Hiring Johnson was a classic Street turnaround play: Recruit a hot manager from outside the company, hand him huge financial incentives and set him loose. The board gave Johnson $50 million of Penney stock to make up for $50 million in Apple shares he left behind. Johnson also shelled out $50 million of his own money to buy a warrant giving him the right to buy 7.3 million shares at $29.92 from mid-2017 through late 2018. Already wealthy from his tenure at Apple, Johnson took that huge flier seeking mega-riches. It also conveyed that he was willing to wager his money on his audacious revival plan.
At first it seemed like a win: On the June 14, 2011, announcement of his hiring, the stock ran up 17 percent, putting him ahead more than $30 million on paper. Today, at JCP’s recent price of $15.50, the stock has to rise about 150 percent just for him to get his $50 million back. The guys who hired him are way down, too: Ackman is looking at a paper loss of $550 million on his $1.55 billion investment, and Vornado is down about $260 million. Ackman says: “Retail turnarounds are difficult and take time.”
Over time, Sears stock has performed poorly and J.C. Penney took a steep dive last year.
More business news
The tech giant moves to reassure customers it will protect them against government surveillance.
The giant retailer opens in city after development delays, months of disputes about wages.
Under a new law, no business is too trifling to reveal to U.S. regulators.
More business news
Bad bets at Sears
In contrast to Ackman and Roth, who began buying their Penney’s stake less than three years ago, Lampert has been dealing with his retail company for more than a decade. He’s way, way ahead on his investment; we estimate at least 300 percent. He started by buying Kmart debt in 2002, at undisclosed prices, while the company was in bankruptcy.
His hedge fund owned more than half of Kmart’s stock when it emerged from bankruptcy in 2003. A major attraction was Kmart’s real estate, which had far more value then to bricks-and-mortar merchants than it does now, with Amazon and its online brethren eating traditional retailers alive.
Then, in 2005, after Kmart stock had surged from its original post-bankruptcy $15 to triple digits, Lampert got Kmart to buy Sears. That gave Lampert even more real estate and a batch of attractive assets, such as the Craftsman tool line. The bullish story, repeated endlessly at the time, was that Lampert would be the next Warren Buffett, redeploying capital generated by fading stores the way Buffett redeployed capital from Berkshire Hathaway’s original fading (and now closed) textile business.
Lampert didn’t discourage this. He took to writing long, discursive letters about the company and his views of life, similar to Buffett’s Berkshire reports. He was famously intrusive, saying yea or nay on even relatively minor investments. Lampert ran through three chief executives in eight years before becoming acting chief executive in January — a title he probably should have assumed years before.
For all his smarts, Lampert failed to hire a strong, top-notch retail chief executive to run his company. Time and again, he has been able to articulate a financial strategy for his investors; he has rarely been able to offer more than a cursory nod at a retail strategy — a reason that customers should shop at Sears or Kmart. That deficiency is evident in the company’s results. In 2005, Sears generated $49.1 billion in revenue and $858 million in profits. In 2012, revenue slumped to $39.9 billion and Sears lost $1.1 billion.