Sense of the markets: Restocking the shelves

Legacy department stores that posted their most robust numbers by making sales out of Talmud-sized catalogs seem an unlikely business to get the merger arbitrage juices flowing among sophisticated investors.

Sears Holdings Corp. and J.C. Penney Co.--both controlled by hedge fund managers -- are racing to prove that they are not headed into the trash bin of retailing history occasioned by a new generation of consumers and online shopping.

When hedge fund manager Eddie Lampert engineered an $11 billion merger of Sears, Roebuck & Co. and Kmart to create Sears Holdings Corp. in 2005, the move was hailed as visionary, sure to revitalize two department stores that had seen better days.

More than five years later, the vision has faltered on Sears' failure to escape its stodgy image, despite Lampert's push to burnish the company's online presence.

Sears' share price spiked upward Tuesday as ex-Liz Claiborne Inc. executive Edgar Huber, the newly installed CEO for Sears' Lands' End brand, started putting together his top management team by promoting internally.

Sears was still 35% off its 52-week high of $94.79 per share, mostly occasioned by two straight quarterly losses so far this year.

The company's choice for its chief cook and bottle washer also led to some head scratching. Lou D'Ambrosio, who came to Sears in February, had significant technology experience but knew zip about retailing; he was a consultant to Sears' board when he was chosen. (Paging Meg Whitman.)

Contrast that with the situation at J.C. Penney. Hedge fund manager Bill Ackman doesn't own the company, but he picked up a significant stake -- he recently negotiated rights to increase it to 26.1% -- and, after some saber rattling, got the retailer to give him two seats on the board.

J.C. Penney is bringing on former Apple Inc. executive Ron Johnson, who led the effort to redo the physical retail costumer's shopping experience, to great effect. Johnson, in turn, has just hired Target Corp.'s Michael Francis to be president and manage the company's rebranding effort.

J.C. Penney still has a way to go, as it's 34% off its 52-week high of $41 per share.
Ackman once had a chunk of Sears Canada but last year the company bought out his 17.3% share for $560 million.

Perhaps Lampert might have been better served by asking his fellow hedge fund manager to stick around.

J.C. Penney, after all, is running a profitable shop, even if Ackman believes it to be an undervalued one.

Still, the proof will be in the profits.

And the share price.