Over the last several months, a confidential report has circulated within the headquarters of Wal-Mart Stores, proposing sweeping changes to its employee health care plans.

It looks like a typical corporate planning document, but it is not. The nine-page report, written by an Emory University professor, Kenneth Thorpe, was commissioned, paid for and given to Wal-Mart by its longtime foes, the Service Employees International Union, and a group the union finances, called Wal-Mart Watch. They are known for attacking the chain, not cooperating with it.

But after waging an aggressive public relations campaign against Wal-Mart for three years, the company’s full-time, union-backed critics, who once vowed never to let up, are lowering their pitchforks.

Shrill condemnations and embarrassing leaked documents are giving way to acknowledgments of progress — and, in the case of Wal-Mart Watch,free advice.

“It’s fair to say we have been less in-your-face,” said David Nassar, the executive director of Wal-Mart Watch, which had hammered the company in stinging newspaper advertisements and provocative reports with titles like “Shameless: How Wal-Mart Bullies Its Way Into Communities Across America.”

The mellowing of the anti-Wal-Mart movement is an unexpected development for the retailer, whose public image and share price were bruised by the well-financed union campaigns. On Friday, when the chain holds its shareholder meeting in Arkansas, investors are likely to applaud Wal-Mart for fending off these detractors.

“It definitely has helped the company,” a retail analyst at Deutsche Bank, Bill Dreher, said. “Those attacks hurt Wal-Mart.”

The union-financed campaigns were started in 2005. As the groups turned up the heat on the company, Wal-Mart was at first defensive, but eventually it responded in ways few of its critics expected. The company expanded its health care plans to cover more workers, though still not enough to satisfy the unions. And it made commitments to the environment, such as becoming the country’s biggest seller of more efficient light bulbs.

Indeed, Wal-Mart has gone so far on some initiatives, like the environmental programs, that it has started to draw scattered attacks from the right, particularly from a group called the National Legal and Policy Center that has accused the company of giving in to political correctness.

Now, the union-backed groups appear to have concluded it would be more constructive, sometimes, to engage Wal-Mart. That leaves them navigating a complex situation in which they have to decide, issue by issue, whether to shake hands with the company or to slap it.

Since late 2006, the head of the union that provides the majority of financing to Wal-Mart Watch, Andrew L. Stern, has met repeatedly with the chief executive of Wal-Mart, H. Lee Scott Jr., to discuss solutions to the country’s health care crisis.

Mr. Stern said his dialogue with Mr. Scott “does not end the need for the vigilance of Wal-Mart Watch.”

Wal-Mart Watch has always insisted that it does not take orders from Mr. Stern, even though his union provides most of its financing. But those with knowledge of Wal-Mart Watch’s operations say Mr. Stern’s growing relationship with Mr. Scott has inevitably influenced the group’s behavior.

They point to the health care report Wal-Mart Watch commissioned from Mr. Thorpe that was handed over to Wal-Mart this year, rather than published to embarrass Wal-Mart, as it might have been in the past. It is unclear whether the report will influence the company to alter its health plans.

Mr. Nassar said that it was the service employees union, not Wal-Mart Watch, that gave the report to Wal-Mart. Even within the labor movement, Mr. Stern’s work with Mr. Scott has raised eyebrows, with some worried that he has obtained too few concessions while allowing Wal-Mart to claim support, however limited, from an old foe.

The less antagonistic approach from the union-backed groups is evident inside Wal-Mart, which had hired dozens of new employees to combat the negative public relations onslaught.

Over the last several months, the company has disbanded a campaign- style war room set up in 2005 to do battle with Wal-Mart Watch and another group, WakeUpWalMart.com, which is financed by the United Food and Commercial Workers Union.

And Wal-Mart has disbanded an advocacy group, called Working Families for Wal-Mart, intended to rally support for the company (and serve as a counterbalance to the anti-Wal-Mart groups). A company spokesman would not comment for this article.

Wal-Mart Watch and WakeUpWalMart.com still level occasional attacks against Wal-Mart, and remain potent watchdogs on some issues. That was made evident this year, with the case of Deborah Shank.

Ms. Shank, a shelf stocker at a Wal-Mart in Missouri, suffered brain damage in a car accident and won an insurance settlement of $700,000. Wal-Mart then tried to recoup more than $400,000 from her, to cover what the company had spent on her medical expenses.

Wal-Mart Watch and WakeUpWalMart.com quickly swung into action. Wal-Mart Watch, for example, set up a Web site that allowed thousands of people to e-mail the top 40 executives at Wal-Mart, expressing their opposition to the company’s position.

After the groups’ efforts drew heavy — and overwhelmingly negative— media attention to Wal-Mart’s conduct, the company backed down in April, saying it would forgive the expenses.

Such campaigns, many of them created by the union-backed groups or amplified by them, seemed to materialize every few weeks beginning in 2005.

That year, the newly formed Wal-Mart Watch obtained a copy of an internal Wal-Mart memorandum proposing ways to cut employee health care costs by hiring fewer unhealthy workers.

That same year, when WakeUpWalMart.com was founded, the group paid for TV commercials that questioned whether Christians should shop at Wal-Mart, given its wages and benefits. “Jesus would not embrace Wal-Mart’s values of greed and profits at any cost,” it said.

But such flare-ups are far rarer now, and they tend to attract significantly less attention.

Leaders of both groups said their original burst of activity was never sustainable, and was intended as a quick way to attract attention.

“You can’t keep up that white hot level of energy,” Meghan Scott, the communications director at WakeUpWalMart.com, said.

Mr. Nassar, of Wal-Mart Watch, said his group needed to “transition away from being a campaign into being an organization that is here for the long haul.”

Much like a political campaign after Election Day, the groups have reduced their staffs. Wal-Mart Watch, which once had 40 workers, now has 10. WakeUpWalMart.com had up to 12 workers, but has about 6 today. And its aggressive founders, the former political operatives Paul Blank and Chris Kofinis, left in early 2008.

Both groups insist that, even if there is a change in their tone or size, they have not wavered from their mission of fighting to make Wal-Mart a better employer that pays higher wages and offers more generous health care.

“I don’t think there has been significant progress,” on those fronts, Ms. Scott said. Wal-Mart, she said, still requires workers to meet deductibles ranging from $700 to $4,000 a year for their health insurance. And most workers earn less than $20,000 a year.

But Mr. Nassar and Ms. Scott acknowledge that the appetite for criticism of Wal-Mart, which seemed insatiable at first, has waned, especially in the news media. “There has been a certain amount of fatigue about writing the Wal-Mart-is-bad story,” said Mr. Nassar. Ms. Scott described “a cooling down of the Wal-Mart story.”

Both said their groups are pursuing different, perhaps less high-profile, strategies than they did in 2005 and 2006. Wal-Mart Watch, for example, wants to be viewed as the best source of outside research on Wal-Mart; WakeUpWalMart.com is reaching out more to regional news outlets, rather than big national newspapers. Both said they would remain critical when it made sense. “As the company makes changes, it becomes harder to be critical,” Mr. Nassar said, “because our critique has to become more nuanced.”

“But that’s O.K.,” he added. “We didn’t sign up for an easy job.”

Rescue Memo: Eddie Lampert/Know When to Fold'em
CONDÉ NAST PORTFOLIO
June 3, 2008

Rescue Memo: Eddie Lampert
by Jack Flack
Jun 2 2008

What would Warren do? First, he would admit his mistakes. Then he'd fix them. You should do the same.

by Jesse Eisinger

Why Eddie Lampert's failing Sears-Kmart experiment could mean trouble for dealmakers.

5 Comments
Latest: Jun 3 2008 10:21pm ET

From: Jack Flack

Subject: Know When to Fold'em

I'm writing you this Rescue Memo because of two big assumptions.

Assumption #1: Reality.

Sears can't be saved, at least as traditionally conceived. In a struggling economy that shows no signs of rejuvenation, you've tethered together two of the weakest players in a sector notorious for its ruthless economics.

Your flacks are already having to defend the idea that Sears will be solvent next year, and you've provided no credible plan for fixing an operating model that is now widely presumed to be completely broken.

Assumption #2: Perception.

Your golden reputation as an investor can be easily salvaged. Your reputation as an ops guy probably can't. And your reputation as a retailer was burnt to an acrid crisp long ago.

Thus, you must refocus your story back on to the character of Eddie the Magical Investor. Here's how you can do it.

Go back to who you really are. You're a tremendous finance guy, who the business press used to love to call the next Warren Buffett. That was heady stuff, but your track record at the time actually made it somewhat credible.

The bad news is that you're a lousy merchant.

Great merchants tend to have a talent for making the old retired guy who now greets shoppers at the door feel like he's doing brilliant work at the most important job in the world. You, on the other hand, have a talent for making veteran retail executives painfully aware that you're much smarter than they are, which tends to demoralize.

No turnaround, particularly in retail, was ever fueled by demoralization. Hedge funds and investor activism, however, require exactly the kind of ice-cold Prestone that flows through your veins, and you need to confine yourself to environments where your fundamental nature is a huge competitive advantage, not an impediment.

I'm still not sure why you felt the need to want to operate a business. But just as Michael Jordan cleanly walked away from the baseball diamond before it became embarrassingly obvious that he was never, ever going to be able to hit a Major League cutter, you must do the same at Sears.

If you get stubborn and cling to this episode in your career, it will end up overshadowing everything you've done in the past, and provide a poisonous prologue to whatever you decide to do next.

Embrace reality. I'm not the first to point out that your troubles come from the fact that you violated two of Buffett's most important rules:

You bought companies with anemic core propositions, and then you insisted on managing them yourself. Even the Oracle of Omaha loses when he violates his own rules, but he also knows how to cut his losses and move on.

You can debate the projections of financial implosion, but your core operations are deteriorating at a rate that will not allow you to wait for the economy to turn.

In fact, each month you wait significantly weakens your hand, and you must now focus on the optimal way to fold while you still have some flexibility.

End the interim. Quickly announce that Johnson is now your actual C.E.O., not just a placeholder. It will allow you to stop searching for a candidate who simply does not exist—that is, someone who is both qualified and interested.

Even more important, it will eliminate a huge internal uncertainty, and allow your people to get on with business.

Take it private. I'm sure you've already done the math in your head. The real estate is worth X, and the brands are worth Y. As your stock price continues to track your operational decline, it won't take many quarters before the math of a leveraged buyout will make sense.

On the day that happens, make a sales call on Miller, Berkowitz, and Ackman. With the support of your biggest shareholders, you should be able to carry the vote easily, and with limited lawsuits.

With that strategy in mind, you may want to drag your feet on the share repurchase you just announced, keeping cash freed up and not artificially supporting the stock price.

Going private will get you out of the fishbowl, where every move will be highly scrutinized. That will be important, as you...

Sell the real estate. You excel at transactions, and I have no doubt that you won't leave any panic money on the table, even in this environment.

This will effectively take you out of traditional retailing, a brutal sector where you are heavily disadvantaged. But it will allow you to recast Sears into a far superior business model, as you...

Become the brands. In other words, as you shed the real estate assets, you will turn Sears back into what it started as, a trusted consumer-products company.

The fact that Craftsman, Kenmore, DieHard, and Lands' End remain solid brands despite being starved of support in recent years says much about their underlying strength.

Drag your feet on the stock repurchase program you announced, and actually start investing meaningfully in your brands.

Properly contextualize the events. The media will want to cast this story as one of Midas losing his touch, personalizing events specifically to you. You've got to pull the camera back, reminding everyone of just how dire the presumed fate was for both Kmart and Sears before you came on the scene.

Here are the core messages that you must repeat until your mouth gets sore:

"I own half the company, and nobody takes the future of Sears more seriously than I do. It's painful, but we are doing what's required to make sure Sears survives.

"At a very challenging point in history, we made a bold move to try to save two American icons. We're proud of what we accomplished, but we probably underestimated the challenge.

"We're saving Sears by taking it back to its original roots as the provider of great products that Americans can count on."

Emulate your idol, especially in acknowledging problems. I know you want your shareholder letters to be as notable as Buffett's, but that will never really happen unless you stop complaining about how unfair things are, particularly how the media treats you.

Notice that Buffett almost always personally embraces accountability for poor performance, which then gives him permission to make big changes without losing face. It's called manufacturing your own Teflon as you go.

That means you probably need to get yourself a fortysomething version of Loomis. If you can't find somebody who will stand up to you enough to steer you clear of disastrous conceits, give me a call. I'll give it my best. But if we can't make it work, then I can brag that I got fired by Eddie Lampert.

After all, minimizing your defeats by embracing them is often the real key to a lifetime reputation.

Most recent comments: Posted: Jun 3 2008 10:21pm ET

This poor old ship needed a merchant at the helm 10 years ago, but it's been passed around like a cheap party girl at a bacherol party among fast food chain gurus...(like THAT ever made sense).

Cut and run Eddy....the stores look like hell.
By Tex

Jun 3 2008 11:46am ET

Change the names of the company and make it one. And start fresh

By ty6898

Jun 3 2008 09:04am ET

Eagle-Eyed Eddie doesn't know his behind from third base when it comes to retail. It's a tale of pure hubris and ego. He should get the heck out of the way and take your advice. Sears maybe has one last chance. It would be a hail Mary for sure.

By Pete

Jun 3 2008 06:10am ET

kill off Kmart & Keep Sears

By jerry7118

Recommended by 1 Users

Is Lampert Making the Grade at Sears Holdings?
by: Dan Weiss - Seeking Alpha
June 2, 2008

Although my focus is on small cap stocks which are underfollowed, I have been following with a close eye the progress of Eddie Lampert in creating change at Sears Holdings. The stock is now trading at levels not seen since 2004. If you go into a Sears or Kmart store they are often empty (at least in the area in which I live) and they are clearly not the premier brand that they once were.

Lampert has an outstanding track record as a hedge fund manager and utilizer of capital. However, to this point he has been unable to truly learn the ins and outs of the retail business, as Sears has faced increased competition from the likes of Home Depot and Lowe's for tools and appliances, Wal-Mart and Target for everyday items and the increasing number of discount auto suppliers for auto parts and tires. The company has also faced customer service issues (Lampert has said that one focus of the company going forward is improving the customer's experience).

Sears has some very strong brand recognition with its offerings such as Craftsman, Kenmore and Lands End, however, these names are not enough to drive strong future growth for the company. All along, the theory on Wall Street has been that Lampert would create a holding company or conglomerate type of setup much like Buffett has very successfully done at Berkshire Hathaway.

Lampert has said himself that he would like to see the company over the long term modeled after a company such as General Electric; "My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come. One of the critical
elements of that kind of longevity is having a culture of testing and measuring, and openness to change. It is very rare for companies to continue to operate for long periods of time without substantial change and adaptation."

Some of the smartest investment managers in the world believe strongly in Lampert and Sears Holdings including Bill Miller at Legg Mason, Bruce Berkowitz at Fairholme, Davis, Mohnish Pabrai, Bill Ackman and many more. Of the group, Ackman is one of the more
interesting as he is known for being an activist investor but as of yet has not demanded much from Lampert (although this could change in future quarters if shareholder value has not increased.)

Some other positives for the company are that Sears Holdings has significant value in its real estate holdings, since much of it is currently priced on the books at cost, and in addition, Lampert is able to use his investment expertise to invest the cash as he sees fit.

All of the above variables make Sears an interesting case study to see whether a highly intelligent hedge fund and business manager is able to turn around a once very strong retailer which has struggled for years to return to its glory days and to bring wealth to its shareholders. Thus far, Lampert would get a C in my book, but I think there are many more chapters to come which can significantly change that grade.

Disclosure: The author does not hold shares in Sears Holdings.

Sears and low bucks
Analysts wonder if Kmart can survive
after loss that's worse than expected
By Sandra Guy - Chicago Sun-Times
May 30, 2008

Analysts wondered aloud Thursday about Kmart's survival and the number of Sears stores that will close in the wake of Sears Holdings Corp.'s report of a bigger-than-expected first-quarter loss and sales declines.

Sears Holdings reported a net loss of $56 million, or 43 cents per diluted share -- a dramatic fall from a $223 million profit a year ago.

Sales at stores open at least a year -- a key measure of retail health -- fell 9.8 percent at Sears and declined 7.1 percent at Kmart. Sales fell 5.8 percent to $11.1 billion.

Cash fell 60 percent to $1.4 billion from $3.5 billion in the year-ago quarter that ended May 3.

"Kmart is not relevant at all," said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm.

Davidowitz said Sears Chairman Edward S. Lampert should shutter the Kmart chain and close Sears stores that are losing money.

Kmart's leases, many for 99 years and at $1 a square foot, are "tremendously valuable," Davidowitz said.

The Hoffman Estates-based retailer also must gain control over its piled-up inventory, making Davidowitz question whether Sears has the technology to do so.

Analysts also were puzzled by Sears' unusual pronouncement that its profits after expenses, called EBITDA, should be higher this fiscal year than last.

Analyst Gary Balter of Credit Suisse said it would be difficult to figure that out unless Sears sells assets or liquidates the company.

He said Lampert, a billionaire hedge-fund manager, could be trying to keep vendors happy, prevent other hedge-fund investors from bailing, or assure rating agencies after Bank of America refused to renew a $1 billion long-term credit agreement with Sears under existing terms.

Sears' shares have dropped 12 percent this year. The stock lost $3.22, or 3.6 percent to close at $86.14 Thursday.

Davidowitz said Sears must find a new CEO who understands merchandising and who could introduce to Sears exciting products, door-buster sales and exclusive merchandise.

Of Lampert, Davidowitz said, "Here's a very wealthy man . . . who is smarter than smart. Does he really want to stay in the middle of this?"

S&P lowers outlook on Sears Holding to 'Negative'
Associated Press - Forbes
May 30, 2008

NEW YORK - Standard & Poor's Ratings Services said Friday it revised its outlook on Sears Holding Corp.'s ratings to "Negative" from "Stable," after the retailer swung to a hefty first-quarter loss.

S&P affirmed Sears' non-investment grade "BB" corporate credit rating, as well as the senior unsecured ratings on Sears Roebuck Acceptance Corp., Sears Canada Inc., and Sears DC Corp.

"The outlook revision is based on Sears' disappointing operating results for the quarter ended May 3, 2008, with steep declines in sales and weak profitability" said Standard & Poor's credit analyst Ana Lai.

Lai also expressed concern about management's ability to boost sales and improve profitability in a difficult consumer spending environment, with the added pressure of intense competition.

On Thursday, the Hoffman Estates, Ill.-based company said it swung to a $56 million first-quarter loss, as customers were forced to spend more of their money to cover rising gas and food costs.

Total domestic same-store sales dropped 8.6 percent. Same-store sales, or sales at stores open at least a year, is a key indicator of retailer performance since it measures growth at existing stores rather than newly opened ones.

Sears shares fell $1.36 to $84.78 in afternoon trading, after hitting a 52-week low of $83.34 earlier in the session.

Will Sears Go for Broke?
By Rich Duprey - The Motley Fool
May 30, 2008

We won't utter the word "bankruptcy" just yet -- OK, I just did -- but it's one of the scenarios investors need to ponder as they look at the continued dismal performance of Sears Holdings (Nasdaq: SHLD). After a few years of using gimmicks to post profits -- selling off real estate, using total return swaps, failing to make capital expenditures to upgrade stores, buying back expensive shares -- Chairman Eddie Lampert's bag of tricks has apparently run dry.

For the first time in three years, Sears failed to report a profit, instead posting a $56 million net loss, or $0.43 per share (a loss of $0.53 a share, excluding favorable gains on the sale of assets). The top line fell 5.2% to $11.1 billion, and total domestic comps -- sales at stores open for at least a year -- plummeted 8.6% from the year-ago period.

Not that falling comps are any surprise. Sears hasn't posted a single increase in this important retail metric in years.

The new game plan for supposedly turning Sears around is to reorganize the company into five autonomous pieces that will all be held separately accountable for making good on progress. Without question, Sears has some well-known brands that it could tap and exploit -- DieHard batteries, Land's End clothing, Kenmore appliances, and Craftsman tools -- but it seems that a new distribution model is necessary, because consumers simply don't want
to shop at Sears.

Instead, they're heading to Wal-Mart (NYSE: WMT), Costco (Nasdaq: COST), and Target (NYSE: TGT), all of which reported higher sales. The combination of low price and quality are bringing in consumers looking to stretch their dollars.

Despite the new strategy, it looks like Lampert is returning to his old financial-engineering ways. The board of directors approved another half-billion worth of stock buybacks. When combined with the amount remaining from previous authorizations, that gives Sears nearly $650 million to spend. Over the past year, the company's buybacks haven't proven beneficial to shareholders' returns; management bought shares as high as $150 a stub that are worth less than $85 today. Sure, the shares seem cheap to repurchase now. But if conditions continue their current trend, they might seem as richly priced as those previous certificates it retired.

Sears is running out of time, if not cash. With more than $1.4 billion in the bank and a substantial $4 billion line of credit, it can hold on for a while longer. However, if the once-venerated retailer continues to bleed through its cash, it might not be too long before we're once again discussing the dreaded "B-word."

A giant continues to unravel

Amid a quarterly loss and sagging sales, investors find it tough to believe Edward Lampert can make Sears whole again
By Sandra M. Jones - Reporter - Chicago Tribune
May 30, 2008

The situation has turned so grim at Sears Holdings Corp. that most investors have given up on the prospect of a retail turnaround and are counting on Chairman Edward Lampert to begin raising cash through asset sales.

The Hoffman Estates-based company posted its biggest quarterly loss since Lampert combined Sears and Kmart three years ago, as shoppers cut back spending on appliances and clothing and the company stepped up promotions to clear inventory.

Sears warned in a statement that it didn't expect the retail environment to improve this year and that the company's sales and gross margin for the remainder of fiscal 2008 "will likely continue to be pressured."

"There is no one in the world who can fix Sears or Kmart," said Love Goel, chairman and CEO of Growth Ventures Group, a private-equity firm that buys retail companies. "So let's get real. The best option is to look at the assets they've got and how to maximize the value of those assets."

Lampert opened the door to asset sales earlier this year when he reorganized the company along separate business units: operations, brands, real estate, online and support. He also raised the possibility of selling Sears' exclusive brands such as Craftsman tools and Kenmore appliances outside of Sears stores. If that happens, it could signal the company's waning interest in operating its own stores.

Yet some analysts wonder whether selling assets is easier said than done. "The easiest way to make money is to redeploy the underlying assets and in this market that's hard to do, " said Sean Egan, managing director at Egan-Jones Ratings Co., an independent credit rating agency.

Lampert won fans years ago when he spotted the real estate value of Kmart stores as the discount chain went through Chapter 11 bankruptcy. Wall Street had hoped he would do the same at Sears, but demand for department store space has waned as the retail industry
consolidates. Retailers from J.C. Penney to Home Depot are cutting back expansion plans as falling home values, rising gas prices and tighter credit prompt consumers to shop less.

"If it is possible to feel sorry for a multibillioniare, then we feel sorry for Eddie Lampert," wrote Credit Suisse analyst Gary Balter in a report earlier this month. "Here is a brilliant guy, someone who we believe can add tremendous value with his insight into many a situation, now stuck with his largest investment in a retailer that is effectively beyond repair. Put simply, Sears and Kmart are the poster children for what one does not want to own in an environment of slowing consumer spending, excess supply and alternative methods
of distribution."

By just about any financial metric, Sears performed poorly in the quarter. Gimme Credit co-founder Carol Levenson, a bond analyst, put it bluntly in a Thursday report: "Where to begin to survey the carnage?"

The operator of Sears and Kmart stores posted a net loss of $56 million, or 43 cents a share, for the quarter ended May 3, compared with net income of $223 million, or $1.45 a share, a year ago. The current quarter's loss would have been 53 cents a share without a gain of 10 cents a share related to the $40 million sale of property in Calgary, Alberta, where Sears operated a full-line store.

Sales at U.S. Sears Holdings stores open at least a year, a key barometer, fell 8.6 percent, the weakest in almost six years, according to Deutsche Bank analyst Bill Dreher. At Sears, same-store sales dropped 9.8 percent. At Kmart, same-stores sales tumbled 7.1 percent. Total revenue fell 5.8 percent, to $11.1 billion.

Sears' closely watched cash situation also deteriorated. Cash fell to $1.4 billion on May 3 compared to $3.5 billion on May 5, 2007.

Meanwhile, a metric Lampert has cited as more telling than the industry standby of same-store sales also declined dramatically in the quarter. Adjusted earnings before interest, taxes, depreciation and amortization, or EBITDA, was $208 million, or 1.9 percent of
revenue, down from $594 million, or 5.1 percent, in the same period last year.

Lampert, who owns half the company, has said repeatedly that he prefers to track Sears' success through EBITDA, a metric that essentially reflects sales minus expenses, and has even tied management incentives to the figure.

Sears interim CEO W. Bruce Johnson said in a statement that Sears expects EBITDA for 2008 will be higher than in 2007, helped by expense cuts. But analysts contacted Thursday were skeptical such a feat could be accomplished.

Reaching that goal "largely hinges on cost cuts, which, if attained, might provide a temporary floor," Goldman Sachs analyst Adrianne Shapira said in a report. "However this action does little to mitigate concern regarding the lack of strategy to drive profitable
top-line growth."

Balter of Credit Suisse suggested that the EBITDA goal means Sears is planning to "significantly" cut marketing expenses and labor costs, he wrote in a Thursday report.

Sears trimmed hundreds of jobs at its headquarters this year and is expected to eliminate more positions as the year progresses.

Shares fell 3.6 percent, to $86.14, on Thursday. The stock is down 16 percent this year and off more than half of the record high of $191.93 in April 2007.

Hedge fund investor Mohnish Pabrai has been watching Lampert since he worked his magic at Kmart and until recently viewed Sears shares as too expensive. But last fall—a time when the shares began their decline to below $100—his Irvine, Calif.-based Pabrai Investment Funds began buying and as of March 31 held 517,607 shares, according to Securities and Exchange Commission filings.

"There are two ways to look at Sears," Pabrai said. "One is as a retailer. The second is as a collection of assets being managed by the greatest capital allocator. And I view it as the latter."

Sears Holdings Reports an Unexpected Loss
By Geraldine Fabrikant - New York Times
May 30, 2008

The Sears Holdings Corporation, the parent of Sears and Kmart, reported an unexpected $56 million first-quarter loss on Thursday, dealing another setback to Edward S. Lampert, the billionaire hedge fund manager who has struggled to turn the company around.

When Mr. Lampert combined Kmart and Sears in 2005, he planned to join the strength of the Sears brands, like Kenmore appliances and Craftsman tools, with the attractive locations of Kmart stores. But the combination has failed to produce either the financial or retailing benefits he envisioned. A cutback in consumer spending and a slumping housing market have complicated his restructuring efforts.

The quarterly loss amounted to 43 cents a share, a sharp reversal compared with a profit of $223 million, or $1.45 a share, in the period a year earlier. Revenue fell 6 percent, to $11.1 billion. Shares of Sears tumbled $3.22, or 3.6 percent, to $86.14, near the 52- week low of $86.02 on Jan. 15.

Cash flow from the company’s stores as well as the value of its real estate had been the justifications for its lofty stock price. But as the real estate market has plummeted and competitors like Wal-Mart and TJX have become increasingly competitive, Sears has suffered. Same-store sales plummeted both at Sears and at Kmart outlets, with sales down 9.8 percent at Sears and 7.1 percent at Kmart. Total domestic comparable same-store sales fell 8.6 percent.

Mr. Lampert’s hedge fund is the largest single shareholder of Sears,with 65.6 million shares, or 49.6 percent of the company. Although he does not disclose performance figures for his hedge fund, it was down about 26 percent last year. So far this year, it was off about 1.2 percent through the end of April, according to one investor who declined to be identified. A spokesman for Mr. Lampert declined to comment.

Mr. Lampert has said publicly that he does not think that same-store sales are the most important measure for retail performance and that he prefers to look at cash flow. Still, the company’s adjusted earnings before interest, taxes, depreciation and amortization fell to $208 million in the quarter compared with $594 million a year earlier.

Burt Flickinger, a longtime retailing consultant, said that there is “real cause for concern for the company now” because of cash flow and real-estate problems.

In the past, some real-estate experts have wondered whether the value of the Sears and Kmart real estate, which had been seen as the real value of the company, could be hurt because Sears has not made significant capital investment in the properties.

The current real-estate crisis may have compounded that problem. Mr. Flickinger pointed out that with the exception of properties in Canada, it appeared that Sears’s real estate values had been dropping drastically.

Meanwhile, same-store sales are the most obvious measure of Sears’s ability to compete with rivals, he said. “They are the lifeblood of a successful retail store base, and you can’t go more than five to seven years with big negative same-store declines and not have an
uncertain future.”

Some analysts have been critical of Mr. Lampert’s extensive cost-cutting. “We expect this to be the worst retail recession in 35years,” Mr. Flickinger said. “Sears cut working capital, they cut inventory, they cut capital expense for short-term gains, which accrues long-term pain.”

In a report published Thursday, Carol Levenson, an analyst at Gimme Credit, wrote, “The goal of making the merged Kmart and Sears into a retailing success has become increasingly less achievable, as same-store sales plunge and excuses abound.”

Gary Balter, a Credit Suisse analyst who had recommended SearsHoldings some time ago, said he “used to have a buy on the stock because of the underlying values of the assets including real estate and brand value.”

“But it does not appear that the value is there anymore,” he said. “It would be hard to sell a lot of these properties.”

Sears Turns in Loss as Sales Drop 5.8%
Costco's Net Rises 32%
as Consumers Shop for Bulk Bargains
By Karen Talley and Donna Kardos - Wall Street Journal
May 30, 2008

Sears Holdings Corp. swung to a loss on weak sales, and many of its customers appeared to have fled to discounters such as Costco Wholesale Corp., whose results told a quite different tale.

Sears saw same-store sales fall almost 10% in the first quarter as shoppers poured into discounters like Costco, where same-store sales increased 8%. The contrast points to the disparity among retailers during the economic slowdown.

Sears said the weak economy forced it to discount to clear inventory that piled up late last year, but Costco benefited from price-conscious consumers looking for bulk sales. Price increases for gasoline also benefited Costco, which operates gasoline stations at most of its locations. It posted a 32% increase in its fiscal third-quarter profit.

Results at Sears show the deterioration of the Hoffman Estates, Ill., department-store retailer under the control of hedge-fund manager Edward Lampert is continuing if not accelerating.

"Costco is fundamentally a very good company offering discounted products that are broadly appreciated," said Mike Moriarty, a partner at A.T. Kearney. "But department stores like Sears keep trying to tailor their offerings for their targeted consumer group, while basically everyone is a price shopper at this point."

In 4 p.m. Nasdaq Stock Market composite trading, Sears's shares fell $3.22, or 3.6%, to $86.14, and Costco's shares dropped 26 cents, or 0.4%, to $72.98.

Sears continued to see its underlying business weaken in the first quarter ended May 3. U.S. sales at stores open at least a year fell 9.8% at its Sears stores and 7.1% at Kmart. Sears said same-store sales fell across "most major categories...most notably within the home appliance, lawn and garden, and apparel categories."

Sears, which gets about one-third of its sales from home goods and appliances, had added to inventories despite slowing sales of its home-related goods amid a misplaced bet on better year-end sales. Instead, consumer spending weakened further, leaving the company with
racks of unsold goods.

Sears's earnings announcement offered no hope for a change in direction soon, though the company did say sales declines "have moderated somewhat" this quarter.

While Sears takes a promotional approach, offering frequent sales, Costco is a straight discounter, Mr. Moriarty said. Sears also lacks international operations. Costco has an overseas presence, which diversifies the company's portfolio. Favorable foreign-exchange rates also boosted its results in the latest quarter.

Costco, of Issaquah, Wash., said same-store sales increased 8% in the quarter ended May 11, driven by a 6% increase in the U.S. and a 16% rise internationally. The average sales price per gallon of gasoline rose 20%, while stronger foreign-exchange rates, especially in
Canada, buoyed third-quarter international same-store sales.

Costco gave a cautious outlook for this quarter. Chief Financial Officer Richard Galanti said the mean per-share earnings forecast by analysts surveyed by Thomson Reuters for $1.01 is "probably on the high end, if not too high." The reason is strong gasoline sales in last year's final quarter, Mr. Galanti said during a conference call.

The Pain Grows at Sears
Lampert's Strategy Appears to Backfire, As Cash Flow Flags
By Peter Eavis - Wall Street Journal
May 30, 2008

With another dismal quarter in the books, Sears Holdings Corp. is starting to look like it's being pulled toward the abyss.

Investors flocked to the retailer based on the strategy of its chairman, Edward S. Lampert, whose ESL Investments Inc. hedge fund owns 49.6% of Sears. His plan was to maintain respectable sales growth, limit capital expenditure and avoid heavy discounting, all to
generate prodigious cash flow.

But Mr. Lampert's approach appears to have backfired: Sears's sales have slumped, and cash-flow generation is weakening. Earnings before interest, taxes, depreciation and amortization, a gauge of cash flow from core operations, dropped to $208 million in the first quarter, down 65% from the year-earlier period. The company reported a $56 million loss in the quarter ended May 3.

Adding to the pain: Sears is reporting sickly numbers as rivals Target Corp. and Wal-Mart Stores Inc. are posting higher sales.

Sears Chief Executive W. Bruce Johnson said Thursday that this measure of cash flow will be higher in 2008 than it was last year. Analysts scoffed.

With cash flows dwindling, investors have to consider the direst scenario. Wall Street analysts are. If Sears's sales and cash flows continue declining at their current pace, by early next year suppliers will likely wonder whether the company has the cash to pay
them, Morgan Stanley analyst Gregory Melich said.

"Sears Holdings has a strong balance sheet with $1.4 billion of cash, a $4 billion line of credit, backed by over $10 billion of inventory. The company generated over $1.5 billion of operating cash flow last year," a company spokesman said.

If Sears needs liquidity, it could draw from that credit facility, but adding large amounts of debt to the balance sheet will only win over investors if the company's operations show improvements.

Sears's managers have shown little desire so far to take drastic action, but first-quarter numbers were so bad that it wouldn't be a surprise to hear about some big turnaround initiatives.

For instance, Sears executives can manage the balance sheet better to increase cash flows. Even when sales are anemic, cash flows can be lifted by tactics such as improved inventory management. But spending big on better inventory-management systems could mean large cash outflows before any big improvements.

Sears may go further and try a large restructuring, by moving quickly to close stores bleeding cash and booking gains from any real-estate value that these stores have. If Sears can stabilize free cash flow -- operating cash flow minus capital expenditures -- at about $1
billion, the company's share price shouldn't fall past $75, Mr. Melich said. They closed Thursday at $86.14, a 52% decline during the past year.

While Mr. Lampert and his team may need more than a Craftsman screwdriver to fix things, if they don't do more, Sears stock could easily fall below that $75 target.

Sears Swings to a Loss As Weak Sales Hit Results
By Donna Kardos - Dow Jones Newswire
May 29, 2008

Sears Holdings Corp. swung to a surprise loss in its most recent quarter, as sales continue to weaken and margins shrank.

The retailer blamed a tough economy, weak housing market, pressure on consumers from fuel and food costs, and intense competition. Margins were hurt by discounting needed to clear inventory that piled up late last year.

The results show that the deterioration of the storied retailer under the control of hedge fund manager Edward S. Lampert, who took over the company in 2005, is continuing if not accelerating. Sears's earnings announcement offered no hope for a change in direction soon.

"Given that we do not expect any significant near-term improvement in the overall retail environment, we believe that our sales and gross margin for the balance of fiscal 2008 will continue to be pressured," the company said in a statement.

Sears shares were 1.5% higher in premarket trading at $90.70 after shaking off a steep early drop.

For the quarter ended May 3, the department- and discount-store retailer posted a net loss of $56 million, or 43 cents a share, compared with prior-year net income of $223 million, or $1.45 a share. The quarter included items that added 10 cents a share to earnings.

Sears, which gets about one-third of its sales from home goods and appliances, said revenue fell 5.8% to $11.07 billion. Analysts polled by Thomson Reuters were expecting earnings of 15 cents a share on $11.41 billion in revenue.

The company did say sales declines "have moderated somewhat" in the current quarter. It also said it would buy back an additional $500 million in stock and said it expects higher cash flow in 2008 than it posted a year ago. Sears has $143 million left under its previous
buyback plans.

The company's underlying business continues to weaken sharply. U.S. sales at stores open at least a year fell 9.8% at namesake Sears stores and 7.1% at the Kmart discount chain. Sears said same-store sales fell across "most major categories ... most notably within the
home appliance, lawn and garden, and apparel categories."

Gross margin slid to 27.3% from 28.2% on increased markdowns. Inventories, at $10.3 billion, are little changed if not up slightly from levels at the end of the company's fiscal fourth quarter Feb. 2.

Sears has been suffering amid a misplaced bet that the U.S. economy would improve. Despite the fact that sales of its home-related goods slowed early last year, the company had added to inventories in anticipation of better year-end sales. Instead, consumer spending weakened further, leaving the company with racks of unsold clothing, stacks of linens and rows of lawn mowers.

Those issues further stressed a retailer already struggling already with waning business and rising complaints about stores and service that made it hard to stop customer losses to more focused rivals. Sears' once-dominant place supplying refrigerators and washing machines to American homes has been chipped away by Lowe's Cos. and Best Buy Co., while its clothing business has suffered at the hands of department-store retailers Kohl's Corp. and J.C. Penney Co.

The company still is searching for a new chief executive to replace Aylwin B. Lewis, who was ousted in January.

In an effort to bring shoppers back to its stores, Sears recently went on a markdown spree at both namesake and Kmart stores, offering Midnight Madness discounts on Web purchases and "Friends and Family" store discounts, among other profit-sapping price cuts. The company also is hoping to snap up customers' economic stimulus payments, with an offer for a bonus gift card with 10% of the value of any gift card purchased with a customer's entire check.

The company reported cash and cash equivalents of $1.4 billion at the end of the quarter, down from $3.5 billion a year earlier and $1.6 billion at the end of its fourth quarter. Analysts have been watching the company's cash position, as less cash could limit management's
ability to spend big to revitalize sales and stores.

--Gary McWilliams contributed to this article.

Sears still has long way to go: analysts
Some question if retailer is 'nearing sunset'
as cash tumbles 60%
By Andria Cheng, MarketWatch
May 29, 2008

NEW YORK (MarketWatch) -- Billionaire hedge fund investor Edward Lampert's struggling Sears Holdings Corp. said Thursday it would repurchase another $500 million of shares and gave its first earnings forecast for this year, projecting a higher adjusted profit after a drop in the previous year.

Investors, however, shrugged off those remarks, sending shares lower as they focused on the company's unexpected first-quarter loss amid sales shortfall and increased discounts.

Sears (SHLDsears hldgs corp comSHLD) shares have lost more than half of their value in the past year since Lampert's Kmart engineered the purchase of the department store operator in March 2005. Investors bid up the stock of the combined company, hoping that Lampert, often
compared with billionaire investor Warren Buffet, would capitalize on the big real estate holdings the company had and generate promising returns.

Times have changed. Investors' hopes about a lucrative real estate play haven't panned out, as declining mortgage and credit markets have squeezed financing and soured many real estate deals, investors said.

The company said cost control will lead to higher earnings before interest, tax, depreciation and amortization this year and that its sales decline has moderated since the end of the first quarter. But investors and analysts said it's still too early to see light at the end of the tunnel for the battered retailer.

"I'm buying a retail stock because I want a retailer, and not a real estate play," said Walter Todd of Greenwood Capital Associates -- which owns Sears' rivals including Lowe's Cos. (LOWLowe's Companies, IncLOW) , Wal-Mart Stores Inc. (WMTWal-Mart Stores, IncWMT) and Costco Wholesale Corp. but has no interest in acquiring a stake in Sears.

"Sears is facing a lot of company-specific issues. They are losing market share to Wal-Mart and Costco and other discount chains. They are struggling and suffering from product mix issues," Todd said.

Lampert and other executives weren't available to comment for this story, spokeswoman Christian Brathwaite said.

Losing shoppers

Sears has lost traffic and sales to rivals -- from Target Corp. (TGTtarget corp com TGT) to J.C. Penney Co. (JCPPenney (J.C.) Company, Inc JCP) -- after Lampert's ESL, which has a majority stake in the company, skimped on store improvement while its rivals remodeled
stores and sharpened their marketing messages to lure shoppers, analysts said. See full story.

The declining housing market and higher gasoline and food costs also tightened consumers' wallets and hurt demand for Sears department chain-stores' trademark lawn and garden products and appliances, where Sears has a dominate U.S. market share, analysts said.

Lampert has restructured the company's business into five units, including real estate, and has said he's considering selling Sears' prominent labels -- such as Kenmore appliances and Craftsman tools -- through other stores to bolster sales. He's also signed rapper LL Cool J to launch an exclusive collection of apparel this fall and has defended his position not to remodel as many stores because he hasn't seen expected productivity and returns. See full story.

"There's a long way to go for Sears," said Joe Feldman of Telsey Advisory Group. "My biggest concern is if they sell Craftsman and Kenmore through other stores, it calls into question the ability of the stores to operate as a viable concern if their key
differentiators can be found somewhere else. They've been big drivers of traffic."

Surprise loss

Hoffman Estates, Ill.-based Sears posted an unexpected first-quarter loss, missing analysts' estimates by 74 cents a share. Sales came short of Wall Street projections by $211.8 million to decline 5.8% to $11.07 billion, according to FactSet Research. Its stock repurchase also has bolstered first-quarter per-share profit as shares outstanding fell 14%.

"If you are buying back shares for the sake of generating earnings growth, versus using excess free cash flow to do so is a big difference," Feldman said.Sears' cash and cash equivalents tumbled 60% to $1.41 billion as of May 3 from $3.51 billion a year earlier.

While Sears struggled, one of its rivals, Costco (COSTcostco whsl corp new com COST) , said Thursday profit rose a better-than-expected 32%, helped by international gains and budget-conscious shoppers in the U.S. seeking to save money and making bulk purchases on one-stop trips.

The two companies' "management performance (is) as different as night and day -- despite both operating in precisely the same economic environment," said Craig Johnson, president of Customer Growth Partners, a retail consulting and research firm. "Sears Holdings
management is using the challenging economy as an excuse for poor performance. The only question for Sears -- a great company that once was the very definition of American retailing -- is whether it's nearing sunset."

Sears' share of major appliances has fallen from 41% in 2000 to under 29%, Johnson said.

"We see a lack of prospects for a near-term material improvement in sales and margins amid competitive pressures and weak consumer spending," said Standard & Poor's analyst Jason Asaeda.

Andria Cheng is a MarketWatch reporter based in New York.

David Shute 1931 ~ 2008
David Shute, retired top lawyer at Sears, dies at age 77
Served as general counsel during retailer's restructuring
By Trevor Jensen - Reporter - Chicago Tribune
May 29, 2008

David Shute was the top lawyer at Sears, Roebuck and Co. during an era of restructuring that saw the retailer shed subsidiaries including Coldwell Banker and Allstate.

Mr. Shute, 77, died of complications from Parkinson's disease Saturday, May 17, at his Gold Coast home, said his wife, Gerri.

Mr. Shute joined Sears as a general counsel with the Seraco Group, a real estate unit, in 1981 after working 22 years with the law firm of Foley & Lardner in Milwaukee. He worked with Sears-owned Coldwell Banker and Dean Witter Financial, where he laid the legal groundwork for the issuance of the Discover Card.

He took over as senior vice president and general counsel for the entire company in 1987. It was a turbulent era for the retailer, still formidable but reshaping itself to compete in a changing market.

In the early 1990s, Sears sold its Coldwell Banker real estate arm and separated itself from its Allstate and Dean Witter subsidiaries through stock offerings. Mr. Shute, overseeing about 300 Sears attorneys, handled the legal details for these often complicated maneuvers.

As general counsel, he not only interpreted the law for executives and the board of directors, he was a much-trusted strategic adviser, said retired Sears Vice Chairman Jim Denny.

"He had a lot of judgment, a lot of wisdom, a lot of perspective," Denny said. "He could describe complicated legal situations in layman's terms that made it understandable."

Mr. Shute retired from Sears in 1996. He grew up in Crystal, Mich. He majored in English at Princeton University, writing a 125-page thesis on "Humor and the Ulysses of James Joyce."

He continued to read widely throughout his wife, quoting Shakespeare and William Blake at will and filling one suitcase with books when traveling for any extended period.

After Princeton, he served a three-year stint in the Navy aboard the USS Strickland as a lieutenant. He received his law degree in 1959 from the University of Michigan and embarked on a legal career in Milwaukee.

At Foley & Lardner, he specialized in banking, real estate and general corporate law and in 1971 opened the firm's office in Washington, D.C. He also taught commercial law at Marquette University during his years with the firm.

A film and theater buff, Mr. Shute would sometimes sneak out of work while at Foley & Lardner to catch afternoon matinees. He and his wife took regular trips to New York to catch Broadway's latest shows.

Mr. Shute's first two marriages ended in divorce. In addition to his wife, he is survived by two sons, David and Douglas; and two grandchildren. Private services have been held.

Sears Expects to Post Dismal Earnings
By Gary McWilliams - Wall Street Journal
May 27, 2008

Because of a misplaced bet that the economy would improve, Sears Holdings Corp. will report Thursday that first-quarter earnings fell about 90% from the same period a year earlier, analysts estimate, pointing to the retailer's heavy discounting on goods that had piled up late last year.

Sears Holdings' U.S. same-store sales are expected to have declined by about 8%.

Other retailers are cutting prices, too. But few have suffered the outsize impact expected at the 121-year-old Sears, based in Hoffman Estates, Ill. Though sales of its home-related goods slowed early last year, the company added to inventories in anticipation of better year-end sales. Instead, consumer spending weakened further, leaving the company with racks of unsold clothing, stacks of linens and rows of lawn mowers.

By comparison, Target Corp.'s first-quarter net fell 7.5% on a less than 1% comparable-store sales drop while net at Lowe's Cos. fell 18% on an 8.4% drop in same-store sales.

A year ago, Sears Chairman Edward S. Lampert promised he wouldn't chase unprofitable sales, saying "our objective is disciplined growth." But during the quarter ended May 3, Mr. Lampert spun the wheel on markdowns and specials at Sears and its Kmart discount-store unit, offering Midnight Madness discounts on Web purchases, Friends and Family store discounts, and a 10% bonus added to tax-rebate checks, among other profit-sapping price cuts.

Sears recently trimmed its marketing by about $200 million, about 10% of its annual budget, say people familiar with the situation. It also has cut several hundred employees at its headquarters and a distribution center. A spokesman declined to discuss Sears'
marketing or comment on same-store sales in advance of its results.

Sears continues to try to pump up the company's product offerings, bidding for home-furnishings retailer Restoration Hardware Inc. and signing deals with online cataloguers. Sears.com this month nearly quadrupled its online offerings. The catalog deals so far have
expanded its online offerings of music, books, software and movies; other deals, including selling auto parts via its Web sites, are under discussion.

However, analysts say Sears hasn't been able to react as quickly as its rivals. "It didn't have the operational controls or systems," to blunt the impact on profits, says Bill Dreher, senior retail analyst at Deutsche Bank Securities. He forecasts profit will drop 92% to 15 cents a share on a 5.7% sales drop, to $11.03 billion.

Mr. Lampert has restructured Sears into semi-autonomous business units, aiming to free the businesses from a slow-moving culture that has stymied change since the 2005 merger with Kmart. He recently appointed new executives to run retail-product groups and is recruiting a new chief executive officer and an executive to manage its well-regarded brands, including Craftsman, Diehard and Kenmore.

Sears to bring out LL Cool J line of kids' clothing
By Sandra M. Jones - reporter - Chicago Tribune
May 27, 2008

Sears Holdings Corp. signed an agreement with hip-hop artist LL Cool J to introduce a line of street wear for children and teens this fall.

The collection of jeans, graphic T-shirts and sweatshirts will debut the second week of September at 450 Sears stores nationwide and expand to about 600 stores in time for the holiday season, the Hoffman Estates-based company said. Sears operates about 926 full- line stores in the U.S.

The brand, exclusive to Sears, will eventually include accessories as well.

Sears is building in-store shops to showcase the line. Prices range from $22 for a T-shirt to $50 for jeans.

Recently, mid-tier department stores and discounters have been signing exclusive deals with celebrities to draw shoppers and stand out from rivals.

Kohl's Corp. is introducing a clothing line from rock star Avril Lavigne this summer. "Sex in the City" actress Sarah Jessica Parker has her own brand called Bitten at Steve & Barry's. And Macy's Inc. has built an advertising campaign around its celebrity brands from Donald Trump, Jessica Simpson, Martha Stewart and others.

Sears plans to tout the LL Cool J line this fall with a television and print advertising campaign featuring the hip-hop star and his family.

SEC Backs Health Care Balloting
By Robert Pear - New York Times
May 27, 2008

WASHINGTON — The Securities and Exchange Commission, shifting its position, has told companies they must allow shareholders to vote on a proposal for universal health insurance coverage.

The S.E.C. has told Boeing, General Motors, United Technologies, Wendy’s International and Xcel Energy over the last several months that they may not omit the health care proposal from their proxy materials.

This came as a surprise to many executives, who said the agency had allowed companies to exclude similar proposals in the past.

Many companies say the health care principles are not a proper matter for shareholders to vote on, and they have tried to keep the proposal out of proxy statements prepared for their 2008 annual meetings.

Some, like General Electric and Medco Health Solutions, have explicitly adopted principles that include the goal of universal coverage. Some, like Boeing and Reynolds American, have opposed the shareholder initiatives. At least a dozen companies, like Wal-Mart and I.B.M., have negotiated with shareholders in the belief they can find common ground.

The shareholder proposal asks companies to adopt “principles for comprehensive health care reform” like those devised by the Institute of Medicine, an arm of the National Academy of Sciences.

The institute says health insurance should be universal, continuous, “affordable to individuals and families,” and “affordable and sustainable for society.”

Employers frequently complain about the cost of health benefits for employees and retirees. The shareholder proposal would not require companies to provide health benefits for employees, but asks top corporate executives to view the issue in a broader context, as a
question of social policy.

“We are doing what we can as shareholders,” said the Rev. Michael H. Crosby, a 68-year-old Capuchin priest who has had discussions with nine companies on behalf of 20 Roman Catholic orders this year. “We come out of a religious tradition, but we are not engaged in a
messianic enterprise. We are one voice among many seeking equitable access to health care for all.”

Religious groups and labor unions hold billions of dollars worth of stock in their pension and health benefit plans. They submitted the same basic health care proposal to three dozen large companies, and they say they have received respectful hearings at many.

“We are working for a national policy that provides universal access to health care, and we do hold more than 30,000 shares of General Electric stock,” said Barbara Kraemer, a Roman Catholic nun who is national president of the School Sisters of St. Francis. “As we pursued the proposal with G. E., the company requested a dialogue in lieu of the shareholder resolution, so we withdrew it. The dialogue was productive, resulting in G. E.’s public endorsement of the Institute of Medicine principles.”

Labor unions and religious groups said they intended to broaden the proxy campaign by bringing in more pension plans next year. If the dialogue between companies and shareholders were to continue, as expected, it could help bridge the divide that has frustrated earlier efforts to cover the uninsured.

Opposition from businesses was one of the major factors that sank President Bill Clinton’s proposal for universal coverage in 1994. But businesses of all sizes are clamoring for relief from high health costs and have concluded they cannot solve the problem by themselves.

Under the commission’s rules, a company does not have to allow shareholders to vote on a proposal if it “deals with a matter relating to the company’s ordinary business operations,” for which management is responsible.

But the commission said it was appropriate for shareholders to express their views to company management by voting on “significant social policy issues” beyond day-to-day business matters.

Over the years, the commission said, it had reversed its position on certain issues to reflect “changing societal views,” and that now appears to be the case with respect to health care.

One of the more bizarre proxy battles occurred at UnitedHealth, an insurer that covers more than 70 million people. Dr. Reed Tuckson, an executive vice president of UnitedHealth, was a
member of the panel that drafted the principles for universal coverage issued by the Institute of Medicine in 2004. But when the Oneida Tribe of Indians, which owns 800 shares of company stock, asked for a formal endorsement of the principles this year, the
company resisted.

Lawyers from O’Melveny & Myers, representing UnitedHealth, told the S.E.C., “The proposal provides that ‘health care should be universal,’ dictating to whom the company should provide coverage.” Moreover, they said, by asserting that “health care coverage should be affordable,” the proposal usurps the company’s right to decide what prices to charge for its policies.

Even after the commission told UnitedHealth to include the proposal in its proxy statement on April 2, the company urged the agency to reconsider, saying, “The proposal does not relate to a ‘significant social policy issue,’ as that term has been defined” by the
commission.

UnitedHealth mollified shareholders by posting a statement on its Web site that endorsed the goal of “access to health care for all Americans” and the principles of the Institute of Medicine.

“We like to work with our shareholders,” said Donald H. Nathan, senior vice president of UnitedHealth. “It was better to deal with the issue in a dialogue, rather than through the proxy process.”

Exxon Mobil reached a similar conclusion after the staff of the S.E.C. ruled in February in favor of shareholders seeking a vote on the health care proposal. The shareholders, from the Sisters of St. Francis in Minnesota, withdrew the proposal after Exxon agreed to a
dialogue.

The United States Chamber of Commerce has complained bitterly about the shareholder campaign waged by the A.F.L.-C.I.O. and other organizations. In response, the Labor Department declared recently that trustees of a pension fund risk violating their fiduciary duties when they try to “further legislative, regulatory or public policy issues through the proxy process.”

Labor unions and religious groups say the proxy is justified because it advances the potential to enhance their investments.

Companies have offered various reasons for resisting the health care proposal. Boeing said it would “not benefit the company or its shareholders.”

General Motors said that “adoption of these health care principles will not advance the legislative debate or facilitate the enactment of federal legislation that would benefit the corporation, its stockholders or the country.”

Reynolds American, the cigarette maker, expressed concern that universal coverage would be financed by more tobacco taxes.

Sears' Hip-Hop Hope:
Store Signs LL Cool J To Do Apparel Brand
By Julee Kaplan - Women's Wear Daily
May 27, 2008

Edward Lampert is determined to prove to Wall Street he's a retailer after all.

The Sears Holdings Corp. chairman and his team are making some long- awaited merchandising moves in the hedge fund billionaire's retail empire in an attempt to reenergize Sears' apparel offering, stimulate traffic and generate some buzz. And key among them is taking the well-trodden path of launching a celebrity label, albeit with an unexpected partner: rapper LL Cool J.

Sears has teamed up with the hip-hop veteran to launch a brand called LL Cool J for Sears. The collection of casual wear for juniors, young men's, girls' and boys' will roll out to 450 of Sears' 900 stores in September and could generate as much as $100 million to $150 million in its first year, sources said.

If it succeeds, the brand could go a long way toward easing some of the growing skepticism over Lampert's strategy for Sears Holdings, which combines Sears and Kmart, and whether the conglomerate is more of a financial play than a retail one. If all goes as planned, the LL
Cool J brand would be a boost for the store's "softer side," said Irv Neger, Sears' senior vice president of apparel, serving an urban consumer the retailer hasn't been addressing. "We know this [urban] customer is in the store, but it's a customer we weren't reaching. With this brand, we see tremendous growth opportunity."

As for what LL Cool J knows about women's apparel, the hip-hop artist insists he's had plenty of experience. "I was raised by a matriarch, I have a wife and three daughters, so I know what women are looking for when they shop for clothes," he said. "My main concern with juniors is to make sure the fit is right. The fabrics have to feel nice on a woman's body, but sizing and fit are very important. I know that if she comes in, puts it on and it doesn't fit, she won't come back. Clothes have to make a woman feel good, relaxed and sexy. We
are going to be constantly looking at fine-tuning the fit and we'll get it right."

But Sears is going against the grain by tapping the 40-year-old rapper. Retailers seem to be launching celebrity lines as quickly as they're marking down in these tough economic circumstances, but most lately have been signing younger, fresher faces — Avril Lavigne will soon launch at Kohl's and Rachel Bilson is doing a line for DKNY Jeans.

Also, as many celebrities and stores have learned, the apparel road isn't always a guaranteed hit. While Sean "Diddy" Combs has built an empire with Sean John, he's always found women's wear to be a challenge — taking it in and out of business. Beyoncé Knowles' House of Deréon brand has seen its ups and downs, and rapper Eve has launched and relaunched her Fetish brand several times. On the other end of the spectrum, Gwen Stefani has built a solid business with her L.A.M.B line and Mary-Kate and Ashley Olsen have made their mark at Wal-Mart with one brand and at Bergdorf Goodman with another.

Sears executives are hoping LL Cool J's longevity in the business will be a plus rather than a negative in these flash-in-the-pan times. The store is building shops-in-shops for the brand in each department. In the juniors area, the LL Cool J brand will sit near the current mix of sportswear from Southpole, Levi's, Personal Identity and Joe Boxer. "The shop-in-shops in each category will help to show customers our new point of view," Neger said.

The collection will retail on the higher end of its mix in juniors — from $22 for a graphic T-shirt to $50 for a pair of jeans.

Evidence of LL Cool J's involvement is evident throughout — from an embroidered tattoo on the back of a jacket to song lyrics printed on a T-shirt. By holiday, the collection will grow in number of stockkeeping units, extend into 600 doors and launch accessories, Neger said. With LL Cool J's wide appeal, Neger said he can envision the brand extending into new categories ranging from bedding to fitness equipment.

The entertainer, whose given name is James Todd Smith, has been building his music career since 1984, when Def Jam Recordings co-founders Russell Simmons and Rick Rubin signed him as a flagship artist for their label. He was just 16 years old. Since then, the Queens, NY, native has released 12 albums; 10 of them reached multiplatinum status and the last two reached gold. His 13th record, titled "Exit 13," will hit stores in July.

And, like many of his peers, LL Cool J has broadened his scope beyond hip-hop. He's appeared in several movies, including the upcoming "The Deal" with Meg Ryan and William H. Macy, and has been featured on Fox's "House" and NBC's "30 Rock."

The entertainer also has written a children's book, "And the Winner Is"; a workout book, "LL Cool J's Platinum Workout," and an autobiography, "I Make My Own Rules." His men's apparel brand, Todd Smith, sells at Macy's and specialty stores, competing with Sean John.

"I have always had a hand in fashion in some capacity [as the face of brands such as Kangol and Fubu], but I have never embraced a brand the way I will embrace this," LL Cool J said. "The LL Cool J name is a brand I have been building for 25 years and I didn't want to do this line with just any store. I wanted to wait until I felt comfortable enough to take the leap." "We know this [urban] customer is in the store, but it's a customer we weren't reaching. "— Irv
Neger, Sears Neger said that even before he met with LL Cool J, he was working with Regatta, the Li & Fung-owned production house, to bring more fashion into Sears, which is based in Hoffman Estates, Ill. Regatta executives eventually signed LL Cool J, and is handling the production of LL Cool J for Sears apparel.

With Regatta's capabilities, Neger said there should be no problem shipping new product monthly. Regatta has become known as a force in the industry, producing a series of retail-exclusive brands including Simply Vera Vera Wang and Daisy Fuentes for Kohl's and Metro 7 for Wal-Mart.

Evoking his youth in Queens, where he shopped in Sears with his grandfather, LL Cool J said he wanted to launch the line in a store with which he had an emotional connection. He said he also wanted his brand to appeal to a wide audience of working families.

"We used to run up and down the aisles, we would play games in the store," he said. "I used to beg my grandfather to take me to Sears and then to get some fast food after. I have the fondest memories of the store, so this partnership just felt right."

Neger said he sees the partnership as long-term, with the brand becoming a core part of the overall structure at Sears. The line is part of Sears' overall turnaround strategy to fill a void in the store and address more of what shoppers are looking for, Neger said. The retailer has adopted a specialty store mentality.

"Tough economic times create evolution and we are going to take the steps to develop and make us right for our customers," Neger said.

"We are going to take a lot more risks in juniors," he said. "It's all about style, quality and value in juniors and we plan to move quickly, reacting to the trends and constantly have new merchandise on the floor."

If the brand is well received, it would be a much-needed boost for Sears after a tough year financially. The firm's fiscal 2007 financial performance fell below expectations and Sears Holdings emerged from the holiday season with excess inventory, particularly
in apparel, leading to costly markdowns.

For the fourth quarter ended Feb. 2, Sears Holdings reported profits fell 47.5 percent to $426 million from $811 million a year ago, and revenues slid 6.8 percent to $15.1 billion from $16.2 billion. For the full year, Sears' net income dropped 44.6 percent to $826 million, as sales slipped 4.3 percent to $50.7 billion.

As a result, Lampert has come under increasing pressure from investors to articulate a strategy for Sears and Kmart. Sears Holdings' shares are far off their 52-week high of $183.25, closing Friday at $87.95, down 2.39 percent from the day before.

At the Sears annual meeting earlier this month, executives said the company will focus on three areas to turn around the Sears businesses: protecting margins, optimizing promotions and pricing and better managing how goods are bought and sold. Lampert also said
Sears Holdings' restructuring into five distinct business units, announced in January, should enable the company to improve accountability and productivity of all assets from brands to real estate to home services.

And after several years of not remodeling stores and scaling back on marketing, Lampert recently has shown signs he recognizes their value. Kmart, for instance, launched a major marketing campaign this spring, including TV ads, to emphasize its low prices and breadth of
product.

Neger said there will be a major marketing push behind the LL Cool J brand as well, both in print and TV.

The ads will feature LL Cool J himself, along with his family — his wife, Simone, son Najee and daughters Italia, Samaria and Nina. The idea, the rapper said, is to bring the brand to the whole family by showcasing his own family in the campaign. In addition, LL Cool J said he will be working on more ways to give customers access to him, by holding in-store contests where a shopper can win a chance to hang with him in the studio or on the set of a video.

"It's all about making the great life attainable," LL Cool J said.

Yes, There Is an ROI for Doing Good
But Numbers Are Hard to Come by for Efforts by McD's, Sears and Others
By Jack Neff - Advertising Age
May 26, 2008

Surely all the companies investing in cause marketing must be earning points in afterlife. Unfortunately, under both Delaware law and the tenets of most major religions, corporations technically don't have souls and hence aren't eligible for heaven.

And so the question remains, are they making any money at this?

It seems impolite to ask. But make no mistake: Though you might not always glean this by looking at the home pages of the consumer-products giants touting their latest philanthropic or earth-saving gestures, these are for-profit entities.

While the cynical outlook, repeated endlessly across the blogosphere, is that cause marketing is all about making money, perhaps the more mature, post-cynical outlook is, yes, of course it is, and, well, it should be.

Mike Hess, director-global research and consumer insights for Omnicom Group's OMD, New York, has spent his career quantifying the return on marketing investment for several firms and argues that not only should cause marketing have a positive ROI, it should actually
generate a better return than other outlays.

Lacking numbers

After all, if cause marketing doesn't pay off at least as well as other approaches why not pour all that time and money into conventional pitches, avoid the complexity of roping a nonprofit into your brand planning, and just earmark some of the proceeds for donations?

Mr. Hess doesn't really know how well these programs stack up to others, because in nearly two decades working with marketing-mix models, no one's ever actually had him crunch the numbers.

But he suspects cause programs may pay off considerably better than most ad campaigns. Having worked on two major meta-research projects on advertising effectiveness, he said the "coefficient" of cause marketing (i.e., the multiplier effect of the first year's sales lift) may well be higher for cause marketing than your ordinary TV ad because consumers' emotional connections in equating a cause with a brand may be stronger than the connections forged by other advertising.

Gregg Ambach, managing director of Analytics Partners, Cincinnati, hasn't run a model on a cause-marketing program, either, though he's a veteran of both Kraft Foods and Campbell Soup Co., where they have plenty of cause-marketing efforts and love of analytics.

But Mr. Ambach's gut (yes, even analysts have those) tells him some of these programs must pay off handsomely.

Fat payout

He recalled Campbell's Labels for Education program, which years ago would give a van to the school that collected the most labels. One school in Louisville, Ky., won three years running with more than a million labels each year, he said.

If even 5% of those labels represented incremental purchases because of the program, factored against the (likely discounted) cost of the van and tax write-off considerations, the program likely paid out without even counting all the schools that didn't win but still
collected labels, Mr. Ambach said.

Running a marketing-mix model on that or General Mills' "Box Tops for Education" (also syndicated to marketers such as SC Johnson and Kimberly-Clark Corp.) is difficult, considering they've been around for decades, take place year-round and rely largely on entirely untrackable unpaid media, such as PTA meetings and letters home in book bags. But Mr. Ambach said such programs almost certainly pay out, especially considering the low investment.

P&G, whose decades-long commitment to the Special Olympics has helped move a lot of soap each January when the related consumer and retail promotions kick in, has in recent years been layering on a number of similar efforts.

These include shipping cases of Dawn to clean up birds slimed by oil slicks, starting with the Exxon Valdez spill in the late 1980s; the Crest Health Smiles 2010 program that provides dental care for urban youth, launched in 2000; and providing clean drinking water, tetanus
shots for expectant moms and feminine products for schoolgirls (through Pur, Pampers, and Always and Tampax, respectively).

Continued success

Does P&G track the ROI for these programs? Certainly, according to people familiar with them. Is it divulging the details? No way.

"It would be difficult to say whether 'cause' marketing provides a higher ROI, because every brand is different," a spokeswoman said in an e-mail.

But it's unlikely that P&G, which measures everything, would keep reapplying the model across ever more brands if it didn't make money at least as well as other efforts.

In a January interview, Global Marketing Officer Jim Stengel said the Pampers program with Unicef has likely provided the best return among recent efforts, creating "a tremendous impact on our business. When you do it in the right way, with the right tone and the right
authenticity, consumers reward us for it," he said.

One indicator of that is the recent rollout of the Pampers program in the U.S., which had retailer support strong enough for P&G to extend it two additional months. Advertising behind the effort provided the strongest copy-test scores for a pan-franchise "equity" campaign in
the brand's history. With P&G's feminine-care program, the return may be even bigger, if harder to quantify ultimately. Beyond the goodwill generated by ads in the U.S., the product donations are developing markets for the brands in countries where none existed before and
even helping break down trade barriers for some other P&G brands.

But, as with many of the cases below, the impact of cause marketing often gets measured -- or at least reported -- in fuzzy noncurrency terms, such as millions of media impressions generated or millions of people helped, rather than the hard dollars returned for dollars
spent that data marketers increasingly try to generate for other programs.

And while spending money on heavier-duty analytics to measure the financial payback of these programs might look bad, it might not be. If more marketers knew conclusively that it paid to do good, they might just do it more often.

HÄAGEN DAZS

With no obvious connection, Häagen Dazs' support for the effort to curb the declining honeybee population might cause suspicion it is attaching its name to a timely cause to generate some positive, um, buzz. But upon further inspection, it becomes clear the brand has reason for backing this cause.

In fact, it has 30 reasons. That's how many of Häagen Dazs' 73 flavors contain ingredients pollinated by honey bees. The company refers to them as honeybee-dependent flavors and is tagging them with an HDlovesHB icon. Katty Pien, brand director at Haagen Dazs, said
this marks the first time the brand has ever lent its support to a cause.

"From a brand perspective, it was important to take on a cause that was integrally linked to who we are," she said. "We didn't want to be another brand profiting from the latest cause of the day."

How serious is the ice cream maker about its campaign? Ms. Pien said it is seven-figures serious.

International press attention

The push began with a press release three months ago that was picked up in the U.S. by the AP, sparking coverage in parts of Europe as well as Japan and China. That was followed by national cable TV spots and one network TV spot that aired during "60 Minutes," which had
done a story on the honey-bee population. Print executions also ran in the May issues of magazines such as Gourmet, National Geographic and Martha Stewart. All promotional material directs consumers to helpthehoneybees.com, where they can make donations and learn more  about how to help.

In the June 9 green-themed issue of Newsweek, the marketer is running an ad printed on 100%-recycled linen paper embedded with flower seeds that consumers can rip out of the magazine and plant. The ad from Goodby, Silverstein & Partners, which will appear in regional markets including San Francisco; Portland, Ore.; Miami; San Diego; and
Seattle, will sprout wildflowers, Ms. Pien said. For the PR effort, the marketer is working with Ketchum.

In store, it is launching a Vanilla Honey Bee flavor. A portion of the proceeds from the new flavor and all HDlovesHB-labeled flavors will go to the effort. The company has also donated $250,000 to UC Davis and Penn State to fund Colony Collapse Disorder research as well as honeybee-sustainability research. Moreover, Häagen Dazs is visiting community gardening groups with the hope of issuing more than a million plant seeds to be used to grow honeybee-friendly gardens.

It's produced a big PR payoff. Ms. Pien said the campaign has generated more than 186 million media impressions since February, shattering its goal of 125 million for the year. While she had no exact numbers, Ms. Pien said the campaign has resulted in "a very
healthy increase in our baseline volume in retail sales."

MCDONALD'S

If cause marketing has a granddaddy, it might just be the Ronald McDonald House Charities.

The fast-feeder opened the first Ronald McDonald House in 1974 in partnership with the Philadelphia Eagles and former Eagles tight end Fred Hill, whose daughter battled leukemia. McDonald's won't disclose how much it's raised, but says the return on investment is its
perceived interest in children's welfare.

Ronald McDonald House Charities provides housing and care for sick children.

"We look for our partnership to better tell our story about how we really care about kids," said Heather Oldani, director-U.S. communications at McDonald's USA. McDonald's has "internal business tracking measures" to gauge consumers' feelings about the brand as well as the causes it's associated with.

Tania Haigh, a McDonald's U.S. marketing manager, said that awareness of Ronald McDonald House has consistently registered above 90% for the past five years, and "we're always trying to improve that."

As of 2006, the organization had a $32 million budget, and the company said it has raised more than $110 million since 2002. The company spent $2.5 million in measured media to boost awareness of the namesake charity, according to TNS Media Intelligence. A key
component of those efforts has been advertising right before the Super Bowl. Arc Chicago and DDB Chicago are the national marketing and advertising agencies for Ronald McDonald House.

Ms. Haigh said the spots, such as the one used in February, tell "heartfelt" stories about people whose lives have been touched by Ronald McDonald House Charities, which has three primary components: the 276 houses where people spend the night while children in their care are getting medical treatment; 123 Ronald McDonald family rooms in hospitals that allow families to stay near their children; and 32 Ronald McDonald Mobile Care programs that provide medical and dental care, among other services.

McDonald's uses several annual events to drive donations and boost awareness, including World Children's Day in November, when the marketer donates a portion of the profits from specific menu items. Customers may also purchase a "Give a Hand" for $1. The chain also
sponsors an annual McDonald's All-American basketball games, which recognize top male and female high-school athletes and include tours of Ronald McDonald Houses.

SEARS

Sears Holdings has a long history of charitable efforts, but last year it broke new ground with the launch of Heroes at Home.

A partnership with Rebuilding Together, Heroes at Home aids military families in need by the remodeling and refurbishing of their places of residence. In some cases, homes are made accessible for veterans who have suffered injuries, and in others, homes are simply
refurbished to improve the family's living situation.

Sears Heroes at Home refurbishes and remodels army-family homes.

Don Germano, sponsor of Sears Holdings' military network and senior VP-general manager at Kmart, said the program represents an extension of the company's existing military-support program, which holds jobs for deployed personnel, among other things. It also plays to the retailer's theme of home renovation and maintenance. A media integration with ABC's "Extreme Makeover: Home Edition" has been an enormous success for Sears.

While the "Heroes" program has generated more than $4 million in its first year, Sears is using a different yardstick for success. "The return on investment is really the program itself," Mr. Germano said. "It's knowing we're out there doing something that matters to our
customers and associates."

Raising funds, awareness

Sears holds two fundraising drives per year. The first kicks off on Memorial Day and runs through the beginning of July, while the second is geared toward the holiday season. Customers can donate in store, online or by purchasing a Heroes at Home gift card.

Last year, 30-second and 60-second commercials featuring Army specialist Ryan Major, the first beneficiary of the program, ran in an effort to raise awareness. Y&R, Chicago, did the advertising; Euro RSCG Worldwide, New York, handles PR.

"As we get into cause-related initiatives, it's humbling to see how generous our customers are," Mr. Germano said. "And our associates who are volunteering ... feel they are making a difference."

As the program grows, Sears is bringing on other companies whose products are carried at its stores to participate. Hershey will donate $100,000 to the cause this year and sell chocolate kisses wrapped in flag-printed foil at Kmart.

LEXUS

This past September, Lexus Prestige Communications Manager Nancy Hubbell woke from a sound sleep, concerned that no one would articipate in the automaker's about-to-launch cause-marketing initiative, the Lexus Environmental Challenge, which asks teams of middle- and high-school kids to create and implement environmental programs in their communities to improve land, water, air and climate conditions.

She needn't have worried. The automaker anticipated 250 teams would take part and instead got 350, representing 3,500 students.

The Lexus Environmental Challenge asks teens to create environmental programs.

Ms. Hubbell said Lexus chose to target future and not current drivers with this effort based on the feedback it got when it asked current consumers what kind of philanthropy program it should start. "[Our customers] said any way Lexus could 'pay it forward' would resonate
with them," Ms. Hubbell said.

To promote the campaign, Lexus, in partnership with Scholastic, distributed books to students providing information about the program and drove them to scholastic.com/lexus to find out more about the contest, which awards over $1 million in scholarships and grants to
the winners. The two also e-mailed some 100,000 teachers about the
effort.

To get its customers and 223 dealers involved, Lexus created a kit containing information on the program, a letter explaining the importance of getting people to take part in the challenge and a large stack of postcards for the dealers to send out to customers. Customers were encouraged to take those postcards to their children's schools and ask their teachers to visit lexus challenge.com and consider taking part in the program.

Ferris Communications handled the PR component, and Team One managed the advertising element. Ms. Hubbell wouldn't discuss the cost of the campaign but said "administration/PR is definitely under seven figures."

The return on investment? Let's just say Ms. Hubbell won't lose any sleep over it when it returns this fall.

~ ~ ~
Contributing: Michael Bush, Emily Bryson York, Natalie Zmuda.

A New Age for Allstate chief
By Becky Yerak - Tribune reporter - Chicago Tribune
May 22, 2008

Tom Wilson has a New-Age streak to his management style.

In late 2006, the then-president of Allstate Corp. took a dozen managers from the Northbrook-based insurer to the Human Performance Institute in Florida for a three-day seminar.

Attendees learned how to boost their physical and emotional energy by eating better, exercising and finding their "purpose" in life, Wilson explained. The goal was to improve performance.

"If you know your personal purpose, you'll have plenty of energy to do what you want to do," said Wilson, who has since added chairman and chief executive to his title.

His purpose: "I want to help people find more meaning and success in their lives."

Wilson, who turned 50 in October, also learned to eat a healthy snack every three hours. "I eat an apple or something in the middle of the morning because of what it does to your glucose levels," he told the Tribune. "They teach you this."

Wilson isn't afraid to show a sensitive side either.

In his letter to shareholders, who were hosted Tuesday at the annual meeting in downtown Chicago, Wilson tells of Allstate Foundation's signature programs on teen driving and domestic violence.

"I have had tears in my eyes as I listen to stories of domestic violence victims," he wrote to investors of the $36.8 billion business.

But he's willing to play hardball.

Allstate, which this month introduced new financial products such as Allstate-branded ClearTarget Retirement Funds and Guaranteed Lifetime Income, wants to protect such existing products as Your Choice Auto, which offers options for motorists depending on whether they care about cheap or comprehensive coverage.

"Your Choice Auto continues to be very successful," Wilson said in an interview in late March. "People are starting to copy it now, though. It looks like Farmers has something similar so we're trying to figure out whether to sue them on the patent."

In response, Farmers Insurance spokesman Jerry Davies said its "Farmers Flex" auto package was brought to market last month, "after considerable consumer research and receiving regulatory approval in states where it is offered." The product lets motorists lock in base rates for up to three years in most states.

"Most insurers have many similar auto policy features and some unique ones," Davies said. "Insurance consumers will choose for themselves, and all insurance companies should stay focused on serving customers in the most productive way possible."

As of Thursday, Allstate still hadn't filed a patent infringement suit against Farmers, an Allstate spokesman said.

On a broader scale, Wilson has been weighing the value of patents for Allstate.

"The test will be on things like Farmers. I've said to our team, 'We've spent all this money on patents. If we think they're protection, let's use them. And if we're not going to use them, let's quit doing them,'ƒ|" he said. "I don't want to spend money getting a patent just to make ourselves feel good.

"Right now in financial services we're wondering how strong will patents be and how good will they be for us. Or is the answer to be faster than everyone else?"

Sears named in suit over dryer installations
By Monée Fields-White - Chicago Business
May 21, 20008

(Crain’s) — Sears Roebuck & Co. is one among four appliance retailers named in a federal lawsuit that claims they were negligent in ignoring fire-hazard warnings by using metal foil and plastic vents when installing dryers. Home Depot Inc., Lowe’s Cos. and HHGregg Inc. are also named in the complaint filed Wednesday in four U.S. District Courts, including in Northern Illinois. The plaintiffs are seeking class-action status.

The lawsuit claims that all dryer manufacturers instruct owners to use heavy metal vents when setting up the appliance, which also bear labels stating that doing otherwise can lead to a fire or death. The retailers’ installers ignored those warnings, says Paul Geller, a Florida lawyer who is one of five attorneys representing the plaintiffs. None were in the Chicago area; one was in Indiana.

“This is not an innocuous mistake,” Mr. Geller says. “This is a very dangerous and serious mistake.”

The suit against Sears Roebuck, a unit of Hoffman Estates-based Sears Holdings Corp., does not link any dryer fires to retailer installations.

The suit says, “The leading cause of clothes dryer fires is due to improper installation of vents and excessive buildup of lint within the dryer.” It cites figures from the U.S. Fire Administration, a division of the U.S. Department of Homeland Security, showing dryers were involved in an estimated 15,600 building fires, causing 15 deaths, between 2002 and 2004.

A Sears spokesman declined to comment.

Sears opens new direct delivery center
Chicago Business
May 21, 2008

(AP) — Department store operator Sears Holdings Corp. said Wednesday it will open a new direct delivery center in Jacksonville, Fla. The Hoffman Estates-based company said the 811,672 square-foot center will distribute home appliances, TVs and other big-ticket items to local warehouses at 112 Sears and Kmart store locations in Florida, Georgia, South Carolina, the Virgin Islands and Puerto Rico.

The center will employ about 75 people, the company said.

Macy's National Approach: Go Local
Marketing Shifts to Web, Radio and Newspapers,
Away From Television
By Rachel Dodes - Wall Street Journal
May 21, 2008

When Macy's decided a couple of years ago to build a national brand, it boosted its spending on television advertising. But as part of a recent move to appeal to local tastes, the retailer will emphasize media such as newspapers, radio and Internet advertising.

Overseeing the new marketing strategy is Peter Sachse, who doubles as Macy's chief marketing officer and chairman of Macy's online division. A 25-year veteran of Federated Department Stores, which last year changed its name to Macy's, he is serving his second stint as CMO. He filled the job from 2003 to 2006 before moving on to run Macys.com, resuming the role about a year ago after his successor left abruptly.

Mr. Sachse, 50 years old, faces a challenging task in balancing Macy's marketing mix. The retailer has had success with splashy TV ads starring celebrities such as Mariah Carey, Martha Stewart and Donald Trump, all of whom sell branded products in its stores. Macy's 60-second Christmas spot was the most-recalled department-store ad since September 2007, according to IAG Research.

While keeping those types of celebrity-studded ads on the air, Macy's plans to use local media advertising to target consumers who may have been turned off by the company's elimination of regional department- store names following the 2005 merger of Federated Department Stores and May Department Stores.

Despite the well-recalled TV ads, Macy's sales at stores open a year dipped last year. To boost sales Chief Executive Terry Lundgren last month unveiled the "My Macy's" initiative, giving merchants across the country the authority to tailor about 15% of a given store's merchandise to local preferences.

Below, Mr. Sachse discusses the continued value of celebrities in elevating the Macy's brand, the importance of newspaper advertising and how Macys.com will become more localized.

WSJ: What has been the response to the celebrity advertisements over the past few seasons?

Mr. Sachse: We got an incredibly positive response both internally and externally. ...We've been ad testing these commercials since they started, and motivation to shop, likelihood to shop, all these metrics have gone up substantially. Another thing that has come out of the commercial is a sense of discovery that something new is happening at Macy's. As much as we believe that everybody knows we carry Ralph Lauren, Tommy Hilfiger and Mariah Carey [products], they don't. Now the consumer is coming back to us, saying "There's something happening over there at that Macy's store. I am going to check it out." We don't have celebrities for celebrities' sake in our commercials. This is about designers who are making stuff for our store.

WSJ: Have you seen an impact in sales of the celebrity-branded products featured in the ads?

Mr. Sachse:Their businesses have increased. It wasn't something we expected. We...saw specific results, on the specific stuff we put in the commercials. Our Donald Trump business is spectacular. The second we put Mariah Carey in the commercial, her fragrance sales go up. Now we don't have to make quite as many calls [to get celebrities to appear in ads].

WSJ: How has the importance of newspaper advertising changed as readers migrate to the Internet?

Mr. Sachse: Newspapers, as you know, have declined. That's all there is to it. They have fewer eyeballs. As a marketer, you have to go where the eyeballs are. Having said that, we believe strongly in newspapers, always have, and in the foreseeable future, always will.
Something could change, but I don't see it. ... When you think about how we are going to deliver "My Macy's" and those localized ideas, it is going to come from newsprint predominantly.

WSJ: What other strategies are you thinking about in order to get the "My Macy's" message to consumers?

Mr. Sachse:Frankly, we need to get the "My Macy's" organization set up, and let them begin to localize those [merchandise] assortments. Once they have done that then the marketing will follow. ...We can do that through the Internet, by locally targeting ads to a ZIP code. And I can do it in terms of newsprint as well.

WSJ: How do you measure the effectiveness of search marketing?

Mr. Sachse: It's not as precise as we would like it to be. ...We have certain techniques -- surveys, tests, all sorts of things -- to find out how many people "activated." If they searched for "perfume" did they buy it in a Macy's store? We do know if they bought it on the Web site. We have that. What we don't know is what action they took in the store.

WSJ: How will the Macys.com site change to reflect "My Macy's"?

Mr. Sachse: There are several initiatives that the Web site is going after, including the ability for you to go to the Web site, find a blouse [or other item] you like, click on it and see if it's in a store near you. That's the epitome of "My Macy's." The Web site doesn't do that today, but it will [in August]. There are many initiatives under way that truly make us a multichannel retailer. No matter where you go for information, that site should be your hub...from credit-card statements to furniture delivery. In the third quarter, we will be able to tell you if there's a sofa you're interested in, if it's in a showroom near you. Our salesmen in our furniture galleries were saying, "People are showing up with printouts, saying 'This is the one I want. Can I sit on it?'"

Retailers Downscale Their Luxury Lines
By Jennifer Saranow - Wall Street Journal
May 19, 20080

When Ann Taylor and Banana Republic launched higher-priced clothing lines last fall, the strategy seemed like a winner. The luxury market was booming and specialty apparel chains of all stripes jumped on the new "accessible luxury" bandwagon, rolling out $350 jackets and $200 pants to encourage purchases by higher-income customers.
.
Their timing couldn't be worse. As retailers across the board struggle with a slowdown in consumer spending, the market for entry- level luxury goods has been hit especially hard. Some chains are delaying or scaling back their high-end plans, or canceling them altogether.

Cache Inc. closed two of its 15 Caché Luxe stores this year and plans to close more. Coldwater Creek Inc. is dropping its higher-priced Spirit line, after testing it in about 50 stores.

At AnnTaylor Stores Corp., which launched its more-expensive Collection line in 24 of its 929 stores in September, the response so far has been tepid. The company recently noted weakness in Collection suit sales and called the line's sales overall "okay."

Gap Inc. won't disclose sales for Banana Republic's BR Monogram line, now in 30 of its 555 stores in North America, though a spokesman said, "We are on track with where we want Monogram to be right now." In April, the chain opened its first store devoted exclusively to the line, but officials stress the Manhattan store is only a test.

Clothing in the retailers' higher-priced lines are generally made of higher-quality fabrics and priced from 10% to 40% above the chains'
core lines.

Targeting middle-class shoppers who aspired to buy ever more upscale products once seemed like a no-brainer. The strategy had been successful for everyone from Starbucks Corp. to Coach Inc., which pioneered the approach in the fashion world by pitching its high- margin $400-and-up handbags as "accessible" luxuries.

"The aspirational buyer is pulling back and not buying, or shopping at the outlet malls to a greater extent," says Craig Johnson, president of Customer Growth Partners LLC. Shoppers with annual incomes of up to $250,000 have trimmed luxury purchases in the past year, he adds.

The higher-priced concepts may work out in the long run, once the economy recovers. And if they are done well, in a limited way, they can create a halo effect for moderately priced brands that can help in the near term, analysts say.

By moving upmarket, the chains hope to boost their profits. But right now, they are having to slash prices to move merchandise. Ann Taylor is offering 20% off all new skirts and dresses. At Talbots Inc., 15 of the 34 higher-end items on its Web site are marked down.

Amanda Warren, a 24-year-old employee of a private-equity firm in New York, frequently shops at Banana Republic but has yet to buy from the Monogram line. "When you are in a store and you see an identical item that is more money, why would you buy it?" she says.

Sears nearly quadruples number of products sold online
By Sandra Guy - Chicago Sun-Times
May 16, 2008

Sears Holdings is turning its Web site into an Amazon.com-like assortment of books, DVDs, music, software and customizable artwork, nearly quadrupling the number of products sold at Sears.com.

The Hoffman Estates-based retailer will also let shoppers in Sears stores order online at computer kiosks and waive shipping fees for a product to be sent to their home, said Imran Jooma, Sears vice president of e-commerce.

Sears.com offers 600,000 book titles; 250,000 movie and music titles, and 300,000 image options for art prints and canvas reproductions, as well as mirrors and tapestries. Sears has partnered with Alliance Entertainment Corp. to offer music and movies and with ArtSelect.com for the art gallery and custom frame shop. The online book selection is the result of a partnership with Baker & Taylor, and the downloadable software is hosted by Digital River.

The Web site lets shoppers search by a product's size, color, brand and category.

"This is just the beginning," Jooma said. "Every few weeks or months, you will find us adding (products) on Sears.com."

Sears.com broadens its product offerings
Retailer's online strategy moves closer to other sites
By Eric Benderoff - Reporter - Chicago Tribune
May 16, 2008

Sears Holding Corp. said Thursday that it has quadrupled the merchandise at its Web site and even is offering products from other retailers.

"We are approaching it as a total solution," said Imran Jooma, Sears vice president of e-commerce. "If you want entertainment products, and we've always sold consoles, we might as well sell you music and videos too."

The broadening of its online offerings moves the retailer closer in strategy to other online retailers, such as Amazon.com, and also borrows from traditional brick-and-mortar retailers with Web sites, like Circuit City.

For Sears, the approach online has been slow and methodical. Late in 2007, it began offering movies and music. In February it added software programs and computer games. And in April it started selling art prints, custom frames and books.

The Chicago Tribune reported in April that Sears.com was undergoing a significant overhaul in an effort to emulate, online, the girth of the retailer's famed Big Book catalog from another era. Thursday's announcement confirmed the new approach.

"We are testing some categories," Jooma said. "Online, it's better to do that. We don't have inventory costs because we have partners."  Sears.com partners include Alliance Entertainment Corp. (music), ArtSelect.com (prints) and Digital River Inc. (software).

The move largely was applauded by analysts.

"The incremental cost to build out online is pretty low," said Stephen Baker, a retail analyst for the NPD Group. "The trick is to have a great name and drive people to the site."

Getting people to think of Sears.com as a place to shop for books and art, not just appliances, is the biggest challenge, Baker said.

National retail consultant Howard Davidowitz said Sears is "very smart" to expand its online offerings.

"It's the fastest growing channel in retail," he said. "And Sears has two advantages: First, they understand the catalog business. They ought to do well with online fulfillment.

"Second, they have stores everywhere," he said. "That is a huge advantage for people who may want to do store pick-ups or returns.

Jooma said Sears is pointing people to Sears.com in a number of ways, including traditional approaches like newspaper circular ads. In stores, it will encourage customers to use Web kiosks to find items that may not be on shelves. Items ordered at the kiosks can be shipped to a customer's home, Jooma said.

Online, the retailer is using search tools, customer reviews and other techniques to drive visitors to Sears.com. "It's about search engine optimization," Jooma said.

With paid search strategies, Sears will buy keywords that customers likely would put into a search engine like Google. If the customer puts in a certain combination of terms, a text ad to buy that product at Sears.com will appear.

Sears also is trying to grow so-called natural search by encouraging more customers to write user reviews. If shoppers include a specific combination of keywords in a search box, the reviews will "naturally" appear high in non-paid search results.

"They should be pursuing both [search] strategies," said Kelly Cutler, chief executive of Chicago's Marcel Media, which specializes in business search techniques.

"For music, they should use keywords that include the full name of the artist or album. With books, use the exact title of the book name or author, not just 'Harry Potter' books.

"This will be interesting to watch," Cutler said. "Wal-Mart has been successful online. And look at Amazon. It used to be just books, but now they sell everything."

Sears Chairman Edward Lampert has kept information on the retailer's performance and strategy close to the vest. Sears has shed about 300 jobs, or about 6 percent of it workers, from its Hoffman Estates headquarters this year. Shares closed Thursday at $96.85, up 2.2 percent, but down nearly half from its 52-week high of $183.25.

There could be plenty of room for Sears to grow online. According to ComScore, Amazon attracted 58 million visitors in April, while Sears .com attracted 9.6 million. But Sears' online traffic jumped 16 percent in April over its year-ago performance, according to ComScore, while overall traffic by retailers rose 8 percent.

Baker said a more apt comparison might be with electronics retailer Circuit City. Its brick-and-mortar stores may be struggling, but online "it is probably one of the best e-commerce Web sites," Baker said.

Circuit City's Web site traffic grew to 10.7 million visitors in April, 39 percent more than the year-ago period, according to ComScore.

Macy's to Bring FAO Schwarz Into Its Stores
By Vanessa O'Connell - Wall Street Journal
May 16, 2008

In an effort to attract more shoppers, Macy's Inc. is expected to announce Friday plans to open FAO Schwarz toy boutiques in all 685 Macy's stores that carry children's clothing.

As many as 275 of Macy's 812 locations, including those in downtown Minneapolis, Union Square in San Francisco and Dadeland Mall in Miami, will get the toy boutiques by fall, in time for the holiday shopping season. The rest will open in 2009 and 2010.

Under the deal, FAO Schwarz will lease the floor space and pay Macy's an undisclosed percentage of sales as rent.art of a broader trend in which big retailers are teaming up with specialty merchants to create stores within stores. With foot traffic down at many malls, department stores and other big chains are scrambling to give shoppers more reasons to step inside. For their smaller partners, such deals provide a chance to reach new customers with less financial risk than opening independent outlets.

J.C. Penney Co. is trying to attract younger shoppers with upscale Sephora cosmetic and fragrance shops in its stores. Over the past two years, it has installed them in 72 J.C. Penney locations and is working with Sephora -- a unit of Paris-based LVMH Moët Hennessy Louis Vuitton SA -- to roll them out in more than 300 of its 1,074 stores by 2010. Penney staffs the in-store shops and owns the Sephora merchandise.

Macy's opened an FAO Schwarz boutique in Chicago as a test in November.

Lord & Taylor, a unit of NRDC Equity Partners, plans to open Fortunoff jewelry-and-watch boutiques in all 47 of its stores in February. NRDC, a big retail developer, acquired the 21-store Fortunoff chain in March.

Along with its potential advantages, however, the strategy poses the risk of tarnishing the specialty retailer's more-exclusive brand. Penney says that is why it doesn't cut prices in its Sephora shops, even when it offers discounts elsewhere in its stores.

At FAO Schwarz, "We spent a lot of time thinking about the risk" before concluding that the Macy's rollout would broaden the store's image and help counter the perception that all of its toys are expensive, said Chief Executive Edward Schmults. "At a time of economic weakness, to be able to roll out this many stores at one time is just tremendous," he added. "Macy's is where Mom is shopping."

Macy's Chief Executive Terry J. Lundgren said the deal "will drive store traffic, particularly to our children's departments," which traditionally have had lower sales per square foot than other departments.

In a test over the past seven months, a 5,300-square-foot FAO Schwarz boutique at Macy's cavernous State Street store in Chicago produced a "ripple effect" of higher sales in children's apparel and accessories, he said.

For FAO Schwarz, the arrangement is a way to raise its profile. At its peak in the late 1990s, the fabled toy retailer had 40 stores. But after running into financial trouble, it closed 18 stores in 2002 and sold the rest to Right Start Co., which filed for bankruptcy protection in 2003 and closed the remaining FAO Schwarz stores.

In 2004, hedge fund D.E. Shaw & Co. bought and reopened FAO Schwarz's flagship Fifth Avenue store in New York and a second location at Caesar's Palace in Las Vegas, as well as the retailer's catalog and Internet-sales businesses. D.E. Shaw is currently seeking to expand the 145-year-old brand.

The FAO Schwarz deal is part of a push by Cincinnati-based Macy's to differentiate its stores from the competition. It recently struck agreements with celebrities and well-known designers, including Martha Stewart, Donald Trump and Tommy Hilfiger, for exclusive merchandise.

Macy's has struggled to integrate the 400 department stores it acquired in its 2005 purchase of May Department Stores. Earlier this week, it reported a $59 million loss for the first quarter ended May 3, because of restructuring costs and a decline in sales. Sales in the period fell 2.9% to $5.75 billion.

Macy's plans to play up the FAO Schwarz connection in its fourth-quarter marketing campaign, according to Peter Sachse, its chief marketing officer. The chain hasn't had a year-round toy department in its stores for many years, according to spokesman Jim Sluzewski.

The new boutiques will include FAO Schwarz's private-label toys as well as independent brands such as Alex crafts and Lionel trains. FAO Schwarz toys will eventually be sold on the Macy's Web site, but Mr. Lundgren said there wasn't a timetable for online sales.

Lampert Reports Stakes In KB Home,
Centex, Sallie Mae
Dow Jones Newswires
May 15, 2008

Hedge fund billionaire Edward Lampert on Thursday reported new or increased holdings in a number of lenders and home builders.

Lampert, through RBS Partners LP, reported holding six million shares of SLM Corp (SLM), also known as Sallie Mae, as of March 31. He also reported holdings in home builders Centex Corp. (CTX) and KB Home (KBH); and in commercial finance company CIT Group Inc. (CIT) and mortgage and vehicle fleet management services provider PHH Corp. (PHH).

His stake in Home Depot (HD) increased by 6.1 million shares to 22.8 million, according to his disclosure.

Lampert reported the holdings in his quarterly filing with the Securities and Exchange Commission. He said that some confidential information was omitted from the form. The SEC sometimes permits such omissions when disclosure would compromise a fund's investment strategy.

Lampert's last two quarterly reports omitted mention of the fact that he was accumulating PHH Corp. and Sallie Mae shares. He made the disclosure of those holdings along with his regular quarterly report on Thursday.

The following table details the holdings of RBS Partners at March 31, and the change in the number of shares from previous reports:

GE May Shed Storied Appliance Unit
By Dana Cimilluca, Carol Hymowitz, Matthew Karnitsching and Rick Carew
 Wall Street Journal
May 15, 2008

General Electric Co. is preparing to sell or divest itself of its century-old appliances business, one of the best-known American consumer brands, as Chief Executive Jeffrey Immelt seeks to revive his weakened conglomerate.

GE could receive between $5 billion and $8 billion from a sale of the business, according to people familiar with the matter. A sale would come as the company faces pressure to trim a portfolio that ranges from credit cards to aircraft engines to television broadcasting, following a disappointing first-quarter earnings report.

Selling GE's appliance business would fit in with Chief Executive Jeffrey Immelt's strategy of shedding slower-growing industrial businesses. Shedding the appliances brand would be a symbolically significant move for the Fairfield, Conn., company. GE entered the business in 1907 and boasts of milestones such as introducing the refrigerator, room air-conditioner and toaster oven.

But because the unit is now a relatively small part of the company, a sale might not satisfy investors who are pressing Mr. Immelt to improve GE's sluggish performance. Last month, GE reported an unexpected 5.9% drop in first-quarter net income and lowered its earnings forecast for the year, only weeks after issuing sunnier projections. The move prompted the biggest one-day selloff in GE shares in more than 20 years.

GE's shares finished Wednesday at $32.51 each in New York Stock Exchange composite trading, putting them near levels they traded at in 1999.

GE has hired Goldman Sachs Group Inc. to run an auction for the appliances unit. It's unclear who might be interested in bidding this early in the process. But possible buyers for the division include appliance makers BSH Bosch & Siemens Hausgeräte GmbH of Germany and Haier Group of China, bankers said. Private-equity firms and GE's Mexican partner, Controladora Mabe SA, could also be interested, they said.

Representatives of BSH Bosch, Haier and Mabe couldn't be reached for comment.

The appliance operations could fetch a lower price than GE might have commanded before the housing downturn and credit crunch. Now, higher commodity prices and doldrums in the housing market have eaten into GE's appliance business, where orders fell 6% in the first quarter. At the same time, the disappearance of easy credit has weakened demand from private-equity firms.

"It was a better environment to sell this three or four years ago, before the housing or financial crisis," said Scott Davis, an analyst at Morgan Stanley.

Investors' Worries
GE blamed its first-quarter shortfall mostly on the credit crisis, which prevented its finance business from completing real-estate sales and forced it to reduce the value of loans. But weak results from some businesses, such as appliances, media and GE Healthcare, also had an impact.

Some investors worry that GE's vast portfolio has become ever more complicated to manage. Moreover, in the past GE usually had at least one big growth-engine business that helped generate smooth results even in tough times. Mr. Immelt has identified GE's infrastructure unit -- which includes aircraft engines, power turbines, water treatment and other businesses -- as its current growth engine. But its profits haven't been enough to offset results elsewhere.

Though some investors are pushing for a more dramatic streamlining or even a breakup, most appear willing to give Mr. Immelt time to turn things around. Some note that Tyco International Ltd.'s breakup into three companies didn't create near-term value for investors.

The 52-year-old Mr. Immelt in recent weeks has defended GE's conglomerate business model. Still, he has increased cost-cutting and pursued sales of some businesses. GE has put its personal-credit-card business up for sale. GE already has sold off portions of the industrial segment, agreeing in recent years to sell GE Supply, an electrical-supply operation, as well as the company's silicone- and quartz-based-materials manufacturing business. Last year, Mr. Immelt agreed to sell GE's plastics business to Saudi Basic Industries Corp. for $11.6 billion.

"GE has always been about change," Mr. Immelt told shareholders at the company's annual meeting in Erie, Pa., last month. In recent years, GE has sold businesses with total revenue of $50 billion, he said.

Mr. Immelt also has taken a greater role in some businesses. He has been mulling management changes at GE Healthcare medical-equipment unit and recently has been getting more directly involved in decision-making at the unit, including conferring directly with executives who run various businesses within it, said people familiar with the matter.

With revenue last year of about $7.2 billion, GE's appliance division represents just a sliver of the company's $173 billion of annual revenue. GE and Goldman Sachs are expected to begin distributing sales materials to possible buyers in Europe, Asia and maybe elsewhere in the next few weeks, according to one person. Plans for the sale were in motion before the first-quarter earnings announcement, a person familiar with the matter said.

In any deal, it is possible GE could have a continuing stake in the business. As with other transactions involving strong consumer brands, any buyer could continue to use the GE appliance brand names. The auction may provide an opportunity for foreign buyers to take advantage of the weak U.S. dollar and grab the last big remaining asset in the U.S. major-appliance market.

If the appliance unit is sold to a company in China or perhaps South Korea, the sale will highlight the movement of manufacturing from the U.S. to Asia. The U.S. dominated the consumer manufactured-goods market for decades, but fast-growing Asian rivals and a shift in manufacturing to lower-cost countries has given Asia an increased role in the sector.

Training Ground
GE is the second-largest U.S. maker by the number of appliances sold, after Whirlpool Corp., which bought rival Maytag Corp. in 2006 for $1.7 billion. The business has six plants, four of them overseas. It had disclosed plans to close its plant in Bloomington, Ind., though it still employs about 5,000 workers at a plant in Louisville, Ky. The appliance business has also been a training ground for many top executives over the years -- including Mr. Immelt.

Ailing Businesses
An even tougher challenge for Mr. Immelt than selling weak businesses may be turning around ailing businesses he is determined to keep.

Chief on this list is GE Healthcare, which posted revenue of about $17 billion last year. First-quarter operating profit at the Healthcare unit fell 17% to $528 million compared with a year earlier. GE attributed part of the decline to an accounting change. Last year, operating profit at the unit fell 3%, the only one of GE's six operating units with such a decline.

The business excelled when Mr. Immelt ran it before being promoted to his current job seven years ago but recently has been plagued by a variety of problems. Among them: quality-control glitches that resulted, under a government agreement, in a 20-month shutdown of a plant in Salt Lake City that makes surgical X-ray equipment; an aborted acquisition; and lower insurance payments that have reduced demand for GE medical equipment. GE Healthcare also is facing stiff competition from rival Siemens AG, to which it recently lost some market share in China.

G.E. May Sell Appliance Division
By Andrew Ross Sorkin and Michael J. de la Merced - New York Times
May 15, 2008

General Electric is planning to sell its appliance division, one of the oldest businesses in the conglomerate’s 120-year history, people briefed on the proposal said Wednesday.

A sale of the unit, which makes refrigerators, microwaves and washer- dryers, among other items, could fetch at least $5 billion, these people said. G.E. and its investment bank, Goldman Sachs, have been laying the groundwork for an auction over the last few weeks.

The sale would mark the end of a brand of household products that made General Electric a fixture in American homes over the last century.

Jeffrey R. Immelt, its embattled chief executive, has been trying to refashion General Electric in the face of widespread calls to break up one of America’s largest companies. That mission has taken on greater urgency with the credit squeeze and the slumping economy, which have affected many of G.E.’s businesses.

The appliance unit, which helped make G.E. an American icon, may end up in foreign hands. The division, based in Louisville, Ky., has faced increased pressure in recent years from Chinese manufacturers, which have been growing at double-digit rates thanks in part to significantly lower costs.

Asian manufacturers are expected to be particularly drawn to the division, seeking to take advantage of G.E.’s widely known brand name as they try to become global businesses. Lenovo, the Chinese electronics company, successfully acquired I.B.M.’s personal computer division in 2004, in part to help establish itself on the world stage.

Wall Street bankers are rushing to lay claim to potential bidders for the division. Among the expected suitors are Haier of China, which bid on Maytag two years ago; LG Electronics and Samsung, both of South Korea; Bosch of Germany; Electrolux of Sweden, which makes Sears’s Kenmore line of appliances; and Controladora Mabe, a G.E. partner based in Mexico.

As part of a potential sale, G.E. is likely to hand over a license to use the G.E. brand for a short period of time, the people briefed on the proposal said. After the initial license for using the General Electric brand expires, the buyer of the appliance unit would be allowed to continue to use the Monogram and Profile badges.

The arrangement is similar to the way Lenovo held onto the I.B.M. badge for several years before using its own.

The news was first reported on Wednesday by The Wall Street Journal on its Web site.

G.E.’s once high-flying stock price has fallen 20.5 percent during Mr. Immelt’s seven-year tenure, and many analysts and investors have called for transformational changes at the corporate behemoth. Last year, it sold its plastics business to Sabic, the big Saudi Arabian industrial company, for $11.6 billion.

Mr. Immelt’s critics long have urged him to consider more unit sales, including the appliance unit, NBC Universal and GE Money, the company’s consumer finance unit. The company has focused on higher- growth technology businesses of late, moving out of consumer-oriented operations. G.E.’s light bulbs, however, continue to be made by the company’s lighting division.

That critical chorus grew louder and more insistent last month when G.E.’s first-quarter earnings badly missed analysts’ estimates and its own projections.

G.E.’s stunning announcement, made more notable by its status as a barometer of the economy, shook Wall Street’s confidence: the company’s shares fell 13 percent that day, its biggest one-day loss in two decades. Even worse, for a company that prided itself on meeting expectations, G.E. was forced to cut its projected earnings growth for this year to 5 percent from 10 percent.

The appliance business generated $7 billion in revenue last year, only a small fraction of G.E.’s $173 billion in total annual revenue, but divorcing it from the company would carry great historical import. Begun in 1907 as a maker of cooking and heating appliances, the appliance division has since grown to manufacture a broad range of products. Among its firsts are the room air-conditioner (1930), the combined washer-dryer unit (1954) and the toaster oven (1956).

As of last year, the appliances unit had about 13,000 of G.E.’s 327,000  employees.

Discounters Fared Well in Quarter
By MIchael Barbaro  -  New York Times
May 14, 2008

It’s bargain time in American retailing.

Wal-Mart Stores and the TJX Companies said Tuesday that sales and profit surged during the first three months of the year as belt-tightening consumers flocked to their deeply discounted merchandise.

Profits rose 7 percent at Wal-Mart, the giant discount chain, and by 20 percent at TJX, the owner of the cut-rate clothing retailers T. J. Maxx and Marshalls.

But the slowdown in consumer spending is proving less kind to full- price retailers, like Macy’s, Nordstrom, J. C. Penney and Kohl’s, which are expected to report big declines in first-quarter earnings this week, according to forecasts from analysts.

On average, those four retailers are expected to report a 50 percent decline in first quarter profit, predicted Bill Dreher, an analyst at Deutsche Bank.

“People are cheaping out, and retailers that sell discretionary products at full prices are having a very tough time,” Mr. Dreher said.

Those troubles will be a boon to shoppers: To clear all that unsold merchandise, stores are dangling deep discounts, said John D. Morris, a retail analyst at Wachovia Securities. By his estimate, markdowns are up 5 percent this spring compared with the period a year ago.

Even luxury stores are cutting prices. This coming Thursday, Saks Fifth Avenue is offering discounts of $25 to $1,000 and Ralph Lauren is having a 20 percent off sale.

Wal-Mart, the large retailer and a bellwether for the economy, cautioned that it was not immune to the economic slowdown. It predicted little, if any, growth in individual store sales during the current quarter. The chief executive of Wal-Mart, H. Lee Scott Jr., warned that “there are still uncertainties about the rest of the year.”

During the first quarter, ended April 30, Wal-Mart’s profit increased
6.9 percent, to $3.02 billion, or 76 cents a share, from $2.83 billion, or 68 cents, in the period a year ago, as shoppers swarmed to its low-priced food, prescription drugs and electronics.

Revenue increased 10.3 percent, to $95.3 billion, from $86.4 billion, the company said.

After a period of experimentation with sleeker fashion and upscale merchandise, like skinny jeans, Wal-Mart has returned with a vengeance to low prices, the strategy that built it into the world’s largest retailer.

This year, the chain slashed grocery prices by as much as 30 percent and it trumpeted the strategy in advertisements that asked consumers “ What will you do with your savings?”

Nobody at the chain predicted the downturn that settled in by late last year. But once consumers started pulling back, Wal-Mart was poised to benefit, perhaps more than any big chain.

“Our business is even more relevant to our customers today, given the current economic pressures,” Mr. Scott said. “Wal-Mart is the undisputed price leader.”

But in retailing, investors are focused on growth. Wal-Mart estimated its earnings would be 78 cents to 81 cents a share in the second quarter, possibly at the low end of analysts’ expectations. As a result, shares of Wal-Mart fell $1.37 Tuesday, to $56.65.

It was an unusual dip for a stock that has been on a tear. Wal-Mart’s stock has risen by roughly $10, or about 22 percent, over the last six months, with investors wagering that the chain would benefit from a slowing economy. Its rivals did not fare as well. Macy’s shares have dropped by 15.5 percent, Target’s by 6 percent and J. C. Penney’s by 5.7 percent.

Budget-minded clothing buyers are instead seeking out off-price chains like TJX, which said it earned $193.8 million, or 43 cents a share, in the first quarter, ended April 26, up from $162.1 million, or 34 cents a share.

Sales rose 6 percent, to $4.36 billion, from $4.11 billion. Sales at stores open at least a year increased 3 percent.

“We are very pleased with our performance,” said Carol Meyrowitz, the chief executive of TJX.

Despite the strong results, the company said its gross margin did not meet its expectations, and that helped send its stock price down $1.49, to $30.65

TJX, which specializes in designer brands sold at deeply marked-down prices, said clothing sales and customer traffic in its stores exceeded its expectations.

One reason is that department stores, struggling with slower business, are canceling orders for name-brand clothing, which is rerouted to stores like Marshalls and T. J. Maxx.

TJX said consumers gravitated toward its dresses, shoes, and accessories. That is traditionally a business dominated by department stores like J. C. Penney, Macy’s and Kohl’s. But the appeal of department stores has dimmed, with consumers struggling to pay their bills.

“We are hearing that dresses, shoes and accessories are very challenging categories for department stores,” said Mr. Morris of Wachovia. “That is where off-price chains like TJX can gain an edge.”

Wal-Mart Is Still a Winner
By Steven M. Sears - Barron's
May 14, 2008

AFTER A RECENT MEETING with senior Goldman Sachs executives, a Sandler O'Neill analyst advised clients that the worst of the credit crisis may have passed, but that the economy remains a wild card.

This will not surprise most people, though it is a useful reminder that the stock market attempts to factor in expectations of future outcomes when pricing stocks.

Wal-Mart is not normally one of the most actively traded contracts, yet Tuesday it was the most actively traded contract in the market. More than 576,000 calls traded, and some 48,000 puts.

Normally, most active status goes to special situation stocks or event driven trades where everyone piles in looking for a fast profit.

Wal-Mart's allure in the options market has a lot to do with its strategy of lowering prices, particularly food, to persuade John and Jane Consumer to spend more money at their stores. Visit a Wal-Mart store that sells groceries, and it's easy to see why the retailer just reported first quarter earnings per share of 76 cents per diluted share, above consensus of $0.75, and last year's earnings of 68 cents per share.

Wal-Mart also told investors to expect second-quarter earnings per share of 78 cents to 81 cents. The consensus estimate is 81 cents.

In the options market, which has witnessed much bullish sentiment toward Wal-Mart, investors are now starting to hedge recent stock gains with defensive put options. Wal-Mart's shares are up 19% this year, and up 23% in the past six months.

It appears that these options trades that seek to hedge bets are new positions, implemented in anticipation the stock will decline before May options expire on Friday.

One of the more notable trades came from an investor who bought 3,000 May 55 puts, and sold 6,000 May 52.50, effectively locking in gains should the $57 stock decline. Another investor bought September 55 puts and calls to express a view that the stock has an equal chance of rising, or falling before the options expire.

A little caution is always good, especially on stocks with gains. But it's too early in the current economic cycle to bet against Wal-Mart.The company is likely to continue to perform well for investors, and any declines in the stock are likely buying opportunities as cash- strapped consumers will continue to gravitate toward places where they can buy more for less.

This morning's release of Consumer Price Index data may have been less than forecasted -- 0.2% compared to 0.3% -- but food prices increased 0.9%. Wal-Mart is making a push into the grocery business.The second quarter earnings guidance did not exceed the consensus estimate, but don't forget that Wal-Mart raised earnings guidance in the first quarter.

Bottom line: discounting food prices is good; discounting Wal-Mart is not.

GE to Seek Buyers For Appliances Unit
By Dana Cimilluca, Carol Hymowitz, Matthew Karnitsching and Rick Carew
Dow Jones Newswire
May 14, 2008

General Electric Co. plans to start an auction for its appliances business, people familiar with the matter said.

If completed, a sale could end more than 100 years of GE's involvement with appliances. GE has hired Goldman Sachs Group Inc. to run an auction for the appliances, or "white goods," unit, which could fetch between $5 billion and $8 billion, the people said.

Selling GE's appliance business would fit in with Chief Executive Jeffrey Immelt's strategy of shedding slower-growing industrial businesses. With appliance sales getting hit by the slowing U.S. economy and the housing bust, jettisoning the business could help GE reach its long- term goal of boosting profits by at least 10% annually.

The sale of the appliance business is bound to be emotional for many GE executives and for people in Louisville, Ky., where the business is located. But a sale would fit with Chief Executive Jeffrey Immelt's strategy of shedding slower-growing industrial businesses and focusing on higher-growth technology operations. A sale could also help appease critics who are calling for a more dramatic restructuring of the 120-year-old company, a chorus that grew noisier after GE's surprise first-quarter earnings disappointment and forecast reduction last month.

At roughly $7 billion, sales at GE's appliance division represent just a sliver of the company's $173 billion of annual revenue and therefore the impact of any sale on the company will be limited. The appliance outfit consists of refrigerators, freezers, electric and gas ranges, dishwashers, clothes washers and dryers, microwave ovens and air conditioners, sold under brands including GE Profile and Hotpoint, according to the company's Web site. GE entered the business in 1907 and boasts of milestones such as introducing the first room air-conditioner in 1930.

Wal-Mart Posts 6.9% Rise in Net,
Offers Cautious Outlook
By Donna Kardos - Dow Jones Newswire
May 13, 2008

Wal-Mart Stores Inc. reported a 6.9% rise in fiscal first-quarter net income, but the world's largest retailer also gave a cautious outlook for the current quarter, saying earnings may miss analysts' expectations and that there will be little, if any, U.S. same-store-sales growth.

For the quarter ended April 30, the discount retail giant posted net income of $3.02 billion, or 76 cents a share, up from $2.83 billion, or 68 cents a share, a year earlier. In April, Wal-Mart boosted its forecast to 74 cents to 76 cents a share, citing "well-managed" inventory, lower markdowns and a reduction in internal theft and accounting errors. Net revenue climbed 10% to $94.1 billion, in line with last week's outlook. The mean estimates of analysts polled by Thomson Reuters were for earnings of 75 cents a share on $93.47 billion in revenue.

"We're off to a solid start, with record first-quarter sales and earnings," Chief Executive Lee Scott said.

Excluding fuel sales, the quarter's same-store sales in the U.S. increased 2.9%, with namesake stores posting 2.7% growth and Sam's Club seeing a 3.6% rise. International sales jumped 22% amid a 16% boost in earnings. Gross margin rose to 23.6% from 23.5%.

Looking forward, Wal-Mart projected fiscal second-quarter earnings of 78 cents to 81 cents a share. Analysts were expecting 81 cents. U.S. same-store growth is seen flat to up 2% growth.

Wal-Mart is often viewed as a barometer for the retail industry. Last week, the head of Wal-Mart's domestic locations said sales have been falling at the end of the month "more than we have seen in the past," showing "the "paycheck cycle" is more pronounced for customers than in past months."

Shares of Wal-Mart closed Monday at $58.02 and fell to $57.65 in premarket trading.

Charles Harrison wins Smithsonian
Lifetime Achievement Award
Chicago Tribune
May 11, 2008

Congratulations to Evanston-based industrial designer Charles Harrison. He won the prestigious Lifetime Achievement award from The Smithsonian's Cooper-Hewitt, National Design Museum, which recently announced winners and finalists of its 2008 National Design Awards.

"I'm just delighted and surprised," says Harrison, 76, who was one of the first African-Americans to enter the professional design field where he earned himself a stellar reputation as a designer in touch with average Americans at home.

Harrison spent three decades, starting in 1961, as in-house product designer with Sears, Roebuck & Co., where he later would be named chief designer and create an incredible range of 750 products for the home — from radios and sewing machines to hair dryers and his personal favorite, a plastic garbage can he developed in the late 1960s to replace metal drum cans.

But rest is not on Harrison's agenda. He's still working, teaching product design at Columbia College Chicago.

Other National Design Award winners include: Google for its Corporate Achievement; Seattle architect Tom Kundig for Architecture Design; and the Philadelphia-based Olin Partnership for Landscape Design.

Although the awards are announced now, they officially will be conferred on Oct. 23 at the Cooper-Hewitt in New York.

— Karen Klages

Macy's the latest to look abroad
Foreign markets offer growth opportunities
by Sandra M. Jones - Inside Retailing  - Chicago Tribune
May 10, 2008

The treacherous U.S. retail climate is prompting many retailers to turn their sights overseas.

The latest gambit comes from Macy's, the department store operator struggling to turn around declining sales.

Macy's announced Thursday that it created a new corporate-level post dedicated to analyzing international expansion opportunities and appointed 32-year Macy's veteran Daniel Edelman as president of international retail development. Edelman had been head of Macy's West in San Francisco.

"We believe that selective expansion internationally will provide additional opportunities for top line growth in the years ahead," Terry Lundgren, chairman and chief executive of Macy's, said in a statement. Macy's operates more than 850 U.S. stores under the Macy's and Bloomingdale's banners.

Bloomingdale's could be the first of the two divisions to move overseas, Women's Wear Daily reported on Friday. Bloomingdale's executives have visited China and are said to be eyeing Kuwait, the retail trade newspaper said. Macy's spokesman Jim Sluzewski declined to comment on the report.

"The U.S. is highly over-stored," said Love Goel, chairman and CEO of Growth Ventures Group in Minneapolis. Thousands of store closings have been announced this year, but "there's still too much capacity in the U.S. retail market," Goel said.

Whole Foods opened its first store in London last year. Apple, already in Britain, plans to open its first stores in Australia, China and Switzerland in coming months. And Lord & Taylor and Crate & Barrel both have said in recent months that they are looking to expand overseas.

Abercrombie & Fitch, the teen-clothing chain, said recently that by 2010 most of its store openings would be international. It opened its first overseas store last year in London. On Friday the company announced plans to open a second European store in Denmark next year as well as to make its debut in Tokyo.

Likewise, Kimco Realty Corp., the shopping mall developer, said late last month that its emphasis has shifted to Mexico as development in the U.S. these days is limited.

Retailers, in general, have been slow to set up shop in other countries because the U.S. consumer market is so vast, said Jay McIntosh, director of retail and consumer products group for the Americas at Ernst & Young LLP in Chicago. It's also a risk to determine tastes and habits of shoppers in other cultures, he said.

Just look at Wal-Mart. The world's largest retailer closed up shop in Germany two years ago because its American-style operation clashed with European culture. Luxury stores such as Saks Fifth Avenue and Tiffany have had an easier time because they have an international following.

The National Retail Federation said more retailers are testing the waters by shipping goods to overseas customers and selling via the Internet, something Anthropologie recently started doing.

"A lot of retailers' first step is to go online," said Ellen Davis, spokeswoman for the retail trade group. "It's a good way to dip your toe in the water without investing a lot in staff and store locations."

ABC News Hidden Camera Investigation:
Aged Tires Sold as 'New' by Big Retailers
By Joseph Rhee and Asa Eslocker - ABC-TV
May 9, 2008

Some of the biggest tire retailers in the U.S. are selling tires that are well beyond the age limit recommended by consumer groups and some automakers, according to the results of a hidden camera investigation by "20/20" and ABC affiliates around the country.

Research and tests show that as tires age, they begin to dry out and become potentially dangerous, leading to calls for a six-year age limit for tires from Ford Motor Co. and other car companies.

"20/20" teamed up with our ABC News affiliates to see if tires older than six years were being sold as "new" by major tire retailers. Unlike most consumers, we knew how to read the industry's convoluted date code, which reveals the week and year when a tire was made.

In San Francisco, Calif., reporters from KGO-TV found a tire made in 1999 and two from 2002 being sold as new by Goodyear, the seventh largest tire retailer in the U.S.

In Indianapolis, Ind., affiliate WRTV-TV went tire shopping at Wal-Mart, the country's third largest tire seller, and found a tire made in 2001 and one from 1999. In Orlando, Fla., affiliate WFTV-TV also found two aged tires dating back to 1999 and 2000 for sale at a Wal-Mart store.

At Sears, the fifth largest tire retailer in the U.S., our undercover "20/20" shoppers found nearly a dozen aged tires being sold as new as part of a special "manager's clearance sale." At three different stores in New Jersey, we found tires ranging from seven years old to one that was manufactured 12 years ago in 1996.

At a Sears store in Watchung, N.J., a salesman warned us before we purchased a 2002 tire, saying, "You're supposed to get rid of them every six or seven years...no matter what condition it is." He, however, still sold us the tire, saying to only use it as a spare. At the Sears stores we visited in Union and Jersey City, N.J., we were told the aged tires we purchased were safe.

At at Sears store in Houston, Texas, ABC News affiliate KTRK-TV also found an aged tire dating back to 2001.

Wal-Mart has not responded to a request for comment on our findings.

In response to our findings, Sears released a statement saying, "It is unusual that there would be tires that old in our stores. We follow an inventory process of first in, first out, and we turn our tire inventory an average of more than three times a year. We note that there is a difference of opinion in the tire industry (the Tire Industry Association, RMA and the major tire manufacturers) about the service-life limits of tires. The safety of our customers is a top priority for Sears, and we'll continue to work with all interested parties to push for a consensus on tire service limits. Consistent maintenance, proper inflation and regular inspection for tread wear patterns and damage are the keys to good tire performance. For consumers who are concerned about the age or condition of their tires, it is recommended they let us evaluate their tires regularly, which we'll do free of charge."

Goodyear, Wal-Mart and the U.S. tire industry trade association also say that age is not the key factor in tire safety, and that consumers should pay attention to other maintainance issues. According to Goodyear spokesman Jim Davis, "We don't support age-based limits on tires because there's no scientific data to support that." Wal-Mart spokesperson Linda Blakley said, "Should the NHTSA (National Highway Traffic and Safety Administration) create a ruling related to age of tires and its effect on the safety of our customers, we would of course comply."

Some of the biggest tire manufacturers, including Bridgestone/Firestone and Michelin, however, have issued bulletins to retailers calling for tires to be removed from service 10 years after the date of manufacture. The bulletins note that consumers should follow the tire replacement recommendations in their vehicle owner's manual if they offer different advice on a tire's shelf life. Ford, Chrysler, BMW, Audi and Toyota all recommend that tires be replaced six years after they were made.

Because of those bulletins, tire retailers should not be selling tires close to or older than 10 years of age, according to Sean Kane, who heads a private auto safety firm. "It's shocking to hear that particularly now because companies, like Sears, these large tire retailers have had this information in their hands for some time," said Kane.

The Searing Pain of Eddie Lampert

HOT RESEARCH AM
Barron's
May 8, 2008

IF IT IS POSSIBLE TO FEEL sorry for a multibillionaire, then we feel sorry for [Sears' Chairman] Eddie Lampert. Here is a brilliant guy, someone who we believe can add tremendous value with his insight into many a situation, now stuck with his largest investment in a retailer that is effectively beyond repair.

Put simply, Sears and Kmart are the poster children for what one does not want to own in an environment of slowing consumer spending, excess supply and alternative methods of distribution. Try as he might to think about the brand values and exploit them differently than others have, to think about the service business and what it can do, to improve the systems and reporting structures, Sears is still stuck with what it is: a retailer that loses market share every hour and every day to better-positioned, faster-growing retailers.

Mr. Lampert spent part of his presentation at the annual meeting teaching the uninformed that the leading retailers have added in excess of $100 billion in sales through capital expenditures of over $140 billion in the last five years. He used that as one reason why Sears' sales have slowed but also to question if it really added value for those other retailers. However, we found that part of the presentation quite defensive. It was no surprise that retail would be adding square footage, we all knew it was coming, it was well planned and communicated by the retailers and if anything, ended up slightly less than projected.

So where is the surprise? The surprise seems to be that the consumer did not cooperate past 2006, the housing market fell, and consumers retracted.

In other words, buying Kmart was a bull-market bet, one that was clean as Eddie was able to leave those nasty competitive stores behind in the bankruptcy and emerge with the most isolated locations. As with all good stories, that, too, would have ended as one would naturally expect that Wal-Mart Stores and Target, being not-too- shabby retailers themselves, would open stores near the best Kmarts, and that is what happened. That on its own would have been a problem but buying Sears compounded the issue.

The original thoughts behind purchasing Sears seemed sound. The real- estate market was hot, Sears had been mismanaged, it had brands that could sell well in Kmart and combined they could get buying synergies from global sourcing. We believe a key element of the plan was to move the better brands into Kmart, as if successful, that would improve Kmart's productivity, keep market share for Kenmore and Craftsman and allow Sears to sell its valuable mall locations to Kohl's and others.

The good news did not last long. As the macro began to deteriorate and as competitive stores continued to spring up, the excess demand and poor positioning of Sears-Kmart finally caught up to it.

So where does the company go from here? This is where we feel sorry for Eddie. He has some great ideas to allow the brands to expand their reach, redefine their markets, etc. He also is thinking about how to drive further improvements in his large service segment and whether certain assets should be sold. The company has done a good job of improving systems and is likely to flow inventory better this year.

However, he is saddled by a chain that continues to lose share, and we did not hear anything at the meeting nor do we believe anyone has a solution to how you get the younger customer that shops Lowe's and Home Depot and Best Buy and Dick's Sporting Goods and Kohl's and Target to pay more to shop at Kmart or have a [more] enjoyable shopping experience at Sears.

What does all this imply from an earnings and stock perspective? This first quarter sounds like it will be very challenging, with a high likelihood that the company will actually lose money as they suffer from weak demand and from trying to clear out excess inventory.

We are moving our [first-quarter earnings-per-share] estimate from a gain of a penny to a loss of a penny, more symbolic than mathematical, as we would not be surprised if the company actually lost money this quarter. That brings full-year EPS estimate to $1.44.
We have an Underperform rating on Sears and a $70 target price.

-- Gary Balter
-- Seth Basham, CFA
-- Seth Sigman

IBM to increase pension payments for some retirees
By Craig Wolf - Poughkeepsie, NY Journal
May 6, 2008

Yes, it’s true IBM Corp. plans to raise certain retiree pension payments.

But not all the details are worked out yet, because the raise is “a work in  progress,” said Doug Shelton, a spokesman in Armonk for IBM.

The increase will affect about 42,000 retirees who retired before 1997. About half of those who retired before 1997 will be eligible. The goal is to raise payments to those who were not able to participate in the 401(k) plan.

The details have not been finalized, including how it will be calculated and who will receive it, he said. Authorization for the increase was granted at an IBM Corp. board of directors meeting April 29. The raises will take effect beginning Sept. 1.

IBMers who retired before 1997 will receive a letter in the next week or so about the pension adjustment, Shelton said.

Sears stock tumbles on Deutsche Bank price cut
Chicago Business.com
May 6, 2008

(Reuters) — Deutsche Bank cut its price target on Sears Holdings Corp Tuesday and kept its sell rating, saying comments at the retailer's annual meeting Monday gave little assurance that its operations were on the right track.

Goldman Sachs also repeated its sell rating on the operator of Kmart and Sears stores, citing a lack of a strategy to boost sales in softline categories such as apparel.

Sears Holdings shares fell more than 5 percent at mid-afternoon.

In a research note, Deutsche Bank analyst Bill Dreher cited concern that Sears ' "incredibly complicated" reorganization into different business units could lead to added missteps for the company.

Dreher said Sears executives gave few details on the new operating model or how the company was looking to create a more relevant shopping experience.

"Sears Holdings simply does not have the systems or operational procedures to control business in this extremely difficult retailing environment," Dreher said.

At the annual meeting Monday, hedge fund manager and Sears Chairman Edward Lampert said the retailer has seen no evidence of economic improvement.

Sears is expected to report lower first-quarter profit later this month, and sales at stores open at least a year have fallen for the past two years.

As the tough U.S. economy and housing slump hurts home-goods sales, "a viable game plan to restore profitable top-line growth within the softlines business is still lacking," said Goldman Sachs analyst Adrianne Shapira in a research note.

Dreher added that Sears gave no information on what will likely replace its Martha Stewart home-goods branded product line after that contract expires in January 2010.

"We have no confidence in ... whether Sears Holdings has the systems and operational procedures to control their margins," Dreher wrote in the research note. He cut his price target on the stock to $87 from $89.

Sears , based in Hoffman Estates, Illinois, faces competition from rivals including Wal-Mart Stores in general merchandise and Kohl's in the sale of clothing. In appliances and tools, it vies with Home Depot and Lowe's Cos.

"As competitors J.C. Penney and Kohl's continue to make inroads with middle-income shoppers through new product launches and effective marketing campaigns, we continue to question what Sears really stands for," said Goldman's Shapira.

After hitting a low of $94.55, Sears Holdings was trading at $95.38 — down $4.70, or 4.7 percent —in late-day trading on Nasdaq. The shares have fallen 47 percent in the past year.

Softer slide at Sears
Lampert says lower debt will help retailer survive
By Sandra Guy - Chicago Sun-Times
May 6, 2008

Financier Edward Lampert defended Sears Holdings Corp.'s strategy of paying down debt and keeping expenses down, which will help the troubled retailer survive today's economic turmoil.

Lampert told investors at Monday's annual meeting that Sears' competitors have overextended themselves with store openings and debt acquisition. He bemoaned plans by Sears' five top rivals to collectively open another 5,000 stores, which would add 500 million square feet to the retail landscape.

Sears must keep its expenses lean, better manage inventory, get its mix of prices right, and improve its customers' in-store experience in order to try to deal with the proposed expansion, Lampert said. He said Sears cut its debt by 47 percent in the last four years.

''We do feel that because we're not building a lot of new stores, that we can do a better job with the assets we have in place,'' he said. ''... Our focus is on upgrading the customer experience and being ready when the economic environment turns.''

Lampert damped down expectations that Sears would sell its Kenmore and Craftsman brands at rival retailers -- at least any time soon.

Lampert, billionaire operator of hedge fund ESL Investment, which holds a 47 percent stake in Hoffman Estates-based Sears Holdings, said he believes opening the brands to greater business opportunities, even if hypothetical, will bring about greater innovation and unleash what he believes are the unrecognized values of the Kenmore appliance and Craftsman tool brands.

William Ackman, whose Pershing Square Capital Management hedge fund battled Lampert for control over Sears Canada two years ago, stood in line with other shareholders to ask how executives would be compensated if one lobbies to sell Craftsman at Lowe's and another sees his store sales suffer as a result.

Lampert said parent company Sears Holdings Corp. would make a final decision whether an argument could be made for selling the Kenmore and Craftsman brands outside of Sears and Kmart.

"The holding company acts as a Supreme Court and the legislature," he said.

Sears still is searching for a chief executive officer and one or more leaders to manage the brands as it continues reorganizing into five asset groups that will be subdivided into as many as a 30 or more business units.

A range of topics surfaced during the three-hour shareholders meeting and a one-hour session with reporters that followed:

Sears, which has cut 300 of its 5,000 headquarters jobs since January, intends to keep its store base intact, though Lampert conceded that an unspecified number of stores are unprofitable.

Sears is bulking up its home goods in anticipation of losing Martha Stewart's business in January 2010. It will add the Cannon home goods brand to help beef up its offering.

Acting Sears CEO W. Bruce Johnson said top executives at Hoffman Estates have started a new customer-response effort in which each top executive takes a complaint from a customer each week and follows it through to a successful conclusion. He said one discovery is that the customer-complaint telephone system isn't working the way it should.

• Lampert conceded that he has been very disappointed with Sears Holdings' results and said "some of it was self-inflicted." Sears' shares dropped 40 percent last year, and its sales and earnings have stumbled for the last two years.

Lampert pointed repeatedly to online retailers such as Amazon and Zappos that have realized sales gains despite the competitive retail environment, and said Sears must capture that kind of momentum in figuring out how consumers shop in a variety of formats.

Sears' Lampert playing it close
Chairman gives few details of future plans
By Sandra M. Jones - Tribune reporter - Chicago Tribune
May 6, 2008

Sears Holdings Corp. Chairman Edward Lampert appears to be minding the store but avoiding revealing any grand strategic vision necessary to give the 120-year-old company an identity in the crowded retail landscape, and investors are getting impatient.

The Greenwich, Conn.-based billionaire smiled and nodded at the company's annual meeting Monday as Sears Chief Information Officer Karen Austin ribbed him for being "probably our biggest user" of hourly sales data from thousands of Sears and Kmart stores. Lampert admitted an affinity for detail.

He spent the first 30 minutes of the three-hour meeting defending his decision to cut capital spending on stores. He asserted the retail industry built too many stores in the past five years and is now paying the price as the economy slows.

Lampert, a star hedge fund manager who owns half of Sears Holdings, is disinclined to disclose much. Even when pressed by shareholders to be more forthcoming and break out the financial performance of its various businesses, Lampert did his best to keep his specific plans for the retailer's future under wraps.

Still, one point became clear. Running a retailer isn't at the top of Lampert's list. He is looking at how each of Sears' assets can make the most money.

Just ask William Ackman, the prominent activist investor who thwarted Lampert's plan to buy out Sears Canada Inc. two years ago.

Wouldn't take call

Ackman's New York-based Pershing Square Capital Management hedge fund ranks as Sears' fourth-largest investor, with a 4.7 percent stake. At most companies, that is enough to command access to executives. But Ackman traveled thousands of miles to attend the meeting because Lampert wouldn't take his call, the investor said in an interview after the event.

"There's a lot of value to [Sears'] assets and the question is whether it can be unearthed or not," Ackman said. He didn't disclose whether he plans to increase his holdings.

In a December 2005 interview with Barron's, Ackman said he estimated Sears' real estate is worth more than $22 billion and that the real estate combined with brands including Craftsman and Kenmore provides a "nice asset value cushion" in case Lampert fails to turn around the retail operation.

Ackman didn't say what he thought Sears is worth today, but like many shareholders at the event, Ackman pressed Lampert on whether he intends to sell Sears' exclusive Craftsman and Kenmore brands in rival stores. Lampert repeatedly skirted that question, noting it is "on the table" but no decision has been made.

"If it's a really good answer for us to sell Craftsman and Kenmore by going to specific retailers, and we believe the benefit of doing that is greater than the customer's [coming] to our own stores, we would do that," Lampert said.

Earlier this year, Lampert raised the possibility of selling those cornerstone brands at retailers other than Sears. It's a strategy that some retail experts say could hurt the company because the brands drive shoppers into the stores.

But Lampert clearly wants some gauge as to whether Sears would make more money keeping the brands in the stores or distributing them more widely. He called them "very powerful brands" that haven't been managed well. Lampert has put a high priority on hiring an executive to run the Craftsman and Kenmore brands, he said at a press conference following the meeting.

Sears' annual meeting is generally the only forum at which shareholders get a chance to talk to Lampert. He shut down Sears' investor relations department when he took over the company in 2005 and communicates primarily through letters to shareholders and Securities and Exchange Commission filings.

Stock price falls

Lampert also admitted that if he had to do it over again, he would have bought back less stock last year. Sears spent $2.9 billion buying back 21.7 million shares in 2007, a year in which the stock price fell in half from a high of nearly $190 a share. Sears' share price fell 3 percent Monday, to $100.08.

A search for a CEO continues after Sears ousted Aylwin Lewis earlier this year. Lampert said he remains "very happy" with the job interim CEO W. Bruce Johnson is doing.