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Kohl’s, Citing Analysis and Bad Economy, Decides Not To Shop Around Real Estate

Retailer Says It Won’t Pursue Sale-Leaseback Deals Right Now

Photo Courtesy of Wolterke.

Beleaguered Kohl's, after conducting a "robust" analysis, has decided against putting its real estate up for sale, according to one of the retailer's C-suite executives.


The Menomonee Falls, Wisconsin-based chain, which has over 1,100 stores, has been under pressure from activist investors to strike deals to sell its stores and then lease them back — a so-called sale-leaseback — to essentially cash in on its brick-and-mortar portfolio. But during a third-quarter earnings call on Thursday, Chief Financial Officer Jill Timm said that option is off the table for now after input from a variety of real estate experts. "Given the market volatility and current [interest] rate environment, we’ve concluded that it’s best to stay the course and continue with our existing process of regularly evaluating our real estate to maximize asset value, drive long-term profitability and optimize the portfolio with a focus on maintaining balance-sheet health and financial flexibility," Timm told Wall Street analysts. "We’ll continue to take advantage of favorable opportunities as they arise but not engage in transformative sale-leaseback transactions at this time.”


Kohl's embattled CEO, Michelle Gass, who earlier this month said she would be leaving to join Levi Strauss & Co. in San Francisco as its president and CEO-to-be, wasn't on the quarterly call.


Over the past few years, facing tough economic headwinds and sometimes flagging sales and margins, a number of retailers have entered into sale-leaseback deals, divesting their stores and distribution centers and then leasing them back, to capitalize on their brick-and-mortar holdings. Most recently, specialty women's apparel retailer Lane Bryant sold its headquarters in Ohio in a sale-leaseback deal for $42 million. Earlier this year, home shopping giant QVC sold five properties, including its Pennsylvania headquarters and main studio facility, for $443 million to Oak Street. And in December 2019, Union, New Jersey-based Bed Bath & Beyond sold its Pennsylvania headquarters, a distribution center and some stores to Oak Street in a sale-leaseback deal valued at $250 million.

Canceled Deal

Kohl's has been under attack for over a year now by activist groups, mainly Ancora Holdings Group, over its financial performance, with a call for the ouster of Gass and the sale of the company. In July, Kohl's and a potential buyer, Franchise Group of Delaware, Ohio, failed to close a deal on the sale of the retailer. Franchise Group originally offered roughly $8 billion — later reducing that bid — and media reports said Franchise Group planned to finance the acquisition by arranging a sale-leaseback deal for the retailer's real estate with Oak Street.


When it announced that the sale had cratered, in a statement Kohl's said, "The board is also currently reviewing other opportunities to unlock shareholder value, including reevaluating monetization opportunities for portions of the company’s real estate portfolio."


That review has been finished, according to Timm, and there will be no sale right now.


"We recently completed a robust process where we engaged with dozens of industry participants to assess potential asset-monetization opportunities on our owned real estate," she said on Thursday. "This included robust engagements with large fully integrated real estate service firms, specialty real estate advisory and brokerage firms, large institutional real estate investors and specialty real estate investment and private equity firms."


As of January, Kohl's owned 410 locations, leased 517 and had ground leased an additional 238 sites, according to Brandon Svec, national director of U.S. retail analytics for CoStar Group. He estimated the chain has 28.9 million square feet of owned selling space.

Tough Third Quarter

A number of retailers have seen their third-quarter results affected by inflation and penny-pinching shoppers. In Kohl's case, its net sales dropped just over 7%, to $4.48 billion, and comparable sales declined roughly 7% as well. Because of "significant macro economic headwinds" and Gass' unexpected exit, the retailer didn't provide guidance for the fourth quarter and withdrew its prior full-year guidance.


Kohl's board has formed a search committee to find a permanent CEO, with Tom Kingsbury now serving as interim CEO.


Neil Saunders, managing director of GlobalData, in a note on Thursday was critical of Kohl's performance.


"The latest results raise serious questions over Kohl’s sense of direction, especially as the near-term outlook for all of retail is more pressured," he said. "This gives enormous power to activist investors who are seeking change. And with Michelle Gass relinquishing her role as CEO, a major obstacle to their demands is now removed. In our view, activists’ desire to shake up the company is reasonable. The way some of they wish to go about it — including selling off real estate and separating e-commerce — is much less sensible as these things are about short-term gains with big long-term costs. Unfortunately, Kohl’s has put itself in a position where it may not be able to resist such calls."


Kohl's didn't immediately respond to an email for comment on Saunders' note.


Source: 2022 CoStar News.

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