Investor Group Proposes Kohl’s Board Changes

A group of investors in Kohl’s Corp. has issued an open letter to Kohl’s shareholders announcing the group’s nomination of nine independent candidates for election to the retailer’s board of directors.

The investor group includes Macellum Advisors GP, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. The letter stated that the group beneficially owns, in the aggregate, 15 million shares of Kohl’s common stock, including 3.5 million shares underlying call options exercisable, constituting 9.5% of the retailer’s outstanding common shares.

The investor group asserted that its proposed slate of directors with extensive retail, turnaround, capital allocation and strategic experience could create significant shareholder value. If elected, the directors would focus on repositioning Kohl’s for profitable growth and efficient capital allocation, and institute best-in-class corporate governance, the investor group maintained.

With the proposed board in place, the investor group stated, Kohl’s has the potential to generate more than $10 in annual earnings per share within the next few years. The group plans to share in the coming months a detailed plan developed with its director nominees that it believes could drive a material increase in Kohl’s stock price. A sale-leaseback program for $3 billion of real estate, combined with a large share repurchase program, could be at least 25% accretive to EPS, the group added.

The letter includes underlying reasons for its promotion of the independent board candidates, including shortcomings in Kohl’s current management, which, in its detailed analysis, included slow growth in the Home department, which gained 4% from 2015 to 2019 versus 15%, 48% and 94% at competitors Target, TJX and Burlington Stores, respectively. The reasons for a board shakeup, as identified by the investor group, include:

  • Poor retail execution and strategy have led to stagnant sales and declining operating margins. The board has overseen a long list of sales- and margin-driving initiatives that haven’t created meaningful value for shareholders. Kohl’s has suffered from stagnant sales, market share loss, declining gross margins and bloated SG&A, all of which has contributed to operating income margins declining from 11.5% in 2011 to 6.1% in 2019. In 2019, Kohl’s earned about $1 billion less in operating profit or around 44% than it did in 2011 despite similar total sales and $6.6 billion in cumulative capital expenditures.
  • Long-tenured board with insufficient retail experience and lack of any material share ownership. The board, as characterized, would constitute an impediment to satisfying shareholder interests. Until the addition of a new director last week, after private engagement by the investor group, the board’s average tenure was approximately 10 years. Despite this average tenure, the board collectively owns just 0.5% of Kohl’s outstanding shares, which the investor group believes has prevented proper oversight of management and shows a lack of alignment with shareholders’ interests.
  • Excessive executive compensation and poor alignment between pay and performance. The board has implemented a plan that has increased total compensation despite deteriorating results. From 2010 to 2019, Kohl’s top five executives have increased their total compensation from $20 million to $30 million, despite relatively flat sales and a 42% decline in operating profit over the period.
  • Systemic inability to achieve goals. Many Kohl’s initiatives to improve performance were contained in the retailer’s Greatness Agenda, a strategic initiative Kohl’s delivered to investors in 2013. The agenda called for $21 billion in sales and $1.9 billion in operating profit by 2017. Kohl’s missed those targets by 9% and 25% respectively. For 2019, Kohl’s missed the operating profit target by 36%.
  • Kohl’s has potential with the right board and leadership in place. Kohl’s has a valuable workforce of more than 120,000 employees that can thrive under the right strategic plan. The investor group has pointed out potential opportunities to generate sales and margin improvements through changes in merchandising, inventory management, customer engagement and expense rationalization. It also has asserted the potential to unlock $7 to $8 billion of real estate value trapped on the company’s balance sheet.