Warnaco Bet Unravels For Trader and Pros
By Susan Pulliam
Staff Reporter of The Wall Street Journal
Throughout his trading career, John Lattanzio, former star trader for hedge-fund maven Michael Steinhardt, lived by a few hard and fast trading rules:
Always strive to cut your losses. Don't try to turn a bad trade into an investment. If you buy a stock for fundamental reasons and the fundamentals change, sell. Never use borrowed money to attempt to turn a mediocre investment into a winner.
Then he met Linda Wachner, chief executive of Warnaco Group -- and broke them all, taking Mr. Steinhardt and Leon Cooperman, another well-known Wall Street money manager, along for the ride.
The plunge in shares of Warnaco to a low last December of $1.25 from a peak of around $40 in 1998, amid a nasty legal dispute with Calvin Klein, has been painful for all Warnaco shareholders. But for Mr. Lattanzio, who has owned shares of Warnaco since 1999 and currently holds two million of them, the plummet in Warnaco stock has been a particularly agonizing experience.
"I lost $30 million on this stock," says Mr. Lattanzio; that was a damaging blow to his personal portfolio. He bought the shares at an average price of $23 each. "I'm a trader. Here, I became an investor. I broke all of my trading rules on this one."
Normally, misery loves company. But in this case, Mr. Lattanzio would rather be alone. Indeed, it only makes matters worse for Mr. Lattanzio that he persuaded not just one, but two, well-known Wall Street investors to jump into Warnaco shares along with him.
The fact that experienced investors have gotten burnt so badly on Warnaco shares points to a few important lessons for small investors. Even the pros' investment blunders often result from breaking basic stock-investing tenets. Mr. Lattanzio concedes he allowed himself to get in over his head on the Warnaco investment. "You don't try to turn a bad trade into a good one by hanging on," Mr. Lattanzio says. "The best hedge is a sale. And my mistake was I never got out."
Mr. Steinhardt, who began buying shares of Warnaco last fall at a price of $8 and now owns a stake totaling four million shares, says, "I can't help but acknowledge that my inspiration was [Mr.] Lattanzio, who tried to show me the light on this extraordinary opportunity and succeeded more than either of us might have envisioned." Mr. Steinhardt folded up his hedge-fund shop in 1995, when it had $4 billion under management, but continues to run an investment office that oversees his personal account.
He says he is close to break-even on the Warnaco investment as a result of the stock's recent rebound to about $4, as he had lowered his per-share cost by buying more stock when the company hit its lows. (Warnaco shares were up nine cents to $4.06 at 4 p.m. Wednesday in New York Stock Exchange composite trading. That is off a 52-week high of $12.56.)
As for Mr. Cooperman, Mr. Lattanzio says he persuaded him to buy Warnaco shares in 1998, while Mr. Lattanzio was working for Omega Advisors, Mr. Cooperman's hedge fund. (Hedge funds are investment vehicles for institutions and wealthy individuals.)
Wednesday, Mr. Cooperman disclosed in a Securities and Exchange Commission filing that he has pared back his stake in Warnaco. While a shareholder, Mr. Cooperman agitated loudly for a change in control at the company.
According to the filing Wednesday, Mr. Cooperman held 2,150,400 Warnaco shares, or 4.1% of the company's shares outstanding as of Dec. 31. That was down from the 3,885,600 shares, or a 7% stake, that Mr. Cooperman held as of March 14, 2000.
In an interview, Mr. Cooperman says, "We sold it a long, long time ago -- it was for tax purposes," referring to the recent filing, which covered the fourth quarter of last year. "We haven't had any activity in the stock for quite some time." He declines to elaborate, but is believed to have only a small stake remaining in the company.
Mr. Lattanzio says: "I did put Michael in the stock. I put Leon in it, too. We all make mistakes, and I've endured a lot of loss on this one. But I still believe the company will do better from here."
Mr. Lattanzio and Mr. Steinhardt aren't the only ones standing by Ms. Wachner as her company struggles to overcome its difficulties. Sid Bass, of Bass Brothers Enterprises owns 13.4% of Warnaco shares, as of the most recent SEC filing -- an investment he made, apparently, with no help from Mr. Lattanzio. Mr. Bass declines to comment.
Warnaco's situation worsened last May when the manufacturer of intimate apparel and sportswear was sued by Calvin Klein, its biggest licensee, on counts ranging from breach of fiduciary duty to deceptive acts. Warnaco slapped back at the design house with a countersuit, and an expensive legal battle ensued that hurt sales and distracted management's attention. Last month, Warnaco and Calvin Klein agreed to settle the dispute.
Slowing sales at department stores throughout the summer and fall forced Warnaco twice to lower its earnings estimates for the year. Hefty restructuring charges to close facilities ate up remaining profits, and Warnaco wound up posting a loss for the past two quarters.
With the Calvin Klein lawsuit recently settled, Ms. Wachner's chances of putting the company's troubles behind her are improving, Mr. Lattanzio argues. "They have the best brand names in the business," he says. "There is consolidation going on in the industry, and other apparel companies would love to get their hands on Warnaco." However, other retail-industry watchers aren't so sure about Warnaco's prospects as a takeover target, if for no other reason than because of its heavy debt load, which currently stands at more than $2 billion.
Through a spokesman, the company said, "Warnaco continues to enjoy investor confidence because it's a great company, marketing some of the world's best apparel brands."
Ms. Wachner declined to comment Wednesday on Mr. Cooperman's SEC filing. In previous interviews, she has said that the maker of clothing under brand names such as Olga, Speedo and Chaps Ralph Lauren is better prepared for this year because of its restructuring last year, and she was exuberant last month when Warnaco settled its differences with Calvin Klein, at the last moment avoiding a trial.
For Mr. Lattanzio, it all started out well enough back in 1997 when he bought 500,000 shares of Authentic Fitness, a Warnaco spinoff. "I bought it on a block [that] Goldman Sachs had for sale," he says. "It was a bet on Linda."
By the time he sold that position in 1999, Mr. Lattanzio owned two million shares of Authentic Fitness; he pocketed a $20 million profit on the transaction.
Mr. Lattanzio made his first mistake, he concedes, when he became emboldened by his win, plowing all his profits from the Authentic Fitness position into shares of Warnaco, at that time trading at around $23.
"Sometimes when you make money with an investment once, you go for it the second time around," he says. Then, he says, he began to throw good money after bad. "You don't try to turn a bad trade into a good one by hanging on," he says.
Yet Mr. Lattanzio doesn't seem any more inclined now to follow his own advice and cut his losses than before. "I did screw up," he says. "But I'm not selling the stock. I think it's cheap."
He argues that falling interest rates are working to Warnaco's advantage, lowering its annual interest expense by $10 million every time the Federal Reserve lowers interest rates by half a percentage point. "I never thought the stock would go where it went. A lot had to do with the Calvin Klein lawsuit," he says. "But now that that is over, all she has to do is produce the numbers," he says of Ms. Wachner.
Mr. Lattanzio is also betting that Ms. Wachner is completely devoted to turning the company around. "She has more to lose than me," Mr. Lattanzio says.
-- Rebecca Quick contributed to this article.
Write to Susan Pulliam at susan.pulliam@wsj.com |
