Kohl’s and a group of activist investors are doing a well-publicized dance that will likely result in a contested board election on May 12th. Despite reports in the Milwaukee Business Journal of “constructive conversations”, Kohl’s amped-up it’s defensive posturing last week.
The activist group led by Macellum Advisors GP LLC. which purchased 14.7 million Kohl’s shares (9.3 percent of Kohl’s outstanding stock) has been overly critical of the company’s trajectory. The group notes sales have essentially remained static since 2011 with compounded same store sales declining by 0.6 percent over the decade-long period. They also state that the company has between $7 and $8 billion in non-earning real estate assets that could be put to work to revitalize the operation and better position the company long-term.
That same group made similar advances on Bed Bath & Beyond in 2019, resulting in new board members being seated and its founders given “forced retirement.” This set the stage for Target
Red Letter Day
On March 24th Kohl’s sent its shareholders a proxy letter, lobbying heavily against the efforts of the activist group’s attempts to elect five new board members to the Kohl’s board. In summarizing the proxy letter, Kohl’s states “’Activists’ slate threatens to disrupt Kohl’s momentum; and activists offer no new value-creating ideas.” And, in a somewhat cheeky admission it further states “Kohl’s remains open to new ideas that could enhance shareholder value.”
The proxy letter further lays out the key points the activists have put forth that underlie their position, along with an explanation of how Kohl’s’ “previously announced plans” address the same issues. They include: Inventory turns, SG&A Costs, Marketing Strategy and Effectiveness, Merchandising, Loyalty and Value, and Capital Allocation.
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Merchandising Products versus Stocking Goods
As Storch Advisors Jerry Storch reported in a recent Yahoo Finance Live interview, Kohl’s is “still a kind of a quasi-discounter and quasi-department store…but they have the department store illness.” I would tend to agree. And one of the key symptoms of that illness is, they like many other failing retailers, is a focus on “stocking goods” rather than “merchandising products.”
To elaborate; for store-based retail to survive and prosper, the stores must elevate the customer experience beyond, a three-dimensional e-commerce website. Merchandising implies a mixture of art and commerce. It includes contextual theming, storytelling, cross selling and solution-based rather than product-based retailing.
For all, but the most down and dirty dollar destinations, these fundamentals are no longer just “a nice touch” but they have become table stakes. These are the same tools that department stores used to employ; Nordstrom
Ironically, getting back to the Kohl’s chart of “stated plans” that accompanied the proxy letter, they actually propose “Creating a more simplified and inspired shopping experience through greater storytelling and merchandising customer solutions.” I could not have stated it better, myself. So, what is keeping them from executing?
When comparing how Kohl’s and Target have handled their most recent spring product offerings, it is a virtual case study in contrasts between selling commodities, and merchandising products in an inspired manner. Target is celebrating the season with a coordinated line of fresh goods, bright graphics, and product vignettes. While Kohl’s has stacked patio chairs and pillows in proximity of a sign reading “patio”, like a page on the net. One inspires, the other tires.
Fashion with Passion
The Irish value-priced fashion retailer Primark recently opened its first midwestern store, a 35,000 sq. ft. outlet on Chicago’s State street. And by the looks of the images in a recent press piece they too have a fresh approach that Kohl’s could learn from.
Their girl’s department is open, transparent, inviting and nicely adorned by some great graphics and clean visual merchandising. Like the rest of the well-merchandised store, it says value, without appearing cheap. In contrast, Kohl’s treats its kid’s product in the same tight, opaque, and maze-like manner as they tend to do throughout.
The Chicago Primark store is situated just 100 miles south of Kohl’s Menominee Falls, Wisconsin headquarters. It seems like a deserving destination for a group of socially distanced Kohl’s executives in a caravan of Sprinter vans. Chi-Town field trip!
Hard Case for Hard Goods
The Macellum Advisors position began with a detailed letter sent to the Kohl’s board dated February 22, 2021, and reported on by CNBC. Among other things, it listed criticisms contributing to Kohl’s stagnant sales. These included “a repetitive and over-assorted collection, disappointing new brand launches, private label failures, losing market share in the home category, confusing promotional and loyalty programs.
Cracking the home-goods code is another area that Target has shined and Bed Bath & Beyond is upping its game. Kohl’s and Target’s approach to the home category is similar as their respective outdoor living presentations. Target has embraced the category with high design, an edited offering, tasty graphics, and bright colors. Kohl’s on the other hand, as their sign says, is selling tools and gadgets. It is the contrast between solution-based merchandising which is value-added, and product-based retailing which is readily commoditized.
The most repeated mantra I heard from my many valued mentors was “retail is detail.” It’s a tough game, and getting tougher, but the rule book’s been written and re-edited.