Kohl’s (KSS) closes up 5% on activist plan to separate, sell
21:28, 6 December 2021
Shares in American clothing retailer Kohl’s were up as much as 9.5% on Monday as activist investor Engine Capital pushed the company to improve its stock performance.
In a public letter to the company, Engine Capital proposed two methods of boosting the stock price: spin off the digital store into a separate company or sell Kohl’s to private equity at a premium.
Kohl’s shares climbed as high as $53.06 per share on Monday, up from last week’s close of $48.45 per share. Kohl’s closed at $51.07 per share for a 5.41% gain on the day.
Spin off
The strategy of spinning off legacy retailer’s online stores was originated by Saks Fifth Avenue, which is preparing an IPO of its online store at a valuation of $6bn.
Likewise, Jana Partners acquired a stake in Macy’s in October and is pressuring the company to pursue a similar separation strategy, which it says could raise Macy’s valuation to $14bn from $6.9bn.
Engine Capital estimates a stand-alone Kohl’s e-commerce business would be worth $12.4bn or more – dwarfing its current $6.7bn valuation.
In theory, the separation would allow more resources to go toward the development of the online site faster as these companies downsize their physical retail store presence, which has floundered amid the pandemic. However, several investors and analysts remain skeptical the separate parts are greater than the whole.
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Sell off
The other solution offered by Engine Capital is to sell Kohl’s at a premium to a private equity firm that may be able to unlock more value from their assets and then turn around and sell it at a profit.
A private equity buyer could use Kohl’s free cash flow to run the company with significantly more leverage than the board is willing to now, which would lower its cost of capital and put a buyer in a position to pay significantly more for the company than where it currently trades, according to the letter.
Engine Capital contends that Kohl’s could fetch a private market value of 5.5 times its forward earnings, which would imply a purchase price of around $75 per share. Kohl’s reported having 147 million shares outstanding in its latest third-quarter results, which implies a purchase price of around $11bn.
Change expected
No matter the strategy, investors are telling Kohl’s that they expect change.
“Since Michelle Gass became chief executive officer in May 2018, Kohl’s total shareholder return is -10.5% and the stock has underperformed the S&P 500 by 90% and the company’s peers by 19.1%,” Engine Capital wrote in the letter.
“Given leadership’s failure to create value through operational excellence and strategic initiatives over long periods of time, it is time for the board to accept the fact that the public market is not appreciating Kohl’s in its current form.”