The retail industry has witnessed the dual effects of the COVID-19 pandemic over the last year. While it awarded those who had an enhanced online/digital presence, the pandemic penalized those that had a greater focus on traditional brick and mortar stores.
Enter, activist investors who are on the lookout for persistently underperforming stocks. These investors typically buy a large chunk of the company’s shares. Invariably, these investors will secure at least one seat on the company’s Board to gain influence over the company’s corporate actions and strategic decisions.
In recent times, two small-cap retailers beaten down by the pandemic-triggered supply chain and logistic chaos, and suppressed demand, have become targets of activist investors. One has amicably joined hands to incorporate the changes suggested by the investor, while the other is pursuing shareholder favor to side-line the investor’s short-term motives.
Let take a closer look at both the companies and their investor campaigns, and analyze which retailer will emerge as a winner despite investor pressure.
Kohl’s is an American active and casual lifestyle retailer. The company operates through both department stores as well as offers online convenience through Kohl’s.com and Kohl’s App.
Propelled by news of buyout offers, the KSS stock has gained 23.1% year-to-date. Activist investor Macellum, backed by expert retail industry investor Jonathan Duskin, has a ~5% stake in Kohl’s.
Since its 2021 settlement with the retailer, Macellum has been pursuing Kohl’s to go private or engage in a sale-leaseback transaction for its department stores. Macellum believes Kohl’s digital operation is being pulled down by its “underperforming” brick-and-mortar stores.
In response, Kohl’s argues that the sale-leaseback transaction will hurt its margins and is not an efficient way to release capital. Notably, the retailer has received unsolicited buyout offers since January, valuing the shares at roughly $64 a piece. However, on February 4, Kohl’s initiated a poison pill to stop the hostile takeover.
In its most recent letter to shareholders, the Kohl’s Board has urged voting in favor of all 13 of the Company’s highly qualified Directors. Macellum has nominated ten directors, six of whom “have never served on a public company board,” said Kohl’s. The retailer goes on to call Macellum’s nominees an “inexperienced, unqualified slate.”
In 2021, three directors from Macellum’s nominations joined Kohl’s Board, and ever since the hedge fund investor has been trying to seek control over the Board by adding more directors.
Talking about its performance over the past five years, Kohl’s stressed the success of its turnaround strategy initiated in October 2020. In 2021, Kohl’s achieved record earnings per share (EPS) and in 2022, it is poised to grow by ~50% over the 2019 ẸPS figure.
Moreover, Kohl’s has registered a Total Shareholder Returns (TSR) of 146% since the start of the turnaround strategy up to January 21, 2022. This astounding return surpasses the performance of both the SPDR S&P Retail ETF and the S&P 500. What’s more, the TSR over the past five years has also outplayed the median of its peers.
Furthermore, pointing out Macellum’s short-term interest in the company, Kohl’s stated that the investor is looking for a hasty sale of the company at any price, which is not in the best interest of the shareholders.
Kohl’s is also alleging that four of Macellum’s nominees have close ties to Jonathan Duskin, who is also a nominee, defeating the purpose of them being “independent” directors. Additionally, Kohl’s has also warned that Macellum is using false narratives about the retailer’s health, trying to misguide investors and earn their favor.
All in all, Kohl’s is trying its best to turn around the company and make a meaningful deal that is in the best interest of shareholders.
Meanwhile, Wall Street analysts have a cautiously optimistic view of the KSS stock with a Moderate Buy consensus rating based on six Buys, five Holds, and two Sells. The average Kohl’s price forecast of $64.08 implies almost 6% upside potential to current levels.
Bed Bath & Beyond (BBBY)
Bed Bath & Beyond and its subsidiaries engage in home furnishings and lifestyle offerings. The retailer has both department store chains and an online presence in the segment.
Boosted by mandatory stay-at-home practices in the past two years, consumers have spent greatly on the comfort of their homes, making the year 2021 a success story for the retailer.
Year-to-date, the BBBY stock has gained 48.6%, with most of the enthusiasm gained in the last month since receiving the letter of interest from hedge fund investor RC Ventures.
On March 6, through a letter to BBBY’s Board, Ryan Cohen led RC Ventures disclosed that it held around 9.8% of the retailer. The investor went on to suggest their analysis of the retailer’s financial health, strongly protesting the huge compensation disbursed to executives relative to its stock market performance.
Furthermore, RC Ventures has suggested that the retailer either go private in whole or at least sell off/spin-off the buybuy BABY brand and unlock maximum shareholder value.
The hedge fund sees major value in the brand and noted, “Given that BABY is estimated to reach $1.5 billion in sales in Fiscal Year 2023 with a double-digit growth profile and at least 50% digital penetration, we believe it is likely much more valuable than the Company’s entire market capitalization today.”
By separating the BABY banner, the hedge fund feels that BBBY will be able to fortify its balance sheet and reduce its share count, thus, creating significant shareholder value.
On March 25, BBBY came to a cooperation agreement with the investor, which saw three RC Ventures director designees immediately joining BBBY’s Board of Directors, temporarily expanding to 14 members before reverting to 11 members, following the reelection at the Annual Meeting.
Additionally, two of them will also be a part of a four-member committee responsible for devising alternative strategies for the retailer’s buybuy BABY banner.
RC Ventures also revealed that BBBY has consistently underperformed on the TSR front compared to both S&P Retail Select Index and its peers over the past several years. The investor urges the board to revitalize its turnaround strategies and simplify its plans by suggesting steps such as, “finish fortifying the infrastructure, make remaining store fleet improvements, and prioritize core assortment and inventory fixes to meet near-term demand.”
Lastly, RC Ventures suggests a “full sale of Bed Bath to a well-capitalized financial sponsor with track records in the retail and consumer sectors and the ability to pay a meaningful premium.”
In response to the activist investor’s suggestions, the BBBY Board has agreed to work in coordination with the new nominees and devise a plan, which is in the best long-term interest of the shareholders, employees, and customers.
Despite all the gung-ho from activist investor pressure, analysts on the Street are pessimistic about the company’s future. The BBBY stock has a Moderate Sell consensus rating based on one Buy, six Holds, and six Sells. The average Bed Bath & Beyond price forecast of $15.05 implies 33.2% downside potential to current levels.
Both Kohl’s and Bed Bath & Beyond have the best interests of their stakeholders in the campaign with the activist investors. On the one hand, Kohl’s seems to be successful in its stand-alone turnaround strategy, while BBBY is unable to prioritize its strategies to the full effect.
Moreover, KSS’s financial performance is far better compared to its peers and BBBY is faring poorly. Both companies’ individual stand on fighting against (KSS) and compromising with (BBBY) the activist investors will prove to be beneficial in the long run.
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