The Update Issue: Hit and Run Activism Meets Overcapitalized Private Equity at the Strip Mall, More Bad Press for Uber and Lyft (and Shame on You!)

It's been a couple of months since we last checked in on the battle for retailer Kohl's (KSS)... Back in February, I reviewed the activist rumblings – two different hedge funds, Engine Capital and Macellum Advisors, were pressing Kohl's to spin off its e-commerce business, monetize its real estate holdings, or put itself up for […] Not rendering correctly? View this e-mail as a web page [here](. [Empire Financial Daily] The Update Issue: Hit and Run Activism Meets Overcapitalized Private Equity at the Strip Mall, More Bad Press for Uber and Lyft (and Shame on You!) By Berna Barshay --------------------------------------------------------------- [Revealed: Apple's future iPhone design]( You're looking at the details of a patent application that Apple quietly filed in 2021 for a flexible iPhone. The unique screen in the design blueprint could be the result of a new technology that is going to change our lives. Forbes calls it "the next Industrial Revolution." It will help make everything cheaper, faster, better, and safer... from smartphone screens to computer chips, to vaccines, to construction materials, and more. And one little-known company is leading this revolution. Getting in early could lead to huge profits. But you'll have to do it before the news of this company reaches the masses. [Click here before it's too late](. --------------------------------------------------------------- It's been a couple of months since we last checked in on the battle for retailer Kohl's (KSS)... [Back in February, I reviewed the activist rumblings]( – two different hedge funds, Engine Capital and Macellum Advisors, were pressing Kohl's to spin off its e-commerce business, monetize its real estate holdings, or put itself up for sale. All the cage-rattling put Kohl's into play, and by January, it had received a $9 billion buyout offer from Acacia Research (ACTG), an investment consortium led by activist hedge fund Starboard Value. That deal was priced at $64 per share and was met the next day with a $65 bid from private equity firm Sycamore Partners. Now more suitors have emerged. On Tuesday, Reuters reported that Franchise Group (FRG) has offered $69 for Kohl's. Franchise Group, formerly known as Liberty Tax and still operating that tax preparation business, runs a portfolio of acquired retail businesses, including The Vitamin Shoppe, Buddy's Home Furnishings, Pet Supplies Plus, and furniture chain American Freight. Prominent private equity firm Leonard Green is also said to be circling Kohl's, leading a consortium of potential bidders, which includes brand management firm Authentic Brands Group, a long-time Leonard Green portfolio company. Canadian retail conglomerate Hudson's Bay (HBC.TO), owner of Saks Fifth Avenue plus department stores in Canada, is also believed to be in the mix. Meanwhile, Kohl's management continues to rebuff efforts to sell or take some drastic action like selling real estate or e-commerce operations, arguing it can do better on its own. While Kohl's isn't exactly lighting the world on fire, I'm with management that none of these new owners would be a game-changer for the company – and could make things worse... Last year, Kohl's made a record $7.33 in earnings per share ("EPS"), although net income was down about 20% from its peak 10 years ago. As I wrote in February... Given the rapid adoption of e-commerce over the past decade, this doesn't seem like a terrible result. Kohl's is certainly doing infinitely better than its mid-tier department store peers from a decade ago... Its former peers like Sears, J.C. Penney, Bon-Ton, and Mervyn's have all filed for bankruptcy. Kohl's has benefitted over the past decade from having locations in strip centers as opposed to enclosed malls, where traffic has dropped precipitously. The company has also leaned hard into the athleisure trend, which has had much longer legs than most people expected when the category began to take off years ago. Kohl's was also smart to strike a deal with Amazon (AMZN) to have its stores serve as return centers for the e-commerce giant, boosting traffic to the retailer. And when J.C. Penney filed for bankruptcy, Kohl's was quick to strike a deal with LVMH's (MC:FP) Sephora cosmetics stores to host their shop-in-shops, which formerly were in Penney's and one of the most productive and popular parts of that chain. Activists circled Kohl's because its shares have been sideways for five years... And they trade at a modest valuation of less than 5 times earnings before interest, taxes, depreciation, and amortization ("EBITDA"). But the same could be said of most legacy retailers' stock performance and valuation. The fact that private equity firms are willing to lock themselves up owning all of Kohl's in a position they can’t easily get out of highlights that this retailer is relatively stable within a notably rocky industry. There are certainly cheaper retailers that private equity could have set its sights on. The fact that there are so many bidders says less about the untapped opportunity at Kohl's than it does about too much money chasing too few private equity deals... I've written extensively about how splitting off e-commerce from store operations doesn't create value – it, in fact, destroys value because it will layer on more expenses and degrade the customer experience. The track record of sale-leasebacks isn't great either... how did that work out for Sears and Kmart, to cite just one example? [I spoke to MarketWatch]( about this earlier this week... "Companies have spent a ton of time and effort to get e-commerce operations in alignment with brick-and-mortar stores when it comes to marketing and customer experience because they know it is the best way to build customer loyalty and increase share of wallet," said Berna Barshay, retail expert with Empire Financial Research. "Why un-do all this work, work that was grounded in good corporate strategy... whether we are talking about Kohl's, Macy's (M), or any other company." Also popular are leasebacks and other real estate strategies. In the short term, these sorts of moves could spark a jump in the stock but might not be beneficial in the long term, Barshay said. Let's look at some of the players involved in the bidding... Are these really the retail magicians who have some rabbit to pull out of a hat? Well, [Sycamore is the firm that reneged on its deal to buy Victoria's Secret]( (VSCO) early in the pandemic. Victoria's Secret has been a six-bagger in just two years since they walked away from that deal. That's one of the greatest retail private equity blunders in history. I can't say I know much about Franchise Group, but it runs companies offering tax preparation, furniture, and vitamins... a far cry from Kohl's apparel-heavy and fashion-exposed operations. Hudson's Bay went on an acquisition binge of department stores – first in Europe and later in the U.S. – culminating in its acquisition of luxury retailer Saks Fifth Avenue in 2013. A few years later, it went into financial distress and was taken private by its chairman Richard Baker for a substantial discount to where it had traded a few years earlier. Under Hudson's Bay ownership, department store Lord & Taylor ended up getting liquidated after 196 years in business. Leonard Green probably has the best track record of the bunch here, but I am not sure what magic they will bring to Kohl's. The bottom line is private equity is awash in cash and needs a place to put all that money to work. The amount of buyout capital seeking deals has grown over time, leading to more unspent capital looking to be put to work in private equity and venture capital, real estate, and other private markets... Source: Bain & Company Meanwhile, that dry powder keeps getting a bit older... Source: Bain & Company Most private equity firms must invest their funds in seven years, so the closer they get to that due date, the more incentivized they are to do a deal, regardless of the deal's fundamentals. Activist hedge funds know this, so making a lot of noise about a modestly valued company underperforming its potential is a good way to throw chum in the water and attract the private equity sharks who are desperate to do a deal. And it doesn't really matter if there is value to be created – public markets investors collect their deal premium the second the deal closes. And private equity can often make money through fees and refinancings without ever really improving the business – although they certainly can do much better if they grow the businesses that they acquire. But given these dynamics, it's no surprise that hedge fund activists keep throwing companies like Kohl's, [Macy's]( and [Hasbro]( (HAS) into play. Unfortunately for the companies, though, if they are forced by new owners to make ill-thought divestitures of real estate or operations, their risk of ending up like Lord & Taylor or Sears goes way up versus if they had just been left alone. Kohl's probably will get sold for north of $70 per share, which makes KSS shares attractive here at $61. You can probably make some quick money here, but short-term shareholder gain brings a lot of risk for the company's long-term prospects and its employees. --------------------------------------------------------------- Recommended Link: [How to Survive Biden's Inflation Nightmare]( Life in Biden's America gets more expensive by the day. First, it was supply shortages and inflation... Now, it's rapidly rising gas prices... In this disturbing interview, America's Top Stock Cop, Joel Litman, lays out how inflation and rising interest rates will affect the stock market. And while he says some stocks will get crushed... He has a surprising prediction. He believes a few unknown stocks could soar as rates rise... [Watch the full video to see more](. --------------------------------------------------------------- Ride-hailing apps Uber (UBER) and Lyft (LYFT) are under fire for trying to profit off of tragedy, again... During the Tuesday morning commute, there was a mass shooting on a Brooklyn subway, injuring more than 20 people, which led to widespread panic in the immediate vicinity as the shooter managed to flee the scene. There were also hours-long subway delays throughout the city due to the investigation. As New Yorkers sought alternative transportation and a way out of the crime scene, many turned to the ride-hailing apps and were unpleasantly greeted with surge pricing... Source: Twitter/@shananigans022 Needless to say, New Yorkers were mad. Both companies said they removed the surge pricing in the afternoon, but the New York Post reported that Uber only did so in Brooklyn, not the rest of the city where trains were ensnarled in endless delays. Additionally, the Post reports that at 4:40 pm that afternoon, "an Uber trip from Sunset Park [where the shooting occurred] to Manhattan still cost more than double the price of a similar trip using Lyft." The companies pledge to issue refunds when requested to riders who overpaid, just like they did in 2017 when both companies charged usurious rates in the wake of an explosion in Midtown. But for companies that depend on the goodwill of regulators and consumers, this is pretty stupid brand management and public relations. On a happier note, the suspected shooter was apprehended yesterday, thanks to a tip from a sharp-eyed 21-year-old Syrian immigrant named Zack Tahhan. Source: Twitter/@thedailybeast Thanks, Zack! No word yet on if he is getting any of the $50,000 in reward money offered by the NYPD for tips leading to an arrest... but I hope so! I'll be presenting at the MoneyShow in Las Vegas on May 10 and 11... I'll be doing two presentations, including one with my husband, Boris Schlossberg, called "She Said/He Said: Different Approaches to Buying Stocks." I will make a case for long-term investing, and he will make the case for short-term trading. We've never collaborated on anything in a work context before... so wish me luck? 😊 I'll also be doing a second presentation on a timely stock topic. My readers can get a 20% discount on the conference by clicking [here](. In the mailbag, reader thoughts on the new Warner Bros. Discovery (WBD)... Do you share my jaded view that private equity is so awash with cash that hedge fund activists are now incentivized to assert that management is underperforming even when it may not be? If you're a Kohl's shopper, do you see a lot of opportunity on the table with things they should or could be doing better? Do you think that Uber and Lyft should refrain from enacting surge pricing during an emergency? Share your thoughts in an e-mail by clicking [here](mailto:feedback@empirefinancialresearch.com?subject=Feedback%20for%20Berna). I'm on vacation next week, so I'll be back on the 25th. Until then, enjoy the essays from my colleague Herb Greenberg and select guest writers. "Hi Berna, good insight on the mergers and streaming competition. I'm a Sound Mixer on shows for many of these services and a watcher when I have time. I subscribe to Netflix (NFLX), Amazon Prime, and Direct TV – which gets me HBO Max, Fox/News, and many more. I also still pay for an old Hulu subscription, but I don't know why – hardly use it. "I watch a lot of Netflix, but I also watch a lot of Amazon Prime Video, and I listen to a bunch of podcasts there like Smartless, so I'm there for much more than products and shipping, although Amazon's super-reliable shipping has almost completely pulled me away from an intense relationship with the Gestapo at eBay (EBAY) – perhaps another interesting topic for you to shed some of your expert light on – and I probably binge-watch more series on Amazon – The Boys, Marvelous Mrs. Maisel, Emily in Paris, etc... so, I think their second-place position to Netflix is well-earned and shouldn't be discounted – they have a huge cash base from Prime product sales to fund any size production with ease. "Perhaps we should look into the massive disruption that E-Sports has brought to the table, especially with the coveted younger audiences and their viewing preferences. I've done a lot of work for the major players there, and they're very profitable, product-based, and never flinch at budget, and they're worldwide, which the U.S. streamers are striving to reach – just saying... "I'm a capitalist and support the meritocracy, so CNN means nothing to me, and I never watch it; apparently, by their numbers, not many other people do either. I think CNN is a boat anchor that has and will continue to take down the execs that continue to try to prop it up. All the Best!" – Tomm D. Berna comment: Tomm, good point about E-Sports... it is siphoning off much viewer time. And for sure, Amazon Prime Video is a force to be reckoned with – my main point is that since people don't have to pay for it monthly, it tends not to be budgeted the same way. I will point out, however, that Emily in Paris is on Netflix... if you haven't seen Peyton Manning share his feelings about the show on Saturday Night Live, I suggest you check it out – it's hilarious. You can watch it [here](. I love the Smartless podcast, by the way – if only I had more time to listen to it regularly! "Thanks for that great analysis, Berna. Having held the stock for a long time, I'm now wondering what to do after all of this drama. Take the money and run? Hold forever, again? What do you think? Thanks." – Jeff M. Berna Comment: Which stock, Jeff? If it's AT&T (T), I've been a bear for a long time. As for the new Warner Bros. Discovery, I love the assets but don't love the balance sheet and the management. I'm kind of neutral on the stock... neither a conviction buy or sell. Regards, Berna Barshay April 14, 2022 P.S. Empire Financial Research and the markets are closed tomorrow for Good Friday. Look for the next Empire Financial Daily on Monday, April 18. Enjoy the holiday! If someone forwarded you this e-mail and you would like to be added to my e-mail list to receive e-mails like this every weekday, simply [sign up here](. © 2022 Empire Financial Research. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Empire Financial Research, 601 Lexington Ave., 20th Floor, New York, NY 10022 [www.empirefinancialresearch.com.]( You received this e-mail because you are subscribed to Empire Financial Daily. [Unsubscribe from all future e-mails](