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Kohl's sale falls apart in shaky retail environment

Posted at 7:40 AM, Jul 01, 2022
and last updated 2022-07-01 18:36:51-04

WISCONSIN — The potential sale of the Kohl's department store chain has fallen apart in a shaky retail environment of rising inflation and consumer anxiety.

Kohl's entered exclusive talks early this month with Franchise Group, the owner of Vitamin Shop and other retail outlets, on a deal worth about $8 billion, or $60 per share.

"Given the environment and market volatility, the Board determined that it simply was not prudent to continue pursuing a deal," said Kohl's Chairman Pete Boneparth.

Kohl's, which is based in Menomonee Falls, said Franchise Group revised its initial offer of $60 per share to $53 in light of the current financing and retail environment.

"You look at interest rates. You look at inflation. You look at the potential of a recession, and this thing just didn't really make sense right now," said Mark Kass, editor-in-chief at the Milwaukee Business Journal.

Kass said the good news is the corporate headquarters looks like it is staying in Wisconsin, but like many retailers, Kohl's has struggled against online sales and needs to make strides.

"They have to improve long-term. They have to kind of refocus internally, look at their sales, look at how they operate, look at their stores. They're going to look at trying to sell some of their real estate and then actually lease back the stores," Kass said.

In a press release, Kohl's announced it is going to expand partnerships like that with cosmetic store Sephora. The company plans include opening smaller stores over the next four years, growing its digital business, and rolling out a self-serve option to buy online and pick up in-store at all locations in 2022.

"That actually sounds great if they're going to revamp some stuff and get their numbers up," Nikki Zalewski.

Zalewski shops at Kohl's often and said she used to work in the IT department at the Kohl's corporate office.

"If for some reason when the economy picks up if somebody does this again, I mean, who's to say but I do think it's good that they're gonna stay," Zalewski said.

Kohl's reports seeing consumer spending slow down in light of inflation. It plans to release 2nd quarter earnings in August.

It was the second time this week that a major retailer retreated from a potential sale. Walgreen’s said Thursday that it was giving up on its plans to sell its Boots business in the UK.

“Kohl’s decision to terminate acquisition talks with Franchise Group comes as no great surprise,” said Neil Saunders, managing director of GlobalData. “Current market conditions are not conducive to corporate dealmaking, with issues around financing and raising debt and capital all acting as barriers to closure.”

Saunders said that while Franchise Group was serious about the bid, it “likely found it increasingly difficult to make the math stack up against a backdrop of a deteriorating retail environment.”

Potential takeovers face stiffening headwinds from rising interest rates that make financing such deals much more expensive.

At the same time, Americans have grown more cautious with their spending and economic indicators have repeatedly hinted at a slowing economy. The government reported Thursday that consumer spending rose at a sluggish 0.2% rate from April to May and that a key inflation rate remained elevated at 6.3%.

Kohl’s struggled with anemic sales before the pandemic. Sales and profits rebounded in 2021, but the department store is now battling higher costs and a pullback from its price conscious shoppers who are being more cautious with their spending in the face of rising prices for gas, food, and just about everything else.

Driving home the weak environment for some retailers, Kohl's said Friday that it now expects sales to be down in high-single digits in the current quarter compared with 2021. It had anticipated sales to be down in the low-single digits previously.

That comes less than two months after Kohl’s Corp. cut its annual earnings and sales forecast following a gloomy first quarter. Sales at stores opened at least year dropped 5.2% compared with 2021.

Shares of Kohl’s Corp., based in Wisconsin, fell more than 19% in premarket trading.

Kohl’s has more than 1,100 stores in 49 states.

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