Kohl's ends sale talks with Franchise Group, lowers outlook

Kohl's announced Friday that it is terminating talks to sell its business, saying that the retail environment has significantly deteriorated since the beginning of its bidding process.

The Kohl's announcement confirmed CNBC's report late Thursday that Kohl's no longer planned to sell its business to The Vitamin Shoppe owner Franchise Group.

Kohl's also cut its outlook for the fiscal second quarter, citing softer consumer spending amid decades-high inflation. It now sees sales down high-single digits, compared with a prior forecast of down low-single digits relative to last year.

Kohl's shares fell more than 20% after the news, hitting a new 52-week low.

The retailer's decision to end deal talks comes as its stock price slumps and its sales decline. Kohl's has faced months of pressure from activist investors to pursue a sale and shake up the business with a new slate of board directors. Earlier this year, it rejected a different firm's buyout offer of $64 a share, which it considered too low. The stock was trading below $30 Friday morning.

Kohl's on Friday said rocky conditions in the retail industry and the overall economy effectively doomed the deal with Franchise Group, after it engaged with more than 25 different parties with help from bankers at Goldman Sachs.

In a separate 8-K filing with the Securities and Exchange Commission, Kohl's cited recent disappointing financial reports from major retail companies including Walmart that "raised concerns about retail and consumer industry trends, which were followed by significant declines in retailer stock prices."

"Despite a concerted effort on both sides, the current financing and retail environment created significant obstacles to reaching an acceptable and fully executable agreement," said Peter Boneparth, chair of Kohl's board, in a news release.

"Given the environment and market volatility, the board determined that it simply was not prudent to continue pursuing a deal," Boneparth added.

While Kohl's board decided that it is in the best interest of shareholders for management to continue to operate on a standalone basis, the retailer also said Friday that its board "nonetheless remains open to any opportunities to maximize shareholder value."

Franchise Group also confirmed Friday morning that its negotiations to acquire Kohl's were terminated. The company, run by CEO Brian Kahn, said that it will continue to evaluate other internal and external deal opportunities.

Financing headaches

Financing such a massive deal has become more difficult due to volatility in the stock market and broader economy, as the Federal Reserve jacks up interest rates to counter surging inflation. Walgreens Boots Alliance earlier this week scrapped its plan to sell its U.K. pharmacy chain, Boots, saying no third party was able to make an adequate offer due to turmoil in the global financial markets.

Potential suitors for Kohl's, which ultimately ended up not providing bids, expressed interest in the retailer's real estate, according to the SEC filing. But one party said that an investment in traditional retail would be "difficult." Another said that a take-private deal would require insights that the public market didn't have.

Franchise Group had been weighing lowering its bid for Kohl's to closer to $50 per share from about $60, CNBC reported last week, citing a person familiar with the matter. The shift in thinking came as the outlook for the retail industry grew increasingly grim, the person said, as fears of a recession mounted.

Franchise Group in early June proposed a bid of $60 per share to acquire Kohl's at a roughly $8 billion valuation. The two companies then entered an exclusive three-week window during which they could firm up any due diligence and final financing arrangements. That ran its course this past weekend.

Kohl's confirmed Friday that Franchise Group did submit a revised proposal at $53 per share, albeit "without definitive financing arrangements to consummate a transaction." Kohl's said the parties then faced "significant obstacles" in reaching a fully executable agreement.

Kohl's said, however, that it will still evaluate opportunities to monetize portions of its real estate portfolio. CNBC previously reported that Franchise Group was planning to finance its acquisition of Kohl's, in part, by selling a portion of the retailer's real estate to another party and then leasing it back.

Kohl's shares closed Thursday at $35.69. At one point during the day the stock touched a 52-week low of $34.33. Kohl's ended the day with a market valuation of roughly $4.6 billion, its shares down about 28% so far this year.

Activist firm Macellum Advisors has been pushing for Kohl's to consider a sale or consider other strategic alternatives since January. Macellum was also arguing for Kohl's to revamp its slate of directors, arguing the retailer, under Chief Executive Officer Michelle Gass, has underperformed in recent years compared with its peers.

Macellum didn't immediately respond to a request for comment.

In mid-May, however, Kohl's shareholders voted to reelect the company's current slate of 13 board directors, thereby defeating Macellum's proposal.

In recent weeks, the outlook for the retail industry has grown bleaker as consumers pull back their spending on certain discretionary categories, such as home goods and apparel, amid inflation and the threat of an economic slowdown.

High-end furniture chain RH on Wednesday cut its forecast for revenue in fiscal 2022, anticipating softer consumed demand for its products in the back half of the year. Bed Bath & Beyond saw its sales plummet in its most recent quarter and ousted its CEO.

Companies are also seeing inventories pile up as shipments of goods arrive later than planned, due to supply chain snags. Big-box retailer Target in early June warned investors that its profits will take a short-term hit, as it marks down unwanted items, cancels orders and takes aggressive steps to get rid of extra inventory.

Kohl's sales for the three-month period ended April 30 fell to $3.72 billion from $3.89 billion in 2021. When it reported these figures in mid-May, the retailer also slashed its profit and revenue forecasts for the full fiscal year, further muddying the picture for a potential deal.