While Franchise Group and the board of directors of Kohl’s continue to try to work out a deal for the former to buy the latter, a little speculation on what the retailer would look like in two years if it happens presents some intriguing – occasionally troubling – scenarios.
While the deal may never happen, or another suiter will end up with the business, the potential outcome for Kohl’s could show a very different business model…if not necessarily a better one. We’re basing our timing on the deal being completed this year, the new owners getting their plan in place in 2023 and a new model emerging the year after.
Real Estate
Kohl’s will be operating approximately 850 stores, having closed about 300 locations once Franchise Group takes over. These closed doors will largely be poorly performing units but will also include a few choice locations ripe for offloading to a higher paying renter.
Of course, all of the real estate itself would now be in the hands of a third party, Franchise having sold off Kohl’s 410 locations it owns as well as the 240 or so ground leases. The 517 stores it just leases would not be included in any deals, obviously.
Look for some of those 300 or so closed stores to go to other Franchise Group brands, including American Freight, Badcock and Buddy’s home furnishings. Repurposing.
With the sale of its real estate – and Franchise would recover a good part of its $8 billion purchase price since the property is believed to be valued for that much – Kohl’s would now be paying rent to its new landlords. It’s difficult to put a dollar figure on what that would do to its balance sheet since there are few comps out there for comparison. Needless to say, it would put a big hit on its bottom line…although as part of Franchise we may no longer see its individual numbers.
Merchandising
While none of the suitors who have been chasing Kohl’s for the past year or two have talked much if any about what they would do to fix the retailer’s merchandising profile – and Franchise has scant experience dealing with an operation of this size and scale – there are a few obvious developments to expect.
First off, Franchise would no doubt look to add Vitamin Shoppe and Pet Supplies Plus shop-in-shops within the Kohl’s footprint. Vitamin, if paired correctly with the existing Sephora departments might in fact be a nice fit. Don’t be surprised to see separate entrances for these businesses to get dedicated shoppers into those areas.
Franchise might also add some Buddy’s or Badcock home furnishings departments into some of the larger Kohl’s, though the retailer’s pedigree has never been strong in the broader furniture and décor categories beyond home textiles and housewares.
As for the rest of the store? It’s anybody’s guess.
Management
One has to think that as hard as Michelle Gass has fought to keep Kohl’s separate and apart from anyone else, she wouldn’t necessarily be a team player under new ownership. This could be entirely wrong but even though Franchise says it only wants to buy companies with strong management, retail history of existing management being kept on following unsolicited takeovers is pretty slim.
Who would Franchise bring in to run the place? There is certainly no shortage of talent out there and one has to think they would hire someone with strong retail credibility. There doesn’t appear to be anybody in the existing Franchise management team who could step in, given the strong finance experience one finds there.
We may not know who and we may not know when but there’s reasonable expectations that we know what…as in what will happen to current management once the deal is done.
Franchising
Even though the very name of the company signifies it focuses on franchise models – its website proclaims “Franchise Group, Inc. helps catapult franchise brands forward by providing financial acumen, operational know-how, infrastructure and support that are essential to succeed.” – one has to assume that is not the plan here. Does anyone really need – more importantly, want – a Kohl’s franchise? Doubtful.
Finances
Beyond the issue of now having to pay rent and no doubt kicking some special dividends and management fees up to Franchise, what would all of this mean for Kohl’s ongoing financial well-being? As mentioned, we probably won’t see any hard numbers since Franchise will not be required to break them out but none of these things speculated on address the fundamental problem facing Kohl’s: it is stuck in the increasingly shrinking middle market, squeezed from below by Target and Walmart and from above by Macy’s, Amazon and TJX and its off-price brethren. It cannot reposition itself radically enough to change that and nothing coming along is going to reverse the polarization of the marketplace. That’s a very difficult fix.
Franchise Group may or may not get this deal done and while it’s quite possible the numbers will work out well on a short-term basis if they do, longer term one has to be skeptical. Speculation is intriguing but reality is much more harsh.
WarrensReport 