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Shareholder activism: Retailers in the crosshairs as pandemic restrictions ease

Shareholder activists have sharpened their pencils on targets in the retail sector, particularly as pandemic era restrictions loosen in stores and beyond.

This proxy season, several department store and big box retailers are under activist pressure to add new oversight to their boards, slim down their portfolios or – as is the case with Kohl’s [NYSE:KSS] and Big Lots [NYSE:BIG] – to explore a sale.

The retail sector’s rise in prominence over the past two years has been stark: in the first four months of 2022 seven of the period’s 59 new campaigns – or 11.9% – involved retailers, up from 9.2% (10 out of 109) in the whole of 2021, and just 3.6% (six out of 167) in 2020, according to Activistmonitor.

Insurgent shareholder activity is up overall, however: The number of new campaigns launched in 2022 so far is 31% higher than the 45 at this stage last year. Activists also are training their sights on sectors beyond retail, most notably in the technology sector following a dip in 2021. Year to date, 20% of new campaigns were in the sector, a similar proportion to full year 2020, but notably higher than the 16.5% in 2021, when the sector’s frothy valuations, driven by pandemic era optimism, may have left prospective activists less upside for unlocking value.

Activist tactics

With retail on their radars, shareholders are testing theses both new and old.

Historically, one often deployed tactic is to push retailers to sell and then lease back their real estate as a way of landing a short-term cash infusion – and there is still appetite for these transactions today, says a sector investor. Following pressure from Macellum Advisors and Ancora Advisors, Ohio-based Big Lots completed USD 725m of such transactions in June 2020. In March, another activist, Mill Road Capital, pushed Big Lots to explore going private, saying that a sale leaseback could help finance an acquisition of the company.

Other campaigns in retail have showcased a focus on simplification, advisors note.

Bed Bath & Beyond [NASDAQ:BBBY] is exploring a sale of its buybuy BABY banner after settling with RC Ventures, an investment firm run by Ryan Cohen.

Out with the new

A more novel approach is to pressure retailers to split their ecommerce units from their traditional bricks and mortar businesses.

Activists initially pushed Kohl’s to put the split on the table along with a full company sale. The company has since announced it is opting to engage with potential buyers.

Macy’s [NYSE:M] last year considered a separation of its online business under pressure from Jana Partners, but ultimately decided against the idea. Macy’s focus on an omnichannel experience coupled with its balance sheet flexibility does not incentivize a separation, says an advisor.

Investors likely took inspiration from Hudson’s Bay-owned Saks Fifth Avenue, which decided to separate its ecommerce business in March 2021. Saks’ store footprint may be better suited for a separation of operations compared to some of its peers in the department store space, argues a second advisor.

With investors putting a premium on focus, advisors say other retailers could feel pressure to re-examine their operations going forward.