We recently closed our position in Kohl’s (KSS). The stock has been volatile this summer, but the developments over the last month tipped the balance from “challenged turnaround” to “unacceptable risk.”
What ultimately changed our mind were reports yesterday suggesting Kohl’s is stretching out payments to suppliers. That constitutes a major, classic red flag around liquidity. Vendor trust is sacred for retailers. Lack thereof is highly concerning.
Our thesis around Sephora driving store traffic meaningfully did not pan out as we predicted. Traffic is down LSD/MSD YoY, with no clear sign of stabilization. The narrative of “just get to flat comps” is proving elusive.
Kohl’s CEO was ousted in May for ethics violations. An interim leader is in place, but governance credibility is shaky and spells further unpredictability for the turnaround.
The balance sheet stress is also proving to be more concerning than we initially anticipated. Raising $360 million of debt at a 10% coupon secured by distribution centers underscores how tight the financing window has become.
We’ll be the first to admit it: we got very, very lucky buying Kohl’s at the moment we did. We had no clue that it would end up trading like a meme stock - doubling on speculative bursts, only to give it all back. That kind of volatility can be fun for traders, but it is not the basis for a long-term investment thesis. Without a credible turnaround or stable cash generation, we see more downside risk than upside optionality.
We will keep watching from the sidelines - real estate value and strategic alternatives remain as long-term levers - but for now, we’d rather redeploy capital into names with cleaner balance sheets and clearer catalysts. Our focus is increasingly on stocks in the sub-$500M market cap universe. We believe there is greater opportunity there, on a relative basis, compared to mid- and large-cap.
We switched out our position in Kohl’s for a new holding with near equal weighting: Boston Omaha Corporation (BOC). Investing in BOC is more aligned with our style, and more compelling on a risk/reward basis.