Activist investors are circling Kohl’s, the largest department store chain in the US.
The activists’ complaints focus on Kohl’s share price not doing as well as they wish. In other words, Kohl’s activist investors are not making as much money as they would like to make. These investors are pushing for an entirely new Board that will in turn push for a sale. With a sale, these activist investors would make a lot of money immediately. After that, they would not have much interest in Kohl’s future. As Barron’s, the financial news magazine stated, it is unclear if a private buyer would be able to develop a strategy that would be any better than the brand’s current strategy. However, “… that wouldn’t be the shareholders’ problem anymore.”
Once again, a brand is being excoriated by value extractors who are only interested in their short-term monetary gain. The protests of these investors center around poor performance. This is just a euphemism for “the stock could be higher and we could be making more money.” The main activist fund pushing for a sale stated that a sale would be “value maximizing.” A 2014 Harvard Business Review article, titled Profit Without Prosperity pointed out that an obsessive focus on shareholder value alone makes executives and shareholders happy, but it is a system that shortchanges overall, sustainable business prosperity.
Kohl’s is a department store and the department store category is facing challenges. Kohl’s is in a muddled middle space that feels pressure from discount stores at one end like T. J. Maxx and big box stores on the other end like Target and Walmart. (The original Kohl’s department store positioned itself as an affordable, but not discount, emporium with a wide variety of goods.) Many department stores such as JC Penney, Neiman Marcus, Sears along with its Kmart brand and others filed for bankruptcy.
In Kohl’s’ March 2022 investor call, there were many items to satisfy the activists. Kohl’s has increased its dividends. Kohl’s had a good holiday season. Kohl’s’ partnership with Amazon for pick-ups and returns is doing well. Kohl’s partnership with Sephora for stores-within-stores is attractive. Kohl’s made drastic alterations to its clothing lines dropping well-known brands with limited appeal while adding more popular brands. Kohl’s enhanced its loyalty program.
Kohl’s executives were upbeat about the year’s outlook. Kohl’s reiterated its strategy for long-term growth: to be the store that sells all of the brands needed for leading a more active and casual lifestyle. And, although Kohl’s missed analysts estimates, the report showed topline “promise”. The strategy showed “momentum.” And, according to Barron’s, there were “impressive gains in high growth areas such as athleisure and activewear. (Kohl’s) does expect revenue to come in higher than expected for the year as a whole.”
These impressive gains will not convince the short-termers, even though Kohl’s bet on athleisure is looking smart. Lululemon, the high end athleisure wear brand, posted strong earnings in fourth quarter 2021. Lululemon’s CEO stated that athletic apparel continues to grow “at a faster rate than” the apparel category in general.
As Barron’s made clear, those interested in a sale of Kohl’s “… have little interest in Kohl’s’ long-term strategic goals. If anything, those (long-term goals) are ongoing impediments….” None of the statements from Kohl’s during the investor call changed activists’ minds.
When it comes to brands, this kind of “quarterly capitalism” from activists is a killer. Activist investors tend to focus on making that short-term dollar rather than supporting a brand strategy focused on short-term and long-term. The fact is that a for a brand to live it needs a strategy that includes both the short-term and long-term. If there is no short-term than there is no long-term. However, without the long-term, there will not be enduring profitable growth.
In 2015, in a famous letter, Larry Fink, CEO of Black Rock, Inc., urged public companies to focus on long-term approaches to generating value or lose Black Rock’s support. He said that companies should actively avoid surrendering to the short-term pressures created by the increase in activist shareholders.
Also, in 2015, James Surowieki wrote for The New Yorker’s financial page, “it’s become a commonplace that American companies are too obsessed with the short term. In the heyday of Bell Labs and Xerox PARC, the argument goes, corporations had long time horizons and invested heavily in the future. But now investors care only about quarterly earnings and short-term stock prices….”
In one of his New York Times Deal Book columns, Adam Ross Sorkin weighed in on short-termism pointing out that there is no excuse for “activist shareholders’ seemingly short-term financial engineering efforts like buy-backs, dividends, spinoffs and sales, which can quickly send shares spiking while potentially leaving the company more vulnerable later, especially when a company uses borrowed money to buy its own shares.”
And just this past week, activist Bill Ackman announced that he and his hedge fund Pershing Square were ditching short-term activism. The new approach will be more “constructive” and “thoughtful” investing in brand-businesses that will outperform over the longer term. In the annual letter to shareholders, Mr. Ackman wrote: “We expect that these companies will grow revenues and profitability over the long-term, regardless of recent events and the various other challenges that the world will face over the short, intermediate, and long-term.”
Kohl’s as well is taking on the activists. In a shareholder letter, last week, Kohl’s stated that lead activist Macellum, led by Jonathan Duskin, “… is pushing for a hasty sale at any price” adding that this “reveals a short-term approach that is not in the best interest of the company’s shareholders.” The letter continued, “The choice is clear: re-elect the Kohl’s’ Board… or elect Jonathan Duskin and his associates to destroy value.”
For those who believe in brands, this activist behavior is troubling. At its most basic level, activists of this type shun the fact that there can be no shareholder value without customer-perceived value. In fact, in all the press reports describing the activist machinations, the words customer-perceived value never are spoken.
Peter Drucker, the respected management guru believed that the purpose of business is to create a customer. Losing customer focus is a certain path to trouble. The future will belong to customer-focused businesses that are best at attracting and retaining customers resulting in sustainable, profitable share growth.
The greed squads of activist investors circling Kohl’s appear to have little interest in Kohl’s as a brand. They see a way to make a lot of money quickly. Kohl’s will wind up with a lot of debt. Then, the activists will lose interest in the brand.
Enriching Kohl’s shareholders through a sale has the potential to destroy the Kohl’s brand, as Kohl’s stated in its letter. Growing shareholder returns through this type of financial finagling while failing to grow customer–perceived brand value leads to a weakened brand-business.
Even Wisconsin senator Tammy Baldwin is upset with this activist initiative. Kohl’s was founded and is based in Wisconsin. In her public statement she said that a sale of Kohl’s would “… increase the risk of bankruptcy or imperil the jobs and retirement security of thousands of Wisconsin workers.” If you think this is hyperbole, think again: the activists who pushed around Toys R’ Us, putting it in bankruptcy, faced charges of ruining hundreds of workers’ retirement savings.
Activist investors like those pursuing Kohl’s do not unlock value; they exploit value for short-term benefit. Brands pay the price for these pecuniary, greedy actions. These activists focus on the bottom line. But, there cannot be sustainable growth of the bottom line unless there is quality growth of the top line. One thing is clear: you cannot cost manage your way to enduring profitable growth. For the Kohl’s brand to survive and grow, Kohl’s’ leaders must focus on satisfying customer needs rather than catering solely to shareholder riches.