It’s pretty clear that virtually anyone who was either involved at the senior level or who had invested in Kohl’s Department Stores during the period of the leveraged buyout in 1986 until the last stock split in 2000 did well financially. The success of Kohl’s has made a lot of people rich.
For starters, anyone who had faith in the “vision” and skills of Bill Kellogg, Jay Baker and John Herma have enjoyed outstanding returns on their investment. Whether they were the investment bankers who were part of the 1986 leveraged buy-out or the mutual funds who got on board during the IPO on The New York Stock Exchange six years later, they were richly rewarded. In fact, it was damn near impossible to not get a terrific return on your money if you invested at any point along the way during the early years.
For the three men who were the prime movers in the management-led leveraged buyout in 1986 – Bill Kellogg, John Herma and Jay Baker – they have now taken their place in the ranks of the richest people in the world. In fact, Bill is regularly listed in the annual Forbes billionaire list. John and Jay, based on the value of their stock ownership prior to retiring, are probably in the $500 million – 1 billion range. In fact, as of February, 2003, Bill, Jay and John still owned over 60 million shares of Kohl’s stock, representing over 16% of the shares outstanding. It is interesting to note that while all three have sold some of their holdings in Kohl’s stock in the last several years in order to diversify their asset portfolios, they still seem to have considerable confidence in the current leadership and the prospects for future performance.
Over a dozen or so of the original senior executives who were part of the LBO in 1986 and/or the IPO in 1992 have since cashed out and left the company with proceeds between $15 –50 million.
The two key executives currently running the company following the retirements of Kellogg, Herma and Baker – Larry Montgomery and Kevin Mansell – have positions in Kohl’s stock and stock options (both exercisable and unexercisable) in the tens of millions of dollars. It’s in the public domain.
And then, of course, the hundreds of executives who owned stock options over the years have also benefited, myself included. And while the success story of Kohl’s didn’t create over 1,000 millionaires like Microsoft, in a quiet way, by around 2001 the appreciation of Kohl’s stock had created millionaire nest eggs for over 50 executives working at the corporate offices in Milwaukee and throughout the country where they were veteran storeline managers. From the outset, Bill Kellogg and his senior team strongly believed in the wisdom of incorporating stock options into the overall compensation package to recruit and retain executives from all over the country, recognizing that a fast-growing company like Kohl’s would be on a never-ending search for talent.
For me, the attraction of owning stock options in such a company was compelling. Somewhere along the line in my career I realized that the only way to get materially rich in this world is to own equity and/or stock options in either a private start-up company or a fast-growing publicly-traded company. While I was always blessed with having nice salaries for the various positions I held in retailing, it became pretty obvious that as you made more, you spent more. Your ‘nut’, or overall expense burden, just gets bigger and bigger.
So when I was being recruited to join Kohl’s to fill a key storeline management position in 1993 by Jane Goldman, a former associate with the executive search firm Kerson & Associates, I was particularly intrigued when she repeatedly told me that whoever took the job would hit a financial homerun within ten years, due to the expected appreciation in the value of the stock options that I would receive. In fact, when I did receive a formal offer to join the company in 1994, Bruce Kelso, the Senior Vice President of Human Resources then, presented me with an Excel spreadsheet showing how the projected, “conservative” growth of my stock options would put me in an encouraging future financial position. (note: I later learned that this spreadsheet was one of the original attempts to communicate to prospective executives the significant potential upsides to making a change and joining the company; the practice was discontinued a couple of years later).
Herein lies the beauty of being granted stock options when you’re with a company as successful as Kohl’s was in the 1990’s. Starting back in 1996 Kohl’s scored an impressive 3 stock splits within 48 months. For stock option holders, that’s music to their ears. Each time a stock splits, the number of stock options you hold ‘doubles’. So when it happened three times, as long as the price of the stock kept increasing during this time, fortunes were literally being made. For example, say you had 10,000 stock options in 1995. After the first split (in 1996) you doubled to 20,000. After the 2nd split (in 1998) your numbers jumped to 40,000. Finally, after the 3rd split (in 2000), your initial 10,000 options would have ballooned into a whopping 80,000! Now here’s the really good news: at that point, any time Kohl’s stock goes up $1.00, you’ve increased your net worth by $80,000. And this doesn’t even include all the additional stock options you received along the way as part of you annual performance review. Like I said, stock options remain one of the best ways to get The Big Homerun other than hitching your wagon to a start-up that succeeds.
And then, of course, the individual investors who got in “early” (anytime between 1992 until mid-2000) have also reaped the benefits of Kohl’s unprecedented success and have had skyrocketing returns.
Some great rides must come to an end. New arrivals within the executive ranks at Kohl’s in the last five or so years have had far more trouble accumulating wealth than their predecessors. The last stock split was in April, 2000. It’s fair to assume that many of the executives who have joined the company in the last few years have had significant portions of their stock options “under water” (i.e., the price of KSS is less than the grant price of their options, making them worthless, at least at that point in time). Some of these guys are real ‘hitters’ in the industry, and they no doubt left large compensation packages at their previous jobs, lured away by the opportunity for The Big Homerun. It’s a matter of public record, just by checking out Yahoo Finance and SEC filings and seeing what some of the senior executives at Kohl’s currently own in common stock and stock options, and calculating values.
It’s somewhat startling, actually. When you think that back in the 1990’s several Kohl’s Store Managers and Buyers were on their way to becoming millionaires as a result of all of the stock splits, it’s just in stark contrast to what happens when you’re with a company whose stock doesn’t go up much year after year. Stock options lose a lot of their luster.