Kohl's

The past decade has not been great for department stores. Increased competition from e-commerce has resulted in the closure of hundreds of department stores nationwide, and a n Today, Kohl's is one of the largest department store chains in the US, with over 1,000 locations nationwide. In recent years, their revenue and profitability have collapsed, and the company appears to be headed towards bankruptcy. Recently, Kohl's has become the subject of a meme-stock rally, w Kohl's was founded by Maxwell Kohl in 1928 in Wisconsin. It was originally a grocery store, and by the 1960s had become the largest grocery store chain in the Milwaukee area. In 1962, Kohl's opened Instead of selling food, the department store sells clot In the 1980s, Kohl spun off its grocery store business as a separate company. The grocery store business eventually ceased operations. Kohl's went public on the New York Stock Exchange in 1992. Throughout the 1990s and 2000s, they expanded rapidly, opening up hundreds of new stores across the country. By 2011, they had 1,100 stores. At t Kohl's describes itself as family-focused and value-oriented. Their target demograp In their marketing, they often talk about the Kohl's mom. Kohl's is a place where you can buy clothes for yourself and your kids. They make heavy use of discounting and promotions. The list prices of most products are very Kohl's is almost always running large sales, w They have a rewards program called Kohl's Cash. During specific times, you can earn $10 worth of Kohl's cash for every $50 you spend. You can receive paper Kohl's cash from the cas You can use Kohl's Cash to buy t Kohl's Cash generally expires wit Kohl'strategically chooses when to open the Kohl's Cash-earned windows to bring in more traffic during slow times. Because the Kohl's Cash expires wit For department stores So since the mid-2010s, they've used digital LCD displays to show the prices. T Since the early 2000s, Kohl's has operated an e-commerce business on its website, Kohl's. com. Kohl's online orders can be s Kohl's e-commerce orders are sometimes s The Kohl's e-commerce business is closely integrated with its brick-and-mortar business. Many customers try on clothes at a physical store before ordering online. For example, if you see a piece of clothing at a store that you In 2018, Kohl's disclosed that 75% of its digital customers also shop at Kohl's brick and mortar stores. The last part of Kohl's business we need to understand is the relations In 2020, Kohl signed a partners It's a store wit The profits generated by these Sephora'stores are split between the two companies 50-50. Now let's review the company's financial performance. Throughout the 2000s, Kohl's revenue grew rapidly as they opened new stores. Their free cash flow was barely break even as they reinvested almost all of their profits to fund new store openings. By the 2010s, they stopped opening new stores and their revenue growth flatlined. By the late 2010s, their revenue had reached roughly $20 billion per year and they were making more than $1 billion of annual free cash flow. They used t In 2020, their revenue declined 20%. T In 2021, revenue rebounded almost back to pre-COVID levels, but starting in 2022, their revenues declined precipitously. In 2024, they reported $16. 2 billion of revenue. T Now let's look at Kohl'stock price. Throughout the 2000s and 2010s, it oscillated mostly wit During the pandemic, the share price fell to as low as $15. As the pandemic ended and the stores reopened, Kohl'stock price rebounded to about $60 in 2021. Let's zoom into the last five years, where there's been a n In February of 2021, a consorti 5% of Kohl's outstanding shares and sent an open letter to the company's management team. They complained about Kohl'stagnation over the past decade and the fact that their stock prices underperformed their peers. They proposed a few solutions to increase shareholder value, the most concrete of w They could use the proceeds to buy back stock. W Kohl's also owns a n These are used both to handle the logistics for Kohl'stores as well as their e-commerce business. The activist hedge funds estimated that Kohl's real estate assets are worth $7. 5 billion, of w 2 billion or more than 80% consist of retail stores. The remaining $1. 3 billion consist of their distribution centers and corporate headquarters. The idea is that Kohl'should sell its stores to some real estate investment companies. Kohl's would then lease these buildings from the real estate investor. They would still operate in the same stores. The only difference is that they would now have to pay rent. The hedge funds estimated that Kohl's could sell its real estate at a multiple of 15 times even da. So Kohl's would get $3 billion of cash up front. Going forward, they will have to pay $200 million per year to lease these properties. At the time, Kohl'stock price was about $55 per share. They had 158 million shares outstanding, giving them a market capitalization of $8. 7 billion. With $3 billion, Kohl's could buy back 54 million shares. That would reduce their share count by approximately 1 t What the hedge funds cared about was maximizing earnings per share. The fewer shares there are, the T But there are a few problems with the sale lease back idea. They ass If you paid 15 times even da, that means it will take you 15 years to make back your investment. But what if a few years down the line, Kohl's decides that t Now you need to find a new tenant. It's no secret that the department store industry is declining. Given that most department store chains are shrinking, it may be difficult to find a new tenant for an empty Kohl'store. The idea that Kohl's could sell its stores for 15 times even da seems a bit optimistic. Then there's the issue of adding $200 million of additional rent expense. In 2021, Kohl's was still very profitable. That year they generated $1. 7 billion of free cash flow, so adding $200 million of rent would not break the bank. But if their sales and free cash flow deteriorate in the future, t Kohl's declined to do the sale leaseback transaction that the hedge funds wanted. But the attention from activist investors put the company's management team on edge. They used their cash on hand to buy back some shares, hoping t Investors were not satisfied. In December of 2021, Kohl's became the target of another activist investor. T Engine Capital had two suggestions. Firstly, they said Kohl'should spin off its e-commerce business. The e-commerce business could be conservatively valued at $12. 4 billion. Alternatively, Kohl'should try to sell itself to a private equity firm. Engine Capital believed Kohl's could sell itself for $75 per share, a 50% premi Let'start off with the e-commerce spin off. At the time, Kohl's enterprise value was about $9. 5 billion. The idea that the e-commerce business alone could be worth $12. 4 billion is absurd. That would imply that Kohl's brick-and-mortar business has negative value. Kohl's. com is deeply connected to the brick-and-mortar business. They use the same supply chain, and many online orders are fulfilled from the physical stores. 75% of Kohl's. com shoppers also shop at the physical stores. In 2019, 24% of Kohl's total sales were from e-commerce. In 2020, t Many Kohl's customers shopped online because the physical stores were closed. As the physical stores reopened, online sales declined, falling to 28% in 2024. Kohl's. com is primarily used by existing Kohl's customers. It couldn't stand on its own. It doesn't make sense to spin it off as an independent company. So now let's look at the second idea. Star Engine said that Kohl's could sell itself for $75 per share, a 50% premi At the time, Kohl'stock did look very cheap. At $50 per share, their market cap was $6. 4 billion. In 2021, they generated $1. 7 billion of free cash flow. That's a price to free cash flow multiple of less than four times. Ass $75 per share would represent a market cap of $9. 6 billion. That's a price to free cash flow multiple of 5. 6 times, w Given the extremely cheap trading price of the stock, a sale of the company did seem In June of 2022, Kohl's indeed found an interested buyer. They entered into exclusive negotiations to sell themselves to a company called the Franchise Group seemed They owned a n There are no obvious business synergies between Kohl's and these existing brands. If you're a longtime viewer of t It was run by a man named Brian Kahn, who was later implicated in a bizarre Ponzi scheme. We made a video about that last year. In addition to the lack of business synergies, there was a more practical problem. The Franc When they made the offer, they had very little cash to speak of. Their plan was to pre-sell substantially all of Kohl's real estate in a sale leaseback transaction. Then they would borrow $1 billion. That would get them $8 billion. If they completed t A very risky proposition indeed. As it turns out, the Franc On July 1st, 2022, Kohl's announced that the deal failed and they would no longer be looking to sell themselves. On the news, Kohl'stock price declined 25%. All of the efforts of the activist investors came to not Kohl's did not pursue any strategic alternatives and continued operating as an independent public company. After receiving so much criticism from activist investors, Kohl's CEO Michelle Gas was on t If she wanted to keep her job, she needed Kohl's to return to growth. In early 2022, she unveiled a plan to do just that. There were three main components to her plan. Firstly, they would double down on their partners They would acquire new customers through their partners With these initiatives, Gas forecasted that Kohl's will increase its revenue by low single-digit percentages per year. She also expected to generate approximately $2. 5 billion of free cash flow annually. Unfortunately, t In 2022, Kohl's revenue declined by 7% and they reported free cash flow of negative $544 million. In November 2022, Michelle Gas resigned as Kohl's CEO. She was not fired. She voluntarily quit. She probably concluded that trying to turn around Kohl's was a lost cause and wanted to bail out of the sinking she was replaced by Tom Kingsbury, who previously served as the CEO of Burlington Stores. Kingsbury pretty much followed the same strategy that Gas outlined earlier. The only really noteworthy they put Baby's R Us Stores inside some Kohl'stores. It's a store wit During Kingsbury's tenure, sales continued to decline, falling 3% in 2023 and 7% in 2024. In late 2024, Kingsbury announced that he will resign as CEO. In January of 2025, Kohl's appointed a man named Ashley Buchanan to be CEO. As it turns out, Buchanan was having an extramarital affair with a woman named Chandra Holt. Holt had recently started a company called Incredibrew. Incredibrew makes disposable coffee K-Cups. Almost immediately after taking the helmet Kohl's, Buchanan signed a deal for Kohl's to start selling incredibrew. The terms of there was a clear conflict of interest. Kohl's board of directors found out about t One of Kohl's board members stepped in as interim CEO as the company searches for a permanent replacement. So why have Kohl'sales collapsed over the past few years, and why have all their turnaround plans failed? Kohl's has been losing market share to online retailers W Since 2019, Kohl's has had a partners If you want to return an item you bought on Amazon, you can drop it off at a Kohl'store. The Amazon drop-off location is generally located in the back of the store, so you have to walk through the store to get to it. W Having a big Amazon logo in the back of your store probably just reminds customers that they should check on Amazon before buying anyt Kohl's doesn't really have anything that you couldn't buy on Amazon or at discounters The video we're watc The store was almost completely empty. One t Sometimes a price display only shows a range of prices. For example, these LEGO sets have prices ranging from $5 to $140. The individual items do not have price tags on them. You have to ask a store associate to scan the item and tell you what the price is. They pres The only bright spot is Sephora. Kohl started As of the end of 2024, Kohl's had 1,174 stores, of w Kohl's does not disclose how much revenue it generates from Sephora, but they do have a category called accessories w Their other categories are clothes and home goods. Accessories is the only category that's growing. In 2019, the year before they started the Sephora partners By 2024, t If we strip out the accessories segment, we can see that Kohl's core business is declining very fast. Excluding accessories, Kohl's revenue declined 26% since 2019. During that period, they actually increased their store count by 1%, so the per-store n W There's not much more room to grow. Kohl's is still profitable, but barely. In 2024, they generated $183 million of free cash flow. That's a razor-t If sales continue to decline, which seems In January of 2025, Kohl's announced they'll be closing 27 underperforming stores they will also be shutting down one of their e-commerce distribution centers, as their online sales are also declining. T But remember, that Kohl's operates almost 1,200 stores nationwide. They're only closing 2% of their stores. I doubt t As Kohl's business performance has deteriorated over the past few years, so too is its stock price. That is, until it experiences the meme rally starting t Alright guys, that wraps it up for t What do you t Let us know in the comments section below. As always, thank you so much for watc Wall Street Millennial, signing out.