NEW YORK--(BUSINESS WIRE)--Macellum Advisors GP, LLC (together with its affiliates, “Macellum” or “we”), a long-term holder of nearly 5% of the outstanding common shares of Kohl’s Corporation (NYSE: KSS) (“Kohl’s” or the “Company”), today issued the below open letter to its fellow shareholders regarding the need for an immediate and targeted refresh of the Company’s Board of Directors (the “Board”), as opposed to waiting for a vote at next year’s Annual Meeting of Shareholders (the “2023 Annual Meeting”).
***
Fellow Shareholders,
Kohl’s is having one of the worst years in its long history. Despite a challenging macroeconomic backdrop, Kohl’s results are the worst among its Direct Peers across almost every relevant measure.1 The Board has also overseen the termination of what we argue was a deeply flawed sale process, the departures of three key executive officers and the downgrade of the Company’s long-term credit rating to “junk” by S&P Global Ratings. In our view, the operational problems at Kohl’s transcend macroeconomic variables and stem from self-inflicted execution issues that we conveyed to the Board and leadership two years ago, first privately then publicly, but which have gone unaddressed. We believe this is a function of an ineffective Board, led by Chairman Peter Boneparth, and the other longest tenured members of the Executive Committee that we contend represents a “Shadow Board.” In our view, the Board and, more specifically, the Shadow Board is failing to adequately support Kohl’s senior management, which has resulted in the destruction of billions of dollars of shareholder value recently and perpetual stagnation over the long-term.
The facts supporting the case for immediate Board change at Kohl’s has become abundantly clear to us. In an effort not to be a distraction, we have attempted to work privately with the Board over the past two-and-a-half months to explore a plan that includes replacing several long-tenured directors with independent, qualified retail experts. The Board contends that the shareholder vote at the 2022 Annual Meeting of Shareholders (“2022 Annual Meeting”) is proof they have shareholders’ support today. We believe that had the true degree of business deterioration, senior executive departures and flawed sale process been known by shareholders at the time of the 2022 Annual Meeting, there may have been a different outcome, which is why we write today. We believe there is an urgent need for change now, rather than waiting another eight months for another contested election at the 2023 Annual Meeting. If our fellow shareholders agree, we hope you will make your voices heard.
The Company’s Undeniable Underperformance2
Measurement |
Kohl’s |
Direct Peers |
Underperformance |
TSR Since 12/31/19 (pre-COVID) |
42% Decline |
90% Increase |
132 percentage points (“pp”) |
TSR - 1 year |
40% Decline |
0.2% Increase |
40 pp |
Sales – 1st Half ’22 vs. ‘19 |
8% Decline |
5% Increase |
13 pp |
EBT –1st Half ’22 vs. ‘19 |
Down 54% |
Up 384% |
438 pp |
Inventory – Q2 ’22 vs. Q2 ‘21 |
Up 48% |
Up 8% |
40 pp |
Inventory Change Q1 ’22 to Q2 ‘22 |
8 pp Increase |
7 pp Decrease |
15 pp |
Reduction in ’22 Guidance |
50% |
13%* |
37 pp |
Source: Bloomberg LP, Company SEC Filings. TSR end date as of October 07, 2022 * Average of JWN, M, and DDS changes to Adj. EPS guidance from their initial Q4 2021 to Q2 2022 Earnings Press Release |
|||
Additionally, Kohl’s has experienced the following:
- First half 2022 EBT is the lowest since 2000.3
- Full Year 2022 consensus projects Kohl’s EBT down 50% as compared to 2019, while direct peers are projected to be up 175%.4
- Cash was depleted by over $2 billion in Q2 2022 resulting in the lowest cash level since 2006 and the largest year-over-year decline in cash EVER.5
- Consensus 2022 EBITDA, derived from Company guidance, of $1.6 billion, if realized, will be the lowest since 2005.6
- Even if a Sephora shop was in every Kohl’s store, it appears that sales would have still been down approximately 5% in Q2 2022.7
The Accountability of the Shadow Board
We believe Chairman Boneparth and the Executive Committee have demonstrated an inability to effectively address the Company’s problems and seize on its opportunities. Members of this de facto Shadow Board have, in our view, failed to oversee a course correction of operational woes, effectively evaluate performance with a critical eye and see around corners to mitigate secular challenges. Earlier this year, these individuals seemed content to attribute all of the Company’s post-pandemic reopening success to their own initiatives, even though we believe Kohl’s was actually just benefiting from economic tailwinds and none of the Company’s executional issues have been resolved. However, these same directors appear to assume no accountability for rejecting offers to buy the Company at prices well above $60 per share in January 2022 (after denying there were even any buyers for the Company). These directors then oversaw a slow moving and seemingly flawed sale process that collapsed this summer following months of foreseeable financing market deterioration.
While we have no personal animus towards Chairman Boneparth, we do believe he is a root cause of the Board’s poor oversight and insular thinking, having now served on the Board for over 14 years. We contend his own track record, best represented by his time as Chief Executive Officer of Jones New York, is one of unquestionable underperformance. During a five-year period at Jones New York, he oversaw a 55%8 decline in EBITDA and share price underperformance of 81% versus the S&P 500 (the XRT retail average did not exist yet). 9, 10 Further, Chairman Boneparth’s other public market experience includes his tenure as Chairman of JetBlue. Since becoming Chairman of JetBlue, it is the only company in its proxy peer set to have a negative shareholder return, with a TSR underperformance of 62%, and it is the only member of its proxy peer group trading below its pandemic low price.11
Three of the four other members of the Executive Committee include the next longest tenured directors John Schlifske (11 years on the Board), Stephanie Streeter (15 years on the Board) and Jonas Prising (7 years on the Board), each of whom have no retail experience. Nonetheless, the Executive Committee appears to exert considerable control over Kohl’s and its management team. The Executive Committee’s charter states that its primary function is to act on behalf of the Board outside of the Board’s regular quarterly meetings. According to the Company’s 2022 proxy statement, the Executive Committee met 20 times during 2021 – almost every other week while the rest of the committees met only four-to-seven times that year.
The Path Forward is Clear
Macellum’s private presentation to Kohl’s Board in January of 2020 and our subsequent letters detailed our primary concerns with the Company’s performance: 1) the Company was losing market share due to poor assortment, confusing promotions and weak marketing, and uncompetitive in-store experience; 2) margins were constantly being pressured by the Company’s inability to manage inventories and SG&A; 3) capital was being misallocated; 4) excessive executive compensation was not aligned with shareholders returns; and 5) the Company was unable to capitalize on the significant opportunity left by the wake of store closures throughout the industry. In our view, these issues were present for the years leading up to the pandemic and our first campaign in 2021 – and they remain problematic, if not getting worse.12 We are detailing our past observations only to illustrate that the critiques we shared two years ago were fundamental in terms of the Company’s executional and operational issues that could have been addressed with meaningful Board change. Unfortunately, today we still hear the same initiatives that have been recycled for years.
As we did then, we continue to see a significant turnaround and value creation opportunity predicated on fixing the fundamental executional and operational issues we have raised. The director candidates we nominated earlier this year included individuals with extensive experience in capital allocation, finance, merchandising, operations, supply chain and strategic planning. Macellum also possesses additive ownership perspectives and retail sector expertise. Collectively, with our nominees, we spent much of the winter and spring of 2022 developing a comprehensive operating plan that we believe could have improved the Company’s standalone results over the long-term – even if a sale was not consummated. This plan can be found in the 168-slide presentation available here.
Time to Compromise and Collaborate on a Targeted Board Refresh Now
We recently approached the Board to collaborate on a refresh of the Board that could support long-term improvement at Kohl’s. Unfortunately, we were rebuffed by Chairman Boneparth and the Board would not offer a counterproposal of any kind. The Board insists that only Chair Boneparth interact with us, which we believe is illogical and dysfunctional in that it blocks normal shareholder-director engagement and lets only one individual – who we have admittedly been critical of and stands to lose the most – control the information flow back to the boardroom.
When most of you voted at the 2022 Annual Meeting, there was a different set of circumstances and facts surrounding Kohl’s. We appreciate that the Board’s misleading statements, including its overly optimistic projections, and claims that it was running a robust sale process that could not be disturbed by the addition of new directors may have led you to support the incumbents at that time. Now, as we feared, the sale process has failed, the Company’s operating results have deteriorated significantly, and an ineffective Board remains intact.
Our director candidates and other individuals in Macellum’s network have significant retail experience which can support management and help to turn the Company around. They are prepared to join the Kohl’s Board as part of a refresh that replaces long-tenured directors, such as Chairman Boneparth, and members of the Executive Committee. Anyone we put forth will be prepared to serve on the Board for years to come and bring a long-term outlook and shareholder’s sense of urgency to the Company.
In closing, let us stress that we are sincere in our desire to engage in good faith with the full Board. The time has passed for debate over blame and what could have been done differently in the preceding months and years. We humbly ask likeminded shareholders to communicate their dissatisfaction with the status quo and desire not to wait until May of 2023 for Board change.
Sincerely,
Jonathan Duskin
Managing Partner
Macellum Capital Management, LLC
***
For shareholders interested in further evaluation we have complied a resource center which can be accessed by the below hyperlinks.
Included within are:
- Kohl’s 2014 Greatness Agenda
- Kohl’s 2020 Investor Presentation
- Kohl’s 2022 Investor Presentation
- All of Macellum’s public correspondence
- Macellum’s investor presentation from the 2022 campaign
- A video created by Macellum Nominees providing a detailed look into Kohl’s merchandise and stores
***
APPENDIX
Financial Tables
Exhibit: A
Net Sales |
Q1 22 vs. Q1 19 |
Q2 22 vs. Q2 19 |
1H 22 vs. 19 |
Direct Peers |
4% |
6% |
5% |
Retail Peer Group |
13% |
12% |
12% |
Kohl's |
(9%) |
(7%) |
(8%) |
(Source: Bloomberg LP, Company SEC Filings, Peer Group Numbers are Averages). As used throughout this letter, “Retail Peer Group Average” refers to TJX Companies Inc. (NYSE: TJX), Ross Stores, Inc. (NASDAQ: ROST), Burlington Stores Inc. (NYSE: BURL), Abercrombie & Fitch Co. (NYSE: ANF), American Eagle Outfitters Inc. (NYSE: AEO), Best Buy Co. Inc. (NYSE: BBY), Carter’s Inc. (NYSE: CRI), Chico’s FAS, Inc. (NYSE: CHS), Children’s Place Inc. (NASDAQ: PLCE), Designer Brands Inc. (NYSE: DBI), DICKS’s Sporting Goods Inc. (NYSE: DKS), Express, Inc. (NYSE: EXPR), Foot Locker, Inc. (NYSE: FL), Gap Inc. (NYSE: GPS), Home Depot Inc. (NYSE: HD), PVH Corp. (NYSE: PVH), Target Corporation (NYSE: TGT) and excludes the Direct Peers (as previously defined), as per Kohl’s definition in its investor presentation dated 04/21/2022. |
|||
Exhibit: B
EBT |
Q1 22 vs. Q1 19 |
Q2 22 vs. Q2 19 |
1H 22 vs. 19 |
FY 22E vs. 19 |
Direct Peers |
93% |
101% |
384% |
175% |
Retail Peer Group |
36% |
13% |
23% |
23% |
Kohl's |
(88%) |
(43%) |
(54%) |
(50%) |
(Source: Bloomberg LP, Company SEC Filings, FY 22 Estimates are based on Bloomberg LP Consensus Estimates, Retail Peer Group Numbers are Cumulative Averages) |
||||
Exhibit: C
Inventory |
Q1 22 vs. Q1 21 |
Q2 22 vs. Q2 21 |
Direct Peers |
15% |
8% |
Retail Peer Group |
32% |
34% |
Kohl's |
40% |
48% |
(Source: Bloomberg LP, Company SEC Filings, Peer Group Numbers are Averages) |
||
Exhibit: D
|
Announced Sale Process Was Ending |
AGM |
Pre-Covid |
|
|||||
|
7/1/2022 |
5/11/2022 |
1YR |
12/31/2019 |
3YR |
5YR |
|||
Direct Peers Average |
5 |
(14) |
0.2 |
90 |
110 |
142 |
|||
Direct Peers Median |
(4) |
(15) |
(20) |
12 |
30 |
5 |
|||
Retail Peer Group Average |
5 |
(15) |
(34) |
(10) |
3 |
25 |
|||
Retail Peer Group Median |
4 |
(17) |
(35) |
(22) |
(16) |
(3) |
|||
S&P 500 |
(4) |
(8) |
(16) |
18 |
30 |
56 |
|||
SPDR S&P Retail ETF (XRT) |
(0) |
(11) |
(35) |
32 |
48 |
51 |
|||
KSS |
(23) |
(44) |
(40) |
(42) |
(38) |
(24) |
|||
Direct Peers AVG OUTPERFORMANCE/(UNDER) |
(28) |
(30) |
(40) |
(131) |
(148) |
(166) |
|||
Direct Peers MED OUTPERFORMANCE/(UNDER) |
(19) |
(29) |
(20) |
(53) |
(67) |
(29) |
|||
Retail Peer AVG OUTPERFORMANCE/(UNDER) |
(28) |
(28) |
(5) |
(31) |
(41) |
(49) |
|||
Retail Peer MED OUTPERFORMANCE/(UNDER) |
(27) |
(26) |
(5) |
(20) |
(22) |
(21) |
|||
vs. S&P 500 |
(19) |
(35) |
(24) |
(59) |
(68) |
(80) |
|||
vs. SPDR S&P Retail ETF (XRT) |
(23) |
(33) |
(5) |
(74) |
(85) |
(76) |
|||
(Source: Bloomberg LP as of 10/07/2022 with dividends reinvested) |
|||||||||
1 As used throughout this letter, “Direct Peers” or “Direct Peer Group” refers to Nordstrom, Inc. (NYSE: JWN), Macy’s Inc. (NYSE: M), and Dillard’s Inc. (NYSE: DDS), as per Kohl’s definition in its investor presentation dated 04/21/2022. Direct Peers numbers shown herein are averages of the three companies.
2 See Appendix for more detail on peer group comparisons.
3 Source: Bloomberg LP, Company SEC Filings
4 Source: Bloomberg LP, Bloomberg LP Concensus Estimates, Company SEC Filings
5 Source: Bloomberg LP, Company SEC Filings
6 Source: Bloomberg LP, Bloomberg LP Concensus Estimates, Company SEC Filings
7 Source: Bloomberg LP, Company SEC Filings, and Macellum Estimates
8 Source: Bloomberg LP, Company SEC Filings for the Jones Group FY 2001 through Q3, Q4 2006 and Q1, Q2 2007 (Mr. Boneparth’s last twelve months as CEO)
9 Source: Bloomberg LP, Company SEC Filings for the Jones Group FY 2001 through Q3, Q4 2006 and Q1, Q2 2007 (Mr. Boneparth’s last twelve months as CEO)
10 Source: Bloomberg LP; TSR period from 05/22/2002-07/12/2007 with dividends reinvested
11 Source: Bloomberg LP TSR period from 05/14/2020-10/07/2022, with dividends reinvested. Jet Blue’s Proxy Peer Group Includes: American Airlines Group Inc. (NASDAQ: AAL), Delta Air Lines, Inc. (NYSE: DAL), United Airlines Holdings Inc. (NASDAQ: UAL), Southwest Airlines Co. (NYSE: LUV), Alaska Air Group, Inc. (NYSE: ALK), Hawaiian Holdings, Inc. (NASDAQ: HA)
12 See Appendix.