We initiated a position in KSS equity in our model portfolio at a cost basis of $8.50 a share, and exited at $16 - representing an ROI of 88% and an IRR of ~250%
We believe Kohl’s Corporation ($KSS) is a good short- to medium-term long (~6 mo-1 yr). With short interest exceeding 40%, any materially positive news is likely to drive a squeeze on the stock. We believe activist involvement in the name will resurface and view this as the primary catalyst.
Kohl’s Corporation ($KSS) is a major U.S. retailer operating over 1,100 stores and an online platform, primarily selling apparel, footwear, and home products. The company has been facing declining sales, with FY24 net sales down 7.2% to $15.39 billion. This decline, coupled with competitive pressures from e-commerce and other retailers, has prompted the company to undertake financial restructuring to improve its balance sheet and ensure long-term sustainability/liquidity. A messy 2022 sale process where private equity bidders walked away further soured sentiment.
Kohl's is priced as a dying retailer despite its resilient cash flows, real estate assets, and ongoing turnaround efforts. The valuation is compelling, trading at ~7x NTM EBITDA. It has a net asset value of ~$3.8 billion, compared to a market cap of ~$900 million.
The market overreacts to secular headwinds in brick-and-mortar retail, ignoring Kohl's strategic pivot toward a differentiated omnichannel model, bolstered by partnerships with Sephora and Amazon.
Management has responded by implementing a three-pronged strategy:
Sephora Partnership: In-store Sephora shops in all 1,100+ Kohl’s locations by 2025, driving traffic and higher-margin beauty sales.
Omnichannel Expansion: Leveraging Amazon Returns and a growing e-commerce platform.
Cost Control: Kohl's SG&A expenses decreased by 4.5% year-over-year, reaching ~$1.5 billion in Q4 2024. Kohl’s aims to decrease SG&A by 3.5-5% in 2025.
A significant aspect of Kohl’s financial restructuring is its management of debt and credit facilities to enhance liquidity. In January 2023, the company replaced and upsized its senior unsecured revolving credit facility with a senior secured, asset-based revolving credit facility, maturing in January 2028.
History, Set-Up
Kohl’s has faced multiple waves of activist investor scrutiny over the past decade, reflecting its volatile performance and the broader challenges of the retail sector. The first significant activist campaign emerged in early 2021, when a coalition of hedge funds - Macellum Advisors, Ancora Holdings, Legion Partners Asset Management, and 4010 Capital - collectively holding a 9.5% stake, launched an aggressive push to overhaul Kohl’s board. This group, frustrated by years of underwhelming stock performance (Kohl’s had lagged the S&P 500 and peers like Macy’s and Target), issued an open letter to shareholders in February 2021, nominating nine directors to seize control of the 12-person board. They criticized Kohl’s for losing market share, declining gross margins, and a lack of retail expertise among leadership, proposing a radical shift: tighter cost controls, inventory optimization, and a potential sale-leaseback of its ~$7-8 billion real estate portfolio (~400 stores).
Kohl’s pushed back hard, calling the move an attempt to disrupt its nascent turnaround under CEO Michelle Gass, who had introduced partnerships with Amazon and Sephora. After months of sparring, a settlement was reached in April 2021: Kohl’s added three new directors, including two activist nominees - Margaret Jenkins (ex-Denny’s CMO) and Thomas Kingsbury (former Burlington CEO) - and a third, Christine Day (ex-Lululemon CEO), while boosting its share buyback program to ~$2 billion. The truce was uneasy, with Macellum reserving the right to return.
The calm didn’t last. By late 2021, a new activist, Engine Capital, entered the fray with a ~1% stake, urging Kohl’s to either sell itself or spin off its e-commerce business, which it valued at $12.4 billion standalone. This came amid a retail sector trend of separating digital arms (e.g., Saks Fifth Avenue), and Engine argued Kohl’s stock, then trading in the $50s, was grossly undervalued. Kohl’s dismissed the idea but couldn’t ignore the mounting pressure as its stock remained stagnant despite a post-pandemic sales rebound (up 23% in 2021, yet below 2019 levels).
In early 2022, the stakes escalated: Acacia Research (backed by Starboard Value) and Sycamore Partners floated takeover bids at $64 and $65 per share, respectively, valuing Kohl’s at ~$9 billion. Macellum, still simmering from 2021, revived its campaign, again demanding a sale and nominating directors. Kohl’s adopted a poison pill in February 2022 to fend off hostile takeovers, arguing the bids undervalued its business. By mid-2022, it entered exclusive talks with Franchise Group at $60/share, but the deal collapsed in July amid market volatility and rising interest rates. Activists were left empty-handed, and Kohl’s stock sank below $30.
Undeterred, September 2022 saw Ancora Holdings strike again, this time targeting leadership directly. With a ~2.5% stake, Ancora sent a letter demanding the ouster of CEO Michelle Gass and Chairman Peter Boneparth, blaming them for failing to capitalize on the failed sale and execute a turnaround. Ancora praised Gass’s Sephora initiative but argued she lacked the cost-cutting and margin-expansion expertise needed. Kohl’s stood by Gass, and she remained until November 2022, when she left for Levi Strauss, succeeded by interim CEO Tom Kingsbury (an ironic twist, given his 2021 activist nomination).
Meanwhile, Macellum re-entered in October 2022, threatening a third proxy fight to remove Boneparth and three other directors, citing their “failure to support management” and a junk credit rating downgrade by S&P. Kohl’s avoided a full showdown, but the pressure underscored a persistent activist drumbeat.
Since then, activist noise has quieted, but their legacy of involvement lingers. As of today, Kohl’s stock hovers near decade lows (~$8), and its ~$6 billion debt load and leverage remain pain points. Past campaigns have forced incremental changes - board refreshment, buybacks, and a real estate review (e.g., a $2 billion offer from Oak Street Real Estate in 2022 was considered) - yet no transformative outcome has materialized.
Catalysts
Sephora Rollout Success: Q1 2025 earnings (May 2025) could show double-digit comp sales growth, rerating the stock.
Real Estate Monetization: A sale-leaseback deal could unlock ~$7-8 billion, funding debt reduction or buybacks.
Activist Pressure: With shares near decade lows, activists (who circled in 2021) may push for asset sales or a breakup.