 percent, outperforming the S&P 500 by more than 190 percent, a clear reflection of our differentiated and strong momentum.”
Timm said the activists’ proposal for real estate sale-leasebacks “would be an inefficient means to access capital for Kohl’s given current market conditions, and as a result would destroy shareholder value. A sale-leaseback transaction would add operating risk (e.g., by increasing rent expense and leverage) and would likely negatively impact our investment-grade rating.”
“We are committed to engaging with our shareholders and we are open to all ideas to enhance value,” Gass said. “We have spoken with the activist investors extensively, in more than a dozen conversations with members of our board and management. The activists have not presented any new value-enhancing ideas. Many of the ideas they have raised were well underway at Kohl’s for some time or were otherwise addressed in our October strategy announcement.”
While the activists contend that not much innovation has occurred since Kohl’s launched its “Great Agenda” strategy in 2014, Gass said the strategy introduced in October “reflects a fundamental evolution of our business” and “tapping into high-growth consumer trends, like the active lifestyle, and making these a much bigger part of our future. Active, for example, will grow to more than 30 percent of our business in the coming years.
“We are currently driving the biggest transformation of our brand portfolio in our history, exiting over 25 brands, to offer a more tightly curated assortment of private and national brands,” while attracting such brands as Cole Haan and Calvin Klein. “Our biggest differentiator is our new partnership with Sephora, which will be a significant unlock in driving traffic,” Gass said.