With all due apologies to the late Rick Nelson, “You can’t love everybody so you’ve got to love your…customers.”
Those are words of wisdom Kohl’s might want to try to remember.
Last week, in reporting another dismal quarter with declines in everything but inventory levels, the entry-level department store chain announced it was initiating a $500 million “accelerated” stock repurchase program. With investors bailing out of the stock – down almost 50% since early June – and takeover attempts still swirling around the rumor mill, the retailer is trying to appease shareholders, hoping they will give it some breathing room to try to fix its problems.
Big mistake.
All Kohl’s has to do is look at how this strategy played out across the strip center at Bed Bath & Beyond. Another retailer with a myriad of problems, declining sales, evaporating profits and sharks circling the waters, BBB decided to pay out more than $1 billion in stock buybacks over the past two years. As its share price continued to fall – until the recent ridiculous spurt from meme-crazed investors that is now petering out – the buybacks proved to be an incredibly poor use of its funds.
A year ago, Bed Bath had over a billion dollars in cash sitting on its books, but with the buybacks combined with operating losses and investments in its stores and systems, it is down to about $100 million and desperately looking for new credit lines to keep itself afloat.
One can make the argument – difficult to prove – that BBB used the stock buybacks to keep its activist investors happy, hoping they would remain a little less active. They were the ones who led the overthrow of the former administration and brought in new management to try to turn the place around. It didn’t work but the company kept up the stock buybacks letting its institutional and private equity owners get some of their money back.
Now it seems Kohl’s is trying a similar ploy. Yes, it’s also spending some $825 million in capital expenditures to expand its Sephora roll-out, open more smaller stores and generally refresh its existing store base. That’s good.
But, like BBB, it is diverting a fair chunk of its precious cash for the stock buybacks. Business history shows this is generally a poor use of capital which benefits investors but hardly ever the company itself.
Imagine if that $500 million was added to store improvements. How much faster could the Sephora roll-out go, how much better would the stores look, how quickly could it open the compact formats it says are going to be an important part of its future? How much better a company would Kohl’s be in the long-term?
The Wall Street Journal reported Kohl’s free cash flow will be down to $327 million this year, its lowest level since 2007. If that sounds an awful lot like the situation at BBB…well, it’s because it is. Retail businesses need to keep focused on their customers first. Do that and the share price will take care of itself.
Kohl’s is trying to love everybody but it may end up hating itself.
WarrensReport 