Key Kohl's Metrics
Kohl’s announced that it has finished its strategic review process, concluding that the Franchise Group’s proposal [and financing] “was not fully executable or complete.” We read that to mean its financing wasn’t secure and that the credit markets are demanding a high price (to account for added default risk) for providing debt capital. Additionally, the higher interest burden may have caused a conflict with the covenants of Kohl’s existing debt burden ($7.2B).
Does that mean that one of the other proposed suitors steps forward? Possibly, but unlikely at a price that the board would find acceptable. Another factor that Kohl's will likely weigh is the health of the broader home furnishing category, and what market share opportunities that may create. While the soft home category is in the doldrums at the moment, we would not at all be surprised to see Kohl’s strengthen its positioning in the category by securing more national brands and widening its SKU breadth. In addition, it may also increase its marketing and promotional activity in the category. (Something we suspect Target is also doing.) Other takeaways from the announcement include:
- Kohl's board engaged with more than 25 potential bidders for the company, of which they finalized four offers. The Franchise Group offered $60 per share initially, which was lowered to $53 and came without definitive financing. The others bids were in the $68-$72 per share range. The current stock price of $29 per share renders the retailer's market cap at $3.7B (128M shares) and the enterprise value at $10.3B ($7.2B in debt and $646M in cash).
- "[One] party highlighted [Kohl's] management’s strategic progress, including traffic-driving partnerships and strategy on active, and opined that real estate and e-commerce monetization would negatively impact value. The party expressed its view that it was difficult to see an angle that Kohl's management was not already addressing with respect to generating value…Another party expressed…that it did not see much to add to what the company was already doing.” This is an opinion that we have also shared.
- "The Board is also currently reviewing other opportunities to unlock shareholder value, including reevaluating monetization opportunities for portions of [its] real estate portfolio."
- As inflationary pressures on the consumer continue, [Kohl's] is seeing a softening in consumer spending and now expects sales to be down high-single digits for 2Q22, as compared to prior expectations of down low-single digits relative to last year.” As a reminder, Kohl’s has a heavy sales mix in comfy/cozy apparel and soft home goods, both of which are not selling across retail as the consumer shifts spending to occasion-based, out-on-the-town, and back-to-work apparel as well as other categories like travel and experiences. Producing a -8% comp for 2Q22, would leave its three-year comp CAGR in line with 1Q22’s level. We would also expect 2Q22 to show significant gross margin compression and profits.
- Kohl's announcement reiterated that it plans to open more than 100 smaller format stores over the next four years (targeting $5M in sales per location at roughly 20K square feet in size). “These smaller format stores provide Kohl’s the flexibility to enter new communities, creating a localized experience to meet customer needs.” (See our comments on smaller stores in new communities here). Like many brands, Kohl’s realizes that to grow its digital business, it needs a physical presence in new markets (40% of digital orders are fulfilled in stores).
- Placer.ai data reveals that June has been a difficult month in terms of visitation trends, though the Sephora locations continue to outperform the control. As the second chart below shows, the June period faces a difficult comparison (compared to 2019) and July eases. As such, we would expect Kohl’s traffic trend to improve next month. Moreover, given the large number of openings of Sephora remodels over the summer, we would expect a substantially better 2H22.
