Why Activist Investors Are Targeting Department Stores

Change is coming to department stores, whether they like it or not.

This week, two investment groups moved to buy US chain Kohl’s: a consortium of investors backed by hedge fund Starboard Value LP made a $9 billion bid, and private equity firm Sycamore Partners would prepare a competing offer.

Even before potential buyers emerged, Kohl’s was already the target of activist investors Engine Capital and Macellum Advisors, who are pressuring the Wisconsin-based company to sell its real estate and spin off its e-commerce business. The idea is that offloading certain properties will generate cash flow for the business, and then the retailer will lease its most profitable stores instead. With digital separation, creating an independent online entity is a tactic to attract new capital.

Kohl’s isn’t the only department store operator facing the prospect of being sold off. Retailers in this space have long struggled to increase sales and keep pace with new rivals both online and in the mall. This has led some investors to see their true value in the land and buildings they occupy, or in their brand, rather than in their ability to sell clothes, handbags and shoes. These investors have plenty of money to test this theory.

Richard Baker, owner of Saks Fifth Avenue, sold Lord & Taylor for $100 million in 2019 while retaining the chain’s real estate assets. A year later, the retailer was sold in a bankruptcy auction to investor Saadia Group, which continues to operate its website.

Baker is also behind the trend of e-commerce spinoffs, where stores are separated from their websites. In an agreement announced in March 2021, Saks.com became the main Saks entity and received a $500 million investment from private equity firm Insight Partners, while Saks’ 40 physical stores will operate separately as an entity called “SFA”. Since last fall, Saks has been planning an initial public offering that could value the e-commerce part of the business at $6 billion. Seeing that impressive valuation, activist investor Jana Partners took a stake in Macy’s in October and urged the chain to follow suit.

Real estate transactions and e-commerce spinoffs can be lucrative for a retailer’s investors. What this means for the fashion industry is less clear. Sales spiked at Saks in the months following the spinoff, and Neiman Marcus appears to be finding its footing after several years of boardroom maneuvering, including a bankruptcy filing. But the most publicized example of this kind of financial engineering remains Sears, which was acquired by billionaire Eddie Lampert in 2005. As losses mounted, Lampert spun the company’s properties into an independent REIT, a decision that failed to save Sears from bankruptcy and eventual liquidation.

“Are the breakups of these companies a short-term gain? Yes,” said Robert Burke, retail consultant. “But can this also be a long-term game? Well, we don’t know.

“The department store is dead”

Activist investors and hedge funds are trying to answer the same question as the current management of these retailers: whether, after two decades of declining sales, America’s department stores can be saved.

According to the US Census Bureau, department store sales peaked at around $20 billion in January 2001, but fell to $11 billion in February 2020, just before the pandemic hit the United States. The numbers have risen since lockdowns ended, hitting $12.4 billion in October 2021, but resumed their historic decline thereafter. Many analysts predict further deterioration, especially if inflation causes consumers to spend less on discretionary items such as clothing.

“Retail is in a situation where all players are vulnerable right now,” said Rebecca Duval, analyst at BlueFin Research.

Department stores have tried everything from buying rivals to launching in-house clothing and beauty lines in different store formats. Kohl’s best-known innovation was to partner with Amazon, somewhat its biggest competitor, to allow customers to return orders placed with the online retailer at its stores. It recently started opening in-store Sephora stores and was quick to offer customers hybrid online shopping and in-store pickup options during the pandemic, taking advantage of the convenient location of many of its stores. stores in neighborhood strip malls rather than indoor malls.

For its efforts, Kohl’s saw its revenue drop less dramatically than Macy’s or JC Penney. But sales haven’t increased either. Revenue of $18.8 billion in 2019 was just below the $19 billion in 2013.

Starboard’s offer represents a 37% premium to where Kohl’s shares previously traded. This represents the potential value generated by its goods and equipment, valued at $6.7 billion at the start of 2021, as well as its e-commerce business, which accounted for 29% of the company’s $4.4 billion in sales. business in the third quarter of 2021. In the nine months ending October 31 of last year, Kohl’s generated $12.3 billion in net sales.

But if Starboard or Sycamore didn’t actually change the way Kohl’s operates and seriously invests in its future, its post-sales trajectory would look much like it does today: stagnant sales and a constant struggle to stay relevant. The same goes for other retailers who would be on the auction block.

“There are 100 retailers in the same boat, where they thought bringing Amazon returns or a coffee would solve their problems,” said Lee Peterson, executive vice president of retail consultancy WD Partners. “But the writing is on the wall. The department store model is dead.

About Joel Simmons

Check Also

Community Liability Funding for Struggling Real Estate Developers

An almost without exception, property developers plagued by the prospect of bankruptcy find themselves stretched …