What happened

Shares of Kohl's (KSS 2.69%) plummeted 26.9% this week compared to where they closed last Friday, according to data from S&P Global Market Intelligence, after the department store chain decided against selling itself and would instead remain an independent retailer.

That was not what investors were hoping to hear as they expected the activist investors pressuring Kohl's to make dramatic changes could have convinced the board that a corporate sale was best for shareholders.

Order pickup sign at Kohl's.

Image source: Kohl's.

So what

Kohl's has been the target of activist investors for more than a year amid growing disappointment with the retailer's direction. Although only one of the trio of hedge funds pushing for change was still around this year, it recently lost its attempt for a seat on Kohl's board. When coupled with another terrible quarterly earnings report in May, shareholders were hoping a sale might be in the offing.

And there was still serious hope it might happen. Following the earnings report, the board said it was still committed to the strategic review it had initiated and had hired Goldman Sachs (GS -1.72%) to oversee the process. 

Kohl's had received numerous bids and met with 25 different parties, but the best chance was with Franchise Group (FRG), the owner of the Vitamin Shoppe chain. That company emerged as the top bidder with an offer of $60 per share, which valued the retailer at $9 billion.

After a lengthy negotiation process, the board dashed hopes of a buyout when the board announced it had concluded its strategic review and "determined that it simply was not prudent to continue pursuing a deal."

Franchise Group was said to have considered lowering its bid to $50 a share because of fear over Kohl's condition if the economy worsened, as many economists suspect it will. 

Now what

Kohl's tried to offer consolation to shareholders by saying that the retailer generates a lot of free cash flow and is still financially strong. And don't worry, we'll be buying back a lot of stock, so we are artificially raising our earnings per share!

While they might not have phrased it quite that way -- it actually said, "the Board reaffirms its commitment to an accelerated share repurchase program" -- the effect is the same. It has approved a $500 million accelerated stock buyback program and will launch it immediately after the close of the second quarter, which ends at the end of this month.