People walk near the entrance to a Kohl’s department store on June 7, 2022 in Doral, Florida.

Joe Raedle | Getty Images

Kohl’s might not be selling his business after all. But he is now looking to sell some of his real estate, reversing his previous position.

The retailer announced on Friday that it had ended negotiations with the owner of The Vitamin Shoppe Franchise Group, confirming CNBC’s information from Thursday evening. Instead, Kohl said, it will continue to operate as a stand-alone public company.

For months, Kohl’s has been under pressure from activist companies, including Macellum Advisors, to consider a sale of the business, largely to unlock value tied to Kohl’s real estate.

Macellum argued that Kohl’s should sell some of its real estate and lease it out in order to unlock capital, especially during tough times. Kohl’s, however, resisted so-called sale-leaseback transactions, at least on such a large scale.

The company entered into a small sale-leaseback agreement earlier in the Covid pandemic, according to Peter Boneparth, chairman of Kohl’s board. It recognized a gain of $127 million from the sale and lease of its San Bernardino e-commerce fulfillment and distribution centers.

On Friday, however, Kohl’s explicitly noted in its press release that its board of directors is currently re-evaluating ways in which the retailer can monetize its real estate. Franchise Group had planned to finance part of its Kohl’s acquisition by selling some of Kohl’s real estate to another party and then leasing it out. This likely gave Kohl’s an idea of ​​the kind of value it could get for its brick-and-mortar stores and distribution centers.

“Now you have an environment where funding has changed so much that it may actually be more attractive to use real estate as a vehicle for monetization,” Boneparth told CNBC in a phone interview.

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

As of Jan. 29, Kohl’s owned 410 locations, leased another 517 and operated land leases on 238 of its stores. All his real estate owned was valued at just over $8 billion at the time, according to an annual filing.

Advantages and disadvantages

Proponents of sale-leaseback agreements argue that it’s a convenient way for businesses to find funds to spend on future growth, as long as there’s a buyer for the real estate. But it also obliges the seller to respect his lease obligations since he would be renting the property he has just sold.

These leases could become much harder to break and rents can fluctuate from market to market. 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 entered into an agreement with private equity real estate firm Oak Street to raise $725 million to sell four company-owned distribution centers and lease them. It gave the big-box retailer extra cash at the start of the Covid-19 pandemic.

Also in 2020, Bed Bath & Beyond entered into a sale-leaseback transaction with Oak Street, in which it sold approximately 2.1 million square feet of commercial real estate and raised $250 million in proceeds. Mark Tritton, Bed Bath’s CEO at the time, touted the deal as a move to raise capital to reinvest in the business. Now, however, Bed Bath is facing another cash crunch as sales plummet and Tritton was ousted from his role earlier this week.

Oak Street had planned to offer financing to Franchise Group as part of a deal with Kohl, CNBC previously reported, according to a person familiar with the discussions. A representative for Oak Street did not respond to CNBC’s request for comment.

Kohl’s on Friday reaffirmed its intention to conduct an accelerated $500 million share buyback later this year. It cut its revenue forecast for the fiscal second quarter, citing a recent slowdown in consumer demand amid decades-high inflation.

“Obviously the consumer is under even more pressure today,” Kohl CEO Michelle Gass told CNBC in a phone interview. “We’re not immune to this…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 are part of the company’s longer-term strategy to win new customers.

“Concluding the board process was absolutely the right answer,” she said.

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

Macellum did not respond to CNBC’s request for comment.