business news in context, analysis with attitude

With brief, occasional, italicized and sometimes gratuitous commentary…

•  The Wall Street Journal reports that Franchise Group, which is negotiations to acquire Kohl's for around $8 billion, plans to finance most of the deal by selling of Kohl's real estate.

The story says that "Franchise Group, which mainly owns franchise businesses, is smaller than Kohl’s with a market capitalization of about $1.5 billion. The deal structure that Franchise Group is proposing - selling real estate and adding on debt - has caused problems for other retailers and was seen as contributing to the bankruptcies of Mervyn’s LLC, Shopko Corp. and Toys 'R' Us Inc."

The story goes on:  "Selling and leasing back real estate appeals to investors because these transactions bring an influx of cash. But the leases sit on a retailer’s books as debt and the subsequent rent payments reduce profit margins. That can place pressure on the bottom line, particularly if sales slow.

"Neil Saunders, managing director of research firm GlobalData PLC, said selling real estate would make Kohl’s vulnerable to rising rent and property costs. It could also expose Kohl’s to potential credit downgrades, making borrowing costs more expensive. And with additional debt to service, Kohl’s would have less money to invest in improving its business at a time of increasing competitive pressures."

In other words, Kohl's will have more debt, which will ratchet up the pressure to increase margins and prices and lower labor costs … all of which could have the result of diminishing whatever value proposition it has to shoppers.  Forgive me, but haven't we seen this movie before?