Kohl's investors that together own 9.5% of its common stock on Monday said they have nominated nine independent directors, writing in an open letter to shareholders ahead of their annual meeting that "significant Board refreshment is long overdue."
Macellum Advisors, Ancora Holdings, Legion Partners Asset Management, 4010 Capital and various of their affiliates argue that "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."
In an emailed statement, Kohl's said its "Board and management team have been engaged in discussions with the Investor Group since early December and we remain open to hearing new ideas. Kohl's is deeply committed to enhancing shareholder value and is confident the Company's new strategic framework, published in October 2020, will accelerate growth and profitability."
Kohl's has been seen as a resilient retailer, thanks to a fleet largely based at outdoor strip malls instead of enclosed centers, and a reputation for discounts.
The retailer has recently made a series of efforts to revamp its private labels, is set to replace J.C. Penney as Sephora's department store partner and recently partnered with Eddie Bauer to meet the surging demand for outdoor gear. The company last week also agreed to add one independent director since meeting with the activist group privately, according to the activists' letter.
However, these investors are demanding more. The group said Kohl's can turn around with, among other improvements, merchandising upgrades; more effective marketing; reduced selling, general and administrative expense; more efficient capital investments; and realigning executive compensation and incentives with performance.
For the past decade, they say, Kohl's "has lost market share to other retailers and suffered declining gross margins, despite increasing SG&A spend, capital investments and executive compensation. These persistent failures have been led by several different senior executive teams but overseen by substantially the same Board."
Their demand may be reasonable, but that doesn't make it a game-changer, especially if the focus is mainly on cost cuts, according to GlobalData Managing Director Neil Saunders.
"Some new directors may help drive the pace of change, but it's not a silver bullet – you need the right mix of people with the right levels of experience and vision," Saunders said. "If the play is simply to slash costs then it won't work; if it's to reinvent the business and make it relevant then it has a chance."
Kohl's troubles were evident before the pandemic and have implications for its performance post pandemic, the investors also said.
"The Investor Group believes that these problems are fixable, but will require a high-powered Board with relevant expertise and experience that does not shy away from its oversight role and will hold management accountable," per the letter, in which the group also slammed the company's investor presentation in October as "short on details and rigorous analysis, giving us no reason to believe that lackluster operating performance will improve under the current Board."
However, the company in its statement said that since publishing "the new strategy, Kohl's has received seven equity analyst upgrades and our stock price has appreciated more than 150%."
Kohl's is seeing more footfall than most, according to an upcoming report from store traffic analytics firm Placer.ai. Visits to Kohl's in January were down 17.8% year over year, and 7.9% when compared with January 2019, which the firm cited as the latest examples of its strength compared to other department store and apparel players.
"Kohl's is not a badly run business and Michelle Gass and her team have done a lot to stabilize the company and boost performance," Saunders said by email, noting that Kohl's "consistently outperforms many of its department store peers. However, there is a sense that the business plays it safe and a lot of investors want more radical and far-reaching change."
Kohl's executives have touted in-store Amazon returns, a service Kohl's has offered at all stores for nearly two years, as successful. But some observers doubt it's adding many sales. GlobalData research confirms that the tie-up has helped drive traffic to Kohl's, especially during and after the holidays, but that the conversion to sales is "relatively weak."
"A lot of people come in, make their returns and then exit. A case can be made that any traffic is helpful, but it's not really going to save the company – especially as Amazon offers more and more ways to make returns, including via its own Whole Foods stores," Saunders said. "Basically, Kohl's needs to stand on its own two feet – it should not be too reliant on any other brand or third party to steer its business, and that includes the new partnership with Sephora."
Doug Stephens, founder of consulting firm Retail Prophet, agrees, noting in an email that the need for reinvention "for a new, post-digital era" is felt by all department stores but "will never be achieved by pinning your brand's hopes on a third-party — especially when it's Amazon."
"The task for Kohl's was to rethink everything down to the atom and establish a completely new operating system for the value a department store delivers to consumers," he said. "They rearranged the furniture when they should have rebuilt the house."