Should Kohl’s Go Private?

One of the ways publicly traded companies can create value for shareholders when their stock prices decline is to take themselves private. Even mentioning the possibility of going private can move a stock price higher, as happened to department store chain Kohl’s (NYSE: KSS).
Kohl’s stock has been stuck in the doldrums for the past year. It currently trades near $45, a far cry from the nearly $80 price Kohl’s stock hit last April.
This is what has compelled management to consider breaking the company up or going private. Clearly the public markets are not rewarding Kohl’s with anything close to an average valuation.

Kohl’s Is Getting Squeezed

Kohl’s prolonged stock decline is the result of repeatedly missing the mark on quarterly earnings, going all the way back to early 2015. Management has offered myriad reasons, including the weather being too warm, then being too cold.
But the bottom line is that Kohl’s is struggling. Comparable-store sales, a key metric for retailers that analyzes sales at locations open at least one year, fell 2.2% over the first nine months of 2015, year over year. Reported earnings per share declined 21% over the same time.
However, that doesn’t tell the whole story. Total sales were up 1% through the first three quarters, signifying that the Kohl’s brand still resonates and the company simply needs to improve at certain older stores that are under-performing now. Furthermore, Kohl’s earnings were significantly affected by a $169 million loss to clear some debt. Excluding that one-time charge, Kohl’s earnings were actually up 1% in that time. And, the company will benefit going forward from a stronger balance sheet.
Kohl’s operates approximately 1,200 stores across 49 states, and generates sales in excess of $19 billion each year. The company remains highly profitable, and while department stores are out of favor, people will likely need socks, underwear and a variety of other products Kohl’s provides for the foreseeable future.
For evidence of this, look to Kohl’s loyalty program, which has amassed 34 million members.

Kohl’s Is Down, Not Out

The company is stuck in a structural slowdown in its industry. Department stores are losing customer traffic to more convenient, cheaper online retailers like Amazon.com (NASDAQ: AMZN). But despite the overwhelmingly negative sentiment, Kohl’s is still highly profitable and has only seen a modest decline in sales over the past year.
Kohl’s probably feels pressure to go private, because it’s stuck in a growth lull.
Going private now would present its own challenges. First, Kohl’s would first have to find a buyer, which is not easy in this climate. Valuations are coming down; investors both public and private are not bidding up valuation multiples right now.
Moreover, while going private would probably fetch a much higher valuation than the public markets are currently willing to pay, the key question is at what price? Kohl’s management risks alienating long-term investors if the company is taken private anywhere near its current stock price.
To be sure, Kohl’s has not confirmed these reports. The discussions are preliminary and the board of directors may eventually decide not to do anything.
As a result, the best course of action for Kohl’s may simply be to stand pat. Kohl’s may be better served focusing on turning around its core operations, closing stores that are losing money and improving its balance sheet. Once this current period of market turmoil passes, Kohl’s stock will likely earn a more satisfactory multiple.
Then, the company could consider going private down the road. That would likely be received much more favorably by private-equity investors, and it would also give long-term investors in the stock a chance to be made whole.

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