As careful crafters of insults, activist investors on average probably rank somewhere behind comedians but before politicians.
“Abject failure,” “highly-publicized and scattershot strategy,” “punishing underperformance and perpetual value disconnect” are among the slings and arrows fired at the boards of publicly traded retailers in recent memory.
These are the lifeblood of a very specific literary medium: open letters sent to the boards by activist shareholders, which often are hedge funds owning a modest fraction of stock. Often they are mixed with praise for a company’s market position or competitive advantage, or perhaps their salable assets such as real estate and business units.
Activists can accomplish a lot just by making noise and marshaling an argument. Their power is in persuasion. Often, activist shareholders don’t hold nearly enough stock to force change alone. They depend on convincing other large holders, including institutional investors like pension funds and mutual funds, to add pressure or even vote against incumbent management when campaigns escalate into proxy fights for board directors. But not all activist pressure is public. Often they communicate directly with management before taking their grievances public, if they do at all.
Activists taking stakes in retailers have pushed for a wide spectrum of concessions: strategy changes, management shuffles, compensation changes, asset sales, stock buybacks, spinoffs and even sales of the entire company, all of which can enrich shareholders to varying degrees.
Through sheer volume of public companies, the retail industry makes for fertile ground for activist agitators. Moreover, retail stocks have been consistently priced below the broader market since 2016 (except for a time in 2021 when sales were booming beyond nearly everyone’s expectations). Those sorts of gaps are opportunities for activists, who often target stocks that underperform the wider market.
In 2022 so far, there have been nine “high impact” activist campaigns, one of which has resulted in the activist getting a board seat for a director of their choosing, according to FactSet data provided to Retail Dive. There have also been four full-blown proxy fights, one of which was settled, with three still pending. The proxy fights already equal those of 2021 and are one fewer than all of 2020, according to FactSet.
Activist campaigns in retail
While proxy fights garner attention, by far most proxy battles in retail are either settled formally or end with an activist withdrawing, according to FactSet data going back to 2013.
Yet, what FactSet designates as "high impact campaigns" have resulted in activists getting between four and 10 board seats every year between 2013 and 2021. (FactSet defines high impact campaigns as those involving market-moving goals such as board control or representation, and removal of directors, among others.)
The presence and pressure of activists may have influenced management and boards — and those looking on — in ways both seen and unseen.
For example, after taking an activist stake in GameStop in late 2020, Chewy founder Ryan Cohen took over the board chair role and helped remake the entire executive ranks and rewrite the retailer’s strategy, all without launching a proxy for the board.
As for those few proxy fights that reached a vote, the war between companies and activists has been a draw so far, with management since 2013 winning in six instances and activists winning in six, and another instance ending in a split outcome, according to FactSet.
Proxy fights in retail
|Year||Proxy fights||Withdrawn||Settled||Split||Management wins||Activist wins|
Here’s a look at some of the most recent activist campaigns in retail:
Scott Ostfeld, a partner at activist firm Jana Partners, garnered some attention when he told an audience at an investor conference that Macy’s should spin off its e-commerce business into its own company.
The model for this was Hudson’s Bay Co., which spun off the e-commerce units to its Saks Fifth Avenue, Saks Off Fifth and the namesake Hudson’s Bay department store chain. Those moves followed years of retailers working to blend their digital and store experiences into one operationally seamless platform. Digital businesses in retail typically bring in premiums on the market, meaning a spinoff can generate some cash.
After Jana Partners took a stake in Macy’s, the retailer’s CEO, Jeff Gennette, told analysts that the company had hired the consultancy AlixPartners, which advised Saks on the break up of its store and online operations.
But after months of studying the matter, Gennette said that the company had rejected the idea of an e-commerce spinoff. “In every scenario we considered, we found that the combination of our profitable digital platform with our national footprints will deliver greater value to shareholders than a separation of our digital and physical assets,” Gennette said in February.
Some weeks prior to the announcement, Jana Partners had reduced its stake in Macy’s.
Once seen as among the more resilient department store chains, Kohl’s faces a proxy battle as activist investors deride its performance and try to push the company to sell off assets or agree to a buyout with private equity, both of which could weaken the company financially in the long run.
Last fall, the company was rumored to be facing pressure to do a Saks-like spinoff, which another activist investor in Kohl’s, Macellum Advisors, hinted at in January. Last December, partners with Engine Capital pushed Kohl’s to conduct a review of its strategic alternatives, which often includes asset divestitures or a sale, and to spin off its e-commerce business.
Macellum has since been vocal about Kohl’s selling itself, chiding the retailer on multiple occasions about not taking the sale process seriously enough after the board adopted a “poison pill” to head off a hostile takeover. Among the reported so far are financial firms, including private equity firm Sycamore Partners.
Reportedly interested as well is the real estate firm Simon Property Group, owner of J.C. Penney and an owner or co-owner of a handful of other retailers that fell into bankruptcy. (Kohl’s is named as a key large tenant in 10 malls that Simon owns or co-owns.) Simon Property’s CEO, David Simon, later appeared to downplay the reported interest in Kohl’s, telling analysts not to believe “rumors or media reports concerning our M&A activity.”
Among other twists in the Kohl’s drama, Macellum in February alluded to leadership flying to Seattle, home of Amazon.
Macellum pressed its case to the end, trying to win shareholders over to its point of view. Last week, Kohl’s board directors prevailed in a proxy vote, marking a victory against the activist fund. In a statement regarding the results, Macellum said "we contend this vote was a shareholder referendum for a sale, and we look forward to learning of an announced transaction on the quickest possible horizon."
Bed Bath & Beyond
In terms of gaining influence, Ryan Cohen’s activist campaign at GameStop was about as successful as an investor could ask for. After taking a stake, the Chewy founder in short order joined the retailer’s board, spearheaded a transformation committee and ascended to the chairman’s seat, and from there cleaned house in the C-suite and beyond.
This year, Cohen took on Bed Bath & Beyond. After years of middling performance, the home goods retailer brought on former Target executive Mark Tritton to lead a high-profile transformation. After a bump from a pandemic-driven boom in the category, Bed Bath & Beyond’s sales, profits and stock price have sagged again.
After taking a nearly 10% stake Bed Bath & Beyond, Cohen fired off a letter chiding management for the retailer’s patchy performance. “From our vantage point, Bed Bath’s strategy looks far better in a PowerPoint deck than it does in practice,” Cohen wrote. “It is full of ‘principles’ and ‘pillars’ that high-priced management consultants probably thought would placate information-hungry analysts and satisfy shareholders.”
Cohen suggested a sale of the high-performing BuyBuy Baby business, which he argued could be worth more than the entire market capitalization of Bed Bath & Beyond, or even put the whole company on the sale block.
Bed Bath & Beyond reached a settlement with Cohen and his RC Ventures fund, giving the fund its choice of three new directors to the board and a new board group focused on exploring alternatives for BuyBuy Baby. About a month later, the Wall Street Journal reported that the retailer had held talks with private equity firms potentially interested in acquiring BuyBuy Baby.
Shareholder activists frequently target management in their campaigns over financial and operational performance and strategy. At Guess, Legion Partners has waged a campaign over the personal conduct of the fashion brand’s key leaders.
The fund this year tried to oust co-founders Paul and Maurice Marciano based on a history of sexual assault and harassment accusations. ″[W]e believe the growing list of sexual assault and harassment allegations against Paul Marciano, and the apparent enabling by his brother Maurice Marciano, represent an existential risk for the Company’s brand, reputation and ability to create value for shareholders,” managing directors with Legion wrote in an April 11 open letter.
Arick Fudali, a partner and managing attorney at The Bloom Firm, the law firm representing Paul Marciano’s latest accusers, told Retail Dive that the board put his clients in harm’s way when it reinstated Marciano in 2019.
Nevertheless, the company backed the Marciano brothers, who collectively own 42% of the company’s shares and hold outsized voting power. The company described Legion Partners’ assertions as “regurgitation of previously reported and previously addressed grievances” and defended its handling of allegations against Marciano in the last several years.
The brothers prevailed in the board vote later in the spring, as did the rest of Guess’ slate of directors. Legion Partners said it won the support of holders of 83% of the company’s stock owned by non-insiders, meaning that just 17% of independent owners were enough to tip the board election to the incumbent board’s director slate.
After taking a nearly $2 billion stake in Dollar Tree, investment firm Mantle Ridge put the company on notice that it planned to nominate its own board to run the dollar store chain.
Dollar Tree hit back in public statements, saying the fund had acted in an “unwarrantedly aggressive and hostile manner” and that it “offered no new ideas for how to improve the Company’s performance or operations.”
A couple of months later, Dollar Tree announced that its then-chairman, Bob Sasser, a two decade and change veteran of the company, would retire.
Shortly after, in early March, Dollar Tree announced that Richard Dreiling — a former chief executive of rival Dollar General and Mantle Ridge’s choice of leader for Dollar Tree — would become executive chair of the company.
Mantle Ridge CEO Paul Hilal was also given the vice chair slot, while Dollar Tree said it would add another five directors — all of them of Mantle Ridge’s choosing — to the board. CEO Mike Witynski has so far held on to his job after the tussle for control.
“I look forward to this opportunity to partner with [Dreiling] as we begin the next chapter of growth and success for Dollar Tree and build on the Company’s legacy,” Witynski said a press release on the changes. “We also appreciate Mantle Ridge as true long-term stewards. We value their engagement with us, and respect how they have, since day one, worked constructively, with integrity, and in good faith alongside us to advance the best interests of all stakeholders.”
Mantle Ridge won, in other words, and without a long, arduous proxy fight. Following the announced board changes, Telsey Advisory Group analysts led by Joe Feldman said in a research note that the new leaders backed by Mantle Ridge “should bring urgency to accelerate growth, improve operations, and enhance shareholders value."
Skechers is not an underperforming company in terms of its operations. As activist investor Tremblant Capital Group noted in late 2021, “over the past decade, Skechers has grown revenue faster than Nike, Adidas, Puma, Under Armour, Crocs, and any other relevant peer.”
Its stock price, however, has not followed the shoe brand’s trajectory. Tremblant’s proposed remedy for that, in part, was “aggressive” stock buybacks, which would funnel company cash toward raising its stock price and to the benefit of investors. The activist has also targeted the class structure of Skechers shares that gives “super-voting” power to company’s founding family and keeps them in control.
Not long after Tremblant upped its stake last year, Skechers named to its board Zulema Garcia, who is senior vice president of internal audit at multilevel marketing company Herbalife Nutrition. Following Garcia’s appointment, four Skechers board members left. The company said at the time that “resignations were not the result of any disagreement with the Company or any of its affiliates on any matter relating to the Company’s operations, strategy, policies or practice.”
At the end of last year, Tremblant cut its stake in Skechers by nearly half. This year, Skechers named another new board member, Yolanda Macias, who serves as chief content officer for Cinedigm Entertainment Group.
In the first quarter, in which Skechers posted a record number of sales, the company bought back $25 million worth of its own stock, after making no repurchases at all in the prior two years and $30 million worth for the entire year in 2019.
After Alta Fox Capital Management took a 2.5% stake in Hasbro, the investment firm targeted the toy giant’s Wizards of the Coast game unit, which includes the popular Dungeons & Dragons and Magic: The Gathering franchises. Alta Fox pressed the company to divest the business unit, which the firm said could be $100-per-share windfall for stockholders.
The firm also leveled the familiar critique of corporate management, calling its “Brand Blueprint” strategy “an abject failure ... punctuated by ill-advised acquisitions, haphazard execution and poor disclosure practices.”
Hasbro rejected the idea of divesting Wizards of the Coast, whose former leader, Chris Cocks, is now the chief executive of Hasbro. Rich Stoddart, chairman of Hasbro, said a spinoff of the game business would be “unlikely to create value, is contrary to Hasbro’s strategy, and would negatively impact the benefits Wizards realizes today from Hasbro’s Brand Blueprint.”
Under Cocks, the company is reviewing its strategy and operations as it looks to boost operating profit and jump on opportunities in multi-generational entertainment and direct-to-consumer markets. Meanwhile, Alta Fox has a slate of three directors of its choosing it is pressing shareholders to vote for, down from five earlier this year.