Kohl’s Should Give Its CEO a Chance
Kohl’s (NYSE:KSS) stock recently got a boost from investor activism. It got a second boost from strong Christmas quarter results. It’s getting a third boost from the waning of the pandemic.
But KSS stock isn’t yet priced like Five Below (NASDAQ:FIVE) or even Walmart (NYSE:WMT). Now at $55, Kohl’s has a market cap of $8.7 billion, still just a little over half fiscal 2021’s sales of $16 billion.
If it can get sales back even to 2019’s $20 billion in sales and come close to the pace of $2.20 per share in earnings from last quarter, it’s a bargain.
Whether it will accomplish that, of course, is speculative, which is why I recently took profits of 34% on a small Kohl’s position.
Why I Bought and Sold
I bought Kohl’s late last year, based on CEO Michelle Gass and hopes for a retail rebound.
I got out because I think Jonathan Duskin of Macellum Capital, whose allies now hold 9.5% of the stock, are making a mistake. Their letter blames Gass, who joined the company from Starbucks (NASDAQ:SBUX) in 2014 and became CEO in 2018, for things she’s in the process of fixing. It also attacks her salary and the corporate jet, which is rich coming from a bunch of hedge fund guys.
Media reports on the group quote its brag on being right about Bed, Bath & Beyond (NASDAQ:BBBY). They were. After they moved in the home goods chain replaced his CEO and set a new strategy. I’ve made money on that stock, too. But strategy is what Kohl’s got in hiring Gass.
It’s also clear that the turnaround has begun. Kohl’s beat earnings estimates over Christmas, with online representing 42% of the take. The company’s alliance with Amazon (NASDAQ:AMZN), which now has return desks in its stores, have brought 2 million new customers into Kohl’s.
Kohl’s had been a low-price department store before Gass, a cross between Target (NYSE:TGT) and TJX Companies’ (NYSE:TJX) TJ Maxx. The stores were just too big for the online world.
Gass released some of that space to Amazon and Planet Fitness (NASDAQ:PLNT). She did sales and leasebacks on other excess space. She has also brought higher class merchandise to her suburban locations, everything from Under Armour (NYSE:UAA) and LVMH Moet Hennessey’s (OTCMKTS:LVMUY) Sephora to Lands End (NYSE:LE) and, now, Eddie Bauer. All the brands are motivated to succeed with Kohl’s, having lost distribution elsewhere.
Success of the board takeover would likely lead to Gass quitting on a high, leaving the group with little to show for their efforts but overpriced real estate. Despite their brag, none of their board nominees are operators. Saving a jet is stupid if it loses the company.
The Bottom Line
I’m not the only critic here. Jinjoo Lee of The Wall Street Journal has called the group shortsighted, writing that its proposed financial engineering could risk Kohl’s credit rating for quick profits.
The activists did make me money. But I figure that if they win the KSS stock price will go down because they lack any long-term strategy. If they lose the stock price will go down because their pressure would be removed. It’s at that point, with Gass firmly in charge, that I might step back in at a lower price.
I’ve written before that I like to bet the jockey rather than the horse. I invest in good management with a clear strategy. Gass has that. Let the strategy play out before you break up the team.
At the time of publication, Dana Blankenhorn directly owned shares in AMZN. He did not have (either directly or indirectly) any other positions in the securities mentioned in this article.
Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at firstname.lastname@example.org, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.