In my first decade as an analyst, Kohl’s was a darling of the retail industry. Sales were flying high, it was presumed its “racetrack” layout and narrower assortment was superior to other department stores, and its tech investments were impressive and prodigious. Over the past decade, its fortunes have certainly changed and now, according to the Wall Street Journal (paywall), a trio of activist investors have taken an approximate 9.5% stake in the company and are planning to add nine of their own people to the company’s twelve seat board.

What the heck happened and where does Kohl’s go from here?

On the surface, Kohl’s really did seem to have the right formula for a long time, but when sales and margins started to slip, the company started making what I can only call “classic bad moves.” We have seen this kind of thing in our benchmarks for years. Winners keep pressing their advantage. Laggards cut expenses and make odd decisions.

One of Kohl’s signature products was Chaps, by Ralph Lauren. The line was exclusive to Kohl’s, and in full disclosure, one of my cousins worked for Chaps, and her job was to visually merchandise the stores. Lauren has its own problems, and several years ago, my cousin was laid off, after a long employment with the company. Ralph Lauren just isn’t what it used to be.

Then the churning began in earnest.

I can’t find the exact date, but several years ago, when Marketing was in full ascendancy in retail, the CEO at the time announced that merchandising would report to the Chief Marketing Officer. What a terrible idea! Rather than go into a diatribe about all that was wrong with that decision, I’ll just say it’s a good idea to “stay in your lane.” Success in one lane does not ensure success in other lanes.

In September 2015, the company decided it would be a good idea to open coffee shops in its stores. No seating, just coffee. Ostensibly this was based on “customer input,” but the experiment was deemed a failure and ended in April 2016. What good could have possibly come from having people walk around the store with containers of coffee?

In May 2018, the company hired Michelle Gass as CEO. A well-respected retail veteran, most recently from Starbucks, she seemed to be moving the company in a decent direction.

I have my doubts about Ms. Gass’s team’s decision to accept Amazon.com returns in its stores back in July 2019. The company frequently says traffic has risen since it made that decision, but it never says “that traffic translated into incremental sales for us.”

That is the kind of observation analytics should have told the company, but since the company hasn’t said it, I assume it never happened. I know Kohl’s has the analytics in house to deliver that information. Traffic is not the same as sales.

Still, sales weren’t awful, and even though margins continued to deteriorate, the company was still profitable. Ms. Gass and her team were about to announce a new strategy in March 2020. And then along came COVID. Sales plummeted as stores were closed around the US, and the company swung from a profit to a rather large loss. In the nine months ending October 31, the company swung from a profit of $426 million in the prior year to a loss of $506 million.
I watched an interview with Ms. Gass (paywall) conducted on January 21, discussing the tough decisions the company had to make during the height of the pandemic, and her preparation for rolling out a post-COVID strategy. It sounded like she had a plan that would be revealed soon.

Well, even as we still sit in the middle of this God-awful pandemic, with only 12% of the US population vaccinated, the activist investors decided the company just isn’t moving fast enough.

Per the WSJ:

“The activists are calling for Kohl’s to take a range of actions, including adding directors with retail experience who can work with Kohl’s Chief Executive Officer Michelle Gass and considering a sale-leaseback of some of its more than $7 billion in noncore real estate, according to the people and a letter, viewed by The Wall Street Journal, that the group plans to send to other shareholders. The group also is calling on Kohl’s to reduce inventory levels while improving offerings and make discounts and promotions easier for customers to follow.”

Ayiyiyiy. Always drooling over real estate. And no doubt, if you’re not happy with a twelve-seat board (already too large, in my opinion), add more seats! And then there’s the bliss of the truly ignorant: reduce inventory!!

The company responded in a classy way, saying it’s “always open to new ideas.” Ms. Gass, don’t be open to stupid. Seriously. For a person who has won the NRF’s “Visionary award” that has got to be a serious insult.

I don’t have the power to change the activists’ minds, nor do I know Ms. Gass personally. I do believe this is no time to change direction when we really don’t know what a post-pandemic world looks like in the first place.

I know that Kohl’s has a solid tech infrastructure, and it has a solid CEO. I will also confess to not loving “activist investors.” I’ve been around retail too long not to have bumped into them and seen the carnage they have wreaked, from Morse Shoe back in the 80’s, to Sears Holding Company and JC Penney in the 2010’s, to 9 West right before the pandemic. In short, they have wreaked havoc. Their failures far outnumber their victories, even though the investors themselves make money on fees and temporary increases in stock prices. We won’t even go into the Lampert story and how he increased his fortune at the expense of employees and customers alike.

Somewhere along the line we must let retail professionals run their business and directors must stop drooling over real estate. One common thread among all these “activists” is their interest in selling off real estate which quietly trumps their desire to sell product. Well, they want to sell it, but they’re not so willing to buy the inventory to support those sales.

At root, retail is a relatively simple business. Buy the right stuff, in the right amount, sell it, evaluate results, rinse and repeat. It has become a bit more complex as the path to purchase has become somewhat chaotic, but those fundamentals remain.

I really hope Kohl’s doesn’t end up in the dustbin of history because “activist investors” had a bright idea. I dealt with many boards in my retail career. They had opinions about everything from our pricing (“My wife told me she thought the prices were too high…” and yes, that really happened, more than once), to our signage. Our signage!!

Enough.