Kohl's Proves You Can Pay A CEO $60M And Have Nothing To Show For It

Retailers fail or succeed for one reason - the ability of their CEO to do their job. I can make the argument that Walmart is doing very well as a company thanks to the leadership of their CEO, Doug McMillon. I would be remiss if I didn't mention that I believe Walmart should replace McMillon no later than 2023. McMillon has been CEO since 2014; that's enough. It won't happen but my pick for the next CEO of Walmart is Satya Nadella.

And then there's Kohl's. What a disaster of a company. Unlike Walmart who has Doug McMillon, Kohl's has Michelle Gass. Michelle has done such a poor job of being CEO that Ancora Holdings Inc., the activist investor that helped install three directors on the?Kohl’s?Corp.?KSS?-2.34%▼?board last year, is now trying to force out Kohl's chairman and chief executive.

In a letter sent to the Kohl’s board, Ancora said the retailer needs new leadership after a slow recovery from the pandemic,?a sharp drop in profit?and the?scrapping of a potential sale?to?Franchise Group?Inc.?FRG?-0.86%▼

Ancora’s letter?recommends the replacement?of?Michelle Gass, chief executive officer of the company since 2018, and?Peter Boneparth, who became chairman earlier this year but has been on the board since 2008.

Below is the letter from Ancora:

[Since collaborating with you on an incremental refresh of the Board of Directors (the “Board”) in early 2021, we have spent nearly 18 months privately engaging with leadership to share recommendations for reversing the Company’s sustained underperformance and unlocking value for long-suffering shareholders. We thoughtfully withheld public critiques during this period to provide Kohl’s time to bounce back from the COVID-19 pandemic, conduct a productive review of strategic alternatives and produce a viable standalone plan that investors could rally behind. Much to our disappointment, Kohl’s has failed to deliver on each of these critical priorities under Chairman Peter Boneparth (who has been a director for nearly 15 years) and Chief Executive Officer Michelle Gass (who has been a c-level leader for nearly a decade).

If the Boneparth-led Board remains firmly committed to its preferred standalone path, we contend that Kohl’s needs new leadership with demonstrated experience in cost containment, margin expansion, product catalog optimization and, most importantly, turnarounds.?We appreciate that Chairman Boneparth has allowed us to share private feedback with him in recent months. We also want to underscore that Michelle Gass, the Company’s current Chief Executive Officer, is a talented leader who deserves credit for establishing an innovative partnership with Sephora USA, Inc. and holding the organization together during the pandemic. We have been proud to invest in a business that maintains strong gender diversity in the c-suite, as it aligns with our recognized focus on installing female leaders in more corporate boardrooms.1?However, our view regarding the need for new leadership at Kohl’s is simply based on the facts.

During the Boneparth era, the Board has created an environment in which Ms. Gass is no longer well-positioned to lead.?The Board’s decisions to reject multiple indications of interest in the $64-$65 per share range in the winter and then proceed with an opaque strategic review throughout the spring – as financing markets gradually deteriorated – have destroyed billions of dollars in equity value and painted the Company into a corner. With a failed review of alternatives and recent credit downgrade now casting shadows over what is a shrinking business, we estimate that Kohl’s has begun to trade at a steep discount to its liquidation value. The onus is now on management to begin executing flawlessly against a backdrop that includes high inflation, intense competition and recessionary headwinds. Unfortunately, the facts indicate Kohl’s lacks the right leadership for the exceedingly challenging period ahead – one that will require the Company to reverse high-single-digit sales declines, contain capital expenditures and operating expenses, and immediately optimize fulfillment, marketing and merchandising.

It gives us no satisfaction to note that Kohl’s has produced negative total shareholder returns (“TSR”) over every relevant horizon. The chart can be found here: https://www.businesswire.com/news/home/20220922005234/en/Ancora-Sends-Letter-to-the-Board-of-Directors-of-Kohl%E2%80%99s-Regarding-the-Need-for-a-New-Chairman-and-Chief-Executive-Officer-with-Turnaround-Experience

Although Kohl’s has cited the pandemic as a pretext for recent performance issues, this defense does not hold up. The fact is that Ms. Gass has been a c-level leader at Kohl’s since 2013 – and TSR is negative over that period as well. Additionally, as Kohl’s has languished coming out of the pandemic, many retail peers have recovered and seen their sales dramatically increase over the past 12-18 months.

As the Board hopefully takes time to assess our recommendation, we urge it to consider some other germane facts:

• Kohl’s has had an unsettling level of c-suite turnover in recent quarters as sales have declined, indicating suboptimal personnel selection on the part of Ms. Gass. We are also dismayed that the Board chose to not disclose the recent departures of certain senior executives, including the Company’s Chief Merchandising Officer, until after the 2022 Annual Meeting of Shareholders (the “Annual Meeting”).
• Kohl’s’ most recent strategic plan received a very poor reaction from the market when it was announced on March 7, 2022, suggesting that Ms. Gass is not commanding the trust of the investment community.
• Kohl’s has recently failed to keep up with peers like Macy’s Inc. and Dillard’s Inc, with its net sales and same store sales declining as costs remain elevated. Similar to how it handled recent executive departures, the Board did not disclose a material financial miss prior to a critical shareholder vote at this year’s Annual Meeting. These disclosure decisions suggest to us – and presumably other shareholders – that the Board has been focused on maintaining control above all else.

We would also be remiss not to note that Mr. Boneparth and his fellow directors deemed it appropriate to award Ms. Gass nearly $60 million in compensation between fiscal year 2017 and fiscal year 2021, with her most recent fiscal year compensation being more than 1,000x that of the median employee’s compensation. We recognize that corporate leaders need to be compensated in line with market norms and their peers. Nonetheless, given that Kohl’s has produced years of poor returns and has started to shrink at an alarming rate, we do not support the Board continuing to expend shareholders’ capital on present leadership. Ms. Gass’ well-documented pedigree as a marketing and merchandising expert does not seem as pertinent right now given Kohl’s has pressing challenges related to its financial position, inventory levels and operations.?Looking ahead, we believe shareholders’ capital should be utilized to compensate a new Chairman and Chief Executive Officer that possess operating expertise and turnaround pedigree.

In closing, we want to stress that a number of stakeholders are responsible for the abysmal performance and immense value destruction at Kohl’s. But the combination of the Boneparth-led Board’s ineffective leadership and management’s poor execution, as evidenced by the Company’s numbers, compel us to call for a new Chairman and Chief Executive Officer at this critical fork in the road. We urge the Board to announce a thoughtful succession plan and run a robust search process that accounts for interviewing a highly diverse group of qualified candidates. Ultimately, Kohl’s needs leadership that can design and implement a precise turnaround strategy to ensure the Company averts peril and starts producing enhanced value for shareholders over the long-term.] End of letter.

Michelle Isn't Worth It

Did you catch the part about Kohl's paying Michelle Gass $60M in compensation between 2017 and 2021? The facts are clear - Michelle isn't worth it. I have been a vocal critic of Michelle and Kohl's for several years. At a time when the company should be growing, it's failing. Miserably. Why? Because their CEO isn't doing her job.

Everyone who reads my newsletters, articles, and LinkedIn posts, know that I have one rule that's written in stone: I don't criticize without offering suggestions. In the case of Kohl's and Michelle Gass, I've recommended several strategies. I know that my ideas make sense based on the number of current and former Kohl's executives who have reached out to me supporting my ideas. Boneparth and Gass may have the support of the board, but they don't have the support of the executives, store management, or associates.

Among the ideas that I have shared with Kohl's executives are the following:

1. Do whatever it takes to get Amazon to acquire Kohl's.
2. Instead of only negotiating a returns program with Amazon, arguably one of the worst ideas in business, negotiate an agreement whereby Amazon also agrees to open specially designed Amazon Fresh supermarkets inside every Kohl's store. Supplement the network with automated micro-fulfillment centers to automate online grocery and e-commerce orders.
3. Open mini-technology centers similar to Apple Stores, inside each Kohl's. Partner with Amazon to provide the best prices on all electronics.
4. Expand the returns program to include Home Pickup of returned products, and also delivery of products from other retailers. Acquire of form a partnership with Point Pickup. Create a separate business division - Kohl's Logistics - to offer retailers collaborative logistics solutions. (Kohl's can save millions of dollars in its supply chain by implementing a different strategy.)
5. DO NOT partner with Sephora. Kohl's should create its own cosmetics and hair experience for its customers. For example, open 'PELO' shops curated with the finest brands and private label products for skincare, hair, fragrance, bath and body, tools and brushes, and gifts. Consider an equity investment in Ulta Beauty and open Ulta Beauty stores inside each Kohl's store. (PELO is Spanish for hair. It's a name I chose. Kohl's can choose any name they wish.)
6. If Kohl's chooses to partner with Sephora, go all the way and form a partnership with LVMH, the owner of Sephora, and open specially designed LVMH sections for their 75 distinguished houses across six different sectors:

• Wine & Spirits
• Fashion & Leather Goods
• Perfumes & Cosmetics
• Watches & Jewelry
• Selective Retailing

The challenge for Kohl's will be getting LVMH to curate products in a price range for Kohl's customers while also trying to attract high-end consumers. What I recommend won't be easy but if they get it right...Wow! Lots of potential.

I recently made the following suggestion to several executives at Kohl's. Michelle Gass should fly to San Francisco, CA along with her board of directors, to meet with Gap's board of directors. Executives from Ancora Holdings should also attend. The plan is simple: Michelle will recommend that Gap and Kohl's merge. Michelle will recommend that she become the CEO of the combined companies, but Ancora Holdings will have the right to force Michelle to resign, and help select a new CEO to run the combined companies. Michelle Gass will receive a hefty severance package.

I believe the following individuals are most qualified to become the CEO of Kohl's, or the CEO of Kohl's Gap:

• John Furner, President and CEO of Walmart
• John David Rainey, EVP CFO, Walmart
• Calvin McDonald, CEO of Lululemon

There are of course many other executives that I could have named. However, I believe the problems facing Kohl's requires a special set of skills and experience.

I normally don't recommend that two mediocre companies merge. However, based on my review, I believe there is exceptional value that can be unlocked by combining Kohl's and Gap by divesting several brands, logistics facilities, stores, and other real estate. I also believe a very interesting and engaging retail experience can be created.

The feedback was very positive for the recommendation, but none of the executives thought Michelle or Peter Boneparth, would support the idea. I made the recommendation as a way for Michelle and Peter to call Ancora Holding's bluff - Michelle may not be positioned to lead at Kohl's but if she negotiates a merger with Gap, does that change the situation?

It's only a matter of time before Michelle and/or Peter are forced out of Kohl's. When senior executives become a bigger story than the retailer they work for, they often don't last long. I wish nothing but the best for Michelle and the other executives at Kohl's.

ONE MORE THING

Beyond Meat has had a difficult year. The stock has dropped 73% in 2022 and has fallen 85% since its 52-week closing high in September 2021. The company reported disappointing second-quarter results and issued a weak full-year?outlook, despite a growing demand for meat and dairy?alternatives. The stock hit an all-time low this week and has been grappling with management issues after Chief Operating Officer Doug Ramsey was arrested for allegedly punching another man and biting his nose. (Even Hollywood wouldn't have written something like this happening but it did.)

“Doug Ramsey, Beyond Meat’s Chief Operating Officer, has been suspended effective immediately. Operations activities will be overseen on an interim basisby Jonathan Nelson, Senior Vice President, Manufacturing Operations,” the company said in a statement.

Beyond Meat?shares jumped after the plant-based meat company and Taco Bell parent?Yum! Brands?announced a partnership.?

Beyond Meat and Yum! announced on Wednesday that Taco Bell will be launching the Beyond Carne Asada Steak at certain Taco Bell locations in Ohio starting Oct. 13 for a limited time. The Carne Asada Steak will be featured in a quesadilla and priced the same as a traditional steak quesadilla, but can also be added to any Taco Bell menu item, according to a?press release.

“We know that consumers are looking for diverse protein options that are better for the planet without compromising on taste, so we’re incredibly excited to launch our brand-new, innovative Beyond Carne Asada Steak,”?Dariush Ajami, Beyond Meat’s chief innovation officer, said in the news release.

The partnership with Yum! means nothing. Beyond Meat had a partnership with McDonald's that generated lots of press. What happened? Despite signing up for a three-year partnership with Beyond Meat, McDonald's has concluded its McPlant tests as planned, without any further expansions announced. Peter Saleh, an analyst at financial services firm BTIG, told QSR Magazine in March that "Franchisee sentiment on the sales performance was underwhelming. Their assessment was that they don't see enough evidence to support a national rollout in the near future." At that point, franchises were only selling 20 McPlants per day, which was well short of the target of 40-60 McPlants per day.

I am a workout fanatic. I lift heavy weights. I kick and punch heavy leather bags. I eat a ton of protein (2 grams per pound of bodyweight daily = 414 grams). I eat meat and I do so guilt free. If given the choice of eating a Beyond Meat burger, an Impossible Burger, or a bowl of Blue Buffalo dog food, I'm eating the dog food. Why? Because it's better for me than anything served by Beyond Meat or Impossible Foods. Don't believe me? Look at the ingredients.

Until next week,

Brittain Ladd