Unwanted Suitor

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According to Reuters last week, HBC (and its governor, CEO and executive chairman, Richard Baker) is prepping to make a bid to acquire Kohl’s. Will they succeed? Probably. Should Kohl’s do all they can to repel such a deal? Absolutely!

The Unlocking Value Engineer

Why? Because Richard Baker, real estate mogul extraordinaire is just that. As he reviews the totality of Kohl’s, its problems and opportunities, he is assessing its potential new revenue streams and strategic and structural changes, including economies of scale, consolidating many of the supply chain and administrative functions that can be shared across the HBC enterprise. All roads in his brain ultimately lead to real estate. In other words, “unlocking value” as he described the spinoff of the digital and physical businesses of his current retail brands (the Saks and Hudson Bay properties), or “unlocking” an opportunity such as launching stores in Canada, he is engineering other financial value boosting ideas.

The comparisons made between Baker and Lampert are valid concerns for Kohl’s to be wary. Since Baker has been at the Saks helm for about nine years, it has become obvious that some of his actions (or inactions) and his lack of retail knowledge and experience are similar to Lampert’s

And speaking of which, Eddie Lampert comes to mind. As former CEO and chairman of Sears Holdings he is certainly a financial engineer extraordinaire, who said he “unlocked” a ton of value as he managed Sears and Kmart down and out over the past two decades. At least he gave the dying brands a slow, orderly death. And much of that slow death was managed by securitizing Sears’ private brands to ultimately sell them for higher prices than if they remained solely connected to Sears. Another Eddie example, which would be right in Baker’s wheelhouse and could be an ominous signal for Kohl’s, was Lampert’s move to put the stores in a REIT and then lease the space back to the stores. Back in the day, private equity giants Lupert Adler, Cerberus and Sun Capital choked the life out of Mervyn’s using this very same instrument. Let’s be clear. I doubt that the troika purposely squeezed Mervyn’s to death, it’s just that the short-term prize of winning more bucks was too tempting.

Probably more telling of Lampert’s lack of retail and consumer knowledge, was his cost-cutting efforts. One key executive, having been hired by Lampert and then fired said, “…if any proposed growth initiatives or innovations, including, store improvements, research, etc., did not have some kind of cost reduction, it would not be approved.” The stores quickly became dated, to say it nicely.

The Roads to Nowhere

By the way, I only parachute the Eddie example to draw the parallel to Baker’s roads leading to real estate. As I wrote, Eddie’s mental roads all led to financial engineering to unlock value. https://www.therobinreport.com/hudson-bay-saks-lt-real-estate-or-retail/ And we all know where that ended up. Yeah, Eddie unlocked value and much of it ended up in his pocket or as I have said, he took the last life raft off the sinking Titanic, filled it with cash and sailed into the sunset. I digress for the fun of it.

However, there is a lesson to be learned from the different but equally personal monetary success of these two moguls. At the end of the day, the tons of money they won were by the core acumen of Baker’s real estate brilliance and Eddie’s financial genius.

The fortunes they have made are not from any measure of retail knowledge. Not one ounce. Another similarity is in how they both declared new avenues of growth and/or economies of scale. More importantly, they both have been very reassuring that they would find seasoned, high-caliber experienced retailers to take the helms of their newly acquired iconic brands. It would take me too long to describe the swinging doors they both generated going through one CEO after another, and finally taking the corner office themselves. In reality, they occupied those offices and acted as operating CEO from day one, even though they publicly kept the doors swinging.

If HBC Wins and Acquires, what Happens?

I believe the comparisons made between Baker and Lampert are valid concerns for Kohl’s to be wary. Since Baker has been at the Saks helm for about nine years, it has become obvious that some of his actions (or inactions) and his lack of retail knowledge and experience are similar to Lampert’s. Although we can’t predict what he might do with Kohl’s, there is reason to believe a spinoff of the digital and physical businesses would be an early move. Baker maintains the Saks spin-off was essentially to unlock real estate value. Baker’s lack of understanding of the long-term consumer-favored omnichannel model that winning retailers are perfecting every day, his potential spinoff of Kohl’s would be a rather stupid move. Yes short-term, it might unlock a higher share price. But that over repeated “low-hanging fruit” of short-termism is the enemy of long-term sustainable growth.

Another death knell quickie? Beware the REIT. And finally, a popular saying in today’s world of alternative realities: Don’t listen to what he says. Watch what he does.

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