Why is Kohl’s (KSS) selling itself?
In another sign of the retail apocalypse, America’s largest department store chain, Kohl’s (KSS) could sell itself to Franchise Group Inc. NASDAQ: (FRG).
Kohl’s management is negotiating a sale to Franchise Group, CNN reports. CNN claims Franchise Group is offering $60 a share for Kohl’s. I think the deal shows how bad the department store business is. Franchise is offering $60 a share for a company with over 1,100 stores and $19 billion in annual sales.
Is the Kohl’s deal insane?
Hence, Franchise Group (FRG) which was trading at $42.01 share on 10 June 2022, plans to pay $60 a share for a company that was trading at $45.75. a share. Moreover, The Wall Street Journal claims Franchise Group could offer $1 billion in cash as an incentive to get Kohl’s management to sell.
Disturbingly, The Wall Street Journal speculates Franchise Group wants to finance the acquisition by selling Kohl’s 410 company-owned locations. The Journal notes a similar strategy failed to save another legendary retailer, Toys R S. Toys R Us, declared bankruptcy in 2017 and closed most of its stores in 2018.
Franchise Group Inc. is a holding company that owns several retailers including The Vitamin Shoppe, Pet Supplies Plus, American Freight, Buddy’s Home Furnishings, Sylvan Learning, Braddock Furniture, and Wag N Wash. Franchise claims to operate over 3,000 stores in 12 countries.
Franchise Group specializes in bottom feeding retailers such as rent-to-own store Buddy’s Home Furnishings. Hence, many people will wonder if Franchise Group’s management is insane.
Is Kohl’s Making Money?
Kohl’s (KSS) makes some money. It reported a quarterly operating income of $82 million on 30 April 2022, for example.
Similarly, Kohl’s reported a quarterly gross profit of $1.375 billion and quarterly operating revenues of $3.715 billion on 30 April 2022. The quarterly gross profit from $1.443 billion on 30 April 2021 and $21.137 billion on 31 January 2022.
Kohl’s revenues are shrinking. Stockrow estimates Kohl’s revenues shrank by -4.43% in the quarter ending on 31 January 2022. Kohl’s quarterly revenues fell from $6.499 billion on 30 January 2022 and $3.887 billion in the quarter ending on 30 April 2021. In contrast, the quarterly operating income fell from $273 million on 30 April 2021 and $450 million on 31 January 2022.
Hence, Kohl’s business is shrinking in what is supposedly an economic recovery.
How Much Cash is Kohl’s Generating?
Kohl’s (KSS) burns cash. For instance, Kohl’s reported a quarterly operating cash flow of -$429 million on 30 April 2022.
The quarterly operating cash flow fell from $532 million on 31 January 2022 and $317 million on 30 April 2021. In contrast, Kohl’s had a quarterly ending cash flow of $646 million on 30 April 2022. The quarterly ending cash flow rose from -$206 million on 31 January 2022 and fell from $1.609 billion on 30 April 2021.
Thus we can see why the management wants to sell Kohl’s. The company makes less money and burns cash. Moreover, its ability to make more money is falling.
Kohl’s has less cash. Its cash and short-term investments fell from $1.609 billion on 30 April 2021 to $1.587 billion on 31 January 2022 to $646 million on 30 April 2022.
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What Value Does Kohl’s Have?
Moreover, Kohl’s (KSS) has more debt. Kohl’s total debt grew from $6.273 billion on 30 April 2021 to $6.785 billion on 31 January 2022 to $7.203 billion on 30 April 2022. Hence, Kohl’s added almost $1 billion in debt in one year.
However, Kohl’s assets show the strategy of selling the stores could make sense. To explain, Kohl’s Total Assets grew from $14.689 billion on 30 April 2021 to $15.054 billion on 31 January 2022 to $15.253 billion on 30 April 2022.
Hence, Kohl’s assets are gaining value as the company’s ability to make money seems to be shrinking. A strategy of selling assets to generate cash could make sense. Especially in department stores that are a shrinking business.
Can Franchise Group Make money from Kohl’s?
Currently, Franchise Group Inc. (FRG) makes some money. It reported a quarterly income of $130.37 million, a quarterly gross profit of $485 million, and quarterly revenues of $1.136 billion on 31 March 2022.
Interestingly, Stockrow estimates Franchise Group’s revenues grew by 82.27% in the quarter ending on 31 March 2022. The quarterly revenues rose from $942 million on 31 December 2021 and $621 million on 31 March 2021.
Franchise Group is growing. Its quarterly operating income grew from $52.98 million on 31 March 2021 to $130.37 million on 31 March 2022. Similarly, the quarterly gross profit grew from $264 million on 31 March 2021 to $485 million on 31 March 2022.
However, the Franchise Group’s ability to generate cash could be falling. Franchise Group’s quarterly ending cash flow fell from $184.91 million on 31 March 2021 to $149.60 million on 31 March 2022. Plus, the quarterly operating cash flow fell from $75.75 million on 31 March 2021 to $62.16 million on 31 March 2022.
Why is the Franchise Group trying to buy Kohl’s?
The Franchise Group has more debt. Its Total Debt grew from $1.929 billion on 31 March 2021 to $2.5 billion on 31 March 2022. Yet its management wants to buy a company with $7.023 billion in debt.
Notably, the Franchise Group has a tiny amount of cash. It had $150 million in cash and short-term investments on 31 March 2022. The cash and short-term investments fell from $165 million on 31 March 31 March 2021. Although, Franchise has added value. Its total assets grew from $2.862 billion on 31 March 2021 to $3.853 billion on 31 March 2022.
My guess is the Franchise Group’s management hopes to mortgage Kohl’s real estate to get more credit. However, I cannot see what Franchise Group will do with Kohl’s business department stores. Will they franchise department stores or run them?
Can Franchise Group Make Money from Department Stores?
Department stores are a shrinking business. Statista estimates the number of US Department Stores fell from 7,885 from 2015 to 5,670 in 2022. Furthermore, projects the number of American department stores will fall to 5,349 in 2023 to 5,010 in 2024 and 4,678 in 2025.
I have to wonder how Franchise will make money from a shrinking business. My suspicion is that Franchise Group cannot make money from department stores so its management plans to sell assets to raise cash.
In the final analysis, I consider Kohl’s (KSS) a dying company in a dying business that investors need to avoid. Similarly, the same investors need to avoid Franchise Group (FRG) because I cannot see how either company can compete with Amazon (AMZN).