Kohl's Corp. is encountering pressure from investors to change the course of the company for the second time this year.

An investor sent a letter to Kohl's Corp. Monday to suggest that the retailer consider splitting off the company's e-commerce business or selling the enterprise.

Engine Capital LP, a New York-based hedge fund, said in its letter to Kohl's board of directors that the company's status quo is unacceptable. Engine Capital owns about 1% of Kohl's outstanding stock.

"Given leadership's failure to create value through operational excellence and strategic initiatives over long periods of time, it is time for the Board to accept the fact that the public market is not appreciating Kohl’s in its current form," Engine Capital said. "Even the most patient long-term shareholders cannot be expected to endure the punishing underperformance and perpetual value disconnect seen at Kohl’s."

Kohl's latest quarterly sales were up about 15% compared to the same time in 2020. But the company is still behind how it performed before the pandemic. Total revenue so far through 2021 is less than in 2019 and 2018.

The hedge fund wants the board of directors to conduct a "full review of strategic alternatives."

Engine Capital said its own analysis of the company led to two ideas for the board — separating the legacy retail and e-commerce businesses or selling the company.

"... It is the board's job to drive value and the board has had ample opportunities to do so over long periods," Engine Capital wrote in the letter. "We are not pushing for one of the aforementioned solutions over the other, but we — and other shareholders, clearly — do not believe that the status quo is acceptable."

Kohl's unveiled a new strategic vision for the company in the fall of 2020. A signature part of that plan was Kohl's new partnership with high-end beauty retailer, Sephora. Kohl's launched its Sephora deal both online and in select stores this fall.

The investors proposed that Kohl's split its legacy retail operations from its digital business. The two entities could then contract with each other to maintain the omnichannel experience for customers, the letter said. That would mean that Kohl's more than 1,100 stores would be a distinct business from kohls.com.

"The separation would also allow investors to value both companies and their respective income streams at more appropriate valuations," the letter said. The investors think that the digital business alone would be worth about 40% more than the enterprise value of Kohl's right now.

Macy's Inc. has said that it is exploring a similar separation.

This move would be contrary to what Kohl's has done in integrating its stores and e-commerce operations.

The investors also suggested that the board needs to think about selling the company. Kohl's could be sold at a premium, compared to its stock price, to private market buyers, the investors said. Kohl's weighed the possibility of going private in 2016.

"The Kohl’s board and management team continuously examine all opportunities for maximizing shareholder value," the company said in a statement Monday morning. "Our strong performance this year demonstrates that our strategy is gaining traction and driving results. We appreciate the ongoing dialogue we are having with our shareholders and value their input and perspectives."

Selling the company is a more realistic outcome than separating the two businesses, said Morningstar Research Services Equity Analyst David Swartz.

"The most likely outcome here is that Kohl's does hire some outside consultant firm to do a strategic review and then it tells them the current strategy is the best one they've got," Swartz said. "The activists won't be happy. But I don't think there's interest from Kohl's in doing what they want. (Kohl's CEO) Michelle Gass and the other managers aren't going to put themselves out of a job."

Engine Capital said that it is requesting a meeting with Kohl's board of directors to discuss the letter.

"We invested in Kohl’s because of its differentiated positioning and underlying strength in the active and casual lifestyle categories," the letter said. "We also believe Kohl’s has a unique retail footprint relative to many mall-based retailers as well as a growing ecommerce presence, strong loyalty program, tremendous free cash flow and valuable real estate holdings. However, much to our disappointment, these considerable assets and operating tailwinds continue to fail to catalyze meaningful value for shareholders."

In these types of situations, the investors and the company likely have different long-term objectives, said Anne Brouwer, a senior partner at retail consultant McMillanDoolittle.

"The financial investors — their interest is in their own return on investment," Brouwer said. "The retailer's interests are really about their brand and consumer experience and today that's increasingly dependent on twenty-four seven any and all-channel service. ... From the standpoint of what investors want for return on their investment, they may destroy the value of the brand."

Earlier this year, a different group of investors sought to overtake the company's board of directors citing the retailer's under-performance.

That group launched a public campaign in February for seats on the company's board. The group, which owns around 9.5% of Kohl's stock, initially wanted to take control of the board. Kohl's and the investors ended up agreeing to add two directors nominated by the investor group to the board of directors.

Kohl's stock closed up $2.62 Monday to trade at $51.07 a share. The 52-week high for the stock price is $64.80 a share.

Sarah Hauer can be reached at shauer@journalsentinel.com or on Instagram @HauerSarah and Twitter @SarahHauer. Subscribe to her weekly newsletter Be MKE at jsonline.com/bemke.

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This article originally appeared on Milwaukee Journal Sentinel: Kohl's pressured by Engine Capital to consider separate business, sale