Kohl's betting big on Sephora, smaller stores amid pressure from activist investors

Kohl's unveiled new financial targets

As Kohl's faces growing pressure from activist investors to pursue a sale, the company is looking to become the retailer of choice for active and casual lifestyles and a destination for iconic national brands.

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KSS KOHL'S CORP. 22.73 -0.95 -4.01%

The company unveiled new financial targets during its investor day presentation Monday, including annual sales growth in the low single digits, earnings per share growth in the mid to high single digits, a 7% to 8% annual operating margin, operating cash flow of more than $5.5 billion and approximately $2.5 billion of free cash flow between 2022 and 2024.

KOHL'S ADDING 400 SEPHORA SHOPS IN 2022

Kohl's, which has a growing base of 65 million customers, plans to open more than 100 new smaller-format stores over the next four years. It also plans to turn Sephora into a $2 billion business by opening 850 locations by 2023, grow its digital business to $8 billion by "enhancing discovery and shopability" on Kohls.com and acquire millions of new customers through its partnership with Amazon Returns.

This year, the company will open 400 Sephora stores, roll out self-service buy online and pickup in store to all of its locations and continue to test self-serve returns and checkout. 

Sephora

Kohl's plans to turn Sephora into a $2 billion business by opening 850 locations by 2023 (Image courtesy of Kohl's. ©2017 Kohl's Department Stores, Inc. / Fox News)

The company will also focus on its active and casual categories and plans to grow its dress business, expand its outdoor and swim categories and broaden its inclusive size offerings.

Kohl's will expand its media network, increase daily Kohl's Card rewards to 7.5%, repurchase at least $1 billion in company stock in 2022 as part of a $3 billion share repurchase program and introduce a co-branded credit card in 2023.

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In January, Kohl's received a $9 billion takeover offer at $64 per share from Starboard Value Group, a group led by Acacia Research Corp. In addition, Sycamore Partners reached out to Kohl's with plans to offer at least $65 per share, Reuters reported. 

The offers came as two activist investors, Macellum Advisors GP LLC and Engine Capital, urged the company to consider exploring a sale. Macellum has a roughly 5% stake in Kohl's, while Engine has a roughly 1% stake. 

Following a review by independent financial advisers and upon the recommendation of its finance committee, Kohl's rejected the takeover offers, noting they undervalue the company "in light of its future growth and cash flow generation." The company has adopted a limited-duration shareholder rights plan to ensure it can adequately review future expressions of interest, including potential further engagement with interested parties. 

The review process for future expressions of interest is being overseen by the company's finance committee, which is composed exclusively of independent directors. Kohl's is also working with financial advisers Goldman Sachs and PJT Partners and has asked Goldman to engage with interested parties.