People walk near the entrance to Kohl’s department store on June 7, 2022 in Doral, Florida.
Joe Raedle | Getty Images
Maybe Kohl doesn’t sell his business after all. But now it is looking to sell part of its properties, reversing its previous position.
The retailer on Friday announced that it has ended talks with the owner of The Vitamin Shoppe Franchise Group, confirming the CNBC report Thursday evening. Instead, Kohl’s said, it will continue to operate as a stand-alone public company.
For months, Kohl’s has been pressured by activist companies, such as Macellum Advisors, to consider selling the company, in large part to unlock the value attached to Kohl’s real estate.
Macellum has argued that Kohl’s should sell some of its real estate and lease it back as a way to raise capital, especially in difficult times. Kohl’s, however, has resisted so-called lease transactions, at least on such a large scale.
According to Peter Boneparth, chairman of the board of Kohl, the company completed a small sale and lease agreement before the Covid pandemic. It recognized a $ 127 million profit from selling and renting its San Bernardino e-commerce distribution and compliance centers.
On Friday, however, Kohl’s explicitly noted in its press release that its board is reevaluating the ways in which the retailer can monetize its real estate. Franchise Group had been planning to finance part of Kohl’s acquisition by selling part of Kohl’s real estate to another part and then leasing them again. This probably gave Kohl’s an idea of what kind of value he could get for his brick-and-mortar stores and distribution centers.
“You now have an environment where funding has changed so much that in fact it may be more attractive to use real estate as a monetization vehicle,” Boneparth told CNBC in a telephone interview.
“When you combine it with what we believe are stock levels, it becomes a very different exercise than it was in a previous funding environment,” he explained. “It’s no secret that Kohl’s has one very important asset on its balance sheet: real estate.”
As of January 29, Kohl’s owned 410 locations, leased 517 others, and operated land leases in 238 of its stores. All of his owned real estate was valued at just over $ 8 billion at the time, an annual filing shows.
Pros and cons
Proponents of sale-lease offers argue that it is a convenient way for companies to raise funds for future growth, as long as there is a buyer for real estate. But it also leaves the seller having to comply with the lease obligations as he would rent the property they just sold.
These leases could be much harder to break and rents can fluctuate between markets. Kohl’s said in its annual presentation that a typical store lease has an initial term of 20 to 25 years, with four to eight five-year renewal options.
In 2020, Big Lots reached an agreement with private equity firm Oak Street to raise $ 725 million from the sale of four distribution centers owned by the company and its lease. It gave the big box retailer extra liquidity during almost the onset of the Covid-19 pandemic.
Also in 2020, Bed Bath & Beyond completed a sale and lease transaction with Oak Street, in which it sold about 2.1 million square feet of commercial real estate and earned $ 250 million in revenue. Mark Tritton, the CEO of Bed Bath at the time, promoted the deal as a move to raise capital to reinvest in the business. Now, however, Bed Bath is facing another cash crisis due to falling sales and Tritton was fired from his role earlier this week.
Oak Street had planned to offer financing to Franchise Group in a Kohl deal, CNBC previously reported, according to someone familiar with the discussions. An Oak Street representative did not respond to CNBC’s request for comment.
Kohl’s on Friday reaffirmed its plan to conduct a $ 500 million accelerated share repurchase later this year. It narrowed its revenue target for the second fiscal quarter, citing a recent softening of consumer demand amid decades of high inflation.
“Clearly the consumer is under even more pressure today,” Kohl CEO Michelle Gass told CNBC in a telephone interview. “We’re not immune to that … but Kohl’s represents value. And at times like this it’s more important than ever to amplify that message.”
He added that Kohl’s partnerships with Amazon and Sephora remain in place and are part of the company’s long-term strategy to gain new customers.
“The conclusion of the board process was absolutely the right answer,” he said.
Kohl’s shares fell more than 20% on Friday to a 52-week low. Shares of the Franchise Group recently fell around 9%, also touching the 52-week low.
Macellum did not respond to CNBC’s request for comment.