July 1, 2022

Breakingviews: Kohl’s risks being left on a lonely retail shelf

by Breakingviews.

It’s a tough time to be left alone in retail. Store chains in the United States are facing weaker sales, overstocking and inflation. For Kohl’s, the $4.6 billion company weighing a potential takeover offer from Franchise Group, the pressure to accept a deal – even one that might once have seemed miserly – is rising.

Consumers are spooked by rising inflation, and as a result so are retailers. The latest data from the U.S. Census Bureau shows monthly sales falling 0.3% in May. Prices, as measured by the personal consumption expenditures index, rose 6.3% in the year to May, according to the Commerce Department. Giant retailers Target and Walmart are still reporting increases in sales, year-on-year, but Kohl’s, based on the latest quarterly results, is not. The retailer is also stuffed with unsold items: Inventory was up 40% year-over-year as of April 30.

If Franchise, which owns chains like The Vitamin Shoppe, offers $60 per share, or $7.7 billion, as it did in early June, Kohl’s should take it. The retailer would then be valued at 9.3 times this year’s forecast earnings according to Refinitiv, a premium to its current valuation of 5.6 times. And deals are getting harder to do. Walgreens Boots Alliance scrapped plans to sell UK pharmacy chain Boots amid a rising cost of financing takeovers, while Reckitt Benckiser is considering not selling its infant nutrition business, according to Bloomberg News.

The dilemma comes if Franchise cuts its offer to $50 a share, as CNBC reported it might. Even then, that would represent a ratio of 7.8 times estimated earnings, less than TJ Maxx owner TJX’s 17 times earnings, but almost double what department store chain Macy’s trades at. TJX’s brands are doing significantly better, and, unlike Kohl’s, profit is expected to grow, whereas Macy’s results are closer to Kohl’s.

Kohl’s real estate properties are a sticking point, possibly. Franchise said it would sell the company’s locations, which could be worth about $8 billion, according to Cowen. Kohl’s could conceivably do that itself. But in reality, properties get their value, in part, from who occupies them, so the idea of splitting Kohl’s up may be harder than it sounds. Selling now would leave it to Franchise to shoulder that risk. And Kohl’s long-suffering shareholders can take the cash and go shopping elsewhere.

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