Kohl’s risks being left on a lonely retail shelf

Franchise

30/06/2022 16:16

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own. Refiles to add links.)
    By Amanda Gomez
    NEW YORK, June 30 (Reuters Breakingviews) - It’s a tough
time to be left alone in retail. Store chains in the United
States are facing weaker sales, overstocking and inflation. For
Kohl's  KSS.N , the $4.6 billion company weighing a potential
takeover offer from Franchise Group  FRG.O , the pressure to
accept a deal – even one that might once have seemed miserly –
is rising.
    Consumers are spooked by rising inflation, and as a result
so are retailers. The latest data from the U.S. Census Bureau https://www.census.gov/retail/marts/www/marts_current.pdf
 shows monthly sales falling 0.3% in May. Prices https://www.breakingviews.com/considered-view/capital-calls-lithium-share-sale-li-auto,
 as measured by the personal consumption expenditures index,
rose 6.3% in the year to May, according to the Commerce
Department  urn:newsml:reuters.com:*:nL4N2YH35F. Giant retailers Target  TGT.N  and
Walmart  WMT.N  are still reporting increases in sales,
year-on-year, but Kohl’s, based on the latest quarterly results,
is not. The retailer is also stuffed with unsold items:
Inventory was up 40% year-over-year as of April 30. 
    If Franchise, which owns chains like The Vitamin Shoppe,
offers $60 per share, or $7.7 billion, as it did in early June,
Kohl’s should take it. The retailer would then be valued at 9.3
times this year’s forecast earnings according to Refinitiv, a
premium to its current valuation of 5.6 times. And deals are
getting harder to do. Walgreens Boots Alliance  WBA.O  scrapped
plans to sell UK pharmacy chain Boots amid a rising cost of
financing takeovers, while Reckitt Benckiser  RKT.L  is
considering not selling its infant nutrition business, according
to Bloomberg News https://www.bloomberg.com/news/articles/2022-06-28/reckitt-said-to-weigh-shelving-7-billion-infant-nutrition-sale?sref=vEQJzSks.
    The dilemma comes if Franchise cuts its offer to $50 a
share, as CNBC reported https://www.cnbc.com/2022/06/22/franchise-group-considers-lowering-kohls-bid-closer-to-50-a-share-from-60.html
 it might. Even then, that would represent a ratio of 7.8 times
estimated earnings, less than TJ Maxx owner TJX’s  TJX.N  17
times earnings, but almost double what department store chain
Macy’s  M.N  trades at. TJX’s brands are doing significantly
better, and, unlike Kohl’s, profit is expected to grow, whereas
Macy’s results are closer to Kohl’s. 
    Kohl’s real estate properties are a sticking point,
possibly. Franchise said it would sell the company’s locations,
which could be worth about $8 billion, according to Cowen.
Kohl's could conceivably do that itself. But in reality,
properties get their value, in part, from who occupies them, so
the idea of splitting Kohl's up may be harder than it sounds.
Selling now would leave it to Franchise to shoulder that risk.
And Kohl's long-suffering shareholders can take the cash and go
shopping elsewhere.
    Follow @alpgomez https://twitter.com/alpgomez on Twitter
          
    CONTEXT NEWS 
    Kohl’s said on June 6 that it started exclusive negotiations
with Franchise Group, which owns and operates multiple retail
chains, including The Vitamin Shoppe and Pet Supplies Plus.
Franchise offered $60 per share in cash and said that $1 billion
of that would be from its secured debt facilities and the rest
will be generated from Kohl’s real estate assets. 
    Franchise is considering lowering its bid to $50 per share,
CNBC reported on June 22. 
    Wisconsin-based Kohl’s reported in May that first quarter
revenue fell 4.4% to $3.7 billion. Net income was unchanged at
$14 million in the three months ended April 30 compared with the
same period a year ago. 
    The retailer said net sales will be flat or increase up to
1% for fiscal 2022. That compares with the previous outlook of a
2% to 3% rise in net sales. Earnings per share are expected to
be between $6.45 and $6.85, down from the previous outlook of $7
to $7.50 a share. 

 (Editing by John Foley and Sharon Lam)
 ((For previous columns by the author, Reuters customers can
click on  GOMEZ/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | amanda.gomez@thomsonreuters.com; Reuters Messaging:
amanda.gomez.thomsonreuters.com@reuters.net))