Kohl's better than expected quarter probably does nothing to quiet activist concerns

Brian Sozzi
·Executive Editor
4 min read
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Kohl's (KSS) looks to be staying in its own world despite the arrival of new activist investors seeking to shake up the struggling off-mall department store.

Hence, Kohl's investors should expect this brewing saga to play out for a good bit with an outcome that is far from certain.

Kohl's said on Tuesday it's fourth quarter sales plunged 10.1% year-over-year to $6.1 billion as the retailer continued to reel from the COVID-19 pandemic. Operating profits came in at $316 million, down 21% from a year ago.

For the full year, Kohl's saw sales drop 20% to $15.9 billion. The company posted an operating loss of $262 million. Helped by a $1.15 a share tax benefit, Kohl's managed to beat Wall Street profit estimates for the quarter.

  • Total Sales: $6.1 billion vs. $5.9 billion

  • Adjusted Diluted EPS: $2.22 vs. $0.98

  • Full Year 2021 Guidance: mid-teens percentage sales increase and $2.45 to $2.95 in earnings per share

Shares rose 1% in Tuesday trading as Kohl's said it would reinstate its dividend (to 25 cents a share) and repurchase $200 million to $300 million in stock this year.

A Kohl's spokesperson struck a very upbeat note after what was a challenging quarter and year.

"Kohl’s is extremely confident in the company’s outlook," Kohl's spokeswoman Julia Fennelly said via an email blast Tuesday morning. "Kohl’s delivered strong initial progress against its strategy in the past two quarters, and is positioned to deliver a multi-year improvement in sales and operating margin. Kohl’s will also be resuming its capital allocation strategy in 2021."

The rosy commentary unlikely sits well with Kohl's new activist investors. In fact, they may be emboldened to push harder for change at a retailer so resistant to change and lacking in financial execution.

MIRAMAR, FLORIDA - JULY 16: A view outside a Kohl's store on July 16, 2020 in Miramar, Florida. Some major U.S. corporations are requiring masks to be worn in their stores upon entering to control the spread of COVID-19. (Photo by Johnny Louis/Getty Images
MIRAMAR, FLORIDA - JULY 16: A view outside a Kohl's store on July 16, 2020 in Miramar, Florida. Some major U.S. corporations are requiring masks to be worn in their stores upon entering to control the spread of COVID-19. (Photo by Johnny Louis/Getty Images (Johnny Louis via Getty Images)

Revealed last week, the activist group attacking Kohl's includes Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. They now control a combined 9.5% stake in Kohl’s.

The group nominated nine people to Kohl's already enormous 12-person board.

They collectively blasted Kohl's for "poor retail execution, excessive executive compensation," a "long-tenured Board with insufficient retail experience," and a "systemic inability to achieve stated goals."

A source familiar with the matter tells Yahoo Finance the sides have not met since the campaign was launched and the two remain far apart on a compromise.

Kohl's spokeswoman Fennelly didn't immediately return Yahoo Finance's request for comment on whether Kohl's leadership has met with the activists. Later on in the day, Fennelly emailed the following statement to Yahoo Finance:

"Please see below which is consistent with what we have said:

Since early December, the company and selected board members have held numerous meetings with the activists. It was hoped that those meetings would lead to a constructive solution. The company is open to finding common ground with the activists but only if it’s in the best interest of Kohl’s shareholders."

The activists — who last teamed up in 2019 to shake up then dreadfully performing Bed Bath & Beyond (BBBY) — appear to be well-placed in their efforts. While Kohl's has garnered favorable headlines for its partnerships with Amazon (AMZN) (for store returns) and more recently cosmetics giant Sephora, the company simply has not delivered on several fronts.

The operating performance is more disappointing considering Kohl's pure-play rivals such as J.C. Penney and Macy's have closed hundreds of stores in the past five years. Theoretically, that should have pushed market share to Kohl's (something suggested in the letter).

That hasn't happened.

Kohl's shares are down 15% over the past two years, badly lagging the S&P 500's 39% gain. Target's stock has skyrocketed 142% during that span. TJX Companies shares are up 30%. Kohl's operating margin came in at a negative 1.62% in 2020 (reflecting its $262 million operating loss), down sharply from 8.09% in 2015. Kohl's management has set a goal for operating margins of 7% to 8%.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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