Engine Capital Sends Letter to the Board of Directors of Kohl's Regarding Disappointing Financial Guidance and the Need to Pursue a Sale

Believes the Market Sent a Clear Message to the Board About the Company’s Plan and Weak Guidance, as Shares Dropped More Than 12% on the Date of the Recent Analyst Day

Urges the Board to Expeditiously Compile Final Bids and Submit the Best Offer to Shareholders for a Vote

Engine Capital LP today announced that it has sent the below letter to Kohl's Corporation's (NYSE: KSS) Board of Directors.

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Dear Members of the Board:

As you know, Engine Capital LP (together with its affiliates, “Engine” or “we”) is a long-term shareholder of Kohl’s Corporation (“Kohl’s” or the “Company"). We – and apparently a large portion of the market – are extremely disappointed with the financial guidance presented at the Company’s recent analyst day. Kohl’s had spent months building up expectations around this event, including during our direct interactions. Therefore, we were expecting to hear something so compelling that it would justify your rash public opposition to the recent $64 per share and $65 per share offers from two credible parties.

Instead, we were let down by the Company’s guidance of low single digit sales growth and mid-to-high single digit earnings per share (“EPS”) growth over the next three years. The top line growth is underwhelming considering the addition of 400 Sephora stores and billions in capital expenditures. The EPS growth guidance is puzzling as it incorporates $3 billion of share repurchases. If one assumes $1 billion per year in share repurchases, it means the Company will reduce its share count by between 10% to 15% per year. If the Company guides mid-to-high single digit EPS growth while at the same time shrinking its share count by double digit percentages annually, what does it imply for earnings growth? It is clear that despite all the initiatives highlighted in the 114-page analyst day presentation, earnings are going down – or are flat – in a best-case scenario. The only reason why EPS is growing is because of the aggressive projected share repurchases. Despite its best efforts, management is unable to grow the business’ bottom line. We believe this was one of the reasons the stock went down more than 12% on the analyst day and apparently dragged down other stocks in the sector.

Given this context, we believe it is imperative for the Board to reassess its view of the Company’s intrinsic value. It is our understanding that Kohl’s is finally running a competitive sale process months after we urged the Board to do so. We remain concerned, however, that the Board may reject a final offer based on a misguided and unrealistic conclusion that it undervalues Kohl’s.

In closing, we urge the Board to let shareholders make the ultimate assessment about a sale of Kohl’s. The Board and management have overseen so much value destruction over the years that we believe it is emotionally and financially conflicted to make that assessment. The best offer, whether it be $65 per share or hopefully higher, should be negotiated and put in front of shareholders for a vote so that the Company’s true owners can decide whether the offer is appropriate.

Sincerely,

About Engine Capital

Engine Capital LP is a value-oriented special situations fund that invests both actively and passively in companies undergoing change.

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