Lacy Earns Hefty Bonus
Crain's Chicago Business  - March 21, 2002

Sears, Roebuck & Co. Chairman Alan Lacy's bonus slid 35 percent in 2001, after the No. 4 U.S. retailer failed to meet its earnings per share target.

The Sears annual shareholder proxy filed with the U.S. Securities and Exchange Commission on Wednesday showed Lacy received a $670,000 bonus for last year, compared with $1.04 million the previous year.

But Lacy, who is also chief executive, did win a 33 percent pay rise, bringing home $900,000.  The 48-year-old was also granted options for 369,900 Sears shares, which could be worth $36 million if the stock appreciated 10 percent a year until the options expire in 2011. The options carry exercise prices of $37.66 and $37.94.

"The company's earnings per share for incentive purposes was between the threshold and target levels of performance. Accordingly, Mr. Lacy's 2001 annual bonus was also between the threshold and target levels," the Sears proxy said.

According to the proxy, Sears shares underperformed both the broad Standard & Poor's 500 index and the S&P Retail Department Stores index. Investors buying $100 of Sears stock in 1996 would have made a $15.58 profit by the end of 2001, compared with a $41.15 profit on the same investment in the department store sector.

Shares in the Hoffman Estates, Illinois-based company were trading up 4 cents to $51.74 on the New York Stock Exchange Thursday. They have ranged from $29.90 to $54.29 over the past 52 weeks.

 

Sears Takes Charge During First Quarter

WASHINGTON - Sears, Roebuck and Co. said it will record a first-quarter charge of $208 million for an accounting rule change.

In its 2001 annual report filed with the Securities and Exchange Commission, Sears said it completed an analysis of existing goodwill and found that $261 million from its retail segment, primarily related to its NTB unit and Orchard Supply Hardware, was impaired under the new accounting rule, known as FAS No. 142.

Under the rule, all goodwill and indefinite-lived intangible assets must be tested annually for impairment rather than being amortized over 40 years as was done previously.

Sears also said it plans to spend $1.3 billion on capital expenditures in 2002, up from $1.1 billion. The money will be spent to remodel stores and add nine full- line stores, 40 specialty stores and seven Great Indoors stores. Six full-line stores will be relocated.

Sears said it intends to convert finance charges for its Sears Card accounts from fixed rates to variable rates.

In 2000, Sears began substituting Sears Gold MasterCard accounts for Sears Card accounts that weren't incurring finance charges. Sears has converted 18 million accounts to the Sears Gold MasterCard, the filing said.

The plaintiff, Tamika Craig, is claiming that the Hoffman Estates-based retailer did not "adequately investigate" her complaints and failed to alleviate the harassment by her supervisor.

A Sears spokeswoman said Monday she had not seen the suit and could not comment.

The spokeswoman said the carpet and upholstery care operation licenses the Sears name but is not a division of Sears. As a licensee, the unit is required to meet certain business standards, she said.

Anthony Capua, an attorney with John P. DeRose & Associates in Hinsdale, the firm representing Ms. Craig, said he hasn't heard that the Blue Island facility isn't part of Sears' corporate operations. If the company can prove that it is not the supervisor's employer, he said, the suit may be amended to exclude Sears.

Ms. Craig worked as a technician in the Blue Island facility. In her complaint, filed Friday in U.S. District Court here, she claims her supervisor, Michael Delaney, repeatedly made suggestive remarks and improperly touched her.

The complaint states that Ms. Craig made several attempts to report Mr. Delaney's actions to other Sears managers and company officials, but "no substantive correction action was taken." Ms. Craig also claims she was fired in retaliation for her allegations.

This suit follows an investigation by the Equal Employment Opportunity Commission, which recently gave Ms. Craig the green light to sue Sears. Ms. Craig is seeking $400,000 in damages each from Sears and Mr. Delaney.

Discounter Kmart Corp. confirmed Friday that it will close 284 stores nationwide, including 21 in Illinois, and eliminate 22,000 jobs as part of its Chapter 11 bankruptcy proceedings.

Sixteen of the 21 Illinois stores are in the Chicago area, including two city locations. Many of the local stores to be closed are in high-rent spaces taken over by Kmart from the Venture chain in the 1990s.

After the closings, which are subject to Bankruptcy Court approval, 32 stores will remain open in Illinois. Michigan-based Kmart wants the Court to approve the closures by March 20.

Kmart on Friday notified the thousands of employees who are being let go. It is unclear how many jobs will be lost in Illinois. A Kmart spokesperson could not be immediately reached for comment.

The average Kmart encompasses 80,000 square feet; a size that few retailers are interested in lately. Many of the closed stores are likely to be redeveloped from the ground up, according to James Devine, a principal with the Northbrook development firm Newcastle Properties LLC (Crain's, Feb. 25).

Kmart, which has been struggling to compete with other discount retailers, filed for federal bankruptcy protection in January.

Wal-Mart's February Sales Surge;
Gap, Talbots See Decline for Month

Wall Street Journal Online News
March 7, 2002

Discount retailers such as Wal-Mart Stores Inc. saw strong gains in February sales, while specialty retailers including Gap Inc. and Talbots Inc. reported sharp sales declines.

Wal-Mart, Bentonville, Ark., said Thursday that sales at stores open at least one year -- or same-store sales -- rose 10.3% for the month, with sales at its Wal-Mart stores jumping 11% and sales at its Sam's Club wholesale-warehouse unit increasing 6.9%.

The discount retailing giant's total sales for the four-week period ended March 1, advanced 16% to $17.21 billion from a year earlier, with total sales at Wal-
Mart stores rising 19% to $11.11 billion, and Sam's Club sales gaining 13% to $2.24 billion.

J. C. Penney Co. reported a 13% rise in same-store department-store sales for the four weeks ended Feb. 23, a gain that the Plano, Texas, company called "significantly above plan." Penney said apparel sales powered the increase.

Same-store sales increased 6.7% at Penney's Eckerd drugstores, with pharmacy sales rising 9.7% and so-called front-end sales growing 1.5%. Front-end sales growth was led by the baby-care and hygiene category, as well as cosmetics, fragrances and household products.

But total catalog sales at J.C. Penney slid 29%, below the company's target. Penney blamed the sharp decline onthe elimination of unprofitable promotional events.

Penney's total department-store sales grew 9.6% to $940 million from a year earlier, while Eckerd drugstore's total sales rose 6.5% to $1.16 billion. Total company
sales increased 3.3% to $ 2.29 billion.

Federated Department Stores Inc., a Cincinnati operator of department stores including Bloomingdale's, Macy's and Lazarus, posted a 2.8% decline in same-store sales
for the four weeks ended March 2, in line with the company's expectations. Total sales for the month fell 2.9% to $1.05 billion.

May Department Stores Co.'s same-store sales fell 2.7%, while the St. Louis, Mo., department-store operator's total sales climbed 1% to $941.7 million. The company,
which operates stores such as Lord & Taylor, Filene's and David's Bridal, said it plans to open 11 new department stores in the year ending in February 2003.

Specialty Retailers See Sales Slide
Struggling apparel retailer Gap recorded a 17% drop in same-store sales for the month. Gap's domestic division saw sales slide 24%, while its international business reported a 22% sales decline for the period ended March 2. Its Banana Republic unit posted a 10% decline in sales, and its Old Navy stores saw sales fall 12%. Total sales for the period declined 8.2% to $720 million.

"Overall, February sales did not meet our expectations due to weak results at Gap and international, which were partially offset by better-than-anticipated results at Old Navy," Gap's financial chief, Heidi Kunz, said in a statement. She noted that merchandise margins were slightly ahead of the company's expectations but that they remain below last year's levels.

Gap's shares have been under pressure since the retailer reported a fourth-quarter loss and saw its debt was downgraded to "junk" status by three major rating agencies. The specialty retailer's same-store sales for the fourth quarter dropped 16%, continuing a string of declines that has stretched for nearly two years, as the company continues to miss with its merchandise selection.

Meanwhile, women's apparel retailer Talbots, Hingham, Mass., posted an 18% drop in same-store sales for the four weeks ended March 2, and a 10% slide in total sales
to $84.1 million.  

The company blamed a shift in the markdown of its post- Christmas clearance merchandise to two weeks earlier -- into January this year compared with February last year. The company said the move will help it enter the spring selling season in "a very clean inventory position."

"Since February is a small, transitional month, it is too early in the quarter for us to be able to accurately gauge our sales trends. Therefore, we feel the March/April time frame will be a better indication of our spring selling," Arnold B. Zetcher, the retailer's chairman, president and chief executive, said in a prepared statement.

Two Illinois residents are suing Sears Roebuck and Co., alleging the retailer sold personal information from their Sears credit card accounts to marketers without their consent.

The lawsuit, filed Tuesday in the Circuit Court of Cook County, claims Hoffman Estates-based Sears invaded the individuals' privacy and profited from the sale of the personal information. The complaint seeks class action status and an unspecified amount of damages from Sears.

A Sears spokeswoman Thursday said she had not seen the lawsuit and could not comment. But she said the retailer stands by its privacy policy, which prohibits sharing consumer information with businesses outside the Sears family. The policy is clearly outlined on credit card applications, she said.

The suit alleges Sears gave the customer information to telemarketers, direct mail marketers and other vendors. The complaint names only one firm;Connecticut-based MemberWorks, formerly known as Cardmember Publishing Corp.;as a company with which Sears shared customer data.

The Sears spokeswoman said MemberWorks, which sold health and dental discount programs, is a "licensee" of Sears and falls under the company's family of businesses.

Plaintiffs' attorney Daniel A. Edelman of Chicago-based Edelman, Combs & Latturner LLC was not immediately available to comment.

Sales Down at Spiegel, Sears

By James Evans - Crain's Chicago Business
March 07, 2002

Spiegel Inc. on Thursday reported that its February sales slid 13%, as its three divisions posted at least a 10% decline in sales during the month.

The Downers Grove-based apparel retailer posted sales of $156 million for the four weeks ended Feb. 23, compared with $176.8 million a year ago. The company's faltering Eddie Bauer division continues to be a drag on sales: the unit's comparable-store sales dropped 17% during the four weeks. Comparable-store sales refer to sales in stores open at least a year.

Eddie Bauer suffered mainly because of a slide in apparel sales, the company said, but the unit's home business reported an increase for the month Because of higher sales of decorative accessories and quilts.

Spiegel's recent results also have been hampered by a high delinquency rate from its Spiegel credit card and the company announced in February its plans to sell the credit card unit (ChicagoBusiness.com, Feb. 8).

Spiegel has said it expects its first quarter results to show a 10% decline in sales and fall below its first quarter 2001 performance of a loss of $19.4 million, or 14 cents a share.

Meanwhile, Hoffman Estates-based Sears, Roebuck and Co. reported that its domestic sales fell 1.2% to $1.9 billion in February. Comparable stores sales declined 3.1%.

Sears said hardlines sales fared well with increases in home appliances and home fitness equipment, but apparel sales continued to be weak with double-digit declines in most merchandise categories.

Shares of Spiegel were unchanged at $2.28 a share Thursday morning, whiles shares of Sears were down 6 cents to $52.49 a share.

Judge OK's Settlement in Sears Retirees' Suit

 By Susan Chandler - Chicago Tribune - March 6, 2002

The unhappy, 4-year-old battle between Sears, Roebuck and Co. and its retirees is finally over. U.S. District Judge James Moran approved a $28.6 million settlement Tuesday that partially restores benefits in company-paid life insurance policies. It also guarantees that Sears will never reduce retiree life insurance benefits below $5,000.

Under the settlement, retirees will avoid a 10 percent reduction in life insurance in 2003, but the cuts resume thereafter. Retirees who showed up at Tuesday's hearing wanted the judge to know that they weren't happy with the settlement but were reluctantly accepting it because they had no other option. "The media and the American public must understand this is a win-lose solution--a big win for Sears and Corporate America, and a big loss for Sears retirees," said Melvin Schultz, a 36-year Sears employee, who spoke during the hearing. "And the biggest loser in this sad dispute is the American public and millions of workers in large and small companies everywhere."

The retirees argued that Sears repeatedly had promised them "paid-up" life insurance as part of their retirement benefit package.

Sears contended its benefit plan documents allowed it to reduce retiree benefits at any time.

Moran said he was sympathetic to the plight of retirees but reiterated that recent case law was not on their side. "This was a case with good facts and bad law," he said.

Of the 74,000 retirees affected who are still alive, 56,000 are participating in the settlement, an unusually high response rate of 76 percent. Only 128 eligible retirees opted out of the agreement, attorneys said.

Still remaining to be decided by Moran is the amount of fees that will be awarded to the plaintiffs' attorneys, which include a dozen law firms. The attorneys have asked for $5.4 million in fees and expenses for their work, which would be paid entirely by Sears. In a memo to the judge, Sears contends that the plaintiffs' attorneys deserve only $1. "They lost the certification. They lost the summary judgment. And the settlement was primarily brought about by the retirees, not their lawyers," said Sears spokeswoman Peggy Palter.

Deal Between Sears, Retirees Gets Judge's OK

Tammy Williamson - Business Reporter - Chicago Sun Times - March 6, 2002

Closing an "unhappy chapter" between Sears Roebuck and Co. and 76,000 of its retirees, a federal judge Tuesday approved a settlement that will restore a fraction of their life insurance benefits. The settlement will cost Sears about $28 million, a spokeswoman said.

To retirees, however, the settlement doesn't resolve the "family feud," as one retiree described it, that Sears triggered when it unilaterally reduced life insurance coverage for retirees.

U.S. District Court Judge James B. Moran empathized with retirees, three of whom made heartfelt cases as to how they felt betrayed by a company they said they once loved.

Moran described the 1997 lawsuit filed by retirees as "good facts and bad law," noting that laws regarding companies' obligations to their retirees have "not been favorable" to workers, and that the place for "long-term relief obviously is Congress. I, of course, have to follow the law."

The settlement was to have affected 80,000 retired workers, but lawyers Tuesday noted the class of employees had shrunk since the lawsuit was filed because retirees had died before it could be settled. The estates of retirees who have died since Jan. 1, 1998, and who die before Dec. 31 of this year will get a Sears gift certificate for $100.

Northbrook resident Melvin Schultz, 74, who worked in advertising and sales promotions for Sears for 36 years, said Sears' decision to take away its retirees' fully funded life insurance did "pave the way for the Enron's of today, and in the future. This is a lousy deal. We're being cheated, but what choice do we have? We're in our 70s and 80s, and we're tired. The deck is stacked against us, and Sears is going to win."

In 1997, under Arthur Martinez, former chairman and chief executive, Sears unilaterally cut $60 million of costs by reducing company-paid life insurance benefits for more than 80,000 former employees who retired between 1978 and 1997. It was one of many changes Martinez engineered at the company in his plan to increase profitability.

Retirees at Tuesday's hearing several times mentioned Martinez and how he "left with his millions" upon his retirement in 2000, but praised Alan Lacy, current chairman and chief executive, for working toward a settlement with retired workers.

Under the 1997 plan, life insurance benefits were to be cut 10 percent every year for 10 years, to a minimum of $5,000. The average employee benefit at the time was $17,000.

The settlement approved Tuesday will freeze the planned reduction of 10 percent in 2003, but the 10 percent incremental cuts resume in 2004 and continue through 2007.

A retiree with a $15,000 policy before 1998, for instance, would have had a policy cut to $10,000 this year and $9,000 by 2003 under the old plan. Under the settlement, the value of that policy will stay at $10,000 in 2003, and with be worth $6,000 by 2007.

Also, as part of the settlement, people who retired between 1978 and 1997 get a guarantee their life insurance benefits won't be cut again or revoked-- options Sears could have unilaterally invoked absent the settlement. Attorneys said 56,000 retirees had filed claims to participate in the settlement. Another 128 rejected the settlement and can still sue, while the remaining retirees simply haven't filed a claim. Hypothetical reasons for not filing could include some retirees not seeing the notice of a class action lawsuit, or not wanting to participate in a lawsuit against their former employer, said plaintiffs attorney Michael Mulder.

-o-o-o-o-o-o-o-o-o-o-o-o-o-

Most all of us being loyal employees did not fight this edict, as we felt that Sears had treated us well over our careers even though it was not what Sears had long promised retirees. I, like many, recognized the obvious cost increases in medical costs, and thought perhaps it was best in a small measure to assist Sears by bearing some of the cost increases. Little did I ever consider that a new Chairman, by the name of Martinez in his effort to "Increase Shareholder Value" in 1996, would freeze Sears contribution to our medical, and later take away the promise of our paid-up life insurance. And now, retirees are paying a larger premium for prescription medicines.

Ken Johnson, NARSE Chairman, pointed out to Judge Moran stating, " For over 100 years the overwhelming majority of Sears, Roebuck and Co. employees and retirees loved the company. And the Company loved its employees and retirees. This mutual respect, integrity, and trust was regularly demonstrated and reinforced by actions of both the Company and the employees and retirees.

As a result, the Company's word was "golden"...much like this framed declaration "Sears Balanced Benefit Program" (which he pointed out the retiree benefit of paid up life insurance). During those years, if the Company said something, "you could take it to the bank", to use an old business expression about TRUST".

In further comments, Johnson stated, "NARSE stands before you sadder...and wiser. We do listen. In October when this proposed settlement was presented to you in your courtroom, Judge Moran, you said that the law as currently written does not favor retirees. Retirees are not looking for a "favor". Retirees are looking for Sears to be FAIR. But we understand the facts...and your restrictions by law. We remain concerned for the promised benefits to Sears retirees and for the continued erosions of benefits to current Sears employees. NARSE has offered to work with Sears and Alan Lacy regarding benefit expenses. NARSE will continue to represent retirees to work for these causes, including Federal legislation that is fair to Companies, employees, and retirees regarding earned benefits".

Mel Schultz, in his presentation stated to Judge Moran and the Court is further quoted as saying, " Judge, do not believe that the large Proof of Claim Forms received by the Court represents endorsement of this "settlement" by retirees."

Further, Schultz stated, " Hundreds and hundreds of letters and e-mails to the Retirees National Association have said in effect, "This is a lousy deal. We're being cheated, but what choices do we have? We're in our 70's and 80's, and we're tired. The deck is stacked against us, and Sears is going to win. We might as well take our 10%. As little as it is, something is better than nothing".

Schultz further pointed out, " I hope that no one - not Sears - not Sears lawyers - or even the retirees' lawyers - will attempt to "spin" this so-called settlement into a "win-win" solution for Sears and retirees. The media and the American public must understand that this is a "win-lose" solution - a big win for Sears and Corporate America - a big loss for Sears retirees. And the biggest loser in this sad dispute is the American public, and millions of workers in large and small companies everywhere".

Therefore as employees and retirees, it has become very obvious that we must support legislation for changes that currently allows corporations to take away promised benefits long after retirement.

Congressman John F. Tierney of Massachusetts, along with 87 co-sponsors as of today, has again sponsored the Retiree Benefit Protections Act of 2002, H.R. 1322. Content of the Bill can be found under: www.firstgov.com or you may contact Tierney's office on the web at: www.house.gov/tierney/contact.htm or by phone: 202-225-8020, or fax at: 202-225-5915. His office today advised that they are still in need of Republican support for the proposed legislation. NARSE will keep you appraised as to its developments.

Trouble at the GAP - More Retail Misery

Inc. 2002 is turning out to be a year for living dangerously.

Just two years ago, Gap seemed unstoppable. Its stores sprouted brazenly in every mall and on every city street corner, and its president and chief executive, Millard S. Drexler, was lionized as a merchandising prince. And when Gap commanded its customers to wear leather, they obeyed.

Now the chain is no longer the arbiter of Everyman style, and Mr. Drexler, once thought infallible, is under the microscope as never before. Even measured by the ruthlessly dizzying cycles of fashion-world cool, Gap's fall from grace has been swift. Sales in stores open at least a year began declining in April 2000, and the slide has not stopped. The financial fallout has been grim: operating margins have evaporated into almost nothing, from 9 percent a year ago, and the company is expected to lose $22 million this year, after a profit of $877 million last year. The top credit agencies have reduced the company's ratings to junk status.

Gap's stock, which hit a high of $53.75 in February 2000, trades at $12.41.

Mr. Drexler has responded to this staggering disintegration with a drumbeat of promises to improve fashions and win back the over-30 crowd — whom Gap had alienated with hip offerings like crocheted halter tops and jeans-style jackets in orchid-colored leather.

"Our challenge in the current market is to find the right balance between key items and fashion from both an assortment and presentation standpoint," he said in August. "This is our No. 1 priority." (He declined to be interviewed for this article.)

Mr. Drexler's brilliance as a merchant has saved Gap before. The chain was slumping in 1995 and 1996 when he sensed the move toward casual business dress and cashed in heavily on khakis.

But this time is different. Gap, which is based in San Francisco and also owns the Banana Republic and Old Navy chains and operates a total of about 4,200 stores, has far more constraints now. For starters, its total debt is around $2 billion, up from just $21 million in 1995. As recently as late 1998, Gap had more cash than debt; the debt now exceeds cash by $1.2 billion.

ITH so precarious a position, Gap's survival game must rely on more than Mr.. Drexler's intuition about the perfect denim skirt or knee-length knit sweater.

On Tuesday, when Gap releases its annual financial report, many analysts are hoping for signs of drastic action at last.

"They have to be looking for a major restructuring plan," said Carol Levenson, research director at Gimme Credit, an investor newsletter in Chicago. "At some point you've got to cut costs more dramatically, and you can't just wait to get back into the fashion rhythm."

The crucial issue for Gap, as it was for Kmart (news/quote), which sought bankruptcy protection last month, is generating enough cash flow to service its debt. In November 2000, an important measure of Gap's financial viability — the ratio of earnings (before interest, taxes, depreciation and amortization) to interest payments — stood at 7.3. By the third quarter of 2001, that ratio had slipped to 4.7, according to Standard & Poor's.

"We think it is going a lot lower," said Gerald Hirschberg, a director for corporate ratings at Standard & Poor's. "A ratio of 4 or 5 still provides a pretty good margin, but we have been concerned with the steep decline."

Analysts are comfortable that for now, Gap has the liquidity to cover its debt.

But the coming months will be most important. If the chain still has not regained its fashion touch by Christmas, it could face a nightmare. Another disastrous season would make it taxingly expensive to raise cash just as $500 million in debt matures in 2003.

Gap has used an aggressive form of accounting that could worsen its earnings shortfall in the coming year, analysts say. When most retailers mark down merchandise, they acknowledge right away that the money is lost in a write-off. Most of the time, Gap accounts for the loss only after it has sold the merchandise. As a result, analysts say, losses take far longer to work their way onto Gap's income statement.

Todd Slater, an analyst at Lazard, said, "Not only did their accounting methods probably magnify their earnings fall — a significant portion of their inventory could still be overvalued." That suggests more trouble for later this year.

Gap vigorously denied that its accounting method would have such an outcome.. "We have applied our method very consistently," said the chief financial officer, Heidi Kunz. "It enables us to keep up with inventory valuations on the monthly basis, and the implication that there is some smoking gun does not hold water."

O one, of course, is saying that Gap is Kmart. For one thing, it has more options. Insiders say the chain's San Francisco campus is already swarming with consultants pitching money-raising proposals — maybe spinning off divisions like its more upscale Banana Republic into public tracking stocks, or perhaps closing a number of stores.

So far, the company has been terse about what it might do to stanch the red ink. It is close to securing a $1.3 billion line of bank credit that lasts for two years. It has also announced that it will cut capital expenditures to about $400 million in 2002 from $1 billion in 2001, largely by reducing inventory and by scaling back store openings to less than 5 percent growth from the 15 percent originally projected.

Ms. Kunz points out that the moves have already improved the company's liquidity over last year. "Nobody is focusing on the fact that we are cash-positive," she said, "and that is really important."

Even with those loans and cuts, Gap could still need more cash. The $1.3 billion bank line is less than its pre-Christmas short-term debt in 2000, which was $1.5 billion, and would be barely enough to cover its pre- Christmas debt in 2001, which was $1.27 billion.

Moreover, as the company has been forced to shift almost totally to long-term debt, its interest payments have skyrocketed. In the first three quarters of 2001, interest payments shot up 66 percent, to $77 million, as Gap's creditworthiness deteriorated. The company now expects that it will pay at least $145 million in interest this year.

Ms. Kunz would not say if the company would seek additional financing on top of the $1.3 billion loan. "The plans we have in place," she said, "will provide us with the kind of liquidity we need to support a turnaround."

High on the priority list for improving Gap's prospects will be sorting out its real estate situation. From 1997 to 2000, the company roughly doubled the square footage in its empire, mainly by its infatuation with the Old Navy discount concept. The number of Old Navy stores grew to nearly 3,700 from 2,100 during that time, and store sizes ballooned. Its original Old Navy in Colma, Calif., near San Francisco. was fairly small, but its bigger stores now, like those in New York, San Francisco, Seattle and Chicago, are 40,000- square-foot, four-story monstrosities.

"Old Navy as it was originally conceived — 10,000-square- foot stores in strip malls, which offered fashion at a value — was a solid gold concept," said a former Gap executive, who spoke on condition of anonymity. "But being cool went to their heads, and they lost their focus. They began putting Old Navys in malls right next to Gaps and undermining their own sales."

Therese Byrne, editor of Retail Maxim, a newsletter specializing in real estate, said: "Old Navy is their Achilles' heel. They are going to have to rationalize their portfolio. By this summer," she predicted, "they may be shutting down 15 percent of the portfolio, easy."

Rationalizing does not necessarily mean that Gap will shut stores. In fact, the company denies that it has any bigger plans for closings in 2002 than it would in an average year — and its long-term leases would make widespread closings expensive anyhow. But Gap does acknowledge that it has hired Thompson & Associates, the real estate consultants, to help it evaluate each existing store.

In addition, Gap has said that while it may not close stores completely, it may reduce their floor space. "In the last two years the size of store that we built on Old Navy was too large," Ms. Kunz said. "We are looking at the possibility of doing design changes inside the box to make them more productive."

LSO on Gap's to-do list, but a quieter priority, is bolstering Mr. Drexler in the fashion department. The Gap division has been without a president for a month, and Herbert Mines Associates is conducting the search for what will be its third president in four years. Worse, the company is looking a little threadbare on the talent front further down the line.

While Mr. Drexler, 57, has earned a reputation as a merchandiser with a magic touch, he has always thrived by grooming bevies of talented general-merchandising managers, known in the business as G.M.M.'s. He began to lose his bench in droves when Gap's stock began to slide two years ago.

Richard M. Lyons, president of the Gap division until 1997 and now taking some time off, said, "Go down the roster of people who have left the company in the last three years, and you see that a lot of the great G.M.M.'s are gone."

Mr. Lyons said Gap might be having difficulty keeping top merchandising talent because the jobs were not as creative as they used to be. "They have become so process-driven that it is not about product any more," he said. "It is more important where they get those one million units made than what those units are."

Gap counters by pointing out that it has only two openings at the senior management level. It also says it has much confidence in the creative teams it has in place. "We are not having any trouble at all keeping talent or bringing new talent into the company," Mr. Drexler said in a statement. "We are putting our best people in the right jobs. We have people wanting to work for us."

For Gap's sake, Mr. Drexler must be right, or this dangerous year could end up devastating.

Wal-Mart Using Sears Old Game Plan

Enriched by Working Class, Wal-Mart Eyes BMW Crowd

By Constance L. Hays  - February 24, 2002

MONROE, N.Y. — Wal-Mart Stores (news/quote) just became the nation's biggest company, the first retailer to have done so. It got there by sounding a single note — low prices — that attracted millions of mostly working-class Americans in search of everything from toilet paper to fishing rods.

Now, after leveling discount chains from Kmart (news/quote) to Caldor, Ames to Bradlee's, Wal-Mart executives are setting their sights on a fresh target: more affluent shoppers who pride themselves on snagging bargains and who discovered stores like Target, Costco and Kohl's (news/quote) some time ago.

Many of the 178 stores Wal-Mart has opened in the last year are in well-off suburbs like Plano, Tex., and Alpharetta, Ga. All include grocery sections the size of a supermarket, with gourmet desserts and fresh herbs to attract people with money to spend. Wal-Marts new and old are also adding pricier products, from big-screen televisions to digital cameras to more glamorous cookware.

But reaching for new customers holds risks for Wal-Mart. It has succeeded by selling to penny-wise shoppers, and could alienate them, experts say, if it replaces too many private-label slacks and run-of-the- mill sheets with European cookware and personal computers.

"As they add these new customers, as they trade up, the risk is that a new Sam Walton in some place that you and I have never heard of says, `Hey, I'm going to buy it low, stack it high and sell it cheap,' " said Richard S. Tedlow, a professor of business administration at the Harvard Business School and the author of "Giants of Enterprise," a study of Wal-Mart and other companies. Another risk is that "traditional customers are going to look at Godiva ice cream and they're not going to want it and they're not going to feel at home."

Founded in Arkansas 40 years ago by a five-and-dime merchant, Sam Walton, Wal-Mart built its empire with stores in rural areas where land was cheap and shoppers looking for variety and low prices saw few alternatives. By the time Mr. Walton died 10 years ago, Wal-Mart was the largest discounter. Just last month the company passed Exxon Mobil (news/quote) to become the nation's largest company in sales, reporting $217.8 billion for the fiscal year ended Jan. 31. Wal- Mart is also the nation's largest private employer, with more than 1.2 million employees.

There are 2,600 Wal-Marts, with heavy concentrations in Texas, Florida, Illinois, California and Missouri. It has moved into the Northeast more recently — there are a handful of stores in the New York metropolitan area, and 116 scattered across the region's three states — but for the most part it avoids large cities.

The newest Wal-Marts speak to the company's quiet but growing emphasis on reaching beyond its longtime customers.

At the store here in Monroe, about an hour's drive north from New York, which opened a year ago, Jeep Grand Cherokees and Lexuses are lined up next to Saturns and Ford Broncos. In the grocery section, where the shelves bristle with "We Accept Food Stamps" signs, the Kraft marshmallow spread now shares space with Nutella, an imported chocolate-hazelnut purée.

In the TV section, it's not just the $100 19-inch Orion color sets that Wal-Mart wants to sell. There are also 61-inch models made by RCA for $1,699. And lately there are digital cameras, too, like the Sony (news/quote) P30.

The new customers have a distinctly different mission. "Everything you need for a summer house, you can certainly get in Wal-Mart," said Kathy Sullivan, a Suffern, N.Y., resident who said she discovered the chain after buying a vacation home in Cooperstown. She shops mainly for food and paper products, she said, and has been pleasantly surprised by the selection and the prices.. "Normally I shop at A.& P., which is very expensive, relatively."

Pursuing someone like Ms. Sullivan alters the cost of doing business. Stores opening in suburbs typically must pay more for their real estate. And adding big-ticket items to the lineup can be hazardous. "When you go beyond the basic necessities of life, there is more volatility," said John R. McMillin, an analyst for Prudential Securities. "There will be times when the diamond rings don't turn as well as the milk."

But analysts say Wal-Mart has no choice. "They've had to go into more suburban, upscale places," said Carl Steidtmann, the chief economist for Deloitte & Touche. "They've run out of other places to build stores."

Not just Wal-Mart but other discounters have benefited from the slowing economy. Their sales have shot up while business for department stores and luxury-goods retailers has fallen. Just how Wal-Mart's push for higher-income customers will affect these other chains is not clear. Spokesmen for Kohl's and Target would not comment on Wal- Mart's strategy, and the president of Costco, Jim Sinegal, to whom other executives referred requests for comment, was traveling last week and could not be reached.

But because Wal-Mart is so large and powerful, its move is bound to increase competition, affecting prices in an already low-margin business. Its entry into the supermarket business, where it quickly became No. 1, accelerated the sale of small stores to larger ones, said David Orgel, editor in chief of Supermarket News, and inspired industry seminars around one topic: how to compete against Wal-Mart.

Despite its formidable size, attracting and keeping more affluent shoppers is a battle that Wal-Mart must wage with great care. While it has always promoted "good, better and best" variety, never has it zeroed in on the wealthier customer with such resolve.

"Wal-Mart knows they have a consumer with high income who takes pride in being a smart shopper, and they want to give them more to buy," said Candace Corlett, a partner with WSL Strategic Retail, a consulting firm in Manhattan. "The next key to sales growth for Wal-Mart is to increase the size of the average transaction."

At the same time, Wal-Mart has to maintain its base — the hard-working people who regularly shop the stores for all kinds of necessities. "We've always been identified with the most dominant shopper we have, the people who work paycheck to paycheck, week to week," said Tom Coughlin, the president of the Wal- Mart Stores division. While the stores have no intention of ignoring that shopper, "we've got the ability to customize according to the customer," he said.

Some say this is an extension of Wal-Mart's longtime strategy. "I think they've found a sweet spot, which is great products at great prices," said Robert A. Eckert, the chairman and chief executive of Mattel, which sells millions of Fisher-Price, Barbie and Hot Wheels toys through Wal-Mart. "People are now drawing that conclusion, that they don't have to sacrifice great products for great prices."

In the Dallas suburb of Plano, for instance, Wal-Mart found that its usual jewelry offerings — in 10-karat gold — just weren't good enough. "Our store sits in the middle of $700,000 to $1 million homes," Mr. Coughlin said, "and if you're not selling 14-karat in Plano, you're not meeting the customer's expectations."

In the last year, a new women's clothing line called George has gone on display in many stores. "It's their answer to Mossimo (news/quote) at Target," said one women's-wear manufacturer, who has done business with Wal- Mart for years and asked not to be identified. "It's not as young and not as chic, but it's a step up from where they've been."

One longtime Wal-Mart shopper said she was pleased to see a better selection. "The duration of their pots and pans, the generics they sold, was very short," said Victoria Morris, who said she had moved to Monroe recently from Mississippi. "So they are upgrading. There is a wider choice of more high-end quality products. I see it in the linens, the electronics, and the cookware and the bakeware."

In the cookware aisle, there are still low-priced aluminum skillets and covered pots for sale. But alongside them are Revere pans, a venerable American brand, as well as T- Fal, a French line.

Wal-Mart has forged agreements intended to bring upscale items into its stores. Among them is a strategic partnership with Olympus, the camera maker, said Burt Flickinger III, a managing partner with Reach Marketing in Westport, Conn. "Historically, you'd only find Olympus in the specialty camera shops," he said. "Wal- Mart has matched Target's lead in going to high-end cameras. They will now go up to the $700 range. They are way beyond the typical Wal-Mart of a few years ago."

With 70 million of the 110 million weekly Wal-Mart customers earning $25,000 to $50,000 a year, the store is still largely supported by the people that Sam Walton dedicated himself to serving.

Some of Wal-Mart's efforts to stock its shelves with upscale goods have irritated manufacturers. The company paid $6.4 million in 1999 to settle a lawsuit from Tommy Hilfiger over counterfeit clothing sold in some of its stores, and an additional $1.4 million to settle a similar claim from the makers of Polo, Fubu and Nautica last year. In October, Fubu sued Wal-Mart again, contending that a line of store-brand clothes with an "05" printed on them violated a Fubu trademark for an identical logo. That case is pending.

In its supermarkets, Wal-Mart has found it fairly simple to improve its selection, selling Godiva chocolate raspberry truffle ice cream in its store in East Stroudsburg, Pa., along with the Sam's Choice store brand. And in many cases, its prices do undercut competing supermarkets, enticing shoppers.

"I probably travel 15 minutes to shop here," said Dara Hackett, a shopper in the Monroe store, "and I have a Super Stop and Shop a quarter-mile from me."

The trick for Wal-Mart will be to transfer the success it has had in broadening its grocery array to apparel, housewares and other categories inside its mammoth stores.

Mr. Coughlin pledged allegiance to the low-budget Wal- Mart customer. At the same time, he said: "Will we try to find things to do to improve our relationship with customers who have more income? Absolutely."

Mr. McMillin, the analyst, put it another way. "Whether you're rich or whether you're poor," he said, "everybody wants a bargain."

Lacy Moving to Make Sears More Profitable
February 22, 2002

It is in line with the Sears press release of Oct.24, 2001. Insiders have advised that restructuring at store/district level had quietly commenced at the end of January 2002 with a rumored release of 2,640 personnel from store and field operations.

The retailer also said it was not in compliance with certain 2001 loan covenants due to its dismal results for the year. It said it is currently working closely with its bank and its majority shareholder, Germany's Otto family, to restructure its credit facilities. Its goal is to have new financing agreements in place by mid-April.

Chief Executive Martin Zaepfel said the company has strong support from the Otto family, which controls essentially all of its voting stock, and it is confident it will be able to secure the necessary financing.

He said the company has adequate liquidity and cash flows to fund its day-to-day operations in the interim, and it expects the sale of its credit card business will lower its debt and capital requirements.

``We have made a strategic decision to remove our credit card operations from our business mix to intensify our focus on our core retail business and strengthen our financial position,'' Zaepfel in a statement.

Analysts said good riddance to the credit card unit, which had been in a freefall for the past year and a half.

"Selling the credit business is a positive. It allows management to focus on the stores,'' said Eric Beder, an analyst for Ladenburg, Thalmann & Co. Inc. ``The key now is, can they turn around Eddie Bauer?''

Spiegel said it will continue closing under-performing stores as it evaluates lease renewals. Its Eddie Bauer chain, which has struggled against months of declining sales at stores open at least a year, sells outdoor-oriented apparel and home furnishings through catalogs and more than 560 stores.

The company warned its first-quarter earnings will fall below last year's results, with sales down by about 10 percent. The company said it posted an estimated net loss on the sales of its credit card business of $310.5 million, or $2.35 a share.

Spiegel forecast revenues will be relatively flat to slightly down in 2002, showing a decline in the first half of the year with a modest improvement in the second half.

The company, whose stock have lost more than half its value since the Sept. 11 attacks, said it will not provide full-year earnings guidance due to the pending sale of its credit card operations.

About 70 percent of the stock's value has been wiped out since August, when it traded at around $10.

SPIRALING SALES, BAD CREDIT
The Downers Grove, Illinois-based company, which had lowered its outlook at least twice, posted fourth-quarter earnings from continuing operations of $18.1 million, or 14 cents a share, compared with earnings before the effect of an accounting change of $22.4 million, or 17 cents a share in the year-earlier quarter.

Zaepfel said although the economic downturn hampered its ability to stimulate sales, "weaknesses in our merchandise offer and marketing programs also contributed to the lackluster sales performance, particularly in our Eddie Bauer division,'' he said.

The company had planned for Eddie Bauer's revamped product offering to deliver improved sales during the quarter, but ''customer acceptance was obviously lower than expected,'' Zaepfel said.

Spiegel said it posted a net loss from discontinued operations of $85.7 or 65 cents a share in the quarter, largely due to its credit card operations and a charge to reduce the net gains on the sale of receivables.

Zaepfal said that during 1999 and 2000, Spiegel aggressively expanded its credit card accounts, which included extending credit to higher-risk customers, but it soon faced rising delinquencies and charge-offs despite more aggressive collection efforts and other restrictions.

As the economy started to decline in mid-2000, its credit portfolio deteriorated rapidly and began eating into earnings, Zaepfal said in a statement.

It said it will form a relationship with a third-party to provide private-label credit programs to its customers.

Total revenue from continuing operations declined 13 percent to $1.012 billion in the quarter, from $1.164 billion a year earlier. Net sales slumped 15 percent in its direct sales business, and 14 percent in its retail stores.

Spiegel shares closed at $2.75 in Thursday trade on the Nasdaq stock market.

Eaton's Canada Closing

Sears Canada announced today that it would close Eatons, Canada’s oldest department store chain.

The subsidiary of Sears, Roebuck and Co., bought bankrupt T. Eaton Co.’s 19 stores in 1999 for $50 million and spent more than $100 million trying to revive the upscale brand. Twelve stores immediately were converted to Sears, but seven remained under the Eatons name, known to Canadian shoppers for more than a century.

After battling an economic downturn and bargain-brands such as Wal-Mart, Sears Canada said it would convert the remaining Eatons into Sears stores. The conversion will save Sears Canada more than $10 million annually, Mark Cohen, Sears Canada’s chief executive, said during a conference call.

Sears Canada said it would take a one-time charge before taxes of $150 million in the first quarter. Sears Roebuck and Co., which owns 55 percent of Sears Canada, said in a statement that would take a one-time charge of about $40 million because of the Eatons closure.

Sears Roebuck to Take 1st Quarter Charge of $40 Million
or 12 Cents/Share

Sears Canada Inc. will convert its seven Eatons stores in six Canadian cities to Sears stores.

In a news release, the retailer said the conversion, which will be completed by the end of July, will enable it "to better leverage its buying and advertising efforts, and take more powerful advantage of the Sears brand's equity."

It said it will record a pretax charge of about C$180 million in the first quarter in connection with this move.

Sears Canada Inc. said the stores being converted are in Victoria, B.C., Vancouver, Calgary, Winnipeg, Toronto and Ottawa.

It said one Eatons store in Toronto, at Yorkdale Shopping Centre, and the Eatons in Winnipeg, do business alongside an existing Sears store. It will therefore have to determine which of these stores will be retained as a Sears store at these locations.

It said the first-quarter charge will include C$30 million cash for severance payments, third-party commitments and transition costs, and a C$150 million non-cash writedown of fixtures and leasehold improvements.

Total one-time after-tax charges are expected be about C$1.15 a share. Following conversion of these stores to the Sears format, savings gained are expected to yield improvement in pretax earnings of about C$40 million on an annualized basis, it noted.

It said Sears Canada's management is therefore revising its 2002 earnings guidance. Earning for the full year will likely exceed C$1 a share before charges. This compares with 59 Canadian cents a share last year.

Separately, Sears, Roebuck and Co. (S) said it will record a charge of about US$40 million, or 12 U.S. cents a share, in connection with its Canadian subsidiary's decision to convert seven Eatons stores to Sears stores.

It will also record the charge in its first quarter.

In its news release, Sears Canada Inc. said about 600 associate positions will be affected by the store conversions, but that all affected associates will have an opportunity to apply for other positions within the company. It said it's "committed to protecting the employment of as many associates as possible throughout this process."

As reported, the Canadian retailer acquired 19 Eatons locations in 1999. The 12 stores that it had already converted to Sears are unaffected. These stores are profitable and are performing at or above expectations, it said.

There will be no wide-scale liquidation and all stores will remain open during the conversion process.

The seven stores involved in the conversion, along with about 13 other larger Sears stores, will form the basis of a Sears "select" strategy, offering customers a broader assortment of better fashion merchandise, the company said.

Sears Sales Cool in January
Reuters Newsroom - February 7, 2002

Sears, Roebuck & Co. on Thursday said sales at its domestic stores open at least a year, or same-store sales, fell 3.4  percent in January

Sears, the No. 4 U.S. retailer, said total domestic store revenues for the four weeks ended February 2, totaled $1.69 billion, down 2.3% compared with a year earlier.

"January sales results were soft compared to last year, reflecting a decrease in promotional and clearance activity as a result of our improved inventory position entering the year," Sears CEO Alan Lacy said in a statement.

One wonders how Merck-Medco change may affect costs of prescription drugs for retiree health care . . . .

Merck Will Shed Drug-Benefits Unit
In an Effort to Boost Its Stock Price

By Gardiner Harris - Staff Reporter - The Wall Street Journal
January 29, 2002

Merck & Co., under heavy pressure as five of its biggest drugs are ravaged by generics and as the growth of a newer one stalls, will shed its pharmacy-benefits-management subsidiary, Merck-Medco.

Merck plans an initial public offering of part of Medco by summer. It is weighing alternatives for distributing the remaining shares and intends to complete the separation of Medco within 12 months. Executives hope the move will revive Merck's sagging share price, on the theory that the drugs and the pharmacy-benefits businesses are worth more apart than together.

"This transaction will allow Merck to focus more fully on its priorities of turning cutting-edge science into breakthrough medicines," says Raymond V. Gilmartin, Merck's chairman and chief executive. "We also believe that providing investors with 'pure plays' in the pharmaceutical and PBM businesses, respectively, will allow full valuation of both businesses."

Wall Street Pleadings
The move may also blunt Wall Street pressure for Merck to do a huge merger, a strategy Mr. Gilmartin has staunchly resisted. Mr. Gilmartin says the Medco move and Wall Street pleadings for a mega-merger are unrelated. He says Merck's board has been studying a Medco divestiture for four months. "The timing is based on the fact that the whole market situation and how Merck is positioned in these markets is totally different than it was," he says.

Merck bought Medco for $6.6 billion in 1993, as part of its response to the then-emerging managed-care threat. As a pharmacy-benefits manager, or PBM, Medco is hired by managed-care companies to authorize and fulfill drug purchases for patients. Merck figured it could harness managed care's ability to sway prescription decisions by buying a big PBM and using it to switch some prescriptions to Merck drugs. Other drug companies followed the strategy, acquiring PBMs themselves.

But regulators, wanting to make sure patients' health wasn't sacrificed to corporate profits, quickly insisted that PBMs' drug decisions be kept independent of the parent drug company. Soon some drug companies unloaded their PBMs for big losses. Eli Lilly & Co. sold its PCS Health Systems for a $2.4 billion loss in 1997, and SmithKline Beecham PLC sold Diversified Pharmaceutical Services in 1999 for a $1.6 billion loss.

Medco has grown rapidly under Merck's ownership despite regulators' limits. Medco's annual revenue since 1993 has climbed 12-fold to $26.4 billion -- 55% of Merck's total revenue. An independent Medco would rank among the 70 largest companies in the world in revenue, ahead of Walt Disney Co. and BellSouth Corp.

What is forcing Merck to move is the loss to generic competition of five huge-selling drugs. The five -- Vasotec and Prinivil for hypertension, Pepcid and Prilosec for ulcers, and Mevacor for high cholesterol -- will all have lost patent protection by June. Just as unnerving are the sagging fortunes of Vioxx, an arthritis drug launched in 1999 amid hopes that it would fill in the gap. Safety worries have brought Vioxx's explosive growth to a halt.

Merck's shares have lost a third of their value in the past year, and the company's market capitalization has shrunk to $130 billion from $200 billion. Merck jolted investors last June when it said its earnings wouldn't grow as fast as expected in 2001 -- and probably wouldn't grow at all in 2002. Merck achieved an 8% rise in per-share profits in the fourth quarter by squeezing costs and buying back a lot of stock. But its price-to- earnings ratio, a reflection of investor confidence in future growth, at 18 is the lowest of the seven major American drug companies and about half that of rival Pfizer Inc.

Pressure has been steadily building on Merck to do a big merger, as drug makers often do when key drugs lose patent protection. Such pressure led to the mergers that created GlaxoSmithKline PLC, AstraZeneca PLC, Aventis SA and Bristol-Myers Squibb Corp. But resisting a big merger is almost a religion at Merck. Mr. Gilmartin describes some possible mates as albatrosses. "It would have only made sense to do a merger if you'd lost confidence in future growth," he says. "You don't do a merger just to fill in one or two years."

Merck's chief of research, Edward Scolnick, describes Merck's research labs as a national treasure that must be protected intact. Merck's chief financial officer, Judy Lewent, is also an acolyte. "What we're all here to do is to address major human health concerns through pharmaceuticals and maximize shareholder value," she said in a recent interview. "You don't do that by rationalizing two separate organizations' favorite projects or merging separate organizations' different cultures."

Instead of a big deal, Mr. Gilmartin says he is pursuing a string of small ones. "Our efforts ... will include a continuing, intense focus on the entire spectrum of product licensing, from early- to late-stage opportunities, as well as targeted acquisitions," he says.

Aggressive Push
Mr. Gilmartin held on to Medco and pushed its growth aggressively when he became chairman and chief executive shortly after the Medco purchase. Medco now has 1,700 managed-care customers. It directs drug purchases for 65 million Americans and oversees 537 million drug purchases per year. In sales dollars, its Internet site, where patients order drug refills, is among the world's busiest.

And the PBM business is once again in favor. Most proposals in Congress to offer a Medicare drug benefit involve one or more PBMs. Medco started a national drug discount-card program with Reader's Digest that has spawned a raft of imitators.

In the four years after its 1993 purchase, Merck drugs' dhare of Medco's sales grew to 15% from 10%, Merck says. It says the reason wasn't that Medco was favoring Merck's drugs but rather that Merck had changed from a company hostile to managed care to one that was among the friendliest. Still, the fit was an awkward one, and Mr. Gilmartin has signaled from time to time that Merck was evaluating its relationship with Medco. "What we have to answer," he said in a recent interview, "is if both businesses can grow faster together than they can separately."

While Merck's huge resources have allowed Medco to build two giant automated pharmacies, Medco's growth has posed some problems for Merck. Medco's margins are razor thin.

So Medco's growth has caused the company's overall profit margin to shrink. PBMs increasingly get their profits from drug companies, which pay them to push doctors to switch prescriptions to their drugs, according to AdvancePCS chairman David Halbert. But drug companies may worry that Medco pushes their drugs with less vigor than Merck's own.

Medco's competitors have long told potential managed-care clients that Medco serves Merck's interests and not theirs, a charge Medco hotly denies. Lawyers have sued Medco on behalf of patients, contending its selections favor Merck drugs and hurt patients and managed-care programs.

Merck executives have tried for years to convince Wall Street that Medco was a good fit. Now, they concede it's a distraction, at a time when their attention is needed in the core medicines business.

Merck's troubles in that business mirror those in the rest of the pharmaceutical sector. Bristol-Myers Squibb, Schering-Plough Corp. and Eli Lilly have all warned recently that earnings will disappoint. All are also struggling to overcome patent expirations of major drugs.

Lab Inefficiency
The industry is suffering for several reasons, but the most important is the inefficiency of its labs. Drug discoveries often come in waves, and the industry is in a terrible trough. Through much of the 20th century, drug companies came up with new medicines largely through lucky breaks. They synthesized hundreds of chemicals and gave them to sick animals, hoping something would happen. Good results moved the drugs to human tests.

By the 1970s, scientists realized how much certain crucial body chemicals such as enzymes and neurotransmitters affected health. They sought to interrupt or enhance the work of these chemicals. Merck found a compound that slowed the work of a liver enzyme that creates cholesterol. The development of what is now Mevacor led to a class of drugs, statins, that now includes the world's biggest sellers.

In the 1970s and early 1980s, Merck developed an unparalleled array of medicines. But the easy pickings are over, and this kind of science now often leads to chemicals that don't produce enough benefit to justify their side effects. Biologists hope gene and stem-cell discoveries will solve the mysteries of diseases that remain intractable, but drug breakthroughs based on this science appear a long way off.

Companies are scrambling to manage their way through the drought. Some have scoured the world's labs for molecules to license or co-market. Merck, proud of its history of developing its own drugs in house, has largely focused on the fruit of its own labs. Given its track record, it felt it could beat the patent- expiration challenge. Since 1995, Merck has launched 17 new drugs, such as Fosamax for osteoporosis, Singulair for asthma, Crixivan for AIDS and Propecia for baldness.

Yet even Merck's skills haven't been enough to fill in the huge gap left by the five expiring drugs. In 1999, about a third of Merck's $14.4 billion in medicine sales came from those five. It's as if McDonalds had to give up selling a third of its Big Macs and come up with something just as popular.

Sales of branded drugs used to drift downward after patent expiration. Now they fall off a cliff. Within two months after the August 2000 patent expiration for Vasotec, generics grabbed 75% of the $2 billion hypertension drug's U.S. sales.

Merck marketers may also have underestimated competitors. Merck pioneered the anticholesterol market and used to dominate it. But in 1997, tiny Warner-Lambert Co. launched a pill called Lipitor with a clever marketing strategy: a lower price and an initial starting dose that was more powerful than that of Merck's Zocor. By the time Merck had increased Zocor's own starting dose and done trials proving Zocor just as effective, Lipitor had become the dominant pill. Lipitor and Warner-Lambert are now owned by Pfizer. Failing to anticipate the impact of Lipitor was a multibillion- dollar mistake.

"No one can say on the marketing front that everything has gone perfectly," says William Bowen, a Merck board member who is a former Princeton president and now heads the Andrew W. Mellon Foundation. "But major lessons have been learned." Adds Mr. Gilmartin: "You'd like things to go as planned, but the real question is how do you respond when they don't?"

Generic Threat
Merck has also declined to play the delay game. Almost every other drug company that has faced the loss of big- selling drugs has fought generics in court with patents on such things as the color, scoring and coating of pills. They generally lose these battles ultimately but often win months or years of delays -- and billions in added revenue. Just filing suit can winnow the number of competitors for the first six months of generic competition from 10 to one.

Had Merck tried this for four of its five drugs, it might have been able to meet analysts' profit estimates for 2001 and 2002. (The fifth drug is Prilosec, sold by AstraZeneca with Merck getting 32% of U.S. revenue. AstraZeneca has sued generics makers.) The company could still fight generic versions of Prinivil, a heart medication whose patent expires in June. But Merck executives see such tactics as a distraction to their mission.

"To extend the life cycle of our drugs undermines the intensity and commitment to create that next blockbuster," says Mr. Gilmartin. Medco boasts that it substitutes nearly all of its customers from Merck's branded drugs to cheap generics within weeks of the generics' launch.

Instead of delay tactics, Merck is betting its business on the famous productivity of its labs. Indeed, it seemed to be returning to its old glory in 1999 with Vioxx. Along with rival Celebrex, Vioxx belongs to a new class of painkillers that are supposed to ease painful inflammation with a lower risk of stomach bleeding than from, for instance, aspirin. Though Celebrex came first in 1999, Vioxx had nearly overtaken that Pharmacia-

Pfizer drug by last year. Marketers for the two fought viciously. As Merck marketers pointed to Celebrex shortcomings, their rivals from Pharmacia and Pfizer pointed to an anomaly in Merck's data: Vioxx patients had a higher rate of heart attacks than those taking naproxen, a nonprescription painkiller.

Merck's scientists said that Vioxx users' heart-attack rate was no higher than would be expected among the normal population and that naproxen had simply provided aspirin-like heart protection. But Merck's pivotal study didn't include a placebo group, so this couldn't be proved. Vioxx's sales growth nearly stopped.

Merck's CFO, Ms. Lewent, asked every division for cost cuts, but the numbers didn't add up. One morning in early June, she printed out five charts and walked to Mr. Gilmartin's office, where she gave him the bad news: Merck would never meet analysts' forecasts for 2001 profits, and results for 2002 would be grim as well. On June 22, Merck issued a statement saying 2001 earnings would grow no faster than 10% instead of the 12% hoped for. The stock fell 9% in a day.

Worrisome Profiles
Then in August, a study in the Journal of the American Medical Association concluded that the cardiac profiles of both Vioxx and Celebrex were worrisome. Although other experts criticized the study's methodology, it hurt Vioxx still more. Celebrex sales suffered, too. Since neither drug cures pain any better than older pills costing pennies apiece, the only reason doctors prescribe them is their perceived safety benefit. Once that perception was muddied, doctors stuck with older and far cheaper remedies.

Vioxx's 2001 sales came to $2.55 billion -- a blockbuster level, yet still far off the $3.5 billion Merck projected last February. Merck executives slashed expenses to the bone. Marketing departments were consolidated, advertising cut, construction groups slashed.

"The organization had to turn on a dime," says Mr. Gilmartin. "We're already spending money thinking expenses will rise by double-digits, and we put on the breaks to bring spending growth down to the low single digits."

Meanwhile, more patent losses loom. The cholesterol reducer Zocor, with nearly $7 billion in annual sales, will lose patent protection by 2006. Merck expects to extract itself from these problems as it always has, by getting new drugs out of its labs. By next year, the company expects earnings to grow again at double-digit levels with the expected launches this year of two new drugs. In fact, Merck expects to launch or seek approval to sell 11 new medicines over the next five years.

Peter Kim, deputy chief of research, says gene discoveries will accelerate research productivity. "People ask me, 'How come the company is in such bad shape?'" Dr. Kim says. "But it's in great shape. ... After a hiccup, Merck continues to come back."

Brand-building no bargain ...

Kmart Corp. Chief Executive Charles Conaway believes he knows what the struggling discounter must do to survive--build a stable of blockbuster brands like Martha Stewart that will differentiate Kmart from its competitors.

On Tuesday, the day Kmart sought Chapter 11 bankruptcy protection, Conaway ranked enhancing Kmart's brand position at the top of his priorities list. Kmart intends to become "the authority for what moms value," he said.

But retail experts warn that Kmart's brand-building strategy is much harder to pull off than it sounds, and pitfalls abound. Moreover, Kmart's strategic position won't be saved by brands alone, unless the nation's second-largest discount chain finds a way to stand for something all by itself.

"Target is a brand unto itself, and its fashion brands support that. Wal-Mart is a brand that means low prices all the time," said Neil Stern, retail consultant with Chicago's McMillan/Doolittle. "Kmart's problem is while they have some nice pieces, it's an oddity that they're at Kmart. First, they have to establish what they're all about."

Indeed, Martha Stewart's tastefully appointed linens and dishes seem an odd fit with Kmart's other products--soft drinks, stereo equipment and rap music, to name just a few.

Decades ago, Kmart used to stand for low prices and convenience because it had thousands of locations, retail experts say. But Wal-Mart edged it out on price, and long lines and lots out-of-stock items made Kmart a hassle to shop, the opposite of convenience.

Today, with the exception of its Martha Stewart housewares collection, Kmart resonates with consumers mostly as a dingy place to shop, hardly an image to build on when going head-to-head with the country's two discount titans, observers say.

Putting Stewart's housewares line in Kmart was "like tying a 200-pound weight to Martha's ankle, throwing her in the ocean and telling her to swim," said Christie Nordhielm, assistant professor of marketing at the Kellogg School of Management at Northwestern University.

"She did, but there was only so much she could do." It's certainly true that most major general merchants would love to have a long list of private-label, exclusive brands with Stewart's cachet. Target has had success with architect Michael Graves, who has designed a line of 1,000 affordable home-related products running the gamut from knives to clocks.

In the apparel area, Target has Mossimo, a former department store apparel brand for men and women that is now sold exclusively at its stores. And in the toiletries area, Target worked with makeup artist Sonia Kashuk to create a line of cosmetics under her name. But celebrity brands can be a two-edged sword. If they are really successful, the celebrity can jack up the cost of the license when it's up for renewal, reaping the premium that has been created, Nordhielm said.

They also can easily blow up on a retailer, marketing experts point out. When sweatshop activists accused talk show host Kathie Lee Gifford of having her Wal-Mart clothing line produced in Central American sweatshops, Gifford cried on the air and vowed to become a sweatshop fighter herself.

Wal-Mart, which refused to disclose where its products are made, found itself a target of activists and newspaper editorials while the controversy raged. It terminated its exclusive license with Gifford in 2000 but continues to carry the line.

"As the person goes, so goes your brand," notes Nordhielm. "You have all the challenges of celebrity marketing. An Ivory Girl ended up posing for pornographic pictures." Indeed, the celebrities who have embarrassed their sponsors make up a lengthy list. PepsiCo Inc. had to deal with the child molestation accusations against Michael Jackson. James Garner, who was urging people to eat more beef, had to have heart surgery, becoming a poster boy, in effect, for vegetarianism. And then there's Latrell Sprewell. The young NBA player seemed a perfect match for Converse athletic shoes until he was suspended for grabbing his coach by the neck. Converse dropped its endorsement deal soon after.

Sometimes, a private-label brand can blow up even when a celebrity isn't involved. Take the case of a new lower- price Benetton line that was supposed to become a $100 million brand for Sears, Roebuck and Co. Only a few months after the clothes began appearing in stores, Sears canceled the deal because a Benetton advertising campaign featuring death row inmates offended some shoppers. The move cost Sears millions, both on pricey fixtures to showcase the line as well as penalties paid to Benetton USA.

Indeed, Sears has struggled to find private-label apparel lines that can rival the success of its private-label hardline brands such as Kenmore appliances and Craftsman tools.

And despite a large-scale effort to build such apparel brands in the 1990s, Sears found its customers hardly recognized them in surveys last year. Sears Chief Executive Alan Lacy acknowledged the disappointment at the company's October analyst meeting, promising to clean out its closet.

"Alan said we would be doing away with some of them because they didn't have much customer relevance," said spokeswoman Peggy Palter. Still, Sears hasn't given up its dream to create an apparel brand with the kind of name recognition Kenmore commands in appliances. This fall, it intends to roll out an as-yet-unnamed "mega brand" that will include men's, women's and children's apparel. That will make its marketing more efficient because its ad dollars can go to support one major brand instead of being split among a dozen or more, Palter said.

When it comes to executing Conaway's strategy, Kmart faces far more hurdles than Sears, experts agree. That's because few celebrities or brands will want to be associated with a retailer operating under bankruptcy protection. "The ability to attract the brands that could really make a difference will be hindered by being in Chapter 11," Stern said. "Is somebody going to rush to do business with you? Probably not."

Even if Kmart could find willing volunteers, private-label lines have long lead times because they must be designed at least a year in advance in order to be manufactured overseas. Kmart probably doesn't have that long to turn around its business, experts say. Montgomery Ward & Co. tried to follow much the same strategy after it filed for bankruptcy protection the first time in 1997. But after emerging from bankruptcy 18 months later, cleaning up its stores and spiffing up its merchandise, Wards continued to lose money.

The venerable Chicago chain, which had shrunk to only about 250 stores, went out of business last year.

Kaplan Fox Seeks To Recover Unpaid Wages on Behalf of Sears Home Repair Employees Nationwide

Internet Wire - January 18, 2002

Sears Roebuck & Co. expects domestic store sales to be flat this year, but company executives predicted a 13% to 15% rise in earnings per share. On a conference call with analysts after the release of fourth-quarter results, executives said they expect to maintain gains in gross margin rates and said they are comfortable with the credit quality of  the company's receivables this coming year. The company said it earned $494 million, or $1.52 a diluted share, in the fourth quarter, including extraordinary items, on revenue of $12.24 billion. That compares with net income of $442 million, or $1.32 a diluted share, on revenue of $12.37 billion in the same quarter a year ago. "It was a good quarter for Sears and we feel good about how we concluded the year," said Sears' Chief Executive Alan Lacy. Lacy and Chief Financial Officer Paul Liska repeated projections released with the earnings earlier Thursday morning. They see a low double-digit growth rate in operating income in Sears' retail and related services sector, while credit and financial products operating income will grow at a mid-single-digit rate. Shares of Sears recently traded at $52.45, up 98 cents, or 1.9%, on volume of 1.87 million. Average daily volume is 1.9 million.

"Sears, Roebuck and Co., the No. 4 U.S. retailer, reported a 12 percent increase in fourth-quarter net income Thursday despite lower sales, a year after posting hefty charges to close 89 stores.

Net income in the quarter ended Dec. 29 rose to $494 million, or $1.52 a diluted share, from $442 million, or $1.32 a diluted share, a year ago. The net income figure for the 2001 quarter includes $163 million in after-tax charges to cover job cuts and a litigation settlement. Quarterly results for  2000 include accounting items and charges for store closures.

Excluding the charges, the retailer earned $657 million, or $2.02 a share. Those figures were at the high end of analyst forecasts. Revenues were $12.24 billion, down from $12.37 billion a year ago.

"Despite slow holiday sales, our retail and related services profits increased solidly, driven by margin rate improvements across virtually all of our retail formats,'' Alan Lacy, chairman and chief executive, said in a statement.

Eleven analysts polled by Thomson Financial/First Call on average had expected the retailer to report a fourth-quarter profit of $2.00 a share. Their estimates ranged from $1.91 to $2.02 a share.

Sears also said it expected 2002 earnings per share to rise 13 percent to 15 percent. For 2001 the company posted earnings of $1.39 billion, or $4.22 a share, before one-time items.

"We anticipate that our retail and related services business will grow operating income at a low-double-digit rate, and credit and financial products will grow at a mid-single-digit rate,'' Lacy said.

Analysts forecast earnings per share of $4.40 to $4.81 in 2002, with a consensus of $4.71, according to Thomson Financial/First Call.

Retail and related services revenues fell 3.5 percent in the fourth quarter to $9.49 billion. Sales rose as declines at full-line stores offset improvement at The Great Indoors, dealer stores and product repair services, the company said.

Domestic credit and financial product revenues rose 1.8 percent to $1.33 billion.

Sears Canada revenues fell 3.1 percent to $1.3 billion.
Despite sluggish revenues, Sears has been working to improve profits, announcing plans to cut jobs and revamp stores last year in an effort to shift away from a traditional department store model. In recent years, the retailer has lost ground to newer competitors like Kohl's Corp., as well as discount chains like Wal-Mart Stores Inc.

"Management is emphasizing the profitability that they think they can
restore to the company,'' said Dan Popowics, analyst at Fifth Third Bank, a
Sears shareholder. ``A good chunk of that is just taking a hard look at what
businesses they want to be in.''

Sears shares were up 33 cents, or 0.64 percent, at $51.80 on the New York Stock Exchange on Thursday morning.

Shoppers seeking last-minute gifts and bargains crowded stores in the days before and after Christmas, helping to cushion a holiday season ravaged by recession, retail sales data released Thursday showed.

Although results for many were generally weak, sales at stores open at least a year ;or same-store sales for major retailers, including Gap Inc., Limited Inc., Wal-Mart Stores Inc. and Federated Department Stores Inc., came in better than expected in December.

According to sales data from 84 retailers compiled by Bank of Tokyo-Mitsubishi, same-store sales rose 2.3 percent, surpassing the bank's forecast for growth of 1.5 percent. In December 2000, sales grew only 0.7 percent.

The Standard & Poor's retail index was boosted by the sales data, rising 8.75 points to 922.58 in late-morning activity. This compares with a decline in the Standard & Poor's 500-stock index of 1.54 points.

``If you look at the numbers, it looks like we had a really strong week four and five,'' Jeff Stinson, retail analyst with Midwest Research, said, referring to the five-week December reporting period ended in early January.

``You've got a consumer who is much more dollar-conscious this year. With unemployment rising, consumers are trying to stretch their dollar as far as possible. That's why they waited until the last minute.''

Some had forecast that sales for November and December ;the period considered the holiday selling season  could be the weakest in decades as the fallout from the Sept. 11 attacks and recession took a toll on sales.

However, data from Bank of Tokyo-Mitsubishi showed holiday sales up 2.2 percent, the smallest growth since only 1995. "The December numbers put the season in a lot better standing now,'' Michael Niemira, economist at Bank of Tokyo-Mitsubishi, said.

Sales in November and December are critical because they can account for as much as one-quarter of a retailer's annual sales.

Discounts will pinch profits for many
In an effort to entice consumers, department stores and apparel chains resorted to using the heftiest discounts on record during the holiday season, sometimes at the expense of fourth-quarter profits.

For example, Federated's same-store sales were down 8.6 percent in the month, compared with the company's expectations for a drop of 9 percent to 9.5 percent. But Federated, the parent of Macy's and Bloomingdale's, left its fourth-quarter earnings forecast unchanged at $1.85 to $2.00 a share, citing pressure from heavy markdowns.

Even Wal-Mart, which has fared better than most retailers, told investors on a recorded conference call that it expects profit margins to remain under pressure as its customers prefer lower-priced items in the weak U.S. economy.

As in recent months, discount chains like Wal-Mart and Costco Wholesale Corp. continued to prosper as bargain-conscious consumers picked up food and other household necessities.

Wal-Mart, the world's largest retailer, said sales at stores open at least a year grew 8 percent in December, topping company forecasts for gains at the high end of a range from 4 percent to 6 percent.

Net sales for the Bentonville, Ark.-based retailer in the five weeks ended Jan. 4 rose 16.2 percent to $28.84 billion from $24.82 billion in the year-earlier period.

Issaquah, Wash.-based Costco said same-store sales rose 7 percent in December, while net sales rose 13 percent to $4.27 billion from $3.78 billion.

In stark contrast to other discount chains, Kmart Corp. said earnings for the fiscal year ended Jan. 30 will fall short of Wall-Street forecasts after reporting that same-store sales fell 1 percent in December. Analysts on average were looking for a full-year profit of 1 cent a share.

Kmart, the No. 2 discount chain behind Wal-Mart, also said it was in discussions with lenders regarding existing and supplemental financing. Kmart, in the midst of a massive and expensive restructuring, has been hit hard by competition from Wal-Mart.

Apparel chains, department stores weak
Many department stores and apparel chains saw sales fall as consumers held off on buying clothes during the economic downturn.

Gap, the largest U.S. clothing chain, reported an 11 percent drop in same-store sales, while Wall Street analysts were looking for declines as high at 20 percent. As a result of the better-than-expected sales, San Francisco-based Gap said its fiscal fourth-quarter loss would be no greater than its third-quarter loss of 6 cents a share. Earlier, Gap had said its fourth-quarter loss would be greater than 6 cents a share. Total sales at Gap were unchanged from a year ago at $2.2 billion. Gap shares soared on the news, rising $1.78, or 12.26 percent, to $16.30, on the New York Stock Exchange.

Apparel chain Limited said sales at stores open at least a year fell 1 percent and that its fourth-quarter earnings would top the Wall Street consensus estimate of 51 cents a share due to better-than-expected margins. Total sales for Columbus, Ohio-based Limited fell to $1.74 billion from $1.89 billion a year ago.

TJX Cos. Inc., which operates off-price stores under the names of T.J. Maxx and Marshalls, reported a strong 10 percent increase in December same-store sales. Total sales at Framingham, Massachusetts-based TJX climbed 21 percent from a year ago to $1.46 billion.

Sears, Roebuck & Co. said fourth-quarter profit rose as the biggest U.S. department-store chain reduced expenses and got rid of slow- selling items.

Net income in the quarter ended Dec. 29 rose to $1.52 a share from $1.32 a year ago, based on preliminary results. Full-year profit was $2.24. Sears also said sales at stores open at least a year fell 2.4 percent in December as the U.S. recession prompted consumers to cut spending.

Sears is cutting jobs and exiting areas like the carpet business to focus on more profitable items such as appliances and electronics. Chief Executive Alan Lacy also has started a four-year remodeling program to make Sears' stores look more like those of Target Corp. and Kohl's Corp., with wide aisles, large signs and speedy checkout areas.

"They are turning themselves around," said Kurt Barnard, president of Barnard's Retail Trend Report. "If (Lacy) also fixes their entire apparel offering, it's likely to put Sears back on track."

Focusing on Homes
Excluding certain costs, Sears said it would have had profit of about $2.02 a share in the fourth quarter and about $4.22 a share for the year. On that basis, the company beat analysts' average estimate for fourth-quarter profit of $1.91 and full-year profit of $4.11, according to Thomson Financial/First Call.

Shares of Sears rose $2.28, or 4.6 percent, to $51.73 today, after earlier reaching a 52-week high of $52.45. The stock rose 37 percent last year, compared with a 13 percent decline in the Standard & Poor's 500 Index.

The company, based in Hoffman Estates, Illinois, also said its credit and financial products business "delivered very strong operating profit growth." Since taking the helm, Lacy has installed new technology at the credit division to make it easier to track accounts and collect overdue balances.

Sales of big screen and projection televisions as well as home-fitness products "were particularly strong" in the quarter. Home fashions sold well and the women's ready-to-wear apparel business had a "slight Increase" in sales, Sears said.

"Consumers didn't buy apparel. Instead, they focused on their homes," Barnard said. "This is where Sears shined."

Slow Sales
Sears' same-store sales in December were at the upper end of the company's forecast, spokeswoman Peggy Palter said. The retailer had predicted December same-store sales rising in the "low to mid single digits," she said.

So-called same-store sales are a key indicator of a retailer's business because they exclude results from new and closed locations. Total store revenue in the U.S. fell 1.6 percent to $4.18 billion for the five weeks ended Jan. 6.

Morgan Stanley analyst Bruce Missett raised his rating on Sears to "outperform" from "neutral." He wrote in a report that "despite relatively slow sales growth, execution on expense initiatives should help boost operating performance."

Sears, which has about 860 department stores, had costs of about $163 million, or 50 cents a share, in the fourth quarter related to staff reductions, exiting various categories and the Exide Corp. battery settlement. Last month, the U.S. Justice Department ordered Sears to pay $62.6 million to avoid mail-fraud prosecution for marketing defective DieHard-brand car batteries. Sears plans to release full fourth-quarter results next Thursday.

Sears Sees $163M Charge - Dec. Sales Fall
Reuters - January 10, 2002

Sears, Roebuck and Co. Thursday said it would take one-time charges of $163 million in the fourth quarter, but the giant retailer said earnings before the charges would surpass Wall Street estimates.

Sears, the No. 4 U.S. retailer, also reported that sales at its domestic stores open at least a year fell 2.4 percent in December, hurt by the weak economy.

The company forecast fourth-quarter earnings of $2.02 a share before the one-time charges, which it said would pay for job cuts, exiting certain product categories, and litigation over car batteries.

The consensus earnings forecast of 11 analysts polled by Thomson Financial/First Call was $1.91 a share. Analysts' estimates ranged from $1.87 to $1.93. Sears said the one-time charges would reduce fourth-quarter earnings by 50 cents a share, to $1.52. The company earned $1.82 a share in the year-earlier fourth quarter.

The company said earnings from domestic retail and related services rose in the quarter, driven by gross margin expansion and lower operating expenses. It said that despite the sluggish retail environment, it has benefited from actions to improve profits, such as cutting jobs and getting rid of unprofitable product lines.

"The fourth quarter represents the third consecutive quarter of gross margin expansion, along with continued tight management of operating expenses in our core retail operations,'' Alan Lacy, chairman and chief executive, said.

Credit and financial products delivered "very strong'' operating profit growth in the quarter, Sears said.

The company forecast full-year earnings, before one-time items, of $4.22 a share, compared with $4.21 in the previous year.

Sears said domestic store revenues for the five weeks ended Jan. 6 totaled $4.18 billion, down 1.6 percent from a year earlier.

"As anticipated, the month of December and the holiday season were challenging due to the continued weak economy,'' Lacy said in a news release. "We were pleased, though, that our December sales results were at the upper end of our expectations.''

Sales of big-screen and projection televisions were particularly strong, Sears said.

Sears shares were up $1.40, or nearly 3 percent, at $50.85 in morning trade on the New York Stock Exchange.

Home Depot, Lowes to Benefit from Sears' Carpet Exit
Reuters -  January 9, 2002

Home-improvement retailers Home Depot Inc. and Lowe's Cos. could get a boost from Sears, Roebuck and Co.'s decision to leave the carpeting business, analysts said on Wednesday. Earlier this week, Sears said it would stop selling carpeting, tile and linoleum as well as window treatments in February, cutting about 1,500 jobs in the process.

David Ricci, an analyst at William Blair, said Home Depot and Lowe's were benefiting as general merchandise stores such as Sears pared their business lines. For example, he noted that Circuit City Stores Inc.'s exit from appliances in 2000 likely helped home-improvement retailers. "Business will increasingly move toward those who have scale and cost advantages like Home Depot and Lowe's," Ricci said. Atlanta-based Home Depot and Lowe's, of Wilkesboro, North Carolina, were the top two retailers of flooring over the past year, according to a recent issue of Floor Focus, a leading trade magazine in the industry.

Aram Rubinson, an analyst at UBS Warburg, said in a research note that the departure of Sears could help Home Depot boost installed carpet sales by 40 percent annually.

Home Depot Chairman Robert Nardelli has said carpet installation was a prime expansion category as the company pursued sales beyond the traditional do-it-yourself market. Home Depot is currently testing a store in Texas that only sells floor coverings.

But Barbara Allen, an analyst at Arnhold and S. Bleichroeder, cautioned that installation services was a complicated, risky business, with a high volume of consumer complaints. "Installation is the bugaboo of the floor-covering industry," Allen said. "It's not clear to me that it is clear sailing in there" for any company.

Shares of Home Depot fell 84 cents to close at $50.26 on Wednesday on the New York Stock Exchange, while Lowe's dropped $1.07 to close at $43.15 on the NYSE.

Sears, Roebuck and Co. (S) will stop selling and installing carpet next month as it revamps its product mix, the company said.

The Hoffman Estates, Ill.-based retailer sells carpeting in 560 stores nationwide and is one of the oldest carpet retailers. Spokeswoman Peggy Palter said there are 1,500 sales positions involved in carpeting, but it is too early to determine how many people may lose their jobs, because some may be transferred to other departments.

"Installed floor-covering requires a lot of floor space to display, and we think that space can be used more profitably for other businesses," Palter said Monday. She said Sears will continue to sell rugs and will honor all warranties. Georgia's top carpet makers will be affected by Sears', departure from the carpet business, but only for the short term, an industry official said.

Sears' top two vendors are Shaw Industries of Dalton and Mohawk Industries (MHK) of Calhoun in northwest Georgia, leading manufacturers in the $50 billion floor-covering and installation market.

"There are 30,000 to 40,000 retailers in the United States. The demand will shift to others," John Swift, Mohawk's chief financial officer, told The Atlanta Journal-Constitution.

Sears' carpet sales have lagged in recent years as Home Depot (HD) and Lowe's (LOW), the top floor-covering retailers, have expanded their flooring products. "Home Depot and Lowe's are relatively new players, and I think they have taken a big chunk of Sears' business," said Pierre Maloof, owner of Norcross-based Mag Design, which does work for three Sears stores in the Atlanta area. Analysts say Lowe's and Home Depot would like to install more of the products they sell, but the service side is more complicated than cash-and-carry product sales.

Below is a very involved and knowledgeable retiree comment concerning the events that took place toward the demise of a business we once owned:

D/37 was destroyed long before Martinez ... it was destroyed by the Monitor Group (one of those idiot MBA consultant groups the company brought in to save Sears) ... in 1987 they convinced senior management that the way to make profit was to avoid owning any inventory and to shift as much expense onto the sources as possible ... (like the sources weren't going to overbill for all this service) ... so they convinced Sears management to:

1) discontinue all of Sears proprietary carpet lines
2) toss $3 million worth of carpet samples into the garbage
3) close Sears 3 distribution centers
4) sell only factory cut order, open line merchandise

The problem with this approach was:

1) Sears lost the very effective good, better, best marketing ability that they depended upon for success

2) Sears average cost of goods increased 28% ... exactly the number predicted before the conversion

3) Sears lost most of their 2,500 installed salesmen who rebelled at the notion

4) Sears found itself trying to sell the exact same merchandise as the competition ... but Sears MU was 42% while the competition was selling at 30%

5) Sears still tried to make 28% on top of the installation charges while competition charged installation at cost

Further, Monitor Group convinced Sears management to liquidate inventory of the very lucrative Decorator Rug line which had a Markup on Receipts of 78% .... by selling their inventory to a third party who warehoused and distributed it for them ... and then charged it back to them at 20% higher cost than Sears had originally paid for it.

The result ...

1) Sears installed carpet business dropped from close to $500 million in 1988 to less than $200 million

2) Sears Decorator, Colonial and Accent rug business dropped from over $60 million to less than $20 million

Alternatively, at the same time the Monitor Group was giving such bad advice to Senior Management, D/637 offered a plan to close its three existing distribution centers ... because all were located in high cost, high expense locations and were operating at 17-21% of the cost of goods ... and build a single new facility in North Georgia, close to all mfg.. in Dalton,GA .... which would have operated at 7% of the cost of goods ... the site had been selected and area political leaders had promised everything from site preparation and roads to tax holidays to utility installation to you-name-it .... for the jobs such a facility would produce for the area.

1) Sears would have maintained its proprietary good-better-best product structure

2) Sears would have enjoyed the quantity cost advantages legally available (about 30% less than competition)

3) Sears would have maintained it professional sales force

4) Sears installed carpet would have been competitively priced for the consumer AND profitable to the company

In addition, a secret study was undertaken by D/637 in 1987 and a recommendation was made to Senior Management to purchase Color Tile ... which would have added their $500 million non-competing hard surface business to Sears $500 million soft surface business thus creating an unassailable $1 billion floor covering super store ... Senior Management said Color Tile was too "pipe rack" looking (they were far prettier than Sears at that time) and declined ... a month later they bought Western Auto!!!!!! Go figure!!!!!!!

As much as I'd like to tar Martinez with this brush, THIS debacle had its roots in a prior time.

When is Sears going to learn that every dollar you take OUT of the net cost of goods goes right to the bottom line ... if you force sources to absorb more and more of the cost of doing business, they are going to load their profit factor on top of the cost to provide those services and they WILL overbill the cost of the product to reflect this ... the key to making profit is to MANAGE ALL the costs of doing business better than the other guy ... Sears is now so far behind in this that even if they woke up to the fact they would not survive ... too bad ... but I am still heartbroken ....

Sears New Store/Remodeling Plans
Reuters - January 7, 2002

Sears, Roebuck and Co., the No. 4 U.S. retailer, on Monday said it will open 15 new full-line stores, and plans to remodel 50 more stores nationwide by the end of the year.

The actions are the first wave in a four-year remodeling program in which 600 of Sears' largest stores will be revamped to offer a more convenient shopping experience for its customers while improving the stores' operating efficiency, Sears said.

Sears, which has about 860 department stores, said seven of the 15 stores planned to open in 2002 are relocations. Locations of the new stores include Albuquerque, New Mexico; Bel Air, Maryland; Durham, North Carolina and Glendale, Arizona.

Financial details of the renovations and store additions were not disclosed.

Analyst Upbeat Forecast Boost Sears

Inside Retailing - By Susan Chandler - January 5, 2002

Wayne Hood, retail analyst with Prudential Securities in Atlanta, created quite a stir this week when he issued a "sell" recommendation on Kmart Corp., and speculated that the Troy, Mich.-based discounter could find itself filing for bankruptcy sometime this year.

Given that pessimistic outlook, it's somewhat surprising that Hood followed up on Thursday with a ringing endorsement of Sears, Roebuck and Co., a retailer that was hardly a big winner during the recent holiday season. The Hoffman Estates-based retailer conservatively forecast a December sales decline of between 3 percent and 5 percent, and that's exactly what Sears got, according to its latest weekly sales update.

Final December sales numbers will come out Thursday. Nevertheless, Hood expects Sears to exceed analysts' fourth-quarter earnings estimates of $1.90 a share excluding one-time items when it reports Jan. 17. He credits an "improving trend in apparel sales in the quarter," which should boost the retailer's gross profit margin. Hood also says he is encouraged by signs that credit card delinquencies haven't soared out of control despite the wave of layoffs that swept the economy after Sept. 11.

Undressing: Just what parents of young girls don't need: Scantily clad actress Jennifer Lopez is expanding her line of clothing to include preteen fashions. The denim- heavy line will look similar to the existing J.Lo collection, according to trade publication Women's Wear Daily. And that means waistlines and necklines will plunge.

With prices from $18 to $58, the J.Lo Girls collection may launch as early as this spring in select department stores and specialty stores nationwide.

The idea sends chills up the spine of David Wolfe, creative director for the Doneger Group, a fashion consulting firm in New York.

"Jennifer Lopez is gorgeous and sexy, and her public image is hot and a little scandal ridden, which works very well for a sex symbol," Wolfe says. "But it is unbelievable that parents of a preteen girl would want their daughter to aspire to that kind of image."

Having said that, Wolfe goes on to say that he is sure the line will be "very successful." A contradiction? He doesn't think so. "I don't think parents have control over preteen girls anymore," Wolfe says.

Take a hike: Perhaps you were one of the many Americans last year who cut back spending at department stores because you were worried about your job or the economy in general. You might be on Marshall Field's list to get some unwanted news.

A few months ago, Field's was planning to boot shoppers who spent less than $2,000 last year from its "Regards" program. Those who didn't reach that threshold were scheduled to lose out on goodies such as free coffee and gift wrapping and would no longer be privy to some special events.