Kohls shares fall after Franchise Group talks fail

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Kohls shares fall after Franchise Group talks fail

Kohls shares fell on Friday after the retailer ended sale talks with the franchise owner Franchise Group and lowered its second-quarter sales outlook.

In June, Kohls entered a three-week exclusive negotiation period with Franchise Group, which offered a bid of $60 per share that valued the company at about $8 billion. The exclusive negotiations period was designed to finalize due diligence and financing arrangements.

Kohls confirmed on Friday that Franchise Group submitted a revised proposal at $53 per share without definitive financing arrangements to consummate a transaction. The parties faced significant obstacles to reach an acceptable and fully executable agreement because of a significantly deteriorated financing and retail environment, despite a concerted effort by both sides.

Kohls received two unsolicited offers in the range of $60.00 to $65.00 per share prior to entering an agreement with Franchise Group. Kohls rejected the bids, noting that they did not adequately value the company.

The company adopted a limited duration shareholder rights plan, commonly known as a poison pill, and began working with Goldman Sachs and PJT Partners to engage with interested parties.

Kohls engaged with more than 25 interested parties in total. Kohl received bids as high as $72 a share in late March and early April. They lacked committed financing and were subject to due diligence.

Kohls is facing pressure to explore a sale by activist investors Macellum Advisors GP LLC and Engine Capital.

Boneparth said Kohl's is financially strong, generates substantial free cash flow and has a clear plan to improve its competitive position and improve performance over the long term, even though the sales talks with Franchise Group have fallen apart.

Kohl expects the second quarter to be down in the high-single digits, compared to previous guidance of down the low-single digits compared to last year due to continued inflationary pressures. Kohls is taking actions to navigate the inflation that it will share during its second quarter earnings on August 18.

The board is currently reviewing other opportunities to unlock shareholder value, including monetizing portions of Kohls' real estate portfolio.

Kohls is expected to open more than 100 smaller format stores in the next four years, and 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 the end of 2025, and will open more than 100 smaller format stores over the next four years, which is estimated to drive a $500 million annual sales opportunity.

In addition to that, 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.

Shares of Kohls have fallen 40% year to date as of the time of publication.