Kohl's (KSS -2.45%) CEO Michelle Gass is out, and shareholders couldn't be happier.
That's the takeaway from last week's volatile action anyway. The company announced on Tuesday that Gass would be stepping down as chief executive early next month, sparking an 18% rally from the stock. Her exit presents an opportunity for the struggling department store chain to bring in fresh leadership and new ideas.
It's arguable, however, that Kohl's woes are going to persist no matter who's at the helm. The apparel industry is changing in a way that disfavors the business, and department stores are bearing the brunt of this shift.
The challenge of a changing marketplace
Given its recent results, Gass' impending exit comes as no real surprise. Kohl's sales are down more than 6% through the first half of this year, and earnings have been more than halved. More of the same weakness is in store as well. The retailer is suspiciously missing out on what's proving to be at least a decent recovery for other store chains. It's the sort of situation that puts pressure on CEOs and on boards of directors to put pressure on CEOs.
If you're thinking Gass' replacement will fare meaningfully better, think again. Brick-and-mortar retailing as a whole has been on the defensive for years, and department stores have been losing ground -- and sales -- since 2001.
US Department Store Sales data by YCharts
The underpinnings of this downtrend haven't changed either, even if the bounceback from the height of the COVID-19 pandemic has seemingly reversed this long-established shrinking streak. U.S. department store sales have stagnated since early last year, hinting that whatever unusual circumstances helping this sliver of the retail market have nearly run their course.
But what are these underpinnings exactly? They're not all easy to pinpoint, but there's plenty of anecdotal evidence of consumers' shifting preferences.
Take the continued growth of off-price retailers like TJ Maxx parent The TJX Companies and Ross Stores as an example of the changing paradigm. In defiance of retailing's broad headwind, both of these companies have more than doubled their sales over the course of the past ten years after doubling them during the prior decade as well. It's a clear sign that consumers still want fashion but are decreasingly compelled to pay a premium for it.
There's also no denying the advent of the internet, and the entry of unlikely apparel players is taking its toll on companies like Kohl's. Both Walmart and Amazon now own several of their own clothing brands, and they look and feel a whole lot like what you'd find in a more conventional department store. While Amazon's private labels still only account for a small portion of its total business, about half of its private label business comes from the sale of its own clothing and accessories. In a similar vein, Wells Fargo estimates Amazon now controls about 15% of the nation's clothing market. That sort of growth and reach is going to prove disruptive to any industry.
Data source: Thomson Reuters. Chart by author.
It would also be amiss to not mention the surprising growth of the used clothing industry as well. Secondhand apparel reseller ThredUp's top line is up nearly 29% through the first half of 2022, and the company forecasts the global industry (led by the U.S.) will grow from last year's $96 billion to $218 billion by 2026. That pace means the used apparel market will grow three times faster than the new apparel market, leaving Kohl's out of a key opportunity.
No CEO is going to be able to overcome this changing dynamic in a big way. That's why analysts are still only modeling tepid progress from Kohl's going forward.
The one 'out' is too risky of a bet
There is one potential upside in stepping into Kohl's shares while they're still so beaten down. That's the prospect of a buyout.
You may recall the department store chain also confirmed earlier this year it had received several other preliminary acquisition offers. Franchise Group was the only one of those offers that entered the discussion stage. But unable to come up with a deal the two outfits could agree on, both parties ultimately walked away from the table. Whispers that Amazon was and is interested in acquiring Kohl's are also still circulating, although Amazon itself hasn't made any indication it's going to do so.
While none of these possibilities have gotten any real traction, read between the lines: The idea of a buyout isn't going away, suggesting the prospect of a deal is real. Underscoring the likelihood of such a deal getting done, while a suitor has a chance to hand-pick a new CEO, is the company's real estate. The company values its own real estate at around $8 billion, while Kohl's current market cap stands at only $3.7 billion. Although monetizing that real estate and reviving the company's retail operation will be neither quick nor easy, it's an interesting prospect for any buyer willing to take on the high-risk/high-reward project.
Buying a stock simply because it's a potential acquisition target, however, typically isn't a great idea for most investors. There are far too many other, more reliable investments out there to add to your portfolio.
So, no, Kohl's isn't a buy, even with the company's prime opportunity for a top-down overhaul. The department store chain just faces too many challenges that are entirely out of its control.
