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Jonathan Duskin of Macellum Capital, the lead activist investor in a new campaign against Kohl’s off-mall department store, has a message for Kohl’s longtime board of directors and often too optimistic for the management team: He is well beyond the time to reduce costs to help improve shareholder returns.
One move that will help Kohl (KSS) cut costs is to eliminate the full-time flight crew and two private jets that he would “maintain,” according to a scathing 27-page letter from Duskin and his consortium of activists in the campaign released Monday. .
“It’s always very difficult to find even the smallest thing, but it would be better if they didn’t have these things,” Duskin told Yahoo Finance Live, referring to Kohl’s alleged flight crew and two. private planes.
A Kohl’s spokesperson did not return requests for comment on the status of the alleged flight crew and two private planes.
The last time Kohl’s referred to her plane was in her 2019 proxy filing released on March 26, 2020, detailing how CEO Michelle Gass used the assets.
“As Managing Director, Ms. Gass is authorized to use the company’s aircraft for personal as well as business flights. This benefit increases the safety and efficiency of Ms. Gass’s trip. We believe these benefits are reasonable given both executive compensation expenses and our total employee benefits expenses, ”Kohl’s said.
In 2019, Ms. Gass – who joined Kohl’s in 2013 as Chief Customer Officer and took over as CEO in May 2018 – incurred $ 197,490 in compensation related to the use of the retailer’s aircraft. , according to the record.
“The amounts shown correspond to the additional costs associated with the personal use of the aircraft owned or chartered by Kohl’s, and are based either on the actual charter costs or, for the use of aircraft owned by Kohl’s, on the direct cost of use per hour, which includes fuel, maintenance, reserves for engine restoration costs, crew travel costs, landing and parking costs and supplies ”, a Kohl’s explained about Gass’s airfare costs.
The extent of Gass’ trip on the plane during the 2020 pandemic is unclear, as Kohl’s has yet to file his proxy for the year.
Duskin said such an expense made no sense given Kohl’s low operating margin and return on investment (ROIC) performance in recent years.
“Falling gross margin dollars is the problem and in many different areas of general and administrative expenses [expenses]. This is a company that will tell you bluntly that they are doing a great job of controlling costs and cutting costs across the organization. We just don’t see it at the bottom. Costs increased by $ 450 million [from 2014 to 2019, per the activist letter]. That kind of culture just falls into the air, and a flight crew and two private jets is another example, ”Duskin said.
The battle begins
The group of activists attacking Kohl’s includes advisers Macellum from Duskin, 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 appointed nine people to Kohl’s already huge board of directors, consisting of 12 people.
They collectively criticized Kohl’s for “poor retail execution”, “excessive executive compensation”, “long-time board with insufficient sales experience” and a “systemic inability to meet stated goals.”
A source familiar with the matter told Yahoo Finance that the campaign was not a “catch and kill” attack on the CEO. Instead, they would like to work with Gass to turn the business around.
Duskin told Yahoo Finance Live that he wants Gass to be successful as a CEO and that it would be good to give him access to a board of directors with a solid background in retail.
Kohl’s has hit back at activists and clearly has a different take on how it’s going now.
“Kohl’s is committed to maintaining constructive engagement with all shareholders regarding the strategies and prospects of the company.” Kohl’s board and management team have been engaged in discussions with the Investor Group since early December, and we remain open to new ideas that will improve our operational performance. However, we reject Investor Group’s attempt to take control of our Board and disrupt our momentum, especially as we are well committed to implementing a strong growth strategy and accelerating our performance. , and we have renewed half of our Board with six new independent directors since 2016, ”Kohl’s said in a new press release released Monday afternoon.
A source familiar with the matter told Yahoo Finance that the two sides remained far apart to reach a compromise.
The activists – who last teamed up in 2019 to rock and then perform terribly Bed Bath & Beyond (BBBY) – seem well placed in their efforts. While Kohl’s has made favorable headlines for its partnerships with Amazon (AMZN) (for in-store returns) and more recently cosmetics giant Sephora, the company just hasn’t delivered on multiple fronts.
Operational performance is more disappointing considering that Kohl’s rivals, such as JC Penney and Macy’s, have closed hundreds of stores in the past five years. Theoretically, this should have pushed market share to Kohl’s (which is suggested in the letter).
This does not happen.
Here are some statistics from Kohl’s over the past five years. It is important to look at the results before the pandemic, as sales and profits have fallen off a cliff during the pandemic, like other retailers.
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The stock price over the past five years has risen 18% against a 92% gain for the S&P 500. Target stocks have risen 161%.
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Comparable store sales (excluding 2020) have declined in two of the past five years, with only minor gains in the other three, Bloomberg data shows
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The operating margin for the past five years (excluding 2020) reached 5.5% in 2019, up from 8.09% in 2015, according to Bloomberg data. The management target is 7% to 8%.
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Fourth quarter comparable store sales fell 11%.
Kohl’s shares were up 6.4% on the session.
Brian Sozzi is an editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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