Sale of Kohl’s property on the table after the failure of negotiations on the deal

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People walk near the entrance to Kohl’s department store on June 7, 2022 in Doral, Florida.

Joe Radle | Getty Images

After all, Kohl’s may not be selling its business. But now he wants to sell part of his real estate, changing his previous position.

On Friday, the retailer announced it was ending talks on a deal with the Vitamin Shoppe owner’s Franchise Group, confirming a CNBC report from Thursday evening. Instead, according to Kohl, it will continue to operate as a separate public company.

Activist firms, including Macellum Advisors, have been pressuring Kohl’s for months to consider selling the company, in large part to free up value associated with Kohl’s real estate.

Macellum argues that Kohl’s should sell and rent out some of its properties to unlock capital, especially during difficult times. Kohl’s, however, has resisted so-called sale-and-leaseback deals, at least on such a large scale.

The company entered into a small sale-and-leaseback deal earlier during the Covid pandemic, according to Peter Boneparte, chairman of Kohl’s board of directors. It recognized a $127 million profit from the sale and lease of its San Bernardino e-commerce centers and distribution centers.

However, on Friday, Kohl’s explicitly noted in a press release that its board is currently reviewing the ways in which the retailer can monetize its properties. The Franchise Group planned to finance part of its acquisition of Kohl by selling some of Kohl’s property to another party and then leasing it back. This likely gave Kohl’s an idea of ​​what value it could get from its own brick-and-mortar stores and distribution centers.

“Now you have an environment where funding has changed so much that it might actually be more attractive to use real estate as a vehicle to monetize,” Bounpart said in a CNBC phone interview.

“When you combine that with what we think about stock levels, it becomes a completely different exercise than in the previous financial environment,” he explained. “It’s no secret that Kohl has a very large asset on his balance sheet: real estate.”

As of January 29, Kohl’s owned 410 stores, leased another 517, and leased land from 238 of its stores. At the time, all of her real estate was valued at just over $8 billion, according to annual accounts.

Pros and cons

Proponents of leasebacks argue that it is a convenient way for companies to raise funds for future growth as long as there is a buyer for the property. But this also leaves the seller with the obligation to honor the lease, as he will be renting the property he just sold.

These leases can become much more difficult to terminate, and rents can fluctuate depending on the market. Kohl’s said in its annual report that a typical store lease has an initial term of 20 to 25 years, renewable for four to eight five-year terms.

In 2020, Big Lots entered into a deal with private equity firm Oak Street to raise $725 million from the sale and lease back of four company-owned distribution centers. This gave the major retailer additional liquidity during the onset of the Covid-19 pandemic.

Also in 2020, Bed Bath & Beyond completed a sale-and-leaseback deal with Oak Street in which it sold approximately 2.1 million square feet of commercial property and generated $250 million in net proceeds. Mark Tritton, CEO of Bed Bath at the time, touted the deal as an attempt to raise capital to invest back in the business. Now, however, Bed Bath is facing another financial crisis as its sales plummeted and Tritton was fired from his position earlier this week.

Oak Street planned to offer funding to the Franchise Group as part of the Kohl’s deal, according to a person familiar with the negotiations, as CNBC previously reported. A spokesperson for Oak Street did not respond to a CNBC request for comment.

Kohl’s on Friday confirmed its plan to conduct a $500 million fast-track share buyback later this year. He cut his earnings forecast for the second fiscal quarter, citing a recent decline in consumer demand amid high inflation over the past decades.

“Clearly the consumer is under even more pressure today,” Kohl CEO Michelle Gass said in a CNBC phone interview. “We’re not immune to it… but Kohl’s stands for value. And at times like this, it’s more important than ever to reinforce that message.”

She added that Kohl’s partnerships with Amazon and Sephora remain in place and are part of the company’s long-term strategy to attract new customers.

“Concluding the board process was absolutely the right answer,” she said.

Kohl’s shares fell more than 20% on Friday, hitting a 52-week low. Shares of the Franchise Group recently fell about 9%, also hitting a 52-week low.

Macellum did not respond to a CNBC request for comment.

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