business news in context, analysis with attitude

Yesterday we pointed to a Wall Street Journal report 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.

I commented:

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?

One MNB reader responded:

About your note regarding the Kohl’s buyer potentially selling off real-estate and the future impact of that on Kohl’s customers…I was part of a consulting team that was engaged by Toys R’ Us to help the executive team sort through internal projects/investments both technology and non-technology based.  The goal was to find the most value possible as Toys R’ Us was already in a death spiral and trying to stop the bleeding.  We helped them prioritize a number of projects that had expense, customer experience, productivity and asset impacts into a single list which they could use for decisioning.  When we were done, and they drew the line under that most projects they could/would support…I was stunned.  Because of private equity investors unwillingness to spend and risk cash, they were leaving a large number of projects on the table that were life-saving surgery…not cosmetic surgery.  If I had owned any Toys R’ Us stock at that point, which I didn’t, I would have sold immediately.  They were doomed to be swallowed by the black hole of private equity hubris!  Sounds like Kohl’s is signing up for the same adventure!!

MNB reader Joe Ciccarelli wrote:

This is the typical playbook of Private Equity. They strip out all assets, load the firm up with debt like you said and take high dividends and management fees.  They leave no money for Capital Expenditures (CapEx) – such as store remodels, IT investments, logistics etc. The are many retailers over the years that have had this issue – besides the ones you mention Southeastern Grocers, Topps, Marsh are others that come to mind. Too bad for the employees and customers.

On another subject, from an MNB reader:

Thank you for highlighting the growing gap between compensation for CEOs and frontline workers. I noted the reference to "costs" in a reader view you posted today, which I think captures the issue perfectly. There are two kinds of companies: those that see their employees as costs to be controlled, and those that see employees as resources to be invested in. I believe the latter are more likely to win in the marketplace in the long run.

You're playing my song.

Regarding Saks and its Saks Works initiative, which takes it out of retailing and into the co-working space, MNB reader Rich Heiland wrote:

I have always said that in addition to cash flow there is one other economic factor a business should look at - utilization of overhead. In other words, you are paying a mortgage, utilities, etc for space, but how much of it and how many hours a day do you get return on it? At my last newspaper I found a big, beautiful press worth more than $1.5 million running two hours a day. Poor utilization of overhead. We created a commercial printing venture that in its first year saw the press running many more hours a week and generated $700,000 (in 1991) in gross revenues.

My take is that if Saks has the real estate investment, utility investment and does not need all its space for its traditional line of business, then  using it to generate revenue makes sense. I say that with the caveat that it should be apart from, and not detract from, its core business. I'd actually be saying "is there any way we can find uses for our space at night?" 

I agree with all your observations … though in the case of the Greenwich, Connecticut, space, the Saks Works was put into a closed Ralph Lauren Polo store, not into space that Saks already was using.