Will Kohl’s Go Private?

When Kohl’s went public in 1992, it had fewer than 75 store locations — most of which were operated in the Midwest. By 2009, there were over a thousand Kohl’s locations and the chain was both national and extremely recognizable. Its growth in sales and revenue was almost as explosive as its physical expansion, with the normally reserved commentators over at Fortune noting “for years, it seemed all Kohl’s had to do to grow was open stores and the customers would come.”  

Kohl’s, during that big expansion run, had a particularly strong knack for converting its consumers into high margin sales through skillful promotion of their in-house brands, as opposed to national alternatives. The chain was also the beneficiary of some fortunate timing and shifts in consumer tastes. As Kohl’s was getting huge and national, their natural competitors in the mid-tier/middle-and-working class facing department store business like JC Penney and Sears were facing large (and rather public) meltdowns and losses of consumer confidence.

However, almost as quickly as Kohl’s was able to successfully crack the chain retail code, the landscape began the big digital shift and the codes all began to change.

This has left the entire category Kohl’s finds itself in — big, brick-and-mortar chains, department stores — struggling and beset on all sides. In the physical world, there are the big box chains (particularly Target) with their eyes on the same middle-class consumer spend. Online, there is Amazon (and everyone else) which offers the tantalizing possibility of maximally efficient commerce where the goods come to the consumer, often with nothing more involved than tapping or clicking.

Add to that the fact that some of its competition in the mid-tier department store game are mounting comebacks (JCP most notably) and Kohl’s has hit a pretty intense patch of rough sledding of late and has taken a consequent share price drubbing that may just be attracting every public board’s worst fear: activist investors.

So what’s next? Publicly, Kohl’s is embracing what CEO Kevin Mansell is calling “The Greatness Agenda” – an all-encompassing effort to reinvent the firm into the digital age.

Privately, according to Wall Street Journal reports, the firm is seeking advice and counsel from bankers on how to take the firm private and out of the glaring eyes of the public markets before activist investors come to call.

The Greatness Agenda

Kohl’s struggles in the digital age are not exactly a headline making piece of news – they are suffering from the same great digital migration that many, many very seasoned and very big players have been hemorrhaging customers for the last several years. Walmart has been affected, Macy’s has been affected — so it is unsurprising that Kohl’s, too, has felt the sting of falling foot traffic.

And among the more prominent criticisms of Kohl’s — though again far from a unique one — is that as the digital shift was clearly underway in the mid-aughts and early 2010s, the firm was slow and sluggish to respond accordingly and instead maintained a focus on building more locations just as the market was starting to tell them that more physical locations was the last thing that many retailers were actually going to need.  

However, with foot traffic falling, sales growth has slowed and persistently moving online ,operating revenue dropping for three consecutive quarters and a whole host of negative metrics alarming investors and depressing stock price — by 2015 the firm officially and publicly announced its turnaround effort in the form of the Greatness Agenda.

That agenda is pretty complex and clearly a work in progress. It includes a big leveling up in the firm’s omnicommerce activities:  Kohl’s launched buy online and pick up in-store in various locations last year, as well as ship from store options for customers. They are reportedly also investigating the possibility of same-day delivery in some markets. The agenda also includes a bigger push into beauty products (which has been a big winner for rival JC Penney) and a more data centric loyalty program.

“Our new approach to loyalty is much more focused on gathering and using consumer data to build a better and more rewarding shopping experience from all sides,” a Kohl’s spokesperson noted in a recent interview. “This is a change from a purely discounting-based model.”

Kohl’s — in a better effort to compete with the lower-cost outlets and fast fashion hubs of the world — has  recently announced plans to expand a chain of outlet stores called Off Aisle. It is also working to redesign stores to be smaller and better suited to urban environments.

“They’re doing a lot of the right things, but others were doing that years ago,” Edward Jones analyst Brian Yarbrough told Fortune, in reference to online-to-offline order fulfillment.

Which may explain why, so far, the agenda for greatness has more or less been the agenda of goodness for Kohl’s. Kohl’s has recorded four quarters in a row of comparable sales growth, but the growth has been slow. In this fiscal year it has only seen an .8 percent improvement. Apparel is still the chain’s biggest selling area, which is problematic since the category as a whole is capturing less consumer spend. And while analysts think the move into a outlet brand and a different store design could, in the long term, show big potential for Kohl’s, its immediate effect is largely considered to be marginal.

And that is a big problem, because it seems Kohl’s — with its declining stock price — may not have all that long to wait.

When Activists Come To Call

Kohl’s share price is down, extremely so, about 40 percent from where it was a year ago at this time, pushed by its interior problems discussed above, and a widening investor discomfort with department stores as a concept.

But Kohl’s — with its reasonably good ability to generate cash and its portfolio of real estate holdings — is not without attractions for investors, especially those with an eye toward breaking off and selling the company’s more valuable parts, or at least placing them into trust (a la Sears).

In fact, if recent Wall Street Journal reports are accurate, fears that the chain is ripe to become a target for activist investors with an eye toward dismantling have driven the board to consider passing on the public markets entirely and going private.  

“Activists love this space because retailers generally have clean balance sheets, which makes it easier to advocate for share repurchases, acquisitions or other alternatives,” Rohit Singh, managing director in UBS’s investment-banking, consumer-products and retail group told the WSJ.

“A lot of our retail clients are worried about activists,” a banker at another firm said.

And Kohl’s is clearly worried, as sources close to the firm have told The Journal that the chain’s executive team are considering hiring an investment bank to advise it on alternatives.

Those alternatives could include a sale to a private-equity firm, the person familiar with the situation said.

Whether it will come of anything remains to be seen. All reports indicate that talks on the subject are very preliminary and Kohl’s so far has had no comment on the matter.

But Kohl’s, no matter what happens, is an interesting test case and perhaps canary in retail’s coal (Kohl) mine. Sales are flat, but Kohl’s is profitable and not ailing nearly so hard as, say, Macy’s is these days.

Analysts expect it to earn about $837 million in the current year, and generate more than $700 million in free cash flow, which is nothing to sneeze at.

And what it does to survive intact might just provide a very useful roadmap for other physical retailers trying to stay relevant in a digital world.