People walk near the entrance of a Kohl’s department store on June 7, 2022 in Doral, Florida.
Joe Riddle | Getty Images
After all, Kohl’s may not sell its business. But now he is looking to sell some of his real estate holdings, reversing his previous position.
The retailer announced Friday that it has ended deal talks with the owner of The Vitamin Shoppe Franchise Group, confirming a CNBC report Thursday night. Instead, Kohl’s said it will continue to operate as a standalone public company.
Kohl’s has been pressured for months by activist firms, including Macellum Advisors, to consider selling the company, largely to unlock the value associated with Kohl’s real estate.
Macellum argued that Kohl’s should sell some of its real estate and lease it back as a way to unlock capital, especially in tough times. Kohl’s, however, opposes so-called sale-leaseback transactions, at least on such a large scale.
The company completed a small sale-leaseback deal earlier during the Covid pandemic, according to Peter Boneparte, chairman of Kohl’s board. It recognized a $127 million gain on the sale and leaseback of its e-commerce fulfillment and distribution centers in San Bernardino.
On Friday, however, Kohl’s specifically noted in its press release that its board is currently reevaluating the ways the retailer can monetize its real estate. Franchise Group planned to finance part of the Kohl’s acquisition by selling some of Kohl’s real estate to another party and then leasing it back. This likely gave Kohl’s an idea of what value it could extract for the brick-and-mortar stores and distribution centers it owned.
“Now you have an environment where financing has changed so much that it may actually be more attractive to use real estate as a vehicle for monetization,” Boneparte told CNBC in a phone interview.
“When you combine that with what we think are the stock levels, it becomes a much different exercise than it was in a previous financial environment,” he explained. “It’s no secret that Kohl’s has a very large asset on the balance sheet: real estate.”
As of Jan. 29, Kohl’s owned 410 locations, leased another 517 and operated leases in 238 of its stores. All the real estate he owned was valued at just over $8 billion at the time, an annual filing shows.
Advantages and disadvantages
Proponents of sale-leaseback deals say it’s a convenient way for companies to find funds to target future growth, as long as there’s a buyer for the real estate. But it also leaves the seller having to meet their rental obligations as they would be renting the property they just sold.
These leases can become much more difficult to break and rents can vary 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 struck a deal with private real estate company Oak Street to raise $725 million from the sale and leaseback of four company-owned distribution centers. This gave the big retailer additional liquidity almost at the start of the Covid-19 pandemic.
Also in 2020, Bed Bath & Beyond completed a sale-leaseback deal with Oak Street in which it sold approximately 2.1 million square feet of commercial real estate and earned $250 million in proceeds. Mark Tritton, Bed Bath’s CEO at the time, touted the deal as a move to raise capital to invest back into the business. However, Bed Bath is now facing a new financial crisis as its sales collapse and Tritton was forced out of his role earlier this week.
Oak Street had planned to offer Franchise Group financing 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.
On Friday, Kohl’s reaffirmed its plan to do an accelerated $500 million share buyback later this year. It cut its revenue guidance for the fiscal second quarter, citing a recent softening in consumer demand amid decades-high inflation.
“It’s clear that consumers are under even more pressure today,” Kohl’s CEO Michel Gass told CNBC in a phone interview. “We’re not immune to it … but Kohl’s stands for value. And at times like this, it’s more important than ever to amplify that message.”
She 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.
“Concluding the board process was absolutely the right response,” she said.
Shares of Kohl’s fell more than 20% on Friday to hit a 52-week low. Shares of Franchise Group recently fell about 9%, also touching a 52-week low.
Macellum did not respond to CNBC’s request for comment.
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