Activist investor Ancora Holdings Group is making a pitch for new leadership at Kohl’s Corp. after Macellum Advisors failed in a proxy suit to take over the company’s board.
In a proxy fight, the Kohl’s-sponsored sheet of nominees won control of the board and rejected Macellum provisions including outright sale of the company.
In the letter to the Kohl’s Board over the signatures of Frederick DiSanto and James Chadwick, Ancora chairman and CEO, the firm identified itself as a long-term investor in the retailer, holding about 2.5% of the company’s outstanding stock and one that had collaborated on a board refresh accomplished earlier this year and spending 18 months privately engaging leadership to stem what it characterized as company underperformance, as well as to unlock shareholder value.
The letter stated:
We thoughtfully withheld public critiques during this period to provide Kohl’s time to bounce back from the COVID-19 pandemic, conduct a productive review of strategic alternatives and produce a viable standalone plan that investors could rally behind. Much to our disappointment, Kohl’s has failed to deliver on each of these critical priorities under chairman Peter Boneparth (who has been a director for nearly 15 years) and chief executive officer Michelle Gass (who has been a c-level leader for nearly a decade).
If the Boneparth-led board remains firmly committed to its preferred standalone path, we contend that Kohl’s needs new leadership with demonstrated experience in cost containment, margin expansion, product catalog optimization and, most importantly, turnarounds. We appreciate that chairman Boneparth has allowed us to share private feedback with him in recent months. We also want to underscore that Michelle Gass, the company’s current chief executive officer, is a talented leader who deserves credit for establishing an innovative partnership with Sephora USA, Inc. and holding the organization together during the pandemic. We have been proud to invest in a business that maintains strong gender diversity in the c-suite, as it aligns with our recognized focus on installing female leaders in more corporate boardrooms. However, our view regarding the need for new leadership at Kohl’s is simply based on the facts.
During the Boneparth era, the board has created an environment in which Ms. Gass is no longer well-positioned to lead. The board’s decisions to reject multiple indications of interest in the $64 to $65 per share range in the winter and then proceed with an opaque strategic review throughout the spring, as financing markets gradually deteriorated, have destroyed billions of dollars in equity value and painted the company into a corner. With a failed review of alternatives and recent credit downgrade now casting shadows over what is a shrinking business, we estimate that Kohl’s has begun to trade at a steep discount to its liquidation value. The onus is now on management to begin executing flawlessly against a backdrop that includes high inflation, intense competition and recessionary headwinds. Unfortunately, the facts indicate Kohl’s lacks the right leadership for the exceedingly challenging period ahead – one that will require the company to reverse high-single-digit sales declines, contain capital expenditures and operating expenses, and immediately optimize fulfillment, marketing and merchandising.
Despite developments, including the rejection of the purchase interest that emerged over the past year, the letter insisted that Ancora gets no satisfaction pointing out the negative shareholder trends at Kohl’s. It added that pandemic pretexts for recent performance issues fall short, citing the fact that Gass has been a C-level leader at Kohl’s since 2013, and total shareholder return has been negative over the period since her appointment. The letter also noted other comparable companies had emerged from the pandemic stronger than Kohl’s.
The letter continued by asking the board to assess Ancora recommendations based on observations including:
Kohl’s has had an unsettling level of c-suite turnover in recent quarters as sales have declined, indicating suboptimal personnel selection on the part of Ms. Gass. We are also dismayed that the board chose to not disclose the recent departures of certain senior executives, including the company’s chief merchandising officer, until after the 2022 Annual Meeting of Shareholders.
Kohl’s’ most recent strategic plan received a very poor reaction from the market when it was announced on March 7, 2022, suggesting that Ms. Gass is not commanding the trust of the investment community.
Kohl’s has recently failed to keep up with peers like Macy’s Inc. and Dillard’s Inc, with its net sales and same store sales declining as costs remain elevated. Similar to how it handled recent executive departures, the board did not disclose a material financial miss prior to a critical shareholder vote at this year’s annual meeting. These disclosure decisions suggest to us – and presumably other shareholders – that the board has been focused on maintaining control above all else.
We would also be remiss not to note that Mr. Boneparth and his fellow directors deemed it appropriate to award Ms. Gass nearly $60 million in compensation between fiscal year 2017 and fiscal year 2021, with her most recent fiscal year compensation being more than 1,000 times that of the median employee’s compensation. We recognize that corporate leaders need to be compensated in line with market norms and their peers. Nonetheless, given that Kohl’s has produced years of poor returns and has started to shrink at an alarming rate, we do not support the board continuing to expend shareholders’ capital on present leadership. Ms. Gass’ well-documented pedigree as a marketing and merchandising expert does not seem as pertinent right now given Kohl’s has pressing challenges related to its financial position, inventory levels and operations. Looking ahead, we believe shareholders’ capital should be utilized to compensate a new chairman and chief executive officer that possess operating expertise and turnaround pedigree.
In closing, we want to stress that a number of stakeholders are responsible for the abysmal performance and immense value destruction at Kohl’s. But the combination of the Boneparth-led board’s ineffective leadership and management’s poor execution, as evidenced by the company’s numbers, compel us to call for a new chairman and chief executive officer at this critical fork in the road. We urge the board to announce a thoughtful succession plan and run a robust search process that accounts for interviewing a highly diverse group of qualified candidates. Ultimately, Kohl’s needs leadership that can design and implement a precise turnaround strategy to ensure the company averts peril and starts producing enhanced value for shareholders over the long-term.
