Jonathan Duskin of Macellum Capital, the lead activist investor in a new campaign against Kohl’s department stores, has a message for Kohl’s board of directors and the often over-optimistic management team: It’s time to cut costs to help improve shareholder profitability.
One measure that will help Kohl’s (KSS) cut costs is to eliminate the full-time flight crew and two private jets it supposedly still “maintains,” according to a scathing 27-page letter that Duskin and his consortium of campaign activists released. Monday. .
“It’s always really hard to find the smallest thing, but it would be better if they didn’t have those things,” Duskin told Yahoo Finance Live, referring to Kohl’s alleged flight crew and two private jets.
A Kohl’s spokeswoman did not respond to requests for comment on the status of the alleged flight crew and two private jets.
The last time Kohl’s referenced its aircraft was in its 2019 proxy filing published on March 26, 2020 detailing how CEO Michelle Gass used the assets.
“As Executive Director, Ms. Gass is able to use the Company’s aircraft for personal flights and business flights. This benefit increases the safety and efficiency of Ms. Gass’s travel. We believe these benefits are reasonable based on the relatively small expenses relative to both executive pay and our total benefits expenses, “said Kohl’s.
In 2019, Ms Gass, who joined Kohl’s in 2013 as director of customer service and assumed the role of CEO in May 2018, incurred $ 197,490 in compensation related to the use of the retailer’s aircraft, according to the presentation.
“Amounts shown are incremental costs for personal use of Kohl’s owned or chartered aircraft, and are based on actual charter expenses or, with respect to use of Kohl’s owned aircraft, direct hourly cost of use , which includes fuel, maintenance, engine restoration cost reserves, crew travel expenses, landing and parking fees and supplies, “explained Kohl’s of Gass air travel expenses.
The extent of Gass’s travel on the plane during the pandemic in 2020 is unclear, as Kohl’s has yet to submit its proxy statement for the year.
Duskin said such spending makes no sense in light of Kohl’s tepid operating margin and return on investment capital (ROIC) in recent years.
“The dollar decline in gross margin is the problem and in so many different areas of SG&A expenses [expenses]. This is a company that will tell you frankly that they are doing an excellent job of controlling costs and really driving cost reduction throughout the organization. We just don’t see it in the background. Costs have increased by $ 450 million [from 2014 to 2019, per the activist letter]. We don’t feel like that kind of culture exists, and a flight crew and two private jets is another example of that, “Duskin said.
The battle begins
The activist group targeting Kohl’s includes Duskin’s Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. They now control a combined 9.5% stake in Kohl’s. The news was first reported by The Wall Street Journal.
The group nominated nine people to Kohl’s already huge 12-person board.
Collectively, they criticized Kohl’s for “poor retail execution,” “excessive executive compensation,” a “long-standing board with insufficient retail experience” and a “systemic inability to achieve stated goals.”
A source familiar with the matter told Yahoo Finance that the campaign is not a “catch and kill” attack on the CEO. Rather, they would like to work with Gass to change the company.
Duskin told Yahoo Finance Live that he would like Gass to be successful as CEO and that it would be nice to have access to a board with strong retail sales experience.
Kohl’s responded to activists and clearly has a different view of how it is doing right now.
“Kohl’s is committed to maintaining a constructive engagement with all shareholders regarding the Company’s strategies and perspectives. The Kohl’s Board and management team have been involved in discussions with the Investor Group since early December, and we remain open to new ideas that will improve our operating performance and capital allocation.However, we reject the Investor Group’s attempt to take control of our Board of Directors and disrupt our momentum, especially considering that we are well on track to implement a strong investment strategy. growth and accelerating our performance, and we have renewed half of our Board of Directors with six new independent directors since 2016, “Kohl’s said in a new statement released Monday afternoon.
A source familiar with the matter told Yahoo Finance that the two parties remain too far apart to reach a compromise.
The activists, who last came together in 2019 to shake up and then act terribly at 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 has simply failed to deliver on several fronts.
Operating performance is all the more disappointing considering that Kohl’s pure rivals such as JC Penney and Macy’s have closed hundreds of stores in the last five years. Theoretically, that should have brought market share to Kohl’s (something suggested in the letter).
That has not happened.
Here are some statistics on Kohl’s for the past five years. It’s important to look at pre-pandemic results because sales and profits have plummeted during the pandemic, as have other retailers.
The price of shares in the last five years has risen 18% compared to a 92% increase in the S&P 500. Target shares are up 161%.
Same-store sales (excluding 2020) declined in two of the past five years, with only minor earnings in the other three, according to data from Bloomberg.
The operating margin for the past five years (excluding 2020) reached 5.5% in 2019, down from 8.09% in 2015, according to Bloomberg data. Management’s goal has been 7% to 8%.
Same-store sales in the fourth quarter fell 11%.
Kohl’s shares rose 6.4% on the session.
Brian sozzi is a general editor and anchor in Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and in LinkedIn.
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