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Exclusive: Here's why Vitamin Shoppe's owner wants to buy Kohl's – and what could happen next

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Here's why Vitamin Shoppe's owner wants to buy Kohl's – and what could happen next

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Shoppers enter a Kohl’s store in Peoria, Illinois.

Daniel Acker | Bloomberg | Getty Images

A little-known conglomerate of companies including The Vitamin Shoppe, Pet Supplies Plus and a home furnishing chain called Buddy’s is suddenly the talk of the retail industry.

Franchise Group, a publicly traded business with a market capitalization of about $1.6 billion, has entered into exclusive sale talks with Kohl’s. It proposed a bid of $60 per share to acquire the retailer at a roughly $8 billion valuation. Franchise Group and Kohl’s are in a three-week window during which the two businesses can firm up any due diligence and final financing arrangements.

Questions have since been swirling about what all this will mean for Kohl’s, should a deal go through: What will happen to the Sephora beauty shop-in-shops within Kohl’s, or the retailer’s returns partnership with Amazon? Will Kohl’s CEO Michelle Gass stay on with the company? Are store closings inevitable?

Also, why would Franchise Group want to own Kohl’s in the first place, as retailers including Kohl’s confront inventory challenges and inflation? Just a few weeks ago, Kohl’s slashed its financial forecast for the full fiscal year as more Americans pull back on discretionary spending. Meanwhile, investors are wrangling with rate hikes from the Federal Reserve and the potential for a recession in the near term.

The deal is still in flux, so those questions don’t have firm answers at this point. Instead, analysts and experts point to Franchise Group’s track record and its recent acquisitions for a better sense of what Kohl’s future could hold.

Spokespeople from Franchise Group, Sephora and Amazon didn’t immediately respond to requests for comment on this story. Kohl’s declined to comment.

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What Franchise Group wants

“What Franchise Group does is look for good businesses and well-known, strong brand names with a good consumer following,” said Michael Baker, a senior research analyst at D.A. Davidson.

“And then they have a different strategy on how to capitalize or how to monetize those acquisitions,” he added. “Sometimes it’s turning them from company-owned stores into franchise stores.”

Franchise Group was founded in 2019 through a $138 million merger between Liberty Tax Service and Buddy’s, according to the company’s website.

Under President and CEO Brian Kahn, who has a private equity background, Franchise Group went on to scoop up Sears’ outlet business; Vitamin Shoppe; American Freight, which sells furniture, mattresses and appliances; Pet Supplies Plus; Sylvan Learning; and Badcock, a home furnishings chain that caters to lower-income households.

A Vitamin Shoppe store in New York.

Scott Mlyn | CNBC

Franchise Group is mostly in the business of owning franchises. But the consensus is that Kahn likely won’t employ the same strategy at Kohl’s, which has more than 1,100 bricks-and-mortar stores across 49 states.

“The strategy there would be to work with the current management team to run [Kohl’s] better, or replace management if needed,” said Baker. “They’ve done that with some of their assets. … Kahn has a track record of doing good deals.”

Baker used Franchise Group’s most recent acquisition of Badcock, a deal valued at about $580 million, as one example. The company has since entered into two different sale agreements, one for Badcock’s retail stores and another for its distribution centers, corporate headquarters and additional real estate, to net roughly $265 million altogether. Rob Burnette remains in his role as Badcock president and CEO.

On an earnings call in early May, Franchise Group’s Kahn told analysts — without naming Kohl’s directly — what he looks for in any transaction.

“Management, for us, is always the key,” he said. “Whether we do very small transactions or very large transactions.”

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“We’ve got a lot of conviction in the brands that we operate now,” Kahn also said on the call.

He added that all of Franchise Group’s past acquisitions generate plenty of cash to support the company’s dividend and to allow for further M&A activity, and any deals it considers in the future would also have to fit this mold.

A real estate play

Earlier this year, Kohl’s deemed a per-share offer of $64 from Starboard-backed Acacia Research to be too low. In late May, the retailer’s stock traded as low as $34.64 and it hasn’t been as high as $64.38 since late January. Kohl’s shares closed Wednesday at $45.76.

Franchise Group likely views its $60-per-share offer as somewhat of a steal, particularly if the company can finance most of the transaction through real estate.

Franchise Group said in a press release earlier this week that it plans to contribute about $1 billion of capital to the Kohl’s transaction, all of which is expected to be funded through debt rather than equity. Apollo is in talks to potentially be Franchise Group’s term loan provider, according to a person familiar with the matter. Apollo declined to comment.

Meanwhile, the majority of this deal is anticipated to be financed through real estate. CNBC previously reported that Franchise Group is working with Oak Street Real Estate Capital on a so-called sale-leaseback transaction. Oak Street declined to comment.

If it plays out this way, Franchise Group would receive an influx of capital from Oak Street, and it would no longer have Kohl’s real estate sitting on its balance sheet. Instead, it would have rent payments and lease obligations.

As of Jan. 29, Kohl’s owned 410 locations, leased another 517 and operated ground leases on 238 of its shops. All of its owned real estate was valued at a little more than $8 billion at that time, an annual filing shows.

“If Franchise Group can get the $7 billion or $8 billion out of the real estate, they’re only paying about $1 billion for the assets. So it’s pretty cheap,” said Susan Anderson, a senior research analyst at B. Riley Securities. “And I think [Kahn] wouldn’t do the deal unless he already has the sale lined up and agreements already in place.”

‘A playbook in place’

But some retail experts are pouring cold water on the plan, saying such a substantial real estate sale could end up putting Kohl’s in a much weaker financial position.

“This is completely unnecessary and will only serve to weaken the firm and restrict investments that are needed to revitalize the business,” said Neil Saunders, managing director of GlobalData Retail. “Takeovers of other retail businesses that have followed this model have never ended well for the party being taken over.”

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To be sure, some sale-leaseback transactions, and particularly those on a much smaller scale, have been seen as successful.

In 2020, Big Lots reached a deal with Oak Street to raise $725 million from selling four company-owned distribution centers and leasing them back. It gave the big-box retailer additional liquidity during near the onset of the Covid-19 pandemic.

Also in 2020, Bed Bath & Beyond completed a sale-leaseback transaction with Oak Street, in which it sold about 2.1 million square feet of commercial real estate and netted $250 million in proceeds. Bed Bath CEO Mark Tritton touted the deal at the time as a move to raise capital to invest back in the business.

Franchise Group could be eyeing Kohl’s as a way to create more efficiencies on the backend, between all of its other businesses, according to Vincent Caintic, an analyst at Stephens. Cobbling together resources such as fulfilment centers and shipping providers could be a smart move, he said.

“They have the furniture stores, a rent-to-own store, and a lot of them deal with consumer goods,” Caintic said. “Maybe they can get some additional pricing power by becoming a larger player.”

At the same time, he said, this would be Franchise Group’s largest acquisition to date, which could come with a steeper learning curve.

All of Franchise Group’s retailers combined did $3.3 billion in revenue in calendar year 2021. Kohl’s total revenue surpassed $19.4 billion in the 12-month period ended Jan. 29.

“Franchise Group has a history of buying businesses, levering them up, and then freeing up capital very quickly to pay off that debt,” Caintic said. “They do have a playbook in place.”

But, he added, the companies Franchise bought before it pursued Kohl’s were much smaller – “And those were done when it was very cheap to get debt.”

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Exclusive: Mystery rocket makes moonfall – TalkOfNews.com

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Hello and welcome back to Week in Review, where we recap the biggest stories from the week. If you want this in your inbox every Saturday, sign up here.

Greg Kumparak is still on vacation, but not to worry! He’ll be back at the helm next week to bring you our biggest stories. Until then, I’ve got you covered.

First for some quick business. TechCrunch+ is having an Independence Day sale, which gets you 50% off on an annual subscription. Need more? TC+ Editor-in-Chief Alex Wilhelm gives you all the reasons to take the plunge here.

Okay let’s go to the moon! Yes, the moon. Some space junk crashed to the lunar surface this week, causing some enthusiastic observers to scratch their heads. Was it from SpaceX? Was it from a rocket launched in 2014 by the China National Space Administration? We still don’t know, but Devin Coldewey had a chat with Darren McKnight from LeoLabs, which has built a network of debris-tracking radar, to get some more insight.

Image Credits: NASA/Goddard/Arizona State University

other stuff

Speaking of space: Ever want to stare longingly into the depths of the universe and actually have something stare back? This is supposed to happen in two weeks when the James Webb Space Telescope will release its first images. “This is farther than humanity has ever looked before,” NASA administrator Bill Nelson said during a media briefing this week. Maybe the truth is out there.

Tesla Autopilot layoffs: The automaker this week laid off 195 employees across two offices in its Autopilot division. Those who were laid off filled supervisor, labeler and data analyst roles. Questions persist about what impact the layoffs will have on Tesla’s wider advanced driver assistance system. The remaining 81 staffers on the Autopilot team will be relocated to another office, as the San Mateo office will be shuttered.

SPAC subpoenas: A New York-based federal grand jury sent subpoenas to the board of Digital World, which is preparing to acquire Trump Media & Technology Group, Donald Trump’s media group responsible for Truth Social. According to an SEC filing, the subpoenas are an effort to gather more information about “Digital World’s S-1 filings, communications with or about multiple individuals, and information regarding Rocket One Capital.”

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Deepfake job apps: The FBI this week issued a warning that deepfakes are being used along with stolen information to apply for jobs. A part of this even involves video interviews. “In these interviews, the actions and lip movement of the person seen interviewed on-camera do not completely coordinate with the audio of the person speaking. At times, actions such as coughing, sneezing, or other auditory actions are not aligned with what is presented visually,” the FBI said in a statement announcing the disturbing news.

Party pooper: Welp, that 2020-era indefinite ban on unauthorized parties at Airbnbs is now permanent. This means no open-invitation parties and no parties whose attendance exceeds 16. The company said in a blog post that since they instituted the ban 2 years ago, there was a 44% year-over-year decrease in the rate of party reports. There will be no partying on, Garth.

Human And Artificial Intelligence Cooperating Concept

Image Credits: DrAfter123 / Getty Images

audio stuff

Over on the TechCrunch Podcast Network, Christine Tao, founder of Sounding Board, joined Darrell and Jordan on Found to talk about difficulties she and her co-founder faced while fundraising and how they established the customer type that made scaling possible.

And on the Wednesday episode of Equity, Natasha Mascarenhas asked a question inspired by a recent post penned by TC’s own Rebecca Szkutak: What’s in the fine print for term sheets these days, and what does that tell us about who is going to be in control during the downturn?

Check out our full roundup.

added stuff

Want even more TechCrunch? Head on over to the aptly named TechCrunch+, where we get to go a bit deeper on the topics our subscribers tell us they care about. Some of the good stuff from this week includes:

The SEC rejected bitcoin spot ETFs again. Now what?
The SEC’s decisions aren’t a first for the industry; the government agency has denied over a dozen bitcoin spot ETFs in the past year alone while approving several bitcoin future-based ETFs, Jacquelyn Melinek reports.

Disclose your Scope 3 emissions, you cowards
Tim De Chant takes on the companies that claim they’re serious about carbon emissions. In short, if they’re serious, then they’ll estimate their Scope 3 emissions and not undermine attempts to make Scope 3 disclosures standard.

Pitch Deck Teardown: Wilco’s $7 million seed deck
Haje’s back with another pitch deck teardown, this week from Wilco, a company whose funding he covered last week. He is pretty excited about Wilco’s deck, as, he says, it’s 19 slides that tick all of the boxes.

Image Credits: Wilco (opens in a new window)

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Exclusive: Kohl's says a real estate sale is on the table after scrapping deal talks – TalkOfNews.com

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People walk near a Kohl’s department store entranceway on June 07, 2022 in Doral, Florida.

Joe Raedle | Getty Images

Kohl’s might not be selling its business after all. But it’s now looking to sell some of its real estate, reversing its prior stance.

The retailer on Friday announced it terminated deal talks with The Vitamin Shoppe owner Franchise Group, confirming CNBC’s reporting from Thursday evening. Instead, Kohl’s said, it will continue to operate as a standalone public company.

Kohl’s for months has been pressured by activist firms including Macellum Advisors to consider a sale of the company, in large part to unlock the value tied up in Kohl’s real estate.

Macellum has argued that Kohl’s should sell some of its real estate and lease it back as a way to unlock capital, particularly during tough times. Kohl’s, however, has been resistant to so-called sale leaseback transactions, at least at such a large scale.

The company did complete a small sale-leaseback deal earlier on in the Covid pandemic, according to Peter Boneparth, chair of Kohl’s board. It recognized a gain of $127 million by selling and leasing back its San Bernardino e-commerce fulfillment and distribution centers.

On Friday, though, Kohl’s explicitly noted in its press release that its board is currently reevaluating ways that the retailer can monetize its real estate. Franchise Group had been planning to finance a portion of its Kohl’s acquisition by selling a chunk of Kohl’s real estate to another party and then leasing it back. This likely gave Kohl’s an idea of what sort of value it could fetch for its owned bricks-and-mortar stores and distribution centers.

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“Now you’ve got an environment where financing has changed so much that it may in fact be more attractive to use real estate as a monetization vehicle,” Boneparth told CNBC in a phone interview.

“When you combine that with what we think the levels of the stock are, it becomes a much different exercise than it was in a previous financing environment,” he explained. “It’s no secret that Kohl’s has a very big asset on the balance sheet: Real estate.”

As of Jan. 29, Kohl’s owned 410 locations, leased another 517 and operated ground leases on 238 of its shops. All of its owned real estate was valued at a little more than $8 billion at that time, an annual filing shows.

Pros and cons

Proponents of sale-leaseback deals argue it’s a convenient way for companies to come up with funds to put toward future growth, so long as there is a buyer for the real estate. But it also leaves the seller with having to meet lease obligations since they would be renting the property they just sold.

Those leases could become much more difficult to break and rents can fluctuate across markets. Kohl’s said in its annual filing that a typical store lease has an initial term of 20 to 25 years, with four to eight five-year renewal options.

In 2020, Big Lots reached a deal with private-equity real estate firm Oak Street to raise $725 million from selling four company-owned distribution centers and leasing them back. It gave the big-box retailer additional liquidity during near the onset of the Covid-19 pandemic.

Also in 2020, Bed Bath & Beyond completed a sale-leaseback transaction with Oak Street, in which it sold about 2.1 million square feet of commercial real estate and netted $250 million in proceeds. Mark Tritton, the Bed Bath CEO at the time, touted the deal as a move to raise capital to invest back in the business. Now, though, Bed Bath is facing another cash crunch as its sales slump and Tritton was ousted from his role earlier this week.

Oak Street had been planning to offer financing to Franchise Group in a Kohl’s deal, CNBC previously reported, according to a person familiar with the discussions. A representative from Oak Street didn’t respond to CNBC’s request for comment.

Kohl’s on Friday reaffirmed its plan to conduct a $500 million accelerated stock buyback later this year. It reduced its revenue guidance for the fiscal second quarter, citing a recent softening in consumer demand amid decades-high inflation.

“Clearly the the consumer is under even more pressure today,” Kohl’s CEO Michelle Gass told CNBC in a phone interview. “We’re not immune to that … but Kohl’s stands for value. And at times like this it’s more important than ever to amplify that message.”

She added that Kohl’s partnerships with Amazon and Sephora remain in place and part of the company’s longer-term strategy to win over new customers.

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“The conclusion of the board process was absolutely the right answer,” she said.

Kohl’s shares ended Friday trading down nearly 20% and at one point touched a new 52-week low of $27.65. Shares of Franchise Group ended the day down 7.5% and also touched a new 52-week low of $31.67 during trading.

Macellum didn’t respond to CNBC’s request for comment.

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Exclusive: Travel Smarter This Summer with This Rosetta Stone-Highlighted Bundle – TalkOfNews.com

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Travel Smarter This Summer with This Rosetta Stone-Highlighted Bundle

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Disclosure: Our goal is to feature products and services that we think you’ll find interesting and useful. If you purchase them, Entrepreneur may get a small share of the revenue from the sale from our commerce partners.

Summer is here, and you may be gearing up for all sorts of leisure or business travel. But unless you’re the type of person to spend millions to eat lunch with Warren Buffett, you have some concerns about globe-trotting. It’s not cheap to see the world, so you owe it to yourself to find ways to save money and make sure you get the absolute most out of every travel experience.



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