Jonathan Duskin of Macellum Capital, the lead activist investor in a new campaign against off-mall department store Kohl's, has a message for Kohl's long-tenured board and often too optimistic management team: it's well beyond time to slash costs to help improve shareholder returns.
One measure that will help Kohl's (KSS) cut costs is eliminating the full-time flight crew and two private jets it allegedly still "maintains", according to a scathing 27-page letter Duskin and his consortium of activists in the campaign released on Monday.
"It's always really tough to find the tiniest little thing, but it would be better if they didn't have those things," Duskin told Yahoo Finance Live, referring to Kohl's alleged flight crew and two private planes.
A Kohl's spokeswoman didn't return requests for comment on the status of the alleged flight crew and two private planes.
The last time Kohl's referenced its aircraft was in its 2019 proxy filing released on March 26, 2020 detailing how CEO Michelle Gass used the assets.
"As Chief Executive Officer, Ms. Gass is permitted to use the Company’s aircraft for personal flights as well as business flights. This benefit increases the safety and efficiency of Ms. Gass’ travel. We believe these perquisites are reasonable based upon the relatively small expense in relation to both executive pay and our total benefit expenditures," Kohl's stated.
In 2019, Ms. Gass — who joined Kohl's in 2013 as chief customer officer and took over as CEO in May 2018 — incurred $197,490 in compensation related to the use of the retailer's aircraft, according to the filing.
"Amounts shown are the incremental costs of personal use of Kohl’s-owned or chartered aircraft, and are based on either actual charter expense or, with respect to Kohl’s-owned aircraft utilization, the direct cost of use per hour, which includes fuel, maintenance, engine restoration cost reserves, crew travel expenses, landing and parking fees and supplies," explained Kohl's of Gass' air travel expense.
It's unclear as to the extent of Gass' travel on the aircraft during the pandemic in 2020 as Kohl's hasn't filed its proxy statement for the year yet.
Duskin said such an expense doesn't make sense in light of Kohl's tepid operating margin and Return on Investment Capital (ROIC) performances in recent years.
"Declining gross margin dollars are the problem and in so many different areas of SG&A [expenses]. This is a company that will tell you with a straight face they are doing an excellent job of controlling costs and really driving cost-cutting throughout the organization. We just don't see it to the bottom line. Costs have increased by $450 million [from 2014 to 2019, per the activist letter]. It kind of falls hollow on us that there is that kind of culture, and a flight crew and two private jets is another example of that," Duskin said.
The battle begins
The activist group attacking Kohl's includes Duskin's Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 4010 Capital. They now control a combined 9.5% stake in Kohl’s. The news was first reported by The Wall Street Journal.
The group nominated nine people to Kohl's already enormous 12-person board.
They collectively blasted Kohl's for "poor retail execution," "excessive executive compensation," a "long-tenured Board with insufficient retail experience," and a "systemic inability to achieve stated goals."
A source familiar with the matter told Yahoo Finance the campaign is not a "catch and kill" attack on the CEO. Rather, they would like to work with Gass to turn the company around.
Duskin told Yahoo Finance Live he would like Gass to succeed as CEO, and it would be good to get her access to a board with strong retail experience.
Kohl's fired back at the activists, and clearly has a different view of how it's doing right now.
"Kohl’s is committed to maintaining constructive engagement with all shareholders regarding the Company’s strategies and prospects. The Kohl’s Board and management team have been engaged in discussions with the Investor Group since early December, and we remain open to new ideas that will improve our operating performance and capital allocation. However, we reject the Investor Group’s attempt to seize control of our Board and disrupt our momentum, especially considering that we are well underway in implementing a strong growth strategy and accelerating our performance, and we have refreshed half our Board with six new independent directors since 2016," Kohl's said in a new statement released Monday afternoon.
A source familiar with the matter told Yahoo Finance the two sides remain far apart in reaching a compromise.
The activists — who last teamed up in 2019 to shake up then dreadfully performing Bed Bath & Beyond (BBBY) — appear to be well-placed in their efforts. While Kohl's has garnered favorable headlines for its partnerships with Amazon (AMZN) (for store returns) and more recently cosmetics giant Sephora, the company simply has not delivered on several fronts.
The operating performance is more disappointing considering Kohl's pure-play rivals such as J.C. Penney and Macy's have closed hundreds of stores in the past five years. Theoretically, that should have pushed market share to Kohl's (something suggested in the letter).
That hasn't happened.
Here are some stats on Kohl's over the past five years. It's important to look at the results pre-pandemic because sales and profits have fallen off a cliff during the pandemic, like other retailers.
Stock price in the past five years is up 18% versus a 92% gain for the S&P 500. Target shares up 161%.
Same-store sales (excluding 2020) declined in two of the past five years, with only minor gains in the other three, according to Bloomberg data
Operating margin past five years (excluding 2020) hit 5.5% in 2019, down from 8.09% in 2015, according to Bloomberg data. Management's goal has been 7% to 8%.
Fourth quarter same-store sales plunged 11%.
Kohl's shares rose 6.4% on the session.
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