Kohl’s property sale on the table after deal talks fall apart

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

Joe Raedle | Getty Images

Kohl’s may not be selling his business after all. But it now wants to sell some of its real estate, reversing its previous stance.

The retailer announced Friday that it has ended deal talks with The Vitamin Shoppe owner Franchise Group, confirming Thursday night’s CNBC coverage. Instead, Kohl’s said, it will continue to operate as a standalone publicly traded company.

Kohl’s has been pressured for months by activist firms, including Macellum Advisors, to consider selling the company, largely to unlock the value of Kohl’s property.

Macellum has argued that Kohl’s should sell and lease back some of its real estate as a way to free up capital, especially during difficult times. However, Kohl’s has resisted so-called sale leaseback transactions, at least on such a large scale.

The company has entered into a small sale-leaseback deal earlier in the Covid pandemic, according to Peter Boneparth, Kohl’s chairman of the board. It made a profit of $127 million by selling and leasing back its San Bernardino e-commerce fulfillment and distribution centers.

On Friday, however, Kohl’s explicitly noted in its press release that the board is currently re-evaluating how the retailer can monetize its real estate. Franchise Group planned to finance part of the Kohl acquisition by selling some of Kohl’s real estate to another party and then leasing it back. This probably gave Kohl’s an idea of ​​what value it could get for its own brick and mortar stores and distribution centers.

“Now you have an environment where financing has changed so much that it may actually be more attractive to use real estate as a way to make money,” Boneparth told CNBC in a telephone interview.

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

As of January 29, Kohl’s owned 410 locations, leased an additional 517, and leased 238 of its stores. All of the real estate owned at the time was valued at just over $8 billion, an annual filing shows.

Pros and cons

Proponents of sale-leaseback deals argue that it is a convenient way for businesses to raise money for future growth, as long as there is a buyer for the property. But it also causes the seller to meet rental obligations as he would be renting the property he just sold.

Those leases can become much more difficult to break and rents can fluctuate by market. Kohl’s said in its annual filing that a typical retail lease has an initial term of 20 to 25 years, with four to eight five-year renewal options.

In 2020, Big Lots struck a deal with private equity real estate company Oak Street to raise $725 million by selling and leasing back four distribution centers owned by the company. It gave the big box retailer extra liquidity during the onset of the Covid-19 pandemic.

Also in 2020, Bed Bath & Beyond entered into a sale-leaseback transaction with Oak Street, selling approximately 2.1 million square feet of commercial real estate and generating $250 million in revenue. Mark Tritton, Bed Bath’s CEO at the time, praised the deal as a step in raising capital to reinvest in the company. Now, however, Bed Bath faces another cash crunch as sales plummet and Tritton was sacked from office earlier this week.

Oak Street was planning to offer funding to Franchise Group in a Kohl’s deal, CNBC previously reported, according to a person familiar with the discussions. An Oak Street representative did not respond to CNBC’s request for comment.

Kohl’s Friday confirmed its plan to conduct a $500 million accelerated share repurchase later this year. It lowered its revenue forecast for its fiscal second quarter, citing a recent weakening in consumer demand amid decades of high inflation.

“Clearly, consumers are under even more pressure today,” Kohl’s CEO Michelle Gass told CNBC in a phone interview. “We’re not immune to that… but Kohl’s stands for value. And at times like these, it’s more important than ever to amplify that message.”

She added that Kohl’s partnerships with Amazon and Sephora will continue and are part of the company’s long-term strategy to win new customers.

“The conclusion of the board process was definitely the right answer,” she said.

Kohl’s stock ended Friday nearly 20% lower, hitting a new 52-week low of $27.65 at one point. Shares of Franchise Group ended the day at 7.5% and also hit a new 52-week low of $31.67 in trading.

Macellum did not respond to CNBC’s request for comment.