People walk near the entrance of Kohl’s department store on June 7, 2022 in Doral, Florida.
After all, Kohl’s may not be selling its business. But now he is looking to sell some of his real estate, reversing his earlier stance.
The retailer announced Friday that it has ended talks on the deal with The Vitamin Shoppe’s owner, Franchise Group, confirming CNBC’s reporting on Thursday night. Instead, Kohl’s said, it will continue to operate as an independent public company.
For months, Kohl’s has been pressured by activist firms, including Macellum Advisors, to consider a sale of the company, in large part to unlock the value tied up in 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 unlock capital, particularly during tough times. However, Kohl’s has resisted so-called sale-leaseback transactions, at least on such a large scale.
The company completed a small sale-leaseback deal earlier in the Covid pandemic, according to Peter Boneparth, Kohl’s chairman of the board. It recognized a $127 million gain from selling and leasing its San Bernardino e-commerce fulfillment and distribution centers.
On Friday, however, Kohl’s explicitly noted in its press release that its board is reevaluating ways the retailer can monetize its real estate. Franchise Group had been planning to finance a portion of the Kohl’s acquisition by selling a portion of Kohl’s real estate to another party and then leasing it back. This probably gave Kohl’s an idea of what kind of value it could get for its own physical stores and distribution centers.
“Now you have an environment where financing has changed so much that it may actually be more attractive to use real estate as a monetization vehicle,” Boneparth told CNBC in a phone interview.
“When you combine that with what we think are stock levels, it becomes a very different exercise than a previous financial environment,” he explained. “It’s no secret that Kohl’s has a very large asset on its balance sheet: real estate.”
As of January 29, Kohl’s owned 410 locations, leased another 517, and leased land in 238 of its stores. All of the real estate he owned was valued at just over $8 billion at the time, an annual filing shows.
Pros and cons
Proponents of sale-leaseback agreements argue that it is a convenient way for businesses to raise funds for future growth, as long as there is a buyer for the real estate. Read also : 3 tap breaking in selected real estate. But it also leaves the seller with the obligation to fulfill the obligations of the lease, since they would be renting the property that they just sold.
Those leases could become much harder to break, and rents can fluctuate between markets. Kohl’s said in its annual filing 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 real estate firm Oak Street to raise $725 million from the sale of four company-owned distribution centers and lease them back. It gave the large retailer additional liquidity during the near start of the Covid-19 pandemic.
Also in 2020, Bed Bath & Beyond completed a sale-leaseback transaction with Oak Street, selling approximately 2.1 million square feet of commercial real estate for $250 million in proceeds. Mark Tritton, the CEO of Bed Bath at the time, touted the deal as a move to raise capital to invest back in the business. Now, however, Bed Bath is facing another cash crunch as its sales fall and Tritton was sacked from his post earlier this week.
Oak Street had been planning to offer financing to Franchise Group in a Kohl’s deal, CNBC previously reported, according to a person familiar with the discussions. A representative for Oak Street 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 lowered its revenue guidance for the fiscal second quarter, citing a recent weakening in consumer demand amid decades of high inflation.
“Clearly, the consumer is under even more pressure today,” Kohl’s CEO Michelle Gass told CNBC in a phone 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 win over new customers.
“The conclusion of the board process was absolutely the right answer,” he said.
Kohl’s shares ended Friday trading down almost 20% and at one point hit a new 52-week low of $27.65. Shares of Franchise Group ended the day down 7.5% and also hit a new 52-week low of $31.67 during trading.
Macellum did not respond to CNBC’s request for comment.
