Kohl’s Wins Proxy Battle, but Larger Question Remains

After an acrimonious battle, Kohl's KSS thwarted an attempt by 5% shareholder Macellum Capital to take control of its board of directors and implement significant changes or push for a sale. This result became a forgone conclusion in recent weeks as neither institutional shareholders nor proxy advisory firms showed much enthusiasm for a takeover. We have argued that although Macellum's criticisms of Kohl's operations and its lack of a clear real estate plan have merit, it is unlikely that its changes would have materially improved Kohl's weak competitive position in the long run (as suggested by our no-moat rating). Now that the proxy fight is over, Kohl's management must decide the greater question of whether to accept one of the bids to buy the company. It has been reported that multiple parties have expressed interest in purchasing Kohl's at prices in the $65-$70 per share range, including a $68 bid from Brookfield Asset Management and no-moat mall operator Simon Property Group, owner of Kohl's close competitor JCPenney. Thus far, Kohl's has expressed lukewarm interest in a sale (while insisting that it is conducting a fair process), preferring to allow CEO Michelle Gass the chance to implement key plans like the introduction of new brands and the addition of Sephora shop-in-shops. Our view is Kohl's must seriously consider any legitimate bids above our $59 fair value estimate. We lack confidence that its efforts will improve its pricing power, store traffic, or operating efficiency. Despite previous reforms, between 2011 and 2019 (prepandemic), Kohl's generated minimal sales growth and its adjusted operating margin declined to about 6% from greater than 11%. We now forecast just 2% sales growth and operating margins around 6% over the next five years, short of the company's 7%-8% target. Thus, we agree with Macellum that it is risky to turn down fair offers around $70. If Kohl's does scare off potential suitors, there could be another proxy fight in 2023.