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Did Kohl's Investors Miss Their Big Opportunity?

Motley Fool - Mon May 23, 10:15AM CDT

Two Kohl's(NYSE: KSS) executives jumped ship just prior to the retailer release of another poor financial report that widely missed Wall Street earnings expectations. Coming as it did just after Kohl's beat back an attempt by activist investors who wanted seats on the board to help initiate a turnaround, it's fair to ask if the retailer won the battle but lost the war.

Did shareholders miss out on their chance to get a fresh person on the board who could have righted the sinking ship?

Kohl's package pickup sign.

Image source: Kohl's.

A deteriorating retail environment

There's no question Kohl's first-quarter report was ugly. Although sales of $3.72 billion narrowly exceeded Wall Street expectations of $3.68 billion, they were still down 4.4% as same-store sales tumbled 5.2% vs. a near-70% gain a year ago (though that's not a fair comparison since they were rebounding from pandemic store closures). Analysts had expected comps to grow 0.5%.

Worse still was adjusted earnings of $14 million, or $0.11 per share, which plummeted 92% year-over-year from $165 million, or $1.05 per share, far below analyst forecasts of a $0.70 per share profit.

"The year has started out below our expectations," CEO Michelle Gass said in a statement. "Following a strong start to the quarter with positive low-single digits comps through late March, sales considerably weakened in April as we encountered macro headwinds related to lapping last year's stimulus and an inflationary consumer environment."

That played out in the recent earnings reports of Walmart and Target as well, but it led Kohl's to cut its guidance for the full year, now saying it expects net sales to be flat to 1%, with adjusted earnings to come in between $6.45 and $6.85 per share. That's down from its previous estimates of 2% to 3% growth in net sales and adjusted earnings of $7.00 to $7.50 per share.

And just before the earnings announcement, two top executives -- the chief merchandise officer and the chief marketing officer -- both quit for other opportunities. It's not a good look for a company trying to turn itself around as well as prepare for a possible sale of the company.

Sephora boutique in Kohl's.

Image source: Kohl's.

Still looking for an out

Kohl's says it's still committed to its review of potential strategic initiatives, including a sale of the retailer.

Goldman Sachs was hired to oversee the process, and Kohl's noted it has met with 25 different parties regarding the initiatives and that "multiple bidders" have been given access to documents to help prepare potential offers.

Although its board also continues to compare what a bidder might offer with its own plans for remaining a stand-alone company, one thing shareholders did not want to entertain is an activist investor coming on board to try their hand at redirecting the business.

Macellum Advisors wanted to put a control slate of 10 directors on the board, arguing Kohl's existing board has become entrenched with some directors serving for 15 years and few having retail experience. It noted the stock has gone essentially nowhere for two decades. Investors, though, rejected the slate, and reelected the entire board to serve. It may have been a mistake.

KSS Chart

KSS data by YCharts

Not changing horses midstream

Macellum had noted that where Kohl's was the "best of the worst" among retailers before the pandemic, coming out of the crisis it has been one of the very few retailers that has been unable to post higher sales relative to 2019.

Kohl's has made several smart moves at various times to get its business back on track, such as its partnership with Sephora, the beauty products company that was credited with keeping J.C. Penney afloat for as long as it had, but much of the rest of its program has not worked. Some fresh blood might have been the jolt it needed. Without that, it's quite possible that shareholders may be doomed to more years of going nowhere.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs. The Motley Fool has a disclosure policy.