Kohl's Corp. has called off its sale to Franchise Group Inc. amid rising interest rates and an uncertain economic environment that is having a chilling effect on deal making.
The department-store chain said on Friday that it would no longer pursue a sales process and would instead focus on navigating current conditions on its own.
Kohl's chairman Peter Boneparth said in an interview that recent choppiness in the financing market and the retail industry had made a deal unattainable.
Mr. Boneparth said the board has confidence in the company's management to execute its strategic plan.
"While there was criticism from activists, the vast majority of shareholders are supportive of the direction management is taking the company," he said.
"The company is exploring other ways to unlock value for shareholders, including by selling some real estate and buying back stock,'' Mr. Boneparth said.
Like other department stores, Kohl's, with roughly 1,100 stores, has struggled to attract shoppers amid rising competition from discounters, fast-fashion chains and online competitors.
Despite efforts to woo shoppers by adding new brands, improving its loyalty program and offering features such as the ability to return items bought at Amazon.com Inc. to its stores, its recent performance has lagged behind some of its peers. It has attracted the attention of activist investors, who pushed unsuccessfully to overhaul its board.
In an interview on Friday, Kohl's chief executive Michelle Gass said the company is largely sticking with its playbook of rolling out Sephora shops in more than 850 of its stores by the end of 2023 and opening 100 smaller format stores over the next four years.
"Sephora is a game changer," she said.
Kohl's board began to engage with advisers in late January after receiving informal inquiries about buying the department-store chain, the company said in a securities filing.
The company later launched a sale process and said it attracted interest from more than 25 parties. Bidders included the private-equity firm Sycamore Partners and Canada's Hudson's Bay, owner of Saks Fifth Avenue, during a monthslong sales process, according to people familiar with the situation.
The retailer last month entered exclusive deal talks with Franchise Group, which owns retail brands like Vitamin Shoppe and Pet Supplies Plus.
Franchise Group initially offered to pay $60 a share for Kohl's -- a deal valued at around $8 billion -- but ultimately reduced the price to $53 a share, without definitive financing to close the deal, Kohl's said.
The deal structure called for Franchise Group, which has a smaller market capitalization than Kohl's, to sell real estate and add on debt.
Analysts have said that such structures contributed to the bankruptcies of Mervyn's, Sears Holdings Corp., Shopko Corp. and Toys "R" Us Inc.
Kohl's said on Friday that the two sides "faced significant obstacles reaching a fully executable agreement."
Franchise Group released a statement confirming that the deal talks ended, but said it is committed to evaluating opportunities that will enhance shareholder value.
In a securities filing, Kohl's said that several other bidders didn't want to invest in retailing, which continues to face challenges from the shift to online shopping, and others said they didn't see how to add value beyond management's current plan.
Kohl's has also been facing a downturn in discretionary spending that has hit the retail industry particularly hard, with climbing inflation pushing consumers to rethink their shopping needs.
On Friday, Kohl's said inflation is cutting further into consumer spending and that it expects sales to fall at a high-single-digit rate in its second quarter, worse than prior expectations of a low-single-digit drop.
The company also reaffirmed plans to conduct a $500 million accelerated stock buyback after its second-quarter earnings report, which is slated for Aug. 18.
"The consumer is facing a lot of pressure, and we'll navigate that effectively," Ms. Gass said. "We stand for value and have a lot of agility with pricing and promotions."
Analysts said Kohl's difficulties will likely deepen as the economy softens.
"The challenge now for Kohl's is how to create new value going forward, beyond the Sephora and small-format initiatives at a time when retail sales are slowing and fears of a recession loom," said Craig Johnson, president of consulting firm Customer Growth Partners.
