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Hedge fund advocates for Kohl's to evaluate digital commerce offshoot as a strategic option.

Frustrated by the retailer's struggling stock, Engine Capital suggests considering a sale as a possible solution.

Frustrated by poor stock performance, Engine Capital is suggesting a potential sale for the...
Frustrated by poor stock performance, Engine Capital is suggesting a potential sale for the retailer.

Fresh Take:

  • Frustrated by Kohl's subpar stock performance, hedge fund Engine Capital, owning 1% of Kohl's shares, on Monday bluntly advised the department store to "publicly announce a comprehensive review of strategic alternatives."
  • In a letter to the Kohl's board, partners Arnaud Ajdler and Brad Favreau from Engine Capital proposed "two feasible strategies" - separating its e-commerce and physical store operations into two companies, or selling the entire company.
  • In a statement, Kohl's acknowledged receiving the letter and stated, "Our strong performance this year signifies our strategy is picking up momentum and generating outcomes." They expressed appreciation for the ongoing dialogue with their shareholders and recognized their input.

Insights:

Hedge fund advocates for Kohl's to evaluate digital commerce offshoot as a strategic option.

Engine Capital's hard-hitting message is hardly unexpected news - Kohl's has been under the microscope for potential investor pressure on e-commerce spinoff agendas.

These maneuvers, which entail separating a retailer's online and brick-and-mortar operations while preserving the brand and customer experience, have become the preferred method among financial gurus, particularly for department stores. Notable examples include Saks Fifth Avenue, Saks Off 5th, and Hudson's Bay Co., which have all undergone separate operations transitions - though their aftermath is yet to be observed.

Engine Capital referred to the rumored initial public offering for the independent Saks.com as a promising model, expressing confidence that Kohl's digital business alone could fetch a staggering $12.4 billion, around 40% more than the current enterprise value of the entire business.

"There's no excuse for the Board to stick to the status quo," Ajdler and Favreau asserted in their letter.

Despite Kohl's dismissive response, the board will likely ponder both scenarios suggested by Engine Capital. Macy's initially resisted the concept when an activist investment firm recommended the department store could unlock billions in value by segregating online operations. However, Macy's recently enlisted the same firm that helped Saks orchestrate their split.

While financial experts are championing the idea, many analysts and retail experts are unaffected, citing the complexities of maintaining seamless branding, merchandising, and fulfillment across two companies. The shared setup, less than a year old, took hundreds of contractual agreements to master, according to people familiar with the Saks split.

"Splitting companies into two makes little sense from the perspective of where demand is heading," Neil Saunders, GlobalData Managing Director, pointed out via email. "Most retailers, including Walmart and Amazon, seem to recognize this and are focusing on integrating their online and offline operations."

This is Kohl's second conflict with activist investors this year. In March, Kohl's defended its board from an investor group demanding changes in board composition, operations, and real estate, aiming to unleash somewhere between $7 billion and $8 billion in value.

  1. The buying group, Engine Capital, finds AI-driven predictions in the markets indicating a potential breaking point in the weather for Kohl's retail business, as they advocate for a comprehensive business policy change.
  2. If current affairs in the fashion industry are any indication, the board of Kohl's could face a challenging cybersecurity aspect regarding the future direction of the company, as they ponder Engine Capital's proposed strategies.
  3. In the fast-paced world of business, where health precautions are paramount during epidemics, experts argue that segregating Kohl's e-commerce and physical store operations might risk the overall cohesion of the brand, a concern that surfaced in the debates around Saks Fifth Avenue's split.
  4. In the context of an ever-changing culture, Engine Capital's recommendation to potentially sell Kohl's could lead to a significant power shift within the industry, affecting both local and international competitors.
  5. The potential separation of Kohl's e-commerce and brick-and-mortar operations might attract the attention of regulatory bodies, as they examine the implications for various laws governing the retail and finance sectors.
  6. As Kohl's considers Engine Capital's suggestions, financial analysts will keenly observe the impact on the company's stock markets, tracking the potential growth or decline in stock prices.
  7. Retailers worldwide will keep a close eye on Kohl's decision, understanding its repercussions could set a new trend in the industry, influencing the strategic directions of other retail businesses.
  8. Regardless of the decision, the ongoing saga has captivated the attention of TV audiences and market observers, shedding light on the complexities of running a large-scale business in the face of diverse shareholder opinions, demanding new strategies, and relentless market fluctuations.

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