As part of its ongoing struggle with an activist investor, Kohl’s Corp. has sent a letter to shareholders asking for their votes to return its current board of directors and reject that proposed by Macellum Advisors.
The letter also summarizes what Kohl’s claims is Macellum’s shifting narrative and short-term focus on a company sale “at any price.”
In the letter, the company states that the Kohl’s board has the skills necessary to oversee the company’s strategy while exploring any potential value-maximizing opportunities. The 13 independent directors and CEO Michelle Gass who make up the board provide industry-leading experience in areas critical to the company’s growth, including retail, e-commerce, and technology, as well as robust financial and mergers and acquisitions expertise, Kohl’s insisted.
Steps the board has been taking to create value include working closely with Kohl’s management team to execute a corporate strategy launched in October 2020 that has helped the company make substantial progress in transforming the business, the letter emphasized, and achieve record earnings per share in 2021. Kohl’s generated total shareholder returns of 146% from October 19, 2020, through January 21 of this year, significantly outperforming the SPDR S&P Retail ETF and the S&P 500, Kohl’s maintained, and total shareholder returns over a 5-year period exceeded the median of the company’s peers.
The letter also stated that Kohl’s is “committed to testing and measuring our strategy against alternatives. In January, the board and its finance committee, composed solely of independent directors including a designee from Macellum Advisors, directed Goldman Sachs to engage with bidders who submitted indications of interest in Kohl’s that were non-binding and without committed financing. This process continues and involves further engagement with select bidders who submitted indications of interest in Kohl’s, including assisting with further due diligence that may create opportunities to refine and improve proposals.”
Kohl’s has updated its board as the corporate strategy has evolved, the company pointed out, actively adding directors with the capabilities and skills that could accelerate its transformation into a leading resource for active and casual lifestyle consumers. It added six new independent directors in three years, including the three directors who joined Kohl’s board last year as part of a settlement with Macellum after it lodged initial objections to the corporate direction. Kohl’s board seats directors with experience at lululemon, Walmart Burlington and Kroger, the retailer asserted, as well as experience in M&A, technology and operations.
The Kohl’s letter continued:
“Macellum is attempting to take control of your board with an inexperienced, unqualified slate. Six of 10 nominees have never served on a public company board, and none have served on a retail company board of comparable size to Kohl’s. In addition, Macellum is promoting an ever-changing narrative, misinformed claims and value-destructive proposals, all of which reveal a reckless and short-term approach that is not in the interest of driving long-term, sustainable value.
Macellum has offered virtually no new ideas. The few ideas they have presented are short-term focused and likely to destroy significant value. Macellum has presented no value-enhancing proposals. The sale-leasebacks that they are demanding are an inefficient source of financing that would negatively impact margins by adding unnecessary rent expenses in perpetuity and risk Kohl’s investment-grade rating. While Kohl’s utilized sale-leaseback transactions in May 2020 under unique circumstances, they are typically an inefficient means of accessing capital. A large sale-leaseback would also potentially limit Kohl’s flexibility to explore all avenues to create value for shareholders. Notably, Macellum also previously urged Big Lots to pursue sale-leasebacks, arguing that they would create significant value. Big Lots then engaged in a sale-leaseback transaction in April 2020. Big Lots subsequently saw a meaningful decline in operating margin, and Bloomberg reported in August 2020 that the sale-leaseback was a factor in thwarting a buyout offer from Apollo Global Management.
Macellum’s campaign is riddled with contradictions. Macellum has repeatedly contradicted itself in its public attacks on Kohl’s. Examples include:
- Macellum criticized Kohl’s board for rejecting a $64 offer while claiming the company was worth ‘at least $100 per share.’
- Macellum called Kohl’s shareholder rights plan an entrenchment mechanism while publicly acknowledging it is a ‘stop, look, and listen device.’
- Macellum praised the omnichannel approach as the future of the industry only months before calling on Kohl’s to spin off its e-commerce business.
Macellum appears to be advocating for a quick sale of Kohl’s at any price. Macellum’s push for a hasty sale at any price reveals a short-term approach that is not in the best interest of Kohl’s shareholders. Macellum has repeatedly criticized Kohl’s for rejecting an offer to acquire the company at $64 per share, a price that is well below the value that Macellum itself publicly declared. Their focus on short-term value is further evidenced in the selling of stock in the low $60s over the last month.
Macellum continues to make false and disruptive statements about the board’s engagement with bidders. Macellum’s reckless and baseless commentary on your board’s M&A process is particularly concerning. Macellum is not a party to the process, yet they continue to make false statements that have the potential to distract bidders.
Macellum’s criticisms of Kohl’s are ill-informed. Macellum has called 2021 a ‘lost year’ for Kohl’s, despite the company achieving record EPS. Additionally, Macellum seeks to mislead investors by focusing on Kohl’s stock performance on the day of its recent investor day that corresponded with a global market decline driven by heightened concerns of war in Ukraine and a surge in global oil prices, another example of Macellum opportunistically promoting an empty narrative. Regarding our go-forward strategy as articulated in our Q4 earnings and investor day, we have received positive feedback from shareholders and analysts, and the average analyst estimate for Kohl’s 2022 EPS has increased by 10% since those two events.
Macellum ‘day traded’ Kohl’s options, netting tens of millions in profits. Macellum bought call options representing 2.5 million shares of Kohl’s common stock in the two weeks before Acacia’s unsolicited expression of interest was publicly reported. In the following trading days, Macellum sold most of these options, all while stating that Kohl’s was worth ‘at least $100 per share.’”
Kohl’s added that several of Macellum’s nominees are not independent as they have close ties to the hedge fund’s founding partner, Jonathan Duskin, who is also among those on the ballot for the board elections.
