Kohl’s can turn its meme moment into something more

Kohl’s Corp. should make the most of its meme stock status. Some of the investor fervour around the department store has faded since its recent trip to the moon. But another 6% jump on Monday puts its shares at almost double their April low of about 6 dollars.

It’s an opportunity for the company to use that newfound enthusiasm to raise funds, shore up its balance sheet and engineer a sales revival.

Kohl’s has become a target for retail investors looking to pile into heavily shorted companies with low share prices. Two weeks ago, they sent the stock soaring by as much as 105%, to an intra-day high of more than 21 dollars, the highest level in nearly a year.

The retailer, which has more than 1,100 stores, became a day trader favourite because its market capitalisation has shrunk from about 10 billion dollars as recently as 2021 to about 1.3 billion dollars today. Ahead of its newfound desirability, short interest was about 54%, according to S&P Global Securities Finance.

Although the company reported a narrower than expected decline in same store sales in May, revenue excluding beauty is on track to be 5.6 billion dollars lower this year than in 2021, when it began opening Sephora outlets in its stores, according to Mary Ross Gilbert, an analyst at Bloomberg Intelligence. Those Sephora store-in-stores could generate 2 billion dollars in sales this year, but that won’t be enough to offset the slide caused by increasing competition and strategic missteps.

Net debt, excluding store leases, is expected to be 3.8 billion dollars at the end of this financial year. That’s 3.4 times earnings before interest, tax, depreciation and amortisation- notable because above three times  is where investors start to get nervous. Add in store leases and year-end net debt could hit around 6.5 billion dollars. The company cut its quarterly dividend by 75% in March.

Kohl’s is on its fourth chief executive officer in three years, after Ashley Buchanan was fired for directing millions of dollars of business to someone with whom he had an undisclosed personal relationship. The retailer has appointed Chairman Michael J. Bender as interim CEO, but is looking for a full-timer. 

A tried and tested route for meme stocks is to take advantage of a high stock price and sell new shares to raise funds. A similar strategy could be a winner for Kohl’s.

It’s not clear by how much the retailer could grow its coffers. During the original meme stock frenzy in 2021, GameStop Corp. sold over 1 billion dollars of shares, while AMC Entertainment Holdings Inc. raised billions of dollars across multiple offerings. Even at the highs we saw two weeks ago, Kohl’s hasn’t reached the dizzying heights of those companies yet. But an injection of funds would certainly be useful to the department store chain.

Kohl’s in May refinanced bonds maturing in July with 360 million dollars of new notes backed by 11 distribution centres. 

Most of its other bonds aren’t due until at least 2030. But it has drawn 545 million dollars under its 1.5 billion dollar revolving credit facility, a line of credit that retailers typically use to deal with seasonal swings, which the company classes as short-term debt. Paying this off would provide more financial flexibility for the coming holiday season, particularly if it has to pay higher import tariffs.

Kohl’s has also taken on an extra 1 billion dollars or so in debt since 2021, in the form of financial leases, to fund the creation of the Sephora shop-in-shops; it might also look to reduce these liabilities. 

Shoring up the balance sheet would put Kohl’s on firmer footing, and might make it easier to attract a bold new CEO. The company should also earmark new funds for investment, which could be used to strengthen its offering to customers and help stem the sales decline.

Chief financial officer Jill Timm told investors in May that the retailer was working to address shortcomings, such as restoring jewellery departments which had been displaced by the Sephora shop-in-shops. In addition, it was improving its womenswear offering, sprucing up its private labels and sharpening its prices to compete better with rivals such as TJX Cos Inc.

But other, bigger moves are needed. More than 1,100 stores is too many. Closing some outlets and updating others would be wise. Neil Saunders, managing director of GlobalData, suggests Kohl’s should develop a new prototype store that is better designed and nudges the consumer into spending. Once refined — and accompanied by an updated product range — this concept could be rolled out more widely. That kind of change would be expensive.

Even with the recent jump in its stock price, Kohl’s market capitalisation is a fraction of its real estate value, which Bloomberg Intelligence’s Gilbert estimates at almost 6 billion dollars. That could pave the way for an intervention from an activist investor, or even a bid from a property-focused consortium seeking to take the company private. After all, Macy’s Inc.’s about 8 billion dollar real estate portfolio was what attracted Arkhouse Management Co. and Brigade Capital Management to the department store chain in late 2023.

For a struggling retailer, such an offer might be tempting. Being shielded from the glare of the equity markets, with the associated scrutiny of quarterly earnings, is often seen as a more conducive backdrop for a successful turnaround. But of course, being in private hands means giving up certain opportunities — like the ability to raise cash when your stock is riding high. Ordinarily, that’s a reasonable trade off, but when retail investors come calling, it can lead to a serious case of FOMO.