Kohl’s CEO is facing a rough ride with activist investors

A group of [hotlink] Kohl's [/ hotlink] shareholders have had enough of the retailer's years of mediocre performance.
A quartet of activist investors - dissatisfied with Kohl's declining operating income and stagnant business over the past decade - said it appointed a list of nine directors on Monday, the majority of its 12-person board of directors. This creates the conditions for a potentially brutal proxy fight at Kohl's annual general meeting in May.
The group, consisting of Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital, together holds 9.5% of the Kohl shares. Firms say that too few of Kohl's directors have real retail experience and that too many have been around too long. (Five of Kohl's 12 directors have been on the board for more than five years.)
Other shareholders seemed to agree with the group's displeasure: Kohl's shares rose 9% Monday morning when news of a reorganization came on. Kohl's stock has fallen 16% since Michelle Gass took office in 2018, though its value has quadrupled since it bottomed out at the start of the pandemic.
The activists are considering, among other things, whether they should lower the salaries of executives and sell real estate that is not absolutely necessary for Kohl's day-to-day business. In their letter they made exceptions to aspects of the Kohl business such as: B. How much it spends on advertising and its e-commerce strategy.
It's easy to see why the activists are being taken seriously: Legion, Macellum and Ancora previously teamed up to reshape the board at Bed Bath & Beyond and install a new CEO.
Nominees for the board include Jonathan Duskin, CEO of Macellum, Thomas Kingsbury, former CEO of Burlington Stores, and Margaret Jenkins, Chief Marketing Officer of Denny.
At the top of the list of complaints is a net revenue level that remained virtually unchanged between 2011 and 2019 despite a series of turnaround attempts, including one announced in October, and an operating profit margin that has declined nearly in half during that time despite Kohl's allegedly market shares of weakened competitors in malls like [hotlink] JC Penney [/ hotlink] and [hotlink] Macys [/ hotlink].
"These ongoing failures were spearheaded by several different leadership teams but largely overseen by the same board of directors," the group said in a February 22 letter to co-shareholders.
Kohls said it was in talks with the group in December. "Kohl's is determined to increase shareholder value and is confident that the new strategic framework released in October 2020 will accelerate the company's growth and profitability," a spokesman said in a statement sent via email. Kohls later sent a second statement stating, “We reject the attempt by the investor group to take control of our board and disrupt our momentum, especially given that we are well on track to implement a strong growth strategy . "
However, companies expressed concern that Kohls [/ hotlink] will no longer be able to benefit from the reopening after the pandemic ends, as the company allegedly "is systematically unable to execute a plan that creates shareholder value."
In that regard, the group has a point: in the fiscal year ending in early 2020 before the COVID-19 outbreak, net sales were $ 18.9 billion, roughly the same as eight years ago. The operating result rose from 11.5% to 6.1%.
Fight rivals outside the mall
Kohl's has done much better than its malls competitors. In fact, the company often reminds investors that 95% of its stores are outside the mall. But its rivals outside the mall, from [Hotlink] Ulta Beauty [/ Hotlink] to [Hotlink] Gap [/ Hotlink] Inc.'s Old Navy to [Hotlink] Dick's Sporting Goods [/ Hotlink] to [Hotlink] Target [/ hotlink ], have easily defeated Kohl's.
Kohl's net sales fell 25.3% in the first three quarters of the year, in large part due to store closings last spring. While the declines moderated significantly at the beginning of the holiday season, falling 10%, this contrasts sharply with retailers outside the mall.
In October Kohls unveiled a new turnaround strategy that aims to build on the latest success in activewear, continue to phase out weak retail brands and ultimately become a major beauty factor. The company also promised to increase its operating profit margins back into the 7% to 8% range. (It will post an update on these efforts next week when fourth quarter financial results are released.)
An earlier turnaround strategy in 2014 called the Greatness Agenda, which was also based on a larger beauty store and refreshed private labels, couldn't change Kohl's total sales.
Still, the retailer Unter Gass, who has been Kohl's CEO since 2018, has taken giant strides that are likely to prevent large sales declines. After joining Kohl's in 2013, she was the architect of Kohl's big push into active clothing, particularly with Under Armor: the category now accounts for 20% of sales, and Gass has said that could reach 30%.
Kohls has finally scaled down stale brands like [hotlink ignore = "true"] Dana [/ hotlink] Buchman and Rock & Republic, but struggled to create new ones with the same touch and agility as Target. Instead, Kohls has focused on bringing in more national brands that its competitors don't stock, like Lands'End, Cole Haan, and Toms.
And in a daring step, Kohl's has teamed up with [hotlink] Amazon [/ hotlink] to process the returns in its branches for the e-commerce giant, betting that the additional customer traffic would increase sales. The company doesn't give out a lot of information on the subject, so it's hard to know if the partnership is over.
More recently, Gass landed a coup by winning a shop-in-shop partnership with LVMH's Sephora outside of Penney, instantly making Kohls a major player in the beauty wars. The challenge, of course, will be to see if Kohl manages to get Sephora customers to shop in the rest of the stores, which they haven't done much at Penney. (Kohls will compete against the upcoming Ulta Beauty stores in the Target stores.)
For all its problems, Kohl's has a lot to offer. While many competitors are dwindling, the retailer has a loyal clientele as well as a ton of stores across the country selling well-known brands. Ultimately, however, it is also difficult to offer customers things that they cannot find elsewhere or online.
As Target's vacation results and [hotlink] Walmart [/ hotlink] have shown, shoppers are consolidating shopping trips during the pandemic and choosing to bring everything from clothing to groceries to sports gear under one roof.
It's unclear if they will continue to do so after COVID-19 recedes. But Kohls has to come up with a very compelling argument to get her to break these new habits.
This story was originally featured on Fortune.com

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