Kohl's shares sink after ending sale talks with Franchise Group, lowering outlook
The retailer said talks fell apart due to a 'significantly deteriorated' financing and retail environment
Kohls shares tumbled Friday after the retailer terminated sale talks with Vitamin Shoppe owner Franchise Group and lowered its second-quarter sales outlook.
In June, Kohls entered a three-week exclusive negotiation period with Franchise Group, who offered a bid of $60 per share that valued the company at about $8 billion. The exclusive negotiation period was designed to finalize due diligence and financing arrangements.
On Friday, Kohls confirmed that Franchise Group had submitted a revised proposal at $53 per share without definitive financing arrangements to consummate a transaction. Despite a concerted effort by both sides, the parties ultimately faced "significant obstacles to reaching an acceptable and fully executable agreement" as a result of a "significantly deteriorated" financing and retail environment.
"Given the environment and market volatility, the Board determined that it simply was not prudent to continue pursuing a deal," Kohl's board chairman Peter Boneparth said in a statement. "As always, the Board remains open to all opportunities to maximize value for shareholders, and we look forward to actively engaging with our shareholders as we move forward to ensure we are considering their perspectives in our plans."
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Prior to entering an agreement with Franchise Group, Kohls received two unsolicited bids in the range of $60.00 to $65.00 per share. However, Kohls ultimately rejected the bids, noting they did not adequately value the company.
The company proceeded to adopt a limited duration shareholder rights plan, commonly referred to as a poison pill, and began working with Goldman Sachs and PJT Partners to engage with interested parties.
In total, Kohls engaged with more than 25 interested parties. Kohl received bids as high as $72 a share in late March and early April. However, they lacked committed financing and were subject to due diligence.
Kohls has been facing pressure to explore a sale by activist investors Macellum Advisors GP LLC and Engine Capital.
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Though the sale talks with Franchise Group have fallen apart, Boneparth said Kohl's is financially strong, generates substantial free cash flow and has a clear plan to enhance its competitive position and improve performance over the long term.
However, due to continued inflationary pressures, Kohl anticipates a softening in consumer demand and now expects second quarter sales to be down in the high-single digits, compared to previous guidance of down low-single digits relative to last year. Kohls added that it is taking actions to navigate inflation, which it will share when it releases second quarter earnings on Aug. 18.
On Friday, Kohls' board of directors reaffirmed its commitment to executing a $500 million accelerated share repurchase program following its second quarter earnings. The board is also currently reviewing other opportunities to unlock shareholder value, including monetizing portions of Kohls' real estate portfolio.
Kohls plans to expand its partnership with Sephora to more than 850 stores by the end of 2023, putting the company on a path for $2 billion in annual omnichannel sales by 2025, and open more than 100 smaller format stores over the next four years, which is estimated to drive a than $500 million annual sales opportunity. In addition, Kohls will continue to grow its digital business, roll out self-serve buy online and in-store pick up to all stores in 2022 and continue to test self-serve returns and check-out.
As of the time of publication, shares of Kohls have fallen 40% year to date.