News of note for fans of D-list celebrity clothing brands: Changes might be coming to the department store Kohl’s, at least if activist investors get their way. In a December letter sent to the retailer’s board of directors, activist investor Engine Capital urged management to consider either selling the retailer to a private equity firm “who can pay a meaningful premium” or spinning off the e-commerce division, “given Kohl’s unacceptable long-term stagnation.”
According to Engine, Kohl’s private market value is “far superior” to what it’s currently trading at and the activist investor is eager for Kohl’s to perform a market test and see just how high a private buyer or buyers could bid. The expectation is that Kohl’s might pay about $75 per share (Kohl’s closed at $47.98 per share on January 12). The other option on the table involves Kohl’s separating its digital business from its bricks-and-mortar operation, which Engine believes by itself could be “conservatively valued” at $12.4 billion, well above the brand’s current market cap of $6.7 billion. Either option makes sure that Kohl’s investors can line their pockets with even more cash.
The push is part of a bigger trend in retail: Macy’s is considering an e-commerce spinoff that could almost double its market cap, according to the activist investors pushing for the breakup. And Nordstrom recently threw itself into the conversation when Bloomberg reported that it could be considering separating its discount outlet chain Rack from the rest of the company. All of the retailers have their eyes on Saks which split off its e-commerce business in 2021.
Saks CEO Marc Metrick boasted that the iconic department store’s e-commerce spinoff was a wise decision. Because Saks has been privately held for the past two years, many of the company’s financials are unknown. Saks’s separation isn’t exactly apples to apples to Kohl’s. Saks sells haute couture and Louboutins in its 40 physical stores across North America, whereas the budget-friendly Kohl’s has more than 1,100 locations in the US. If the Saks e-commerce unit goes public–as it will reportedly do in the first half of 2022–other retailers will gain a bit more visibility into how the split impacts the retailer’s bottom line.
If Saks’s numbers are as good as Metrick has suggested then that might give Engine’s arguments even more persuasive. In its letter to the Kohl’s board, Engine took a swing at Michelle Gass, the retailer’s CEO, by pointing out that total shareholder return is down 10.5% since her appointment in May 2018. Engine’s analysis also noted that the stock underperformed the S&P 500 by 90% during that time and lagged in comparison to competitors Macy’s, Dillard’s, and Nordstrom.
Kohl’s Cash (those coupons that make your thrifty aunt’s heart sing) and Lauren Conrad’s exclusive line are draws for stores, but they haven’t been enough to keep the retailer rolling in money. During the first year of the pandemic, Kohl’s opted to forego paying dividends to shareholders, but in 2021, it announced it would distribute between $500 million and $700 million back to investors through share buybacks. Kohl’s also raised prices, which led to a bump in profits.
“Kohl’s e-commerce business could be more valuable on its own, but the additional complexity the spinoff adds to strategy, logistics, omnichannel integration, and customer experience may detract from that value,” Ava Buechel, retail consulting analyst at McMillanDoolittle, told Morning Brew. Services like buying online and picking up in-store or with curbside pickup, and using the mobile wallet are linked to both.
(Engine Capital did not respond to requests for comment, and Kohl’s largest institutional investors, BlackRock and Vanguard, declined to comment on whether they agree with Engine’s assessment.)
Engine only owns about 1% of Kohl’s stock, but Gass told CNBC on Dec. 8 that she was listening. “Like we would any big idea, we are putting a lot of resources to understand what this means for our business,” she said. She noted that the “number one priority” for herself and for the Kohl’s board “is to drive shareholder value.” The Kohl’s board and management team issued a statement that echoed Gass’s comments.
Macy’s is facing similar questions about its future. On November 18, 2021, during a third quarter earnings call, Jeff Gennette, Macy’s chairman and CEO, acknowledged that the company was considering “a range of things,” like cost and operational analyses of both the company continuing to operate as is and dividing into two businesses. Macy’s hired AlixPartners as a third party “to really pressure test all of our analyses.” In that same quarter, Macy’s reported $5.4 billion in sales, one-third of which came from digital. Plus, the department store’s bricks-and-mortar aren’t on particularly sound foundation: In February 2020, Macy’s announced it would close 125 stores over three years.
According to Jana Partners, the activist investor that put pressure on Macy’s in October to consider an e-commerce split, if Macy’s separated its physical stores from its online presence, it could double in value, climbing from its $6.9 billion market cap at the time to $14 billion. But some analysts need more convincing. “To an extent, you still need stores,” Jessica Ramirez, retail research analyst for Jani Hall & Associates, told Morning Brew. Kohl’s and Macy’s customers are now “trained” to connect with the physical store when they buy online and return merchandise to the store, she said.
Nordstrom has its own spin on how to thrive. Bloomberg reported that Nordstrom also hired AlixPartners, the same firm retained by Macy’s, to solve its Rack dilemma. It isn’t an exact replica of Kohl’s, but it could lead to the same results–to drive up the company’s value. Home to clearance racks overstuffed with designer handbags, smelly candles, and tops with hemlines that are just a tad uneven, Rack was once considered a key growth driver for the retailer, but sales have slid from pre-pandemic levels. It accounted for close to $1.2 billion of the $3.5 billion in total net sales in the company’s Q3 earnings. CEO Erik Nordstrom said in a November 23 earnings call that the company was taking action to improve performance at Rack. Nordstrom declined to comment on what it referred to as “rumors.”
Consumer and retail analyst Faye Landes thinks that spinning off the Rack is “likely less complicated” than separating out the Nordstrom e-commerce business. She’s skeptical that the business case for the “quasi-fad” of an e-commerce spinoff makes sense for Kohl’s and Macy’s, given the shared resources and expenses.
Some of the answers to whether any e-comm spinoff scenario would be in the best interests of Kohl’s or Macy’s might come with a Saks IPO. Saks CEO Metrick said previously that Saks.com has double the number of eyeballs (1 million visits per day) compared to two years ago. In that same amount of time, both in-store sales and online sales are up. According to the Wall Street Journal, Saks is hoping for a $6 billion valuation in an IPO this year. Last March, the luxury retailer was valued at about $2 billion. Through a spokesperson, Saks declined to comment on the potential IPO, saying the company does “not comment on rumor or speculation.”
Buechel of McMillanDoolittle warns the retailers looking at these e-commerce spinoffs that they “could be valuable in the short term” but it remains to be seen what the impact would be on the so-called omnichannel customer experience that connects all the dots when a customer interacts online and in store, like those who browse on their phone and then pick up at a nearby location.
At Kohl’s, more foot traffic is coming through the door since it partnered with Amazon for in-store returns and Sephora to offer mini shops for its clientele, 70% of which are women. Future partnerships and supplier contracts would need to be restructured or duplicated to meet the needs of both businesses, Buechel said.
“Kohl’s online and in-store experiences are more integrated than ever, and the decision to split them could negatively impact the customer experience,” Buechel said. “While Saks has observed some initial success in spinning off their e-commerce business, this has yet to be proven as a viable long-term solution and their upcoming IPO will be more telling.”
If it turns out the price tag of a standalone e-commerce business is worth it, Kohl’s could graduate to attracting richer investments, or at least some C-list celebs.