Kohl’s (KSS) Edges Higher After Receiving Takeover Bids Below Previously Rejected Offers
2:49 pm Friday, June 03rd, 2022
Kohl’s (KSS) shares are ticking higher today as bidding for the department store chain heats up. The WSJ and The NY Post reported yesterday after the close that KSS received takeover bids from private-equity firm Sycamore Partners as well as retail holding firm, Franchise Group (FRG). Sycamore’s proposal reportedly put KSS’s value in the mid-$50 per share range, and FRG’s valued the department store slightly higher, around $60. KSS’s board is expected to meet to review the bids within the next few days.
However, as the stock is edging up only slightly on the day, it seems that investors are not convinced KSS will be very receptive to the offers. The company may view these bids as vastly undervaluing the stock, especially after KSS turned down offers above $60 per share earlier this year. In fact, it was reported that luxury department store Hudson’s Bay was willing to pay at least $70 per share.
Perhaps the company’s relatively weak AprQ earnings report last month dampened the mood among buyers. KSS posted -5.2% comps when analysts expected the metric to be positive. Meanwhile, KSS missed earnings estimates as operating margins dropped over 480 bps yr/yr to 2.2%, highlighting the intense inflationary pressures experienced during the quarter. Shares initially sunk on the report but quickly recovered lost ground, ending the day in the green. However, the following day, the stock pulled back by over 13%. Shares now trade down roughly 20% on the year.
Still, KSS’s value goes well beyond its disappointing share performance. A key component separating the retailer from many of its peers is that KSS owns over 30% of the real estate on which its stores are located. This provides the company with the potential opportunity to sell land and do a lease-back with a real estate firm, which could unlock billions in cash. Also, 94% of KSS’s storefronts are either located in strip centers or are freestanding, giving it a greater level of convenience than mall-based businesses, such as one of its main rivals, Macy’s (M).
Bottom line, the offers KSS received do not appear likely to materialize into a concrete deal. KSS’s shares have appreciated just ~10% over the past five years, mightily underperforming the retail sector’s ~60% gains; this underperformance implies that things likely need to be shaken up. However, management has shown significant apprehension about working with potential buyers. As a result, investors are not letting their hopes get too high today.
