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The Ratings Game: Kohl’s soars after takeover offer, but skeptical analysts question the retailer’s real estate value

Kohl’s Corp. stock soared 31.8% in Monday trading to buck a highly negative market trend, after the department store retailer confirmed that it had received buyout offer.

The Wall Street Journal first reported talk of a takeover, writing that a consortium backed by Starboard Value LP proposed a deal valued at $9 billion. Kohl’s confirmed receipt of an offer on Monday and said the company “will determine the course of action that it believes is in the best interests of the company and its shareholders.”

Investors may be upbeat about the offer, but UBS analysts are skeptical it would happen as described. The research group maintained its sell stock rating and $38 price target.

“The key is we believe it could be challenging for the investor group to get financing for two reasons: 1) We doubt Kohl’s real estate has enough value to serve as
adequate collateral. 2) We don’t believe an operational turnaround plan exists which will convince creditors to lend enough capital to make the deal happen,” analysts led by Jay Sole wrote.

Read: Kohl’s, Abercrombie & Fitch, Canada Goose downgraded with inflation expected to put fashion and retail under pressure in 2022

UBS estimates the average value of each of Kohl’s 409 stores at $6 million to $8 million, with few “hidden gems” in the bunch.

“UBS Evidence Lab data and our work suggest Kohl’s owns few stores in high-value real estate markets, such as Manhattan,” the note said.

“We attach a $0.8 billion to $1.9 billion valuation to Kohl’s distribution centers and headquarters. Importantly, our $3.25 billion to $5.00 billion valuation is really only applicable to a sale/leaseback strategy. A hypothetical real estate developer buying a Kohl’s asset in order to repurpose it would likely value the property at a 20% to 25% discount because of the numerous costs and challenges of repurposing retail
real estate.”

Analysts also think the retailer will continue to lose market share, mostly to off-price retailers like TJX Cos. TJX, +0.15%, Amazon.com Inc. AMZN, -1.93% and other brands.

Also: Under Armour used the pandemic to make long-lasting improvements to the business, analysts say

Cowen analysts maintained their outperform stock rating and raised their price target to $75 from $73.

“Cowen gives 60% to 70%-plus likelihood of deal closing if financing is secured through a $3 billion-plus sale leaseback, a $2 billion of equity contribution and a 3.0X leverage ratio; alternatively, if a sale leaseback does not occur, a deal may require a 4.0X leverage ratio, holding the $2 billion equity contribution constant,” analysts led by Oliver Chen wrote.

Cowen thinks the retailer’s turnaround “is on the right track,” citing the Sephora partnership and other initiatives, but results would take more time.

Kohl’s released a comment to that effect on Jan. 18 following a statement from activist investor Macellum Advisors GP LLC that said leadership is “materially mismanaging” the company.

“Based on our performance in 2021, we are positioned to exceed our key 2023 financial goals two years ahead of plan,” the letter said, also noting the Sephora partnership as well as a refreshed board and other initiatives.

“We remain confident in our future and have accelerated our share repurchase activity.”

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The news sent shares of other department stores up during Monday trading. Macy’s Inc. M, +12.69% shares rose 6.96% and Nordstrom Inc. JWN, +9.10% was up 2.8%.

Macy’s has faced its own activist investor pressure, with activist investors Jana Partners LLC encouraging the company spin off its e-commerce business. Cowen analysts have estimated the enterprise value of that business at $11.5 billion.

Kohl’s stock has run up 36.5% over the last year while the S&P 500 index SPX, -2.20% has gained 10.2% for the period.

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