Kohl's Investor Group Eyes Sourcing, Inventory Changes

March 1, 2021

  • Believes poor retail strategy and execution have led to stagnant sales, declining operating margins, a 44% drop in operating profits between 2011 and 2019 and a chronically underperforming stock price
  • Views Board as deeply entrenched with insufficient retail expertise and sees directorsí lack of meaningful stock ownership as an impediment to serving shareholder interests
  • Plans to address the tremendous potential of unlocking $7-8 billion of real estate value trapped on the Companyís balance sheet
  • The Investor Group believes Kohlís has opportunity to generate more than $10 in annual earnings per share within the next few years and drive the stock price over 2x higher than current levels with a sale-leaseback program for $3 billion of real estate and a properly executed large share repurchase program
  • The Investor Group has proposed a diverse slate of retail experts who will be focused on reversing Kohlís chronic underperformance and repositioning it for future success
Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital issued an open letter to shareholders of Kohlís and announced the nomination of nine independent candidates for election to the Companyís Board of Directors at the 2021 annual meeting of shareholders. The Investor Group is deemed to beneficially own, in the aggregate, 14,950,632 shares of the Companyís common stock, including 3,481,600 shares underlying call options currently exercisable, constituting approximately 9.5% of the Companyís outstanding common stock.

In the letter, the Investor Group highlights the following:

  • 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 which have created no meaningful value for shareholders. As a result, Kohlís has suffered from stagnant sales, market share loss, declining gross margins and bloated SG&A Ė all of which has contributed to operating income margins declining from 11.5% in 2011 to 6.1% in 2019. In 2019, Kohlís earned nearly $1 billion less in operating profit, or ~44%, less 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 is an impediment to serving shareholder interests. Until the recent addition of a new director last week, likely in response to our recent private engagement, the Boardís average tenure was approximately 10 years. We also believe the Board lacks relevant retail expertise. Despite this long average tenure, the Board collectively owns just ~0.5% of Kohlís outstanding shares, which the Investor Group believes has prevented proper oversight of management and shows a lack of alignment with shareholdersí interests.
  • Excessive executive compensation and poor alignment between pay and performance. The Board has developed and implemented a compensation plan that has increased total compensation despite deteriorating results. From 2010 to 2019, Kohlís top five executives have increased their total compensation from $20 million to $30 million, despite relatively flat sales and a decline in operating profit by ~42% over the same period.
  • Systemic inability to achieve stated goals. Many of the initiatives Kohlís is currently targeting to improve performance were the focus of the ďGreatness AgendaĒ Kohlís delivered to investors in 2013. The agenda called for $21 billion in sales and $1.9 billion in operating profit by 2017. Those targets were missed by 9% and 25%, respectively, by 2017. By 2019, the operating profit target was missed by 36%.
  • Kohlís has tremendous potential with the right Board and leadership in place. Kohlís has a valuable and dedicated workforce of more than 120,000 employees that can thrive under the right strategic plan. The Investor Group has identified significant opportunities to generate improvements in sales and margins through changes in merchandising, inventory management, customer engagement and expense rationalization, as well as the potential to unlock $7-8 billion of real estate value trapped on the Companyís balance sheet.
  • The Investor Group proposes a strong slate of directors with extensive retail, turnaround, capital allocation and strategic experience, who are well-positioned to create significant shareholder value. The Investor Groupís diverse slate of retail experts will be focused on repositioning Kohlís for profitable growth and efficient capital allocation, and instituting best-in-class corporate governance.
  • With the right Board and strategic plan in place, the Investor Group believes that the Company has the potential to generate more than $10 in 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 together with its director nominees, that it believes could drive a material increase in Kohlís stock price. A sale-leaseback program for $3 billion of real estate, combined with a properly executed large share repurchase program, could be at least 25% accretive to EPS.

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