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Are there separate dot-com companies and stores in the cards?

Kohl’s Corp. Will he be the next retailer pushed to turn his dot-com into a separate company?

Financial sources say Kohl’s, with its underperforming stock, is expected to come under pressure from activist investors later this year to part with its e-commerce business, mirroring what the Hudson’s Bay Company has already done with its Saks Fifth Avenue, Saks Off 5th and the Hudson’s Bay Divisions, and what Macy’s Inc. is also driven to do.

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“Nothing is happening at Kohl’s right now, but it will happen later this year,” a financial source told WWD. “It makes a lot of sense for Kohl’s.”

“Shareholders are in contact with Kohl’s board to at least assess a split for the same reasons Jana Partners is pushing Macy’s to part with its e-commerce. It’s just as viable with Kohl’s.

Investors have seen Kohl’s share price languish recently and believe that taking the dramatic and complicated step of separating dot-com and physical store operations would bring greater value to the company.

Kohl’s stock is trading at around $ 47, topped $ 64 last spring, and ranged from around $ 30 last year to over $ 80 in fall 2018. The stock wasn’t helped in September when Bank of America cut its investment recommendation for the retailer by two levels, citing supply chain issues. Bank of America gave the stock an “underperformance” rating, down from “buy”. Bank of America reduced its price target for Kohl’s shares to $ 48 from $ 75.

Yet a stock price does not always reflect the strength of a retailer’s operations. At Kohl’s, there have been significant advancements in merchandising, including the rollout of Sephora online and in stores this year, as well as strengthening casual and active offerings with leading brands like Nike, Adidas, Cole. Hahn, Calvin Klein, Tommy Hilfiger and Lands’ End, and with an emphasis on inclusiveness in product offerings. They are widely viewed as positive maneuvers refining Kohl’s brand identity and providing a simpler and more relevant shopping experience.

Ecommerce at Kohl’s is estimated to be around 30-35% of total volume, although in the fourth quarter of last year it accounted for north of 40% of sales. This year, with most Americans vaccinated against COVID-19, many are inclined to return to shopping in stores, meaning some businesses would revert to brick-and-mortar retail.

Kohl’s generated $ 15.96 billion in total sales in 2020 and $ 19.97 billion in 2019.

Kohl’s, a public company, could part with its dot-com business through an initial public offering or spin-off in some other way. The company could sell much of the e-commerce business and use the money to buy back stocks, pay off debt, and invest in dot-coms for growth.

In April, Kohl’s struck a deal with activist investors fighting for new blood on the retailer’s board of directors. TTwo independent directors appointed by the activist group – Margaret Jenkins and Thomas Kingsbury – were appointed to the board. An additional independent director identified by Kohl’s and accepted by the investor group, former Lululemon CEO Christine Day, has also joined the board.

The activist group was led by Macellum Advisors GP LLC, along with Ancora Holdings Inc .; Legion Partners Asset Management LLC and 4010 Capital LLC. At the time, the group collectively owned 9.3% of Kohl’s outstanding common stock, including options.

On Thursday, Macellum declined to comment on Kohl’s and Kohl’s did not return a request for comment.

Along with last spring’s pact, the investor group agreed to abide by certain customary standstill provisions up to 30 days before the nomination window closes for the company’s annual meeting of shareholders in 2022. The regulations should expire before investors can act again.

Opinions are divided on whether separating a retailer’s dot-com and stores activities into separate companies is a good strategy. Pureplay e-merchants have generated higher stock valuations than those with online and physical trades, but the long-term value of separating the two remains to be seen.

“The only crazy thing about this idea is that Saks is the only one who thought about it,” said a retail expert. “It’s the most logical thing for a retailer to do right now. You get fresh capital, a chance to invest in a high growth digital business, money to hire new people, and you grow the business, and you can still invest in the slower growing stores. You don’t have to neglect it.

However, it is not a simple process. “It takes months of hard work, up to a year,” said the expert. The process involves the participation of store managers, lawyers and accountants, the development of a feasibility study, new legal identities and the creation of numerous operating and service agreements between the store and the point companies. com.

“It’s not a solution for all retailers, but it’s a solution for a number of retail businesses stuck in the middle with traditional stores,” the source said.

This would not be seen as a solution for companies like Costco Wholesale Corp. and Walmart Inc., which have higher stock prices than Macy’s Inc. and Kohl’s. Costco and Walmart also have huge, dominant store operations, and dot-com revenues that are relatively low compared to their overall businesses, unlike Kohl’s and Macy’s.

Separating a retailer from their dot-com operations goes against a decade of omnichannel merger, where the industry as a whole has pushed to break down the divisions between their bricks and clicks to focus more directly on their relationships with buyers and provide “” shopping experiences, channel to channel.

“Traditional retailers bristle at the idea, but shareholders care about generating value, and Richard Baker does. He’s trying to create value, ”another source said, referring to the president, governor and CEO of Toronto-based HBC who, along with Marc Metrick, now CEO of and former CEO of Saks stores and from, came up with the idea of ​​the separation from Saks.

Cowen Equity Research released a report from Macy’s on Thursday saying it doesn’t think a spinoff is likely in the near term.

“We believe that a split may be possible, and management and the board are currently analyzing and analyzing this possibility and other value-generating initiatives. However, we recognize that there hasn’t been much long-term evidence of success, and that there are significant risks of destabilizing the business and slowing momentum. “

Before a spin-off occurs, there are several considerations, Cowen reported, including “the viability of the margin and growth profile of a Macy’s-only business and the economics of the related unit, execution. and the creation of hundreds of essential service agreements, and the dis-synergies and overheads that may need to be created between two new companies.

Regarding the main risks of a separation, Cowen cited “the need for Macy’s to drive an integrated and frictionless customer experience, a cross-channel supply chain and inventory management, the dissynergies of separation and management of risk loses focus of operations during separation, customer acquisition considerations and cost sharing. In addition, the need to drive speed and agility and manage constantly changing “customer-centric” priorities.

On the positive side, Cowen cited “the potential ability to accelerate digital investments, enhance talent acquisition, as well as a greater focus on digital marketing efforts and removing capital intensity from stores. physical “.

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