This Overlooked Stock May Acquire Kohl’s – Is It A Buy?
Kohls (KSS -0.15%) has been a hot topic of conversation lately as investors debate whether the department store chain is a buy amid ongoing talks that it could be taken private if the right deal is struck. But what about the shares of the company that might end up being the acquirer? franchise group (FRG -0.96%)?
The Ohio-based holding company is now in an exclusive negotiation window with Kohl’s after talks with several other potential buyers broke down. Deal or no deal, Franchise Group shares look like a solid long-term investment as the shrewd operator continues to build its franchise business empire.
What is the Franchise Group?
Franchise Group owns and operates a variety of franchise and franchiseable businesses in a range of industries. It seeks to acquire businesses in economically resilient and consumer-oriented sectors, with low upkeep and capital expenditures and unlikely to be disrupted by e-commerce.
The company was created when Buddy’s Home Furnishings merged with Liberty Tax Centers in 2019. It has since divested from Liberty Tax Centers and grown into its current form by gradually acquiring a stable of new businesses. .
You may be familiar with some of the company’s best-known holdings, such as The Vitamin Shoppe and Sylvan Learning Centers. The company also owns furniture and appliance chain American Freight and Badcock Furniture, a home furniture retailer in the southeastern United States. She also owns businesses in the pet care industry like Pet Supplies Plus and Wag N’ Wash. And he still has hire-purchase furniture salesman Buddy’s in his portfolio.
I like that Franchise Group’s business mix seems to fit the criteria it has set – in an economic downturn, businesses like pet care supplies and low-cost options for Furniture should remain fairly resilient, while rent-to-win businesses like Buddy’s may even pick up. The company has increased revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortization) over the past three years – and a large backlog of 367 sites between the businesses indicates the strategy is working so far.
The company is led by CEO Brian Kahn, who has an impressive track record in private equity and has so far done an exemplary job of acquiring companies that have enhanced Franchise Group’s value, such as Vitamin Shoppe and Sylvan. Shares have gained more than 300% since 2019, although they have struggled this year – down 32% since the start of the year.
How could Franchise Group do Kohl’s job?
If Franchise Group completes its acquisition of Kohl’s, it would be by far its largest acquisition to date. But the company’s success with previous acquisitions and the management team’s track record inspire confidence.
Kohl’s has struggled in recent years, leading some major shareholders to call for change. Macellum Capital Management, one of Kohl’s largest shareholders with nearly 5% of shares outstanding, lamented that Kohl lost market share and rewarded executives despite poor results. They point out that if an individual had invested $100 in Kohl’s ten years ago, it would still be worth the same amount today, meaning the stock has significantly underperformed the broader market. Macellum also says that management has “failed to allocate capital and optimize balance, leaving billions of owned real estate idle.”
We don’t yet know how Franchise Group will seek to improve Kohl’s operationally, but the part about the billions of dollars in real estate left idle fits right into Franchise Group’s playbook. Following the recent acquisition of Badcock, Franchise Group engaged in a $94 million sale-leaseback of real estate owned by Badcock. A similar strategy with Kohl-owned real estate appears to be welcomed by shareholders, as it is one of the ideas Macellum has pushed for and would make Kohl a less capital-intensive business.
By monetizing real estate on the balance sheet, Franchise Group could immediately put it to work improving the business and rewarding shareholders. Other possible benefits of the deal include increased pricing power for the group by adding Kohl’s to its current business mix and finding synergies between Kohl’s, American Freight and Badcock, for example.
Attractive valuation and growing dividend
An investment in Franchise Group has more than doubled in the past five years, but the shares still look relatively cheap compared to the broader market, trading at just under eight times earnings. Franchise Group uses recurring royalties from its franchises to create a steady stream of dividends for its shareholders. The company’s large dividend yield of over 6.5% is well above that of the S&P500. Franchise Group has increased this dividend from $1.00 per share in 2020 to $2.50 per share currently per year, representing a 250% increase in just two years.
Franchise Group says its goal is to pay a “growing and reliable dividend to shareholders”. Additionally, the company will also return capital to shareholders through share buybacks, as it announced a massive $500 million share buyback authorization in May, which equates to almost a third of capitalization. current stock market.
Is Franchise Group a purchase?
Overall, if Franchise Group succeeds in acquiring Kohl’s, it could revitalize the business with new talent and a fresh perspective to turn things around. On the other hand, even if Franchise Group does not acquire Kohl’s, its shares still look attractive as a long-term investment, trading at a modest valuation with a strong dividend and a skilled management team at the helm who can continue to browse the market. for further accretive acquisitions while continuing to enhance its current holdings.
Either way, Franchise Group has the characteristics of a solid long-term investment.