Profiles In Retirement -- Running The Numbers
Wall Street Journal
March 31, 2007

At age 73, Henry K. "Bud" Hebeler is spending the bulk of his retirement -- as much as 12 hours a day, six days a week -- helping thousands of people with their retirement.

Mr. Hebeler, a former top executive at Boeing Co., is the developer of analyzenow.com, widely regarded as one of the best Web sites about retirement finances. Started in the mid-1990s, the site is intended, in his words, to "educate a wide range of people, from laymen to professionals, about the realities of retirement planning." To that end, Mr. Hebeler spends much of his day answering emails from users of the site and thinking up new ways to demystify money management in later life.

(Two of the latest and most helpful tools: free programs titled: "Should You Take Social Security Early?" and "Evaluating Immediate Annuities.")

While Mr. Hebeler preaches the necessity of planning for retirement long before the day arrives, he acknowledges that his own preparations at Boeing were a mixed bag. He was president of Boeing Aerospace Co., a division of the parent company. And like many people with busy lives, he says, "I didn't have time to think about things like retirement."

At age 55, though, Mr. Hebeler found himself reading a set of fuzzy financial projections. Those numbers would start him on his present course.

The projections focused on Mr. Hebeler's own retirement savings and came courtesy of a financial planner provided by Boeing. The problem: "Almost all the material was written in the best interests of the financial firms" that helped produce the projections, Mr. Hebeler recalls. "If I had used that material to make presentations to our board, I wouldn't have had a job."

That shortcoming "got a fire burning in me," Mr. Hebeler says. Leaving Boeing, he embarked on a campaign ("idealist that I was") to educate America about retirement planning. The early days were rocky. An effort to publish a book met with closed doors in New York.

Eventually, he hit on a strategy: Anytime he read what he considered a good article about retirement finances in a magazine or newspaper, he would write the author, complimenting him or her on the material -- and offering his own services if the writer needed help in the future.

hat are you doing in retirement? Competing in triathlons? Opening a business? Playing the best golf courses in all 50 states? Saving the whales? Tell us how you're spending your time at encore@wsj.com5. We'll do our best to share your stories in these pages. Gradually, Mr. Hebeler's name and expertise began showing up in financial planning circles. After starting analyzenow.com, he was asked to write a book about retirement: "J.K. Lasser's Your Winning Retirement Plan," which is still in print. His second book, "Getting Started in a Financially Secure Retirement," comes out next month.

Today, Mr. Hebeler and his wife, Mirriam, divide their time between homes in Seattle and Park City, Utah. At the latter, the couple still ski five or six days each week, despite a growing assortment of injuries. (A friend observes that the Hebelers are "held together with Kevlar, titanium and Velcro.") His Web site, Mr. Hebeler says, typically gets "several thousand hits" each day. Money from sales of software and books is plowed back into analyzenow.com.

When asked to compare his time at Boeing with his new career, Mr. Hebeler talks about the personal nature of his work today. "At Boeing I was largely helping people very indirectly -- through the defense of our country, for instance. There were a lot of filters involved. But here, you're right on the forefront of helping people. You can see the effect it can make."

The End of Retirement
By Robert Brokamp - The Motley Fool.com
March 31, 2007

Tired of reading about America's retirement woes? Then I have an alternative for you: Watch a TV show about them. Heck, you don't even have to move to your TV -- you can watch it on your computer, from the comfort of your own desk chair. The particular program I'm talking about is an episode of the PBS series Frontline titled "Can You Afford to Retire"

Of course, since you've clicked on this article, you can't be too tired of reading about all of the impending retirement woes out there, so let me sum up the program's main points and then explain how you can be an extraordinary American by actually being able to retire.

Goodbye, pensions ... unless you're the CEO

We all know that thousands of pensions are underfunded. We've heard the tales of people who dedicated their lives to a company only to see it slip into bankruptcy and take all of its retiree benefits with it. The Frontline program rightly started off by discussing the demise of the traditional pension -- it focused on current and former employees of UAL's United Airlines, which filed for Chapter 11 bankruptcy protection in 2002 and dumped its pension plans on the Pension Benefit Guaranty Corp. When the government-sponsored PBGC takes over your plan, you'll still receive pension benefits, but possibly only a fraction of what you would have received if your company had stayed in business. (The PBGC itself, by the way, is $23 billion underfunded.)

But the real shocker in the Frontline program was the revelation of how such bankruptcies are becoming an acceptable way for companies to get out of their pension obligations. Check out what United Airlines' lead bankruptcy lawyer, James H.A. Sprayregen, told Frontline: "I would say that Chapter 11 has become somewhat of a more accepted strategic tool than just companies filing who are about to go out of business or something like that. As a result, there's more use of Chapter 11 now than probably 20 years ago."

So should you be worried if your pension is underfunded? Well, according to a recent report from Standard & Poor's, corporate America doesn't seem to be taking pension funding too seriously. From the 2005 "Pensions & Other Post-Employment Benefits Report," I found the following statement: "While corporate operating earnings post 16 consecutive quarters of double-digit growth, corporate pension plans remain in the red with minimal contributions continuing to be made. ... S&P 500 defined-benefit plans as a group were $140.4 billion underfunded for 2005."

According to the report, here are some of the companies with the biggest deficits:

Goodyear (NYSE: GT)
Alcoa (NYSE: AA)
DuPont (NYSE: DD)
Motorola (NYSE: MOT)
Electronic Data Systems (NYSE: EDS)

It should be noted that bankruptcy might be the only way for some companies to survive, and sometimes employees have to give up something just to keep their jobs. United was certainly in dire straits. But I suspect that it's harder for the folks in the rank-and-file to accept their reduced pension benefits when, according to Frontline, executives were given $400 million in stock grants and CEO Glenn Tilton's $4.5 million retirement package was put in a special trust so that he'll still get his full benefit. Very nice.

Hello, 401(k)s ... unless you don't participate

Next, Frontline discussed the shift from defined-benefit plans to defined-contribution plans -- i.e., the shift from companies being responsible for funding retirement to the employees having to do it themselves. For instance, Hewlett-Packard and Sears Holdings (Nasdaq: SHLD) cut back their defined-benefit plans at the beginning of 2006, opting to instead focus their efforts on 401(k) plans.

Unfortunately, employees don't seem to be doing a good job of taking the reins. After all, they have to answer several important questions:

"Should I participate?" The answer, of course, is yes! But since 30% of workers choose not to, some folks aren't making the right choice. And we're not even talking about the 50% of workers who don't have access to an employer-sponsored plan.

"How much should I save?" The best answer is "as much as you're allowed,"
but, says Alicia Munnell of the Boston College Center for Retirement Research, fewer than 10% of participants contribute the maximum.

"How should I invest it?" The move to defined-contribution plans requires that every employee becomes his or her own money manager. We at The Motley Fool believe you can do it, but clearly, as we'll see later, many people aren't up to the task.

"How should I take the money out?" Frontline profiled a fellow who cashed out his entire 401(k) when he retired, resulting in a huge tax bill. Ouch. The better move: Transfer the money to an IRA, and take money out only when you need it, leaving the rest to grow tax-deferred. One of the most interesting tidbits from the Frontline episode came from benefits consultant Brooks Hamilton, who oversees 15 large 401(k) plans. At one point, he calculated the investment return for each participant in each of the plans. Here's what he found:

"Say the bottom 20% had an investment return for the year of 4%. The top 20% would be anywhere between five and seven times that number. ... In every case, the 20% at the top not only had the highest investment income, they also had the highest average annual pay. Whereas the bottom 20% not only had the lowest investment income, they had the lowest average annual pay."

Frontline characterized the situation this way: "The richest people are getting richer, and the middle-class workers are falling further behind." This is certainly true, but not in the same way as Glenn Tilton getting to keep his pension while everyone else's is reduced; the 401(k) system isn't rigged. We do have to recognize, however, that the average American isn't prepared to be an investment expert. Most schools don't teach personal finance, and neither do most parents. And clearly, most Americans aren't doing enough to teach themselves.

Now, we at The Motley Fool -- being the do-it-yourself, control-your-own-destiny types -- are big fans of self-directed retirement accounts. And believe me, traditional pensions aren't the answer. They benefit people who stay with the same employer for decades, not the typical job-hopping American. My wife and I worked a combined 10 years at the same elementary school, and from those jobs we'll receive a combined $108 a month in retirement -- not adjusted for inflation. I would have gladly taken the 6% of my salary that the school contributed to the pension fund in the form of matched contributions to our 403(b) plans.

But the reality is that as retirement becomes the sole responsibility of the individual, many people -- because of bad decisions, bad health, bad education, or bad luck -- will have to work forever.

It's all up to you

Frontline interviewed Notre Dame economics professor Teresa Ghilarducci, who said, "What is the meaning of retirement if the only way you can live is to work? The answer is, there is no meaning to retirement anymore. We are now shifting from lifetime pensions to lifetime work. It's the end of retirement."

For millions of Americans, Ghilarducci is absolutely right. But it doesn't have to be that way for you. You don't have to be among the people who don't save enough, who don't invest wisely, and who don't make smart decisions about 401(k) withdrawals. If you need to learn the basics, read about the easiest retirement plan ever. For more detailed information, give our Rule Your Retirement service a 30-day free trial. You'll get access to all of our past issues and special reports, as well as our online financial-planning tool and professionally staffed discussion boards.

But whatever you do, just promise me you'll do something. The choice between working and retiring is entirely up to you.

This article was originally published June 22, 2006. It has been updated.

Robert Brokamp is the advisor of Motley Fool Rule Your Retirement. Robert will rule his retirement by not paying $800 a year for basic cable. And with shows like Frontline, who needs cable? Robert doesn't own shares of any companies mentioned in this article. The Motley Fool has a disclosure policy.

Edward A. Brennan Retires From AMR Corporation Board
AMR News Release
March 30, 2007

FORT WORTH, Texas, March 30 /PRNewswire-FirstCall/ -- AMR Corporation (NYSE: AMR), the parent company of American Airlines, Inc., today announced that Edward A. Brennan will retire from the Company's Board of Directors.

Brennan was first elected to the Company's Board of Directors in 1987. Since 2004, Brennan has served as AMR's Lead Director, which gave him responsibility, among a myriad of other duties, for leading the Board's process of selecting and evaluating the chief executive officer. He also served as AMR's Executive Chairman from April 2003 until May 2004 during a critical period in the Company's history. His retirement is effective March 31, 2007.

"On behalf of the Company and its employees, I want to personally thank Ed Brennan for two decades of exemplary service, vision and guidance," said AMR Chairman and CEO Gerard Arpey. "Ed personally embodies many of the qualities we aspire to as a company and as individuals -- leadership, strength, courage and, perhaps most of all, integrity. His leadership has had a profound impact on the Company and its shareholders as we have made great strides in building a brighter future for American and its employees.
We wish him our very best."

Brennan, 73, retired in 1995 as the chairman, president and chief executive officer of Sears, Roebuck and Co., based in Chicago, Ill., after spending 39 years with that company. He is also a director of Excelon Corp. and McDonalds Corp.

Armando M. Codina, first elected as an AMR director in 1995, will assume the role of Lead Director. Codina, 60, has served as president and chief executive of Flagler Development Group, Inc., since 2006. From 1979 to 2006, he served as chairman and chief executive officer of Codina Group, Inc., based in Coral Gables, Fla., until its merger with Flagler Development Group. He is also a director of General Motors Corp., Merrill Lynch & Co., Inc., and Florida East Coast Industries, the parent company of Flagler Development Group
.

Sears to boost 2007 capital spending
Market Watch
March 29, 2007

CHICAGO (MarketWatch) - Sears Holdings plans to boost fiscal 2007 capital expenditure levels by $150 million to $200 million, with the increase aimed at "innovation projects," along with distribution enhancements and further expansion of appliances into its Kmart locations.

The retail behemoth said in a filing with the Securities and Exchange Commission Wednesday that it will also "consider opportunities to purchase leased operating properties, as well as offers to sell owned, or assign leased, operating and non-operating properties," causing its "capital expenditure levels to vary from period to period."

Further, it "reviews leases that will expire in the short term in order to determine the appropriate action to take with respect to them." Last year, Sears bought eight previously leased properties for $26 million.

Sears puts media buy business up for review
By Sandra Guy - Business Reporter - Chicago Sun-Times
March 29, 2007

Sears Holdings Corp. has put its $780 million media-buying business up for review in its efforts to cut expenses.

The current agencies, MindShare and MEC: Interaction, both owned by WPP Group, will compete with others for the business, a Sears spokesman said Wednesday.

Last year, Sears Holdings consolidated Kmart's and Sears' media-buying agencies.

MindShare has handled Sears' TV, newspaper and other media buying since 2000, while MEC:Interaction has done on-line media ad buys since 2002.

Separately, Sears Holdings put a positive spin Wednesday on its declining store sales and eroding market share selling appliances in a cut-throat market.

The Hoffman Estates-based retailer noted that sales at stores open at least a year -- a key retail measure -- declined 3.7 percent in fiscal 2006, an improvement from a 5.3 percent drop in 2005, according to papers filed Wednesday with the Securities and Exchange Commission.

For the holiday season, same-store sales declined 3.1 percent, with Sears stores seeing a 4.9 percent drop and Kmart staying flat with a dip of 0.9 percent.

The rate of sales declines in home appliances "accelerated somewhat" at Sears stores during the last three months of the 2006 fiscal year.

Sears blamed a slowing housing market and stiffer competition from rivals.

Sears Holdings also reported:

The vast majority of its stores are still based at shopping malls. It has 861 full-line stores, mostly in malls, plus 74 off-mall Sears Grand and Sears Essentials stores that Chairman Edward S. Lampert has acknowledged are unsuccessful.

Part of Kmart's sales declines came after store closings. In fiscal 2006, 28 Kmart stores were closed, including 16 that had been converted to a Sears Essentials-Sears Grand format.

Sears had $375 million of total return swaps from Lampert's investments in risky deals.

Sears Holdings media planning,
buying under review; current firms included
By Tribune staff - Chicago Tribune
March 29, 2007

Sears Holdings Corp. said Wednesday that it is putting its media planning and buying accounts under review, a process that could deal a blow to the firms that now handle the work.

New York-based MindShare provides the offline media services, while MEC Interaction, also in New York, works with the online services. MindShare has handled offline media buying and planning for Sears since 2000, while MEC has worked with the retailer since 2002.

Both firms will be included in the review, a Sears spokesman said.

The review is expected to conclude in the second quarter, he said, but he did not elaborate on whether one firm or two will get the business. Nor did he say how many other firms were involved in the review.

"The review is not necessarily designed to save money," he said. "It's to make sure we are properly connecting and reaching our customers."

He added that Hoffman Estates-based Sears Holdings continues to review all aspects of its business.

Advertising Age reported that the media planning and buying work for Sears was worth $780 million, a figure Sears would not confirm.

Jim Palermini, retired Sears buyer, dies at 82
Chicago Tribune
March 28, 2007

James C., 82, of Westcherster, IL. Beloved husband of the late Virginia, nee Barnas; loving father of Robert J. (Tracy), Linda M. (Daniel) Conway and Nancy (Jim) Simpson; proud grandfather of Stephanie, Kate, Chris, Ross, Jami and Amanda; dear brother of the late Dominick (Eva) Palermini.

Retired Sears buyer for 46 years; and for over 30 years an Instructor for Dale Carnegie Courses. Family and friends will be received at the Conboy-Westchester Funeral Home, 10501 W. Cermak Rd, Westchester, IL (2 blks W. of Mannheim Rd.) on Wednesday, from 3 to 8 p.m. Funeral Thursday, at 11 a.m. from the funeral home to Divine Providence Church, 11:30 a.m. Mass.

Entombment Queen of Heaven Cemetery. Memorials would be appreciated to Heartland Home Health Care and Hospice, 4415 W. Harrison, Ste. 401, Hillside, IL 60162.

Comments in guest book

Your father was my first boss when I joined Sears back in 1974. I worked for him for only a short time but I remember him as being a very nice man who coached me and gave me encouragement. I've thought of him often through the years and am saddened by the news. May your family find peace and comfort at this difficult time and know he is in a better place.
Kristina Karl, formerly Zack (West Chicago)

I knew Mr. Palermini when I worked as a young girl at Sears. He affected my life greatly with what a kind man he was. I cannot ever remember a day when he wasn't smiling. He was truly a gentleman - and it was my profound pleasure to say that I knew him - both as a co-worker - and as a friend.
Cathi Musto-Mitchell (Joliet, IL)

What a wonderful man! He positively affected hundreds of thousands of lives through Dale Carnegie Training and mentored many at Sears. When I think of Jim I think of the warmth and love he shared with me over the years. His love for his children and grand-children was exemplary. Now he is with his beloved Ginny. If they make pizelles in heaven Ginny has a tray of them for Jim.

Bob Gleason (Elm Grove, WI)

Lampert to cut back duties
By Sandra Guy - Business Reporter - Chicago Sun-Times
March 27, 2007

Sears Chairman Edward S. Lampert on Monday said he won't seek re-election to the board of AutoNation so he can devote more time to running Sears Holdings Corp. and his hedge fund, ESL Investments.

Lampert, 44 -- listed as No. 177 among Forbes' richest people, with investments worth $4.5 billion -- will keep a big hand in the country's largest automotive retailer, nevertheless.

Lampert's hedge fund owns 24 percent of AutoNation's common stock.

Lampert's right-hand man, Bill Crowley, the president and chief operating officer of ESL, will continue to serve on the AutoNation board.

Lampert had served on the board for five years, and will exit at the AutoNation shareholders' meeting in May.

Sears' stock on Monday rose by 0.86 percent to $183.56.

Meanwhile, one retail expert on Monday repeated his belief that Lampert must make a big acquisition or start selling Sears' and/or Kmart stores' prime real estate to bolster the flagging retail stores. Lampert engineered Kmart's $12.3 billion takeover of Hoffman Estates-based Sears two years ago.

"It's a critical decision. Eddie is hands-on, and he's got to allocate his time where the big bucks are," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm.

Lampert has "pulled a rabbit out of the hat" for the past two earnings reports to help bolster Sears Holdings' fortunes, first by doing complex trades and in the next quarter by selling real estate, Davidowitz said.

The strategy of slashing expenses, raising prices and cutting merchandise assortments is unsustainable, he said.

A spokesman for Lampert did not return a phone call Monday.

Sales for the three months ended Feb. 3, including the holiday season, declined 4.9 percent at Sears stores and dipped 0.9 percent at Kmart stores.

Lampert's acquisition targets are rumored to include RadioShack; the Gap clothing chain; Anheuser-Busch Cos., the world's largest brewer, and automotive parts retailer Pep Boys.

Davidowitz said, "If Lampert doesn't do a major acquisition, he will have to shrink Sears rapidly."

Ethel Burgeson, director of Sears medical department,
dies at 92
Chicago Tribune
March 27, 2007

Ethel C. Burgeson R.N., age 92. Beloved daughter of the late Eric and Agnes Burgeson; dear sister of the late Edna Bales and Gladys Koehler of Sun City, AZ; loving aunt of David (Debbie) Bales, Jacquelyn (Bruce) Goudy and Beth (Grady) Toy.

Ethel was a nurse and Director of the Medical Department for Sears Roebuck & Co. for 30 years.

Funeral Service Thursday, 12:30 p.m., at Memory Gardens Cemetery, Arlington Heights, IL. Kindly omit flowers.

Arrangements by Smith-Corcoran Funeral Home, Glenview. 847-901-4012 www.smithcorcoran.com

Published in the Chicago Tribune on 3/27/2007.

Sears chief wont run for AutoNations board
By James P. Miller - Staff Reporter - Chicago Tribune
March 26, 2007

Sears Holdings Corp. Chairman Edward Lampert won't stand for re-election to the board of Fort Lauderdale-based auto retailer AutoNation Inc., according to an AutoNation regulatory filing.

Lampert's ESL investments investing company holds a 24 percent stake in AutoNation, and Lampert has been a director at the Florida company since 2002.

AutoNation said in its filing that Lampert told the company he will not stand for re-election at the company's upcoming annual meeting "in order to devote more time to his duties" at ESL and Sears.

In a statement released by AutoNation, Lampert said, "ESL currently plans to remain a significant shareholder (in AutoNation) for the foreseeable future.

A second ESL board representative, President and Chief Operating Officer Bill Crowley, will remain on the board, where he has been a member for the past five years.

A New Day at RadioShack
By Lawrence C. Strauss - Barron's
March 26, 2007

UNDER ITS NEW CEO AND CHAIRMAN Julian C. Day, RadioShack has begun to recharge its depleted batteries. His aggressive cost-cutting and more rigorous financial controls helped the ubiquitous consumer-electronics retailer lift its fourth-quarter earnings by more than 60% over the year-earlier level, to 62 cents a share on nearly $1.5 billion in revenue. That's put a charge into the shares: They recently were at 26.94, up 61% this year.

The run-up reflects the success that Oxford-educated Day, 54, has had during his eight months on the job. He closed underperforming stores, cut ad spending and managed inventory tightly to wring out more profit, giving himself the time and money to face a much sterner test: getting the proper mix of electronic gadgetry onto RadioShack's (ticker: RSH) sometimes cramped shelves so the 86-year old retailer's smallish outlets can compete with the likes of Circuit City (CC), Best Buy (BBY), Target (TGT) and Wal-Mart (WMT).

As Day himself told analysts last month, "It is all about having the right product in the right stores at the right price." (RadioShack declined to make any senior executives available to speak with Barron's.)

Bears insist that Day already has picked the low-hanging fruit through his cost cuts and will find it nearly impossible to replace the profitable growth that cellphone sales -- now in decline at RadioShack -- have produced. And, they argue, the stock -- at a hefty 23.2 times next year's profit estimate of $1.16 a share -- is vulnerable.

CEO Julian Day has boosted margins, in part by shunning "empty-calorie sales" realized in markdowns. But some smart money is betting that the retailing veteran, who worked on turnarounds at Kmart, Sears and Safeway, will succeed. Day "has done what he's had to do with the balance sheet and the financials," says shareholder Robert Olstein, the well-regarded portfolio manager of Olstein Financial Alert. "Now he's got to get the right merchandise in, and we think he's doing that." By another investor's estimate, the shares could gain 34% to near 36 over the next 18 months or so, if Day can trim more costs and reverse the company's recent revenue decline.

DAY DOESN'T HAVE TO DELIVER a miracle right away, because of savings he has wrought -- and may still realize. RadioShack's gross profit margin climbed to 45.6% in the fourth quarter, up sharply from 41.1% a year earlier.

One way for a retailer to widen gross margins is to manage inventory better. At the end of the fourth quarter, RadioShack's inventory totaled $752.1 million, down from $964.9 million a year earlier -- which the company attributed in part to better purchasing analysis. Accounts receivable fell to $248 million from $309 million, suggesting that the company is also getting paid faster.

Further bolstering margins is Day's avoidance of what he calls "empty-calorie sales." RadioShack has offered fewer markdowns since he arrived.

The company has slashed its cost of sales and general and administrative expenses to $482.8 million, from $572.3 million, year over year. A big portion of that came from reductions in ad spending. Other cuts in 2006 included the elimination of 514 jobs.

Powering Up: In the past year, RadioShack's financial position has improved substantially. Cash, earnings and gross margins have all risen, while long-term debt and inventory are down. RadioShack's balance sheet is substantially stronger for the changes. Its cash balance was $472 million at the end of 2006, up from $224 million a year earlier, against slimmer long-term debt of $345.8 million. As a result, it has a cushion if the economy slows; it should still be able to make the investments needed to grow.

Bulls say that Day has other levers to pull. "There is a tremendous amount of room to cut, and this is what people are missing," asserts Dennis Bryan, a partner and portfolio manager at First Pacific Advisors, which owns about three million shares. He says that additional layoffs are possible at corporate headquarters and in the company's field operations (but not at its stores). Eaton Vance analyst David Jenkins believes that fatter operating margins of around 5.5% last year should continue to improve, boosting profits. At the end of 2006, Eaton Vance held about 500,000 shares.

By Bryan's reckoning, RadioShack can boost its operating margins to around 10%. With just a small gain in sales to $5 billion from last year's $4.8 billion, that would mean $500 million of operating profit. After taxes, that would amount to $320 million, or $2.35 a share. Apply a conservative multiple of 15, and the stock's at 35.25, up more than 30%.

THE FINANCIAL IMPROVEMENTS give Day more wherewithal to attack the product problem. "There is a lot of brand equity still sitting in RadioShack, with the right vision and leadership," says Wade Fenn, founding partner of Retail-Masters, a consulting firm in Minnesota.

But to realize this potential, Day must offset declines in RadioShack's wireless business, a crucial profit center whose revenue, 35% of the company's total, fell in 2006. Cellphone carriers like Verizon (VZ) and AT&T 's (T) Cingular have opened their own retail outlets, and the industry is maturing. Another worry: Best Buy recently announced that it is opening more stores devoted to cellphones. At the same time, cell users increasingly are signing up for prepaid plans, in which they buy minutes in advance, rather than getting billed after usage. Wal-Mart and Target (RadioShack also offers them) are pushing these plans, which are thought to be less profitable.

RadioShack is trying to counter the cellphone shortfall with everything from iPods to flat-screen TVs. Accessories like batteries and cables that plug into home entertainment systems are vital (23% of sales) to its business, as are traditional landline phones, digital cameras, satellite radios, digital-music players, DVD players and home-satellite TV systems.

Retailing consultant Fenn says that RadioShack should focus on new niches where its sales staff can "do something complex" for customers, as they did in setting up wireless and satellite TV accounts for buyers before the growth trajectory of those businesses flattened.

Bryan believes that RadioShack "has the ability to sell" a hand-held device like a cellphone that incorporates broadcast TV, which is expected to become available in the U.S. in a year or two. (Despite selling iPods, RadioShack won't handle Apple's much-anticipated iPhone, due out in June.)

The Bottom Line

They've already jumped, but RadioShack shares could rise 30% or more in the next 12-18 months if new chief Julian Day hammers costs further and gets the product mix right. Day has vowed to make the company a better merchandiser by improving field support for stores and introducing different price schedules for certain items in different markets. He's also mentioned improving the shopping experience for customers.

RadioShack has advantages over its rivals that eventually could help the top line. It has about 4,470 company-operated stores (even after closing 505 last year), along with roughly 770 kiosks, mainly in Sam's Club locations and Sprint Nextel outlets in major malls. Circuit City, in contrast, has just 659 U.S. stores.

"They reach people where the Best Buys and Circuit Cities just don't reach," says Douglas Asiello, a senior equity analyst at AIM Capital Management who thinks the stock can hit 35 in 18 months.

A BET ON RADIOSHACK IS A WAGER that Day's operating and merchandising expertise pays off for a retailer that's suffered from years of strategy and management shifts. His predecessor was forced to resign after newspaper revelations about inconsistencies on his resumé. Day isn't the typical consumer sales chief. "He's very quiet; he's not a rah-rah, let's go out and get 'em kind of a guy," says Bryan. "But he's very persuasive, very articulate and super intelligent." Shareholders hope that's the right mix for RadioShack.

Morgan Stanley Shedding Discover Card --
Dream dies with the move
By George Yared - AOL Blogging Stocks
March 24, 2007

Back in 1982 I was a third-year broker/branch manager with Dean Witter Reynolds (remember that name?) when the announcement came across the tape that Sears, Roebuck, and Co. would in one fell-swoop buy Dean Witter and Coldwell Banker, the real estate giant. Wow, Sears was diversifying in a huge, dramatic way. That move spawned the expression "buy your stocks where you buy your socks!" Dean Witter brokers, Allstate agents (Sears already owned Allstate) and Coldwell Banker agents, all to be found within a Sears department store. The whole thing was a flop, but it took nearly ten years to figure this out.

In the mix, Sears CEO and chairman, Ed Telling, selected a young McKenzie & Co. consultant to run the triumvirate. His name was Philip Purcell and he brought an intelligence and energy to the job second to none. He carefully explained that the glue to the whole thing working out masterfully would be the launch of the Discover card. The Discover card was launched in 1984 with a mega advertising and marketing campaign. If you had a pulse, you got a card.

In the early 1990s, Sears realized the "synergies" of Dean Witter, Dean Witter , and Coldwell Banker just was not working according to the dream. The dream took on a new look as all three companies were spun off or went public. The association with Sears became just a memory. Then in 1997, Phil Purcell engineered the coup of coups: merging "Main Street" Dean Witter with glitterati firm Morgan Stanley (NYSE:MS). Phil was named CEO, another masterful coup.

All the while, the Discover card was building itself into a formidable business. The Morgan Stanley white shoe bankers "certainly did not have one in their wallets" was the quote most often heard as the Morgan bankers were annoyed with this low-level credit card.

Yet, the Discover card proved to be a profitable and consistent performer. When Phil Purcell lost a recent in-house struggle for control to former Morgan Stanley CEO, John Mack, it was a given that the Discover card was a goner. Bingo, it is! Morgan Stanley is spinning off the Discover card operations to the shareholders sometime in the fourth quarter. This allows Discover to capture its own valuation in a generous-to-credit-card-operators stock market.

Discover is the fourth largest issuer of credit cards in the U.S., behind of course the mammoth Visa, MasterCard, and American Express. Discover has over 50 million card holders and earned $1.5 billion of profits on over $4.3 billion of revenues. It will capture a healthy valuation in the stock market unto itself and will be an attractive acquisition candidate.

Phil Purcell's vision created the Discover card, and I can assure you -- he has one in his wallet!

Georges Yared is the author of Stop Losing Money Today and Baby Boomer Investing.

Sears Canada Appoints V.P. & CMO
Market News/Canada
March 23, 2007

Sears Canada Inc. has announced the appointment of Pamela Griffith-Jones to the position of Vice President and Chief Marketing Officer. In this position, Griffith-Jones will lead the retailer’s marketing organization, and develop the Sears brand and private merchandise brand positioning in Canada.

"We are very happy to have Pamela join our Company; she is a great addition to our team," said Dene Rogers, President and CEO, Sears Canada Inc. "Her experience greatly qualifies her for this key position, and we look forward to her contribution in making Sears the number-one retailer in Canada."

Griffith-Jones brings with her 20 years of progressive leadership experience, having served at Cooper & Lybrand Consulting in Canada and the U.K. She spent the past 14 years at Canadian Tire Corp., most recently serving as Vice President, Leisure Products Division. She graduated from the University of Western Ontario's Richard Ivey School of Business, receiving her HBA in 1987 and MBA in 1990.

Under the leadership of Griffith-Jones, several initiatives will be undertaken to improve the retailer’s marketing capabilities, including creating a direct marketing group, customizing assortments, marketing the brand to become more relevant to customers, and increasing the return on marketing investments.

Wal-Mart to Sweeten Bonus Plans for Staff
By Kris Maher and Kris Hudson - Wall Street Journal
March 22, 2007

Wal-Mart Stores Inc., long criticized for its pay and benefits, has revamped its bonus program for hourly employees and will establish a new reward program for long-tenured workers in what some view as a bid to boost morale.

The world's largest retailer by sales will pay more than $529.8 million in bonuses to 813,759 hourly U.S. employees at Wal-Mart and Sam's Club stores today. It said it will pay a total of $1.06 billion in bonuses to both managers and hourly employees in the U.S. today. The company declined to say how much it paid in similar bonuses last year.

The company also announced a new annual bonus of one week's pay, called a "Servant Leadership" bonus, to more than 13,400 hourly employees with more than 20 years of service at stores, which will be paid out later this year. The company said it hadn't yet determined the total dollar amount.

In another change, the company said it will begin paying bonuses to hourly employees, based on sales, profit and inventory performance at individual stores, on a quarterly, rather than annual, basis "to reward performance on a more frequent basis." Experts said that more employees could potentially receive bonuses as a result and that the change could help the company reduce costly turnover among hourly workers. The National Retail Federation, a retail trade association, said turnover in the U.S. retail industry is 80% annually for full-time workers.

The Bentonville, Ark., retailer announced the changes today. It said they are part of a program launched last year called "Associates Out in Front," designed to "make Wal-Mart a better place to work." The new rewards are intended "to demonstrate just how much we value every member of the Wal-Mart family," said Susan Chambers, executive vice president for Wal-Mart's People Division.

The company, which will mark "Associate Celebration Day" today with cookouts at each of its 4,000 stores and at its headquarters, said it also planned to create a "Customer Champion" cash award to reward employees who provide "outstanding customer service." It said that award would begin in midsummer but didn't say how the award would be determined or its amount.

Such moves are a stark shift from recent changes that have helped the company rein in labor costs but have also upset and even angered some of its 1.35 million U.S. employees. Those earlier changes include a new automated scheduling system aimed at aligning workers' shifts with each store's busiest shopping times and a move that capped the salaries of tens of thousands of workers, both of which hit longtime workers hardest. In October, employees at a Wal-Mart in Hialeah, Fla., walked off the job briefly in a spontaneous protest of the new policies.

It is unclear what impact the company's latest efforts will have. Some experts say the view among many consumers and workers that Wal-Mart doesn't treat its workers as well as rivals has grown over the past year.

This impression is partly based on actual wage and benefit practices, experts say. Wal-Mart, for example, now says it pays its full-time U.S. workers $10.51 an hour on average. That is an increase from last year's $10.11 average. By comparison, competitor Costco Wholesale Corp., of Issaquah, Wash., recently boosted its minimum pay for full-time hourly workers, and it pays $17.46 on average to its full-time and part-time workers in the U.S. The U.S. Department of Labor's Bureau of Labor Statistics lists average U.S. retail-sales wages ranging from $8.73 to $13.99 an hour in 2005, the latest year for which data are available.

Wal-Mart's image has also been dented by the unrelenting criticism of groups backed by labor unions, as well as politicians and grass-roots community groups seeking to block the company's expansion efforts.

"Wal-Mart is being hit on two sides. One is that it's an unfair competitor, and one is that it's an unfair employer," says Gary Chaison, a professor of industrial relations at Clark University in Worcester, Mass. "I think that it wants to go on the offensive to show workers and consumers that it's not a bad employer."

Lois Honeycutt, a 46-year-old customer-service manager at a Wal-Mart in Altamonte Springs, Fla., said the bonus-program revisions might help boost spirits in some of Wal-Mart's stores. "I really think they're trying to bring up some of the morale," said Ms. Honeycutt, a 10-year Wal-Mart employee. "If you've ever worked in retail, you'll know that it's not an easy job."

Sarah Clark, a company spokeswoman, said the changes weren't an effort to improve morale. "That's not the case," she said, adding that "associate engagement scores" across the company remain very positive.

Wal-Mart Fights Back Over Firings
By Louise Story and Michael Barbaro - New York Times
March 20, 2007

Wal-Mart asserted yesterday in a court filing that two of its former top marketing officials had engaged in a sexual relationship during the process of selecting new advertising agencies and had sought jobs with one of the agencies they ultimately recommended.

The legal brief directly contradicted the statements the executives have made since they were fired late last year.

Wal-Mart accused Julie Roehm and Sean Womack, the two executives, of extending their visits with Draft FCB, an ad agency involved in the review, to spend more personal time together and to promote themselves to the agency as job candidates.

"Instead of working solely in Wal-Mart's interest," the company said, Ms. Roehm "frequently put her own first. She did not merely fail to avoid conflicts of interest, she invited them."

Wal-Mart backed up its assertions with what it said were e-mail messages sent by Ms. Roehm and Mr. Womack, both married, from their work and private accounts.

"I hate not being able to call you or write you," Ms. Roehm wrote early last fall, according to an e-mail message Mr. Womack's wife provided to Wal-Mart. "I think about us together all the time. Little moments like watching your face when you kiss me."

Reached yesterday in Las Vegas, Ms. Roehm denied Wal-Mart‚s accusations of an affair with Mr. Womack, and she said she had not had job discussions with Draft FCB.

"There was never any discussions about us going to work with them full time," said Ms. Roehm. "I know what e-mails they have, and that's not at all what they prove."

The fallout between Wal-Mart and Ms. Roehm, considered by many to be a rising star in marketing, shook the advertising world because Ms. Roehm had overseen Wal-Mart‚s $580 million ad agency selection in the fall. After Wal-Mart fired Ms. Roehm, it also fired Draft FCB, the Interpublic Group agency she had selected for the most important part of the assignment. Wal-Mart has since reassigned the business.

Ms. Roehm sued Wal-Mart for firing her shortly after her dismissal, asserting that the company had not given a valid reason and owed her money under her contract with Wal-Mart.

Wal-Mart said yesterday in its request to file a counterclaim against her that it would seek compensation from Ms. Roehm for legal fees in the case and for other damages, possibly the extra expenses Wal-Mart incurred redoing the advertising account review.

In its filing, Wal-Mart described Ms. Roehm and Mr. Womack as executives determined to advance their careers, even at the expense of Wal-Mart‚s reputation ˜ by, for example, accepting expensive bottles of vodka and dinner at exclusive restaurants.

Ms. Roehm, in responding to Wal-Mart‚s assertions, said that she was hoping to "settle this amicably and move on."

Mr. Womack did not return a call for comment. He was scheduled to give a talk, "Marketing 2.x: Living Between the Internet Age and What Comes Next," alongside Ms. Roehm and top marketing executives from companies like Xerox at a conference in Las Vegas yesterday.

The pair are also listed as speakers at a conference today in Los Angeles. They have been working together part time as marketing consultants since being fired.

Wal-Mart said in the filing that Ms. Roehm and Mr. Womack had lengthy career discussions with Tony Weisman, then the global growth officer of Draft FCB, and that those discussions had tainted the agency review process. Wal-Mart also asserted that Ms. Roehm shared internal company e-mail messages with Mr. Weisman and Mr. Draft, the chief executive of Draft FCB.

Mr. Womack wrote e-mail messages to Mr. Weisman signing them "Sean and Julie" that discussed the two leaving Wal-Mart to work in a venture with Draft FCB, Wal-Mart said in its filing. In one message cited, he said they would want an equity stake and discussed timing: "What do the next 60-360 days look like for your guys? When will it be too late?" he wrote in August.

Wal-Mart also said that Draft FCB officials had paid for more than $2,000 in meals for Ms. Roehm and Mr. Womack. On one night alone in August 2006, the company said, the ad agency spent $1,100 on dinner and drinks for the pair ˜ $700 at LuxBar in Chicago, then $440 on drinks at the Peninsula Hotel. Both the gifts and alleged affair violate Wal-Mart's ethics policies.

A spokesman for Interpublic, the parent of Draft FCB, said that the company had provided e-mail messages to Wal-Mart for the inquiry.

„In his business development role, Mr. Weisman did not have the authority to start new ventures, or make commitments to offer up senior level opportunities within the agency,‰ said Philippe Krakowsky, the spokesman for the Interpublic Group. "Any promises Mr. Weisman may have made were not sanctioned by his company's senior management or discussed with Interpublic."

Mr. Weisman left Draft FCB in December and is now the head of Digitas Chicago, part of the Publicis Groupe. He declined to comment. Last October, after a prolonged search process, Wal-Mart hired Draft FCB and Carat USA, part of the Aegis Group. Both agencies were dismissed in December just days after Wal-Mart fired Ms. Roehm.

Wal-Mart allowed Carat USA to participate in the second agency selection but did not reconsider Draft FCB. Wal-Mart announced new selections weeks later ˜ the Martin Agency, part of the Interpublic Group, and MediaVest, part of the Publicis Groupe.

Mona Williams, Wal-Mart‚s spokeswoman, said the company did not originally intend to divulge the details of what she called Ms. Roehm‚s „flagrant personal and professional misconduct.‰ But Ms. Roehm‚s suit against Wal-Mart, Ms. Williams said, forced the company to respond. „We have no choice but to share the real story of what happened,‰ Ms. Williams said.

Mr. Womack arrived at Wal-Mart in late 2005 as a temporary contract employee in the marketing department. He was also employed by Saatchi X, an ad agency, at that time. Ms. Roehm took a job soon after. According to the suit, Ms. Roehm and Mr. Womack ˜ two self-described East Coast urbanites ˜ plunged into the alien world of northwest Arkansas and quickly became close.

In February 2006, Ms. Roehm told Mr. Womack in an e-mail message that she was "smiling because I am so happy you are here with me. :)))."

Mr. Womack, who sought to become a full-time employee under Ms. Roehm, wrote in an e-mail message that "there are two reasons I want to come here and you are at the top of the list," adding "it is really hard for me to say no to you."

Wal-Mart, in New Leases, Frees Itself for Banking Push
By Damian Paletta - Wall Street Journal
March 15, 2007

Wal-Mart Stores Inc., underscoring its continuing push into financial services, has quietly renegotiated the terms of leases with a number of banks operating in its stores, giving Wal-Mart itself the explicit right to offer mortgages, home-equity lines of credit and consumer loans.

A portion of one of the leases, obtained by Dow Jones Newswires, also gives Wal-Mart the ability to offer debit cards and investment and insurance products either directly or through a third-party vendor. In the wording of the new lease, Wal-Mart said it could "offer these products and services in the checkout lanes, at the customer-service desk, through automated-delivery channels, kiosks" or any other place in the store.

The new lease language comes at a time when Wal-Mart has generated controversy over its repeated efforts to enter the banking business, a push that has drawn fierce opposition from the banking industry, some members of Congress and activist groups. The Bentonville, Ark.-based retailer has a pending application to establish an industrial-loan company in Utah but has promised publicly that it won't open retail bank branches.

The company minimized the importance of the changes, as spokesman Kevin Gardner said the lease language didn't "signal anything new."

"We've been offering services like check cashing, money transfers, branded credit cards and bill payments for some time," he said. "Our strategy is to continue to grow our existing financial services to continue to save our customers money so they can live better."

Mr. Gardner wouldn't say why the leases also protected Wal-Mart's right to eventually offer items it didn't currently sell, such as mortgages, home-equity loans and investment and insurance products. He also didn't say when the company might roll out any of these products.

"We have not made any announcements," he said.

Wal-Mart has repeatedly tried to obtain a banking charter, and a federal regulator shelved the company's most recent attempt in January for 12 months. Still, Wal-Mart would be able to offer many banking products without actually owning a bank or even having a branch within its more than 3,000 stores.

Critics, including thousands of community banks, have tried to block Wal-Mart from owning a bank, alleging that Wal-Mart would present a dangerous mixture of banking and commerce and put the deposit-insurance system at risk. Wal-Mart's application is on hold while Congress debates the issue. If the company doesn't win a bank charter, it can't receive federal deposit insurance or open branches.

There are more than 300 different banks with 1,200 branches inside Wal-Mart stores across the country, and the company plans to add 200 more by 2009. Most of the banks have 15-year leases with Wal-Mart.

Details of the lease agreement were presented to banks by Larry Ellis, Wal-Mart's leasing manager for in-store banks.

The Federal Deposit Insurance Corp., which insures deposits for industrial-loan companies, or ILCs, held hearings last April about Wal-Mart's request for a bank charter.

Fifteen commercial firms already own banks, including Harley-Davidson Inc. and Target Corp. The House Financial Services Committee, which is considering a bill that would prohibit companies such as Wal-Mart from owning a bank, is expected to hold a hearing on the issue next week.

Mastermind: Sears Tower Was A Target
CBS Chicago
March 15, 2007

(CBS) GUANTANAMO BAY, Cuba In confessing to masterminding the Sept. 11 attacks, Khalid Sheikh Mohammed said he was responsible for several other terror plots, including one against the Sears Tower that never happened.

Transcripts from a secret hearing at Guantanamo Bay last week have been released to the public.

"I was responsible for the 9/11 operation from A to Z," Mohammed said in a statement read during the session, which was held last Saturday.

The U.S. Armed Forces said the hearings have to stay private to protect sensitive material, but in edited transcripts, he said along with Sept. 11, he was responsible for 28 plots, including some that were never executed.

The Sears Tower was the intended target in one of the plots. Other intended targets included the Empire State Building and New York Stock Exchange, the Panama Canal and Big Ben and Heathrow Airport in London. None of these attacks ever happened.

But using his own words, the extraordinary transcript connects Mohammed to dozens of the worst terror plots attempted or carried out in the last 15 years -- and to others that have not occurred. All told, thousands have died in operations he directed.

His words draw al-Qaida closer to plots of the early 1990s than the group has previously been connected to, including the 1993 World Trade Center truck bombing. Six people with links to global terror networks were convicted in federal court and sentenced to life in prison.

It also makes clear that al-Qaida wanted to down a second trans-Atlantic aircraft during would-be shoe bomber Richard Reid's operation.

Mohammed said he was involved in planning the 2002 bombing of a Kenya beach resort frequented by Israelis and the failed missile attack on an Israeli passenger jet after it took off from Mombasa, Kenya. He also said he was responsible for the bombing of a nightclub in Bali, Indonesia. In 2002, 202 were killed when two Bali nightclubs were bombed.

He said he was involved in planning assassination attempts against former Presidents Carter and Clinton, attacks on U.S. nuclear power plants and suspension bridges in New York, the destruction of American and Israeli embassies in Asia and Australia, attacks on American naval vessels and oil tankers around the world, and an attempt to "destroy" an oil company he said was owned by former Secretary of State Henry Kissinger on Sumatra, Indonesia.

He also claimed he shared responsibility for assassination attempts against Pope John Paul II and Pakistan President Pervez Musharraf.

In all, Mohammed said he was responsible for planning 28 attacks and assisting in three others. The comments were included in a 26-page transcript released by the Pentagon, which blacked out some of his remarks.

The transcripts also refer to a claim by Mohammed that he was tortured by the CIA, although he said he was not under duress at the U.S. naval base at Guantanamo when he confessed to his role in the attacks.

Law enforcement has been diligent at the Sears Tower ever since Sept. 11, 2001.

In 2002, officials in Spain arrested three al Qaeda suspects carrying videotapes of American landmarks, including the Sears Tower.

Last March, a group of men who took photographs of the building were questioned and released. The men took off in a rental car under a phony name.

In a case that got widespread attention last June, seven men were arrested in Miami in an unrelated plot against that targeted the Sears Tower, the FBI office in Miami, and other buildings.

Authorities familiar with Chicago's anti-terrorist measures say the Miami group clearly wanted to do something and would have tried, but says they had no chance of succeeding.

The Associated Press contributed to this report.

H-P's Pension Switch Signals End to Era Of Cozy Retirements
By Lee Gomes - Wall Street Journal
March 14, 2007

Art Dill, president of the IBM Retirement Club in San Jose, remembers well when he left his company in the early 1990s. He received, in addition to the traditional gold watch, a $1,000 bonus and a company-sponsored dinner for him and 10 of his friends at the restaurant of his choice. For IBM retirees these days, says Mr. Dill, things are more perfunctory: a modest ceremony in which co-workers gather around the departing employee in some corner of the office to pay tribute.

Ceremonies aren't the only thing that is changing about retirement. The old-guard tech companies, the last bastions of traditional pensions, finally have joined their younger counterparts in the New Economy. Pensions that guarantee a set payout upon retirement are no more. In their place are 401(k)s, in which retirement benefits depend on how much individuals chose to set aside, along with how well their investments did.

One of the last holdouts from the old school was Hewlett-Packard, the 68-year-old Silicon Valley company long considered one of the most benevolent of U.S. employers. Late last month, the company announced it would be phasing out its pension plan for new employees and replacing it with a 401(k).

The company said it took the step -- which mirrors similar moves over recent years by IBM and Motorola, among others -- as part of its efforts to remain competitive.

When you read about "high-tech retirees" in the newspaper, they tend to be the highly visible entrepreneurs whose companies have just gone public and who can afford to turn off the alarm clock while still in their 20s or 30s, at least until they start all over again.

The more common retiree profile, however, is the traditional one: the person who dutifully serves 20 or 25 years as an employee before packing up the files and spending more time with the grandchildren. If they take a cruise, it isn't on their own yacht, but on a larger ship -- with a few thousand others.

Employees who retired before the turn of the century were able to take advantage of rising stock and real-estate prices over the past few decades to accumulate a nest egg. Their golden years, while dogged with the same uncertainty about rising health-care costs that everyone feels, are typically marked by activity and comfort.

The bigger and older companies, such as IBM and Intel, even have active retirement groups. Often, a company lets these groups use corporate facilities for meetings. The H-P retirees' chapter near the company's Palo Alto, Calif., headquarters has 2,000 members. They are, by and large, a contented group and the meetings are purely social, reports their president, Stan McCarthy. The most heated debates tend to involve the locations of the group's social events.

At IBM, a group gets together every month to keep up with all the technology the company has produced. A recent session, for example, involved the ins and outs of burning DVDs. There are trips abroad, regular social events and end-of-year dinners.

Many of today's retirees wonder whether their children or grandchildren will do as well as they did after their careers end. "Before, someone could retire and be reasonably comfortable," says Mr. Dill. "I am not sure you can do that anymore."

Nearly all tech companies offer 401(k)s and, in lieu of contributing to a pension, will match a percentage of each employee's contribution, typically up to around 6% of income. Different companies exhibit different degrees of generosity. Microsoft puts in 50 cents for every dollar, while Apple matches dollar for dollar for those with five years of service or more. At H-P, the company gives dollar for dollar, up to 6%.

Are employees better or worse off with 401(k)s? While it's possible to do perfectly well with such an account, more often than not that doesn't happen, at least not in the economy as a whole. "There is a concern that 401(k)s aren't being used well enough by most people," said Andrew Eschtruth, with the Center for Retirement Research at Boston College.

Figures from the Federal Reserve, he said, show that the average 401(k) balance for heads of household between ages 55 and 64 is just $60,000, not nearly enough to retire on. Up to a quarter of workers eligible for 401(k)s haven't even set up one, and many others save less than the 6% of income that most retirement planners recommend.

Talking about retirement assumes that people will last long enough -- 25 or so years -- at a company to do so. It's doubtful that many workers just starting out in today's downsized economy will be able to retire from the same company even if they want to. In that case, 401(k)s, which are portable, might be more useful -- assuming workers don't cash them out when they switch jobs.

The current crop of active and prosperous technology retirees are well aware that they may be the last generation of lucky retirees. "Right now, things aren't as secure as they were in the past," says Mr. Dill. "We worked at the best of times."

Out of Space, Retailers Trim Growth Plans Sears and Others Turn To Buybacks, Dividends To Reward Investors
By Kris Hudson - Wall Street Journal
March 14, 2007

For years, investors rewarded those retailers with fast expansion rates. Now that some retailers have nearly tapped out their potential in the U.S., investors are punishing them for failing to slow down.

The result is that a number of major retailers are ratcheting back on the number of new stores they open each year and are diverting more of their spending to repurchasing shares and increasing dividends. Among those adopting this strategy are Sears Holdings Corp., Home Depot Inc. and AutoZone Inc.

They and other mature retailers that beefed up their buyback programs have seen their stocks perk up in the past year. Several remain in positive territory despite the market's roller-coaster ride in recent weeks and yesterday's report of a weaker-than-expected 0.1% rise in February U.S. retail sales.

Even Wal-Mart Stores Inc., the world's largest retailer by sales, has said it will slightly slow its growth rate this year and redouble efforts to buy back billions of dollars of stock. Wal-Mart's stock, which trades on the New York Stock Exchange, has risen 1.4% in the past year, and it could go higher if the retailer further curtails its U.S. expansion, analysts say. It ended the session yesterday at $46.18, down $1.08. The shares trade at 14.4 times estimated earnings for its current fiscal year, cheaper than rivals Target Corp. at a 16.8 and Costco Wholesale Corp. at 20.7.

Investors often favor share repurchases because the practice reduces a company's number of shares outstanding. So, each remaining share could then get a larger chunk of the money distributed through dividends. Likewise, repurchases boost earnings per share, benefiting the company in the eyes of investors.

Wall Street's badgering of retailers for more buybacks and fatter dividends is nothing new, but the movement has gained momentum of late because so many big-box retailers nearly blanket the U.S. "There are a greater number of large-cap retailers that have reached the point, domestically, that opportunities for additional square-footage growth are diminishing," said Chris Kagaoan, an analyst with investment firm J. & W. Seligman & Co., which has $20 billion under management and holds shares of Wal-Mart, Home Depot, and Best Buy Co., among others.

Most retailers nearing maturity will see their returns on the capital they spend diminish and their sales gains at established stores weaken. Thus, Wall Street is watching for those tell-tale signs in judging when to begin demanding less growth and more return.

"The rapid growth period for these retailers is over -- with the exception of a lot of niche players -- and now they are generating a lot of free cash flow," Sanford C. Bernstein & Co. analyst Colin McGranahan said. "How they allocate that cash flow is an investment concern."

Mr. McGranahan has the equivalent of "hold" ratings on Home Depot and Best Buy with 12-month price targets of $37 and $57, respectively. Home Depot's shares ended the session yesterday on the Big Board at $37.35, while Best Buy closed at $47.66. He owns neither stock. His company manages accounts owning more than 1% of Best Buy's stock.

Even some highly regarded retailers appear to be getting penalized for aggressive growth plans. Best Buy, the electronics retailer, surprised Wall Street on Feb. 21 by announcing that it intends to open 90 U.S. stores in its fiscal year that began March 4, an aggressive 9% expansion. "We view ourselves as a growth business," said Jim Muehlbauer, Best Buy's senior vice president of finance. "We are going to [proceed] opportunistically with our share repurchases."

Meanwhile, Best Buy has boosted its dividend but done little in terms of buybacks. It repurchased 9.5 million shares -- or 2% of its total -- in the first three quarters of its latest fiscal year. What is more, Best Buy had an estimated $3 billion in cash on hand when its fiscal year ended March 4, according to Gary Balter, an analyst with Credit Suisse Securities. He estimates that Best Buy, should it choose, could amass as much as $8 billion in cash and debt to repurchase about one-third of its shares without losing its investment-grade credit rating.

Best Buy trades at about 15 times estimated per-share earnings for its fiscal year ending in February 2008. In comparison, smaller, struggling rival Circuit City Stores Inc. trades at a price/earnings ratio of 19.2. Best Buy's stock is down 13.6% in the past year. "It's as if the market's already saying to you, 'We don't believe this company can keep the growth going,' " said Mr. Balter, who rates both Best Buy and Circuit City the equivalent of "buy," assigns them 12-month price targets of $59 and $25, respectively. He owns neither stock. Credit Suisse has done business with Best Buy in the past 12 months.

Often getting more forgiveness from investors on dividends and buybacks are specialty merchants with ample room to grow, such as PetsMart Inc. and Dick's Sporting Goods Inc.

At least one young retailer is mimicking its larger brethren. Build-A-Bear Workshop Inc. announced Feb. 20 that it has earmarked $25 million for the first share buybacks of its 28 months as a public company. The retailer, which sells teddy bears and other stuffed animals that shoppers assemble on the premises, said it is rewarding shareholders while continuing to expand.

Citigroup Inc. analyst Bill Sims sees it differently. "It is, in my view, a reflection of shareholder pressure," said Mr. Sims, who has a "hold" rating on Build-A-Bear's stock. He doesn't own any shares. His firm hasn't done business with Build-A-Bear in the past year.

Leaders & Success
J.C. Penney Found Big Bucks
By David Saito-Chung - Investor's Business Daily
March 13, 2007

James Cash Penney's first business was a fast flop.

But the reason wasn't a flawed plan, poor execution or too much competition.

It failed because of his conscience. Yet this attitude of doing the right thing helped Penney immensely as he later built one of the largest and most respected retail chains in America.

After finishing high school in Hamilton, Mo., and taking a few jobs, Penney moved to Colorado in the late 1890s and spent his savings on a small butcher shop. The chief meat cutter told Penney he had to give the chef of the local hotel a bottle of bourbon every week. If he didn't, he risked losing his biggest client.

Penney gave a bottle to the chef once, then regretted it. After refusing to do it again, the hotel canceled its orders. The butcher shop went under.

The young man from Missouri didn't give up.

With hard work, dedication to outstanding service, smart hiring practices and keen decision making, Penney turned a humble chain of three dry-goods stores in the West into a giant with 1,033 stores across the U.S. and Puerto Rico.

The company logged $19.9 billion in sales in the latest fiscal year ended in January. "Penney obviously is an icon on the order of a Sam Walton (of Wal-Mart) or a Stanley Marcus (of Neiman Marcus)," said Ed Fox, an associate professor at the Cox School of Business at Southern Methodist University and director of its J.C. Penney Center for Retail Excellence.

Religious Road

Penney (1875-1971) grew up on a small Missouri farm. Penney's father, an unsalaried Baptist minister, and mother taught their son to have abiding faith in God, self-reliance and self-discipline.

Young Penney learned these principles fast. When Penney was 8, he was told he would have to buy his own clothing. He needed new shoes right away. So Penney bought pigs with his $2.50 in savings, sold them at a profit and had enough for shoes.

Penney's parents also preached the Golden Rule: Do unto others what you would have them do unto you. This lesson served Penney well in the retail business.

In 1898, Penney worked for a pair of dry-goods stores named the Golden Rule in Colorado and Wyoming. The chain's partners liked the young man's energy and work ethic so much that they offered him one-third ownership of a new store. At age 26, Penney opened a third Golden Rule shop in Kemmerer, Wyo., in April 1902.

Back then, many store owners had little or no thought of protecting the patron. They treated customers rudely and often sold poor-quality goods. Prices were not the same for every visitor. "Usury was the order of the day," Fox said. "Store owners usually charged poorer people higher prices because they thought they were ignorant."

Then there was Penney. He gave each visitor friendly, reliable service. He clearly marked the prices of items and pledged "one price to all."

In Kemmerer, miners were paid in coupons instead of cash. They used the coupons to shop at the mining-company-owned store. The workers tended to spend their income instantly and later rely on mining company credit. Due to these loans, miners stayed put.

Penney made his store cash-only. Many thought he would shutter the store in little time. But shoppers liked the quality of goods at Penney's store. To provide exciting items, he joined a buying syndicate and traveled to the East Coast in 1903 to catch the latest trends.

"We took our slogan 'Golden Rule Store' with strict literalness. Our idea was to make money and build business through serving the community with fair dealing and honest value," Penney said.

Penney sought to keep costs low so he didn't have to raise prices. He opened his own envelopes and used the blank side for scratch paper. Penney used old packing crates as shelves and counters in the stores.

Happy customers told their friends and neighbors about their positive shopping experience. The Kemmerer store earned $8,514.36 in its first year on sales of $28,898.11, a profit margin of 29%. "The store that sells its wares for less but pays little attention to the service it renders does not meet with the success of the store with courteous employees," Penney said in 1954. "The public is not greatly interested in saving a little money on a purchase at the expense of service. Courteous treatment will make a customer a walking advertisement."

To ensure long-term growth, Penney chose his staff shrewdly. In 1903, a year after his instant success in Kemmerer, Penney was asked to manage another store in Rock Springs, Wyo. Penney discovered that the clerk often closed the store early so he could perform an instrument in local dances. Penney let him go and found a replacement who worked hard.

By 1907, Penney had bought out the ownership stakes of his employers and set off on a rapid growth plan. In 1909, he moved from Kemmerer to Salt Lake City to be closer to banks and railroads. That way, he could stay on top of product buying, distribution and financing.

In 1911, the chain grew to 22 stores and topped $1 million in sales. The next year he had 34 Golden Rule stores, with sales topping $2 million.

In 1913, Penney changed the Golden Rule store name to J.C. Penney Co. The next year, Penney moved the firm's headquarters from Salt Lake City to New York City to stay near major manufacturers and other sources of merchandise.

Two years later, he opened his first two stores east of the Mississippi River. By 1951, total store sales eclipsed $1 billion a year.

To ensure each store had excellent and motivated managers, he offered clerks the chance to become manager-partners. Penney gave the same opportunity that was given to him as a young man in Wyoming ‹ a one-third ownership in the new store.

In the 1920s, Penney turned down offers by bankers to merge the company with Montgomery Ward and Sears Roebuck. He felt such deals weren't worth it if they resulted in laying off some of his personnel.

After the stock market crash of 1929, Penney used his company stock as collateral for loans. But the Depression of the 1930s lasted long, and his fortune was wiped out. He had to close some of his charity organizations, but continued to work hard to keep the company going.

On The Go

Despite stepping down as president in 1917 and becoming the firm's first chairman of the board, Penney traveled constantly to visit stores and meet managers. At age 85, he trekked 80,000 miles and reached 67 stores from 1960 to 1961.

Penney showed younger employees how to wrap items carefully to prevent damage upon arrival. He gave pep talks, peppering the crowd with sayings such as "No man can climb the ladder of success without first placing his foot on the bottom rung" and "The profit is in the last shirt in the box."

He also often stopped help a customer, encouraging the store manager to do the same.

"The friendly smile, the word of greeting are certainly something fleeting and seemingly insubstantial," Penney said. "You can't take them with you. But they work for good beyond your power to measure their influence. It is the service we are not obliged to give that people value most."

Kmart offers card refunds
Retailer strikes deal with trade commission
By James P. Miller - staff reporter - Chicago Tribune
March 13, 2007

The Federal Trade Commission, saying consumers "have a right to know when gift cards come with strings attached," accused Kmart Corp. of deceptive advertising Monday, saying the subsidiary of Sears Holdings Corp.essentially hid the "dormancy fees" that it formerly levied against unused gift cards.

The FTC, which brought its charges via a consent agreement, a format in which the government files a complaint and the company simultaneously resolves the issue by changing its practices and/or paying a penalty, said the action represents the agency's "first law-enforcement action involving gift cards."

Gift cards' popularity has surged in recent years. For gift-givers clueless about what to buy for that certain someone, the cards are a welcome solution. And for merchants, gift cards offer a way to cut back on the labor-intensive chore of handling returns of unwanted presents.

An additional plus for retailers is the boost in store traffic: People who receive a gift card often spend much more than the value of their card during a store visit. Nearly $28 billion was spent on gift cards during the
2006 holiday season, according to the National Retail Federation.

The scope of the trend has altered the economic rhythm of the holiday buying season by spurring big consumer spending in the once-quiet post-Christmas weeks.

But legal disputes related to card-related fees have also grown more prominent, as the FTC's lawsuit makes clear.

Kmart "promoted the card as equivalent to cash," the FTC said, "but failed to disclose that fees are assessed after two years of non-use."

Generally, a $50 Kmart gift card costs $50 to buy and can be used to purchase $50 in goods at the retailer's stores. But since 2003, Kmart has imposed a monthly service fee of $2.10 for each month of inactivity if a card isn't used for 24 consecutive months. Going back all 24 months, that fee would total $50.40, which would erase all the card's buying power.

Under the proposed settlement, Kmart has agreed to reimburse cardholders whose cards were reduced by dormancy fees, if the consumers can provide evidence that their gift cards were docked in that fashion. Kmart has also agreed to publicize the refund program on its Web site. The retailer stopped charging the dormancy fee on gift cards effective May 1, 2006, the FTC noted.

No wrongdoing admitted

The FTC emphasized that Kmart, in agreeing to resolve the agency's claims, isn't admitting wrongdoing. Nor did the FTC declare Kmart's card fees to be inherently illegal. Instead, the agency simply said Kmart had failed to adequately disclose the existence of the fees and that it had violated truth-in-advertising laws as a result.

The retailer either disclosed the fee in tiny print, the suit says, or affixed the gift card to a paper backing that made the small-print warning invisible to purchasers. It also failed to "use understandable language and syntax to describe the dormancy fee," the lawsuit says.

The decree remains subject to public comment through April 10, after which FTC commissioners will decide whether to make the proposed settlement permanent.

Except for repaying whatever portion of money that consumers can prove they lost because of dormancy fees, the FTC's suit doesn't impose any other financial penalty on Kmart.

Two dissenters

That didn't sit well with two of the six members of the FTC. Commissioners Pamela Jones Harbour and Jon Leibowitz said in a separate statement that they backed the consent decree but dissented in part.

"We agree Kmart's alleged conduct justifies the order's injunctive provisions," the two commissioners said, "but we believe the order should go further."

Many consumers "no doubt already have thrown out their gift cards and will have no remedy under this settlement," Harbour and Leibowitz noted. The commissioners said the company should also be required "to disgorge the profits of its unlawful behavior, provide more complete consumer redress, or a combination of both."

Disgorgement, a legal term under which a wrongdoer is obliged to pay back profits gained through improper activities, could be expensive.

Restaurant firm's case

Last year, Darden Restaurants Inc., which operates the Olive Garden and Red Lobster chains, disclosed in a regulatory filing that the FTC, after investigating the way in which it had marketed its gift cards, had determined that Darden had violated federal rules against deceptive practices for not adequately disclosing its dormancy-fee arrangement.

In that case, the FTC was seeking disgorgement of $31 million from Darden.
But the company's filing indicated that negotiations were ongoing, and there's been no further word regarding that case.

An FTC spokesman said the agency couldn't comment on the Darden case.

KKR Spots Cash in Dollar General's Till
Private Equity Displays More Taste for Returns Than Growth in Retail
By Kris Hudson - Wall Street Journal
March 13, 2007

GROWN UP?

The Deal: KKR agrees to buy retailer Dollar General for $6.9 billion.

The Backdrop: Private-equity firms have found an increasing appetite for retailers that have seen diminishing returns from their growth plans.

The Challenge: Much of Dollar General's store base is concentrated in rural markets, meaning that continued expansion will require penetrating more-expensive urban markets.

Kohlberg Kravis Roberts & Co.'s $6.9 billion deal to acquire Dollar General Corp. underscores private equity's interest in retailers whose days of heady growth may be behind them.

Retailers are increasingly being perceived by Wall Street as cash cows rather than growth companies. That has made them more attractive to private-equity companies than to public markets. Dollar General, the largest dollar-store operator by locations and sales, would be among the largest to go private so far.

KKR's offer for the Goodlettsville, Tenn., company provides $22 in cash a share and assumption of $380 million in debt. The per-share price is a 31% premium from the stock's closing price on Friday and an 82% markup from its 52-week closing low of $12.11 on Aug. 30. Both sides expect the deal to be completed in the third quarter.

"Our board of directors and senior management team enthusiastically support this transaction and view it as an excellent deal for Dollar General shareholders," David Perdue, Dollar General's chairman and chief executive, said in a statement. KKR, the New York-based private-equity firm, has cinched deals valued at a cumulative $280 billion in its 31-year history, including buyouts of retailers Toys 'R' Us and Shoppers Drug Mart in Canada.

Preceding Dollar General in accepting private-equity buyouts were grocer Albertson's Inc. for $11.3 billion excluding debt this year; Toys 'R' Us for $6.6 billion in 2005; and Michaels Stores Inc. for $5.9 billion last year, among many others.

Other retailers are considered by analysts to be possible private-equity targets because of recent struggles, including French retailer Carrefour SA, bookseller Barnes & Noble Inc. and office-supply chain Office Depot Inc. Carrefour and Office Depot have declined to comment on buyout possibilities. Barnes & Noble says it hasn't considered going private.

The nation's retail scene has seen an expanding number of large retailers in recent years. That leaves them with fewer places to grow and diminishing returns from their expansions, increasing pressure from investors to instead return money to shareholders through dividends or other measures rather than spending on growth.

Even massive retailers likely to remain public have shifted capital spending to align with Wall Street's focus on return on capital rather than growth rates. Wal-Mart Stores Inc., Home Depot Inc. and Sears Holdings Corp., among others, have reined in growth plans lately to divert more spending toward share buybacks and heftier dividends.

"We're in this environment right now where growing isn't necessarily as accepted as it used to be," Credit Suisse Securities analyst Gary Balter says. "People are very quick to measure the return on incremental investment."

For Dollar General, with 8,260 stores and an estimated $9.2 billion in sales last year, the progression from industry-leading retailer to buyout target was swift. In the first half of this decade, Dollar General was ensconced as the dollar-store industry leader, taking the lead on initiatives such as installing freezers and refrigeration units in its stores to expand its merchandise to include more food. Its same-store sales gains -- increases in sales at stores open for at least a year -- routinely outpaced those of its peers.

Last year, Dollar General's same-store sales gains faltered, and it saw increases in store-manager turnover, inventory costs and so-called shrinkage, which is theft or other merchandise loss, according to William Blair & Co. analyst Mark Miller. The company launched a turnaround effort in November calling for the closure of 400 stores, a paring of its expansion plans and a reduction of inventory costs by eliminating its "packaway"
inventory practice. Under the packaway program, Dollar General previously stored out-of-season merchandise to be brought back into stores when it came back into season. The retailer in recent months has instead started liquidating that inventory at marked-down prices.

In addition, Dollar General faces long-term issues that likely will hamper its results for some time. Much of the retailer's store base is concentrated in rural markets, meaning that continued expansion will require penetrating more-expensive urban markets. As well, Dollar General may decide to close more of its older stores, incurring more costs, Mr. Miller says.

As Dollar General struggled, Family Dollar Stores Inc., the second-largest U.S. dollar-store chain, with more than 6,300 locations, narrowed the gap between the two retailers. Family Dollar, of Matthews, N.C., aggressively installed freezers and refrigeration units in its stores and poured $25 million into shoring up its network of urban stores. The company reined in its store-opening plans several months earlier than Dollar General did, and it has fared better in limiting manager turnover, inventory costs and shrinkage. Family Dollar's same-store sales gains have outpaced Dollar General's in 14 of the past 26 months.

Ward's building sold for $300 million
By Eddie Baeb and Thomas A. Corfman - Crain's Chicago Business
March 12, 2007

The historic Montgomery Ward & Co. Catalog House is set to be sold for about $300 million to a New York investor in a deal that would cap off an ambitious redevelopment that brought office workers and new residents to the once-desolate western edge of River North.

The sprawling property, which hugs almost a quarter-mile of the north branch of the Chicago River, stood mostly empty for almost 30 years. Its rebirth about five years ago, as offices, helped transform the area near the former Cabrini-Green housing complex into an affluent neighborhood with a riverwalk, trendy restaurants and a health club.

New York real estate attorney Victor Gerstein is leading a group that agreed to buy the 99-year-old building from Chicago developer Centrum Properties Inc. and its New York-based partners Angelo Gordon & Co. and Taconic Investment Partners LLC, sources familiar with the transaction say.

The developers struggled to attract office tenants from the beginning. The building, which they retrofitted to accommodate the needs of telecommunications and Internet service providers, opened in 2001 just as those industries were beginning to tank.

"This would be a fabulous end to a story that didn't start out very good," says Greg Gerber, managing director of Chicago-based John Buck Co.'s office tenant representative arm, Strategic Advisory Group. "Five years ago, a lot of people would have bet these guys were going to lose the building."

Centrum and private-equity firm Angelo Gordon teamed up in 1999 to buy the entire 2.2-million-square-foot former warehouse and some surrounding properties out of Bankruptcy Court for $62 million. At the time, the two were the only bidders for the building, where Montgomery Ward employees working as "pickers" once wore roller skates to retrieve ordered goods. Ward's, a pioneer catalog merchant that became one of the nation's largest retailers before going out of business in 2001, vacated most of the building around 1980.

Centrum and Angelo Gordon spent more than $285 million renovating the warehouse structure, including public improvements to the streetscape and riverwalk, according to a 2003 tax-increment financing (TIF) agreement that provided $33 million in city subsidies.

While the sale price barely tops renovation costs, it amounts to about $200 a square foot, a healthy sum for a property that's 20% vacant. Its average gross rents of $19.50 a foot are about $10 less than in downtown office buildings. Executives with the firms involved in the deal didn't return calls.

Separately, developers converted some of the catalog building into 292 condominiums, which were sold at prices ranging from the low $200,000s to as much as $1 million, and also built townhouses on adjacent land. They sold off several of the Ward's parcels to other developers.

Taconic was brought into the office project in 2000 to help make the roughly 1.5 million square feet attractive to high-tech tenants. The developers dubbed the office building "e-port." By April 2002, with just more than 40% of the office space leased, they dropped the high-tech moniker and began seeking more traditional office tenants using the building's address as its name: 600 W. Chicago Ave. The developers took out a $130-million loan for the project in 2001, which they refinanced twice, increasing the total debt to $202 million.

The building's fortunes changed in recent years. The hip restaurant Japonais opened in 2003 and a David Barton Gym in 2004. Insurer Bankers Life & Casualty Co. and gum maker Wm. Wrigley Jr. Co. moved in. In December, the Big Ten Conference announced it will locate its new broadcasting network there. "There's a lot of action here now," says Ronald Shipka Sr., whose Enterprise Cos. residential development firm has been based there for about three years.

HISTORY OF A LANDMARK

1908: Montgomery Ward & Co. opens a warehouse for its catalog business.

Early 1980s: Ward's shuts down most operations in the former warehouse.

July 7, 1997: Parent company files for Chapter 11 bankruptcy protection.

July 20, 1999: Chicago-based developer Centrum Properties Inc. and New York-based investment firm Angelo Gordon & Co. pay $62 million for 23 acres, including the catalog building at 600 W. Chicago Ave. Plans call for selling off adjacent parcels and converting the catalog building into office space and residences.

Aug. 2, 1999: Parent company emerges from bankruptcy.

July 20, 2000: Centrum/Angelo Gordon form venture with Taconic Investment Partners LLC to redevelop commercial space in the catalog building. The project, called "e-port," struggles as the dot-com boom collapses the following year.

Dec. 28, 2000: Montgomery Ward announces it will close its doors.

May 2001: Centrum starts marketing the Domain project, a residential condominium conversion of the north side of the catalog building.

Aug. 3, 2001: Centrum purchases the 26-story headquarters building, 500 W. Superior St., for about $30 million, with plans for a residential conversion.

Dec. 18, 2003: Long-delayed TIF district deal finalized with the city for $33.2 million. The subsidy helps offset costs of the catalog building's rehab and public improvements, originally budgeted at $286.7 million.

Dec. 11, 2006: Centrum venture increases the loan on the catalog building to $202 million, from $180 million in 2005 and $130 million in 2001.

Sources: City of Chicago, Montgomery Ward & Co.

Deal talk lifts Sears to new high
Anheuser-Busch, Home Depot possible targets
By Sandra Jones - staff reporter - Chicago Tribune
March  12, 2006

Sears Holdings Corp. shares reached a record high Tuesday, fueled by the latest buzz over possible acquisition targets on Chairman Edward Lampert's shopping list.

The billionaire investor is reported to be interested in buying Anheuser-Busch Cos., the St. Louis-based King of Beers that has been struggling to revive sales as more Americans drink wine and spirits instead of Budweiser.

Last month shares of Home Depot Inc., the Atlanta-based home improvement retailer, spiked on speculation that Lampert was buying a stake in that company.

Anticipation over Lampert's next move has reached a fever pitch since August, when the hedge fund investor signaled in Sears' second-quarter earnings report that he is looking for acquisitions and could invest outside the retail industry.

Just what Lampert's intentions are is anyone's guess, but the hope that something big is in the works sent Sears up 2.5 percent, to a record $169.29, on Tuesday, after rising as high as $171.40 earlier in the day.

The London Times reported Tuesday in its "Rumour of the Day" column that the latest "whisper on Wall Street" is that Lampert's ESL Investments Inc. is poised to make a $56-a-share bid for Anheuser-Busch, a price that would value the world's largest brewer at $44 billion, a 19 percent premium over Monday's closing stock price. The report sent shares of Anheuser-Busch up 2.1 percent, to $47.98.

Home Depot shares increased more than 8 percent in a week's time last month on similar speculation and have since leveled off, closing Tuesday at $37.76.

Officials at Sears and Anheuser-Busch declined to comment. Home Depot officials couldn't be reached for comment. Investors are hoping that Lampert will follow through with his plan to turn Sears into a holding company along the lines of Warren Buffet's Berkshire Hathaway Inc., said Ivan Feinseth, Matrix USA research director, who rates Sears a "buy."

"It's no longer a traditional retailer," said Feinseth.

That said, the holding company Lampert formed by combining Sears and Kmart is only 18 months old. Berkshire Hathaway has been around since 1956.

Analysts point out that buying Home Depot or Anheuser-Busch is a risky proposition given their market capitalization--$78 billion and $37 billion, respectively. Sears is worth $26 billion.

The Hoffman Estates-based retailer had $3.7 billion in cash as of July 29. It has the capacity to borrow more, but issuing debt would be expensive given the company's junk rating. And Lampert has an aversion to overpaying.

To be sure, each day Sears' stock climbs higher, Lampert has more equity with which to put together a deal. He used Kmart Holding Corp.'s soaring stock price to engineer the acquisition of Sears, Roebuck and Co. last year. And he could do it again.

"Of course, anything could happen, but just from a fundamental perspective, it seems like the deal is far-fetched," said Arun Daniel, consumer analyst with ING Investment Management in New York.

Risky Side of Sears:
Retailer Is Recast As a Hedge Fund As Sales and Stores Decline, Chairman Focuses on Investment
By David Cho - Staff Writer - Washington Post
March 11, 2007

Over its 121-year history, Sears has been a watch seller, a giant mail-order business, a home builder and the nation's favorite retailer. And now, in 2007, it is becoming . . . a hedge fund?

As strange as it sounds, this transformation of Sears is now in force. Its retail sales have dropped for five straight years, and managers complain about deteriorating stores. Meanwhile, Sears is pouring its money into risky, esoteric investments to generate huge returns for shareholders.

The man orchestrating this makeover is Edward S. Lampert, 44, who by many accounts is a brilliant and controversial hedge fund trader. As chairman of Sears Holdings, which includes Kmart and Sears Canada, Lampert is a startling example of the new avant-garde of Wall Street -- alternative investors who have the power and money to acquire and radically transform large traditional businesses.

Lampert's management of Sears Holdings, the nation's third-largest retailer, has been a departure from long-established industry practices -- using extra cash to improve stores or earn a small amount of interest. That has stirred anxiety among former executives who fear the iconic brand could be dying. Their concerns are being heightened by retail analysts who predict the company will shed hundreds of stores.

"I do think the company is in a spiral which, if it doesn't pull itself out of, is likely to face at minimum an uncertain future," said Arthur C. Martinez, who led Sears in the 1990s.

But, if Sears the Retailer is ailing, Sears the Hedge Fund has never been healthier. Hedge funds are massive unregulated investment pools typically open to only institutional investors and wealthy individuals. The company's stock soared 45 percent in 2006, driven by high-risk trades that produced $101 million, or a third, of Sears Holding's pretax income in the third quarter. These investments did not perform well in the fourth quarter, and the firm had to sell off properties to cover its losses, according to a Morgan Stanley report.

"It's clearly not your traditional retail business," said William Dreher, a Deutsche Bank retail analyst who dubs the firm the "working man's hedge fund."

Dreher said: "The classically trained retailer focuses on same-store growth, market share, store spending. These are the keys to traditional merchants. They are not the keys for Lampert."

More than a few Wall Street analysts label Lampert as "the next Warren Buffett," the billionaire investor, for having the insight to buy two troubled retailers, Kmart and Sears, on the cheap and then use their cash flows to fund his investments. In 2003, Lampert gained control over Kmart and helped it out of bankruptcy protection by cutting costs and selling off poor-performing stores. He announced an $11 billion buyout of Sears in 2004.

But some who have crossed Lampert in his dealings say he is ruthless. Traditional retailers add that they doubt whether Lampert's singular focus on profit can work in the long run -- he may cut spending so drastically that stores will stop attracting shoppers.

Lampert's detractors point to a worrisome trend: Overall same-store sales for Sears Holdings have dropped for five years, with the Sears component performing particularly poorly. In 2006, sales at Sears stores dropped 6.1 percent, while Kmart sales were down 0.6 percent.

"As those comparable-store sales decline it means you are losing customers and they are finding solutions to their needs elsewhere," said Martinez, the former chief executive who is credited with leading a revival at Sears in the 1990s and retired in 2000. "And it is unlikely once they find those solutions they will ever return."

Under Lampert, Sears has spent far less on its retail business than competitors. Gone are the days of heavy television promotions such as the "softer side of Sears." The Sears Roebuck Foundation, the firm's charitable arm, has dried up in generosity, several Chicago-based institutions such as the Children's Museum report.

Hundreds of poor-performing stores are being allowed to deteriorate, according to analysts and interviews with store managers. A sign of this can be found in the company's financial statements. In 2005, Sears' first full year under Lampert, the firm recorded that its buildings and other assets lost $1.1 billion in value, but it spent only half that maintaining and upgrading its properties.

Meanwhile, Lampert has amassed a war chest worth about $3.3 billion in cash.
Some Wall Street analysts speculate this kind of build-up is a prelude to making a huge acquisition. But others say Lampert will use the money for his financial trades.

It's hard to know for sure. Lampert is secretive about his company's direction. He has canceled investor conference calls and rarely grants interviews. He even obtained special permission from federal regulators to delay the reporting of trading activity -- a consent granted to a small number of investors.

Lampert, through a spokesman, declined comment for this story. Aylwin B. Lewis, Sears Holdings' chief executive, also declined comment. But in a letter to shareholders, Lampert played down the risks to his strategy.
Without being specific, he stressed his intention to expand Sears slowly despite falling sales and limited capital spending.

"Some commentators have asserted that we want to shrink the company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not," he wrote.

Lampert has defied his detractors throughout his career. When he left Goldman Sachs in 1988 to start his own financial firm at age 26, some of his bosses thought he was reckless. But since then, Lampert's hedge funds have averaged close to a 30 percent return every year, a claim few traders can equal. With a net worth of $4.5 billion, he is estimated to be Connecticut's wealthiest man.

Lampert also has shown a steely resolve -- personally and professionally.

In the middle of negotiating the deal for Kmart in 2003, Lampert was kidnapped in the parking lot of his firm and held for a $5 million ransom. He talked his abductors into releasing him by promising them $40,000 but did not end up paying them a penny. Within days, he was back at work on the Kmart deal.

He tried to strong-arm stockholders of Sears Canada last year to sell their shares to him at a discount. The deal fell through when the Ontario Securities Commission ruled Lampert's tactics -- which included an illicit sweetheart deal to institutional investors -- violated securities laws.

At Sears, Lampert has been undeterred about cutting costs and focused on selling high-margin products. He has experimented with turning Kmart stores into new formats called Sears Grand, which offer items ranging from milk to appliances and are designed to compete with Target and Wal-Mart.

Ron Culp, a former Sears senior vice president, said drastic moves were needed at Sears because of intense competition from discounters. "Lampert's certainly ruined a lot of lives, but at the same time there was fat in the system that he was allowed to eliminate," he said.

But skeptics point to a downside to this strategy. On the day after Thanksgiving last year, the shopping day known as Black Friday, few customers visited the new Sears Grand outside Cleveland, analysts from Morgan Stanley reported. In his letter, Lampert acknowledged that the company has struggled to find the right product mix in the new stores.

The contrast in declining sales and soaring stock price has left those who devoted their careers to Sears with mixed feelings.

"Lampert is certainly not a merchant," said Ronald Olbrysh, chairman of Sears' 25,000-member retirement association. "He is doing extremely well for the shareholders, but whether or not the retail side survives is another question."

The Wishbook from Sears had everything, it seems.
Well, maybe not the book, but ...
By Anita Houk - Memphis Commercial Appeal
March 11, 2007

HOW WE MET...HELEN TOLBERT AND RALPH TOLBERT

I remember the first day I saw Ralph in the office: He had on blue jeans and a striped sweatshirt. He was a fast mover and he loved to sing. He'd be working away and be singing "The Last Time I Saw Paris."

Later -- a long time after we first met -- Ralph did take me to Paris. We even retraced the route he once rode down the Champs-Elysees, back when he was an Army medic taking a wounded man to a ship back to the States.

Ralph himself came back from World War II in March 1946, back to Memphis and to a job at Sears Crosstown, on Cleveland.

That's where we met. I'd only recently moved to Memphis -- I'm from Hardeman County, oldest girl of nine children. I'd started that January at Sears.

A gentleman who worked with us kept coming to me saying, "Helen, I want you to meet Ralph. He's single and you're single."

I said, "No, no, NO!"

One day I had to send some things down the chute from the ninth floor, and when I set the merchandise down on a desk for a moment, Ralph appeared from out of an aisle.

"Say, Helen, how about stepping out with me tonight?" he said.

"They put you up to this, didn't they?" I said.

"Oh, no, no," he insisted.

Boy, all of them burst out of the aisles just dying laughing. Well, I had on a red-checkered plaid blouse that day, and later they told me, "Helen you turned red from your blouse to your hairline. I felt sorry for you!"

I did not tell Ralph yes -- not yet. For about a month he kept asking, and finally I told him, "You all have had your fun, and I wish you'd leave me alone."

He said, "I'm really serious, Helen. Would you go out with me?"

Honey, that shook me up. I told him I'd have to think about it.

He was from Memphis and I tried to find out about him, but couldn't find much. I was very careful in Memphis, because I didn't know my way around too well. As time went on and I talked to different ones, I found out he'd graduated from Tech High and worked briefly for Sears before he turned 18 and got drafted. It sounded like he'd be all right.

Every day or two he'd ask if I'd made up my mind. One day I told one of the girls I worked with, "If he asks today, I'm going. I know he doesn't have a car, so we'll be going by bus and I'll know my way home."

Just before we were to leave work, I mentioned to my girlfriend, "You know, he hasn't said a word today." Much later I learned that that very day he'd decided he would not ask me any more. But my friend went around and told him that if he asked that day, I'd go.

So he did, and I did. We were to go to a ball game at Russwood Park, and it just poured down rain; so, we canceled that. Our first date was June 1, 1946. We went downtown and had dinner and a movie ("The Bandit of Sherwood Forest," with Cornell Wilde and Anita Louise.) We started dating, and in October he told me he couldn't live without me (I can't believe I bought that!) and gave me my ring. We were married March 16, 1947, by Dr. M.C.
McPherson at St. John's United Methodist Church. We are active there still.

We spent our lives working at Sears. He worked there 45 years. Mine combined was 35: 11 years, then home with our daughter, Patricia, and back part-time
24 years.

Sears was just like a big family. There were so many brothers and sisters; husbands and wives met there, and then there were parents and children.

Ralph and I, we always kidded that because we found one another at Sears, we got that Sears guarantee.

We used to say, "Just remember, if you get dissatisfied, I'll just take you back and get the money back!"

-- Helen Tolbert, Memphis

Look Abroad, Wal-Mart
Public-Relations Blunders Draw Unwanted Attention; Tickets to China, Mexico?
Comment from Breakingviews - Wall Street Journal
March 8, 2007

Chronic public-relations battles are eroding the value of Wal-Mart Stores.

Monday's disclosure that an employee spied on critics is just the latest of the retailer's blunders. Incidents like this don't just increase legal costs; they combine with concerns over its business practices to anger consumer-advocacy groups and politicians. To combat this, Wal-Mart needs more than a better PR firm -- it needs a substantial change in strategy.

Part of the problem is Wal-Mart's size. Its U.S. sales account for more than 2% of the country's gross domestic product. The company appears to recognize this -- it has decided to limit its retail square-footage growth to about 7% a year. But it should go a step further. It is time for Wal-Mart to redirect more of its ambitions overseas.

This would have two benefits. First, its efforts to expand in heavily urbanized, and unionized, regions like the Northeast generate unwelcome political heat. Slowing that growth might lower the temperature. Second, Wal-Mart has admitted its new stores in the South and Midwest are cannibalizing business at existing outlets. So its return on investment from launching stores in the U.S. is falling.

Running its existing U.S. business to generate cash for investment overseas has a number of benefits. International sales, which account for a quarter of Wal-Mart's revenue, grew 30% last year. Even at warp speed, Wal-Mart has a decade before it runs out of room to grow in China or Mexico -- countries where its smiley-face logo remains popular. Moreover, its overseas sales are more profitable. Its return on capital invested in Mexico is above 25%, according to A.G. Edwards, about double what it makes at home.

Shareholders would probably back a change in strategy. Poor public perception and falling returns have damaged the company's stock. The shares have lost about a quarter of their value over the past five years. And where they once traded at a multiple of 40 times Wal-Mart's earnings for the previous year, that ratio is now just 17. If the company realizes its future lies in Mexico, not Massachusetts, investors could get another bargain from Wal-Mart.

--Rob Cyran, Janet Al-Saad and Antony Currie

* This column is written by breakingviews.com1, an online financial commentary site.

Sears to Build 1 Million Square Foot Distribution Center Near Scranton, Pennsylvania
Expansion Management - Cleveland, Ohio
March 8, 2007

SCRANTON, Pa.  The state offered the company $90,000 in Customized Job Training funds to help train its new employees.

Sears, the nation¹s third largest retailer, will establish a new distribution center in Lackawanna County, Pa., that will add 200 jobs and inject $6.2 million into the region¹s economy.

The 200 positions to be added over the next three years are on top of the 20,000 Pennsylvanians already employed by the company. A significant number of truck driving positions will be created indirectly to support operations at the new distribution facility.

Sears will lease a 1 million square foot, build-to-suit distribution facility from First Industrial Realty Trust, which will support its stores in Pennsylvania, New York and New Jersey. The company expects to be fully operational by this fall.

"We are very excited about this new facility, which will serve as a vital link in ensuring that merchandise arrives at our stores and to our customers in an efficient and effective fashion," said Aylwin Lewis, president and CEO of Sears Holdings Corp. "We¹d like to thank Governor Rendell, the Governor's Action Team, the Greater Scranton Chamber of Commerce, and the Department of Community and Economic Development for their commitment to this project and for their partnership."

With the help of the Greater Scranton Chamber of Commerce, DCED offered the company $90,000 in Customized Job Training funds to help train its new employees.

Sears¹ new distribution facility will also be located in a Keystone Opportunity Zone, a state-designated area that provides certain tax abatements through 2013 in order to attract new economic development.

Aeropostale names Mindy C Meads as president and CMO
Just Style.com
March 8, 2007

Youth apparel retailer Aeropostale Inc has appointed Mindy C Meads as president and chief merchandising officer.

Ms Meads has more than 30 years experience in the retail industry expertise, spanning children's, juniors, women's and men's apparel.

She most recently served as president of Victoria¹s Secret Direct, a division of Limited Brands. From 1998 to 2005 she served in senior executive positions at Lands' End, Inc/Sears Holding including president and chief executive officer, executive vice president Sears Apparel and executive vice president Lands' End Apparel and Sourcing.

Aeropostale currently operates 728 Aeropostale stores and 14 Jimmy'Z stores.

Wal-Mart Execs Amuse Themselves Playing Favorites
By Kris Hudson - Wall Street Journal
March 7, 2007

Wal-Mart is different from other retailers. That was already apparent when the company's founder, Sam Walton, decided he could sell more Moon Pies by giving the marshmallow treats some special attention. He embraced them as his own, personal VPI, which in Wal-Mart Speak means Value Producing Item, and did all he could to get them to fly off the shelves. Mr. Walton died in 1992, but company executives are still at the VPI thing and having tons of fun.

In late 2005, Unilever made a special pitch for its environmentally friendly All Small & Mighty laundry detergent to Wal-Mart Stores Inc. Chief Executive Lee Scott.

A trading card featuring Wal-Mart Vice Chairman John Menzer as a superhero, as part of a Kellogg promotion. Mr. Scott, who had pledged to make Wal-Mart a green company, was so impressed he designated the product one of his personal VPIs for 2006, and from then on did everything he could to sell the detergent. He touted it in a TV interview with Charlie Rose and urged Wal-Mart employees to give it prominent display in stores.

The detergent rang up $100 million in U.S. sales last year, its first full year on the market. And Unilever executives estimate that Mr. Scott was responsible for 15% to 20% of that. "It was our most successful new-item launch" of 2006, Unilever Vice President Joe Cavaliere says.

The Wal-Mart VPI program encourages each of Wal-Mart's 1.8 million employees around the world to choose a product as his or her pet project for the year. A lot of the marketing goes on behind the scenes. At company conferences several times each year and internal company broadcasts each Saturday, high-ranking executives can push their VPIs to lower-level employees who control display space at stores.

The designation, especially for products selected by executives, ensures that a product will get special treatment at the world's largest retailer. Store employees, who sometimes adopt their bosses' VPIs as their own, give their pet products the spotlight and dream up offbeat marketing gimmicks to promote them. Store workers who push their chosen VPI to top-seller status can reap cash prizes of up to $500 and trips to Wal-Mart's annual meeting in Arkansas, a raucous celebration more like a rock concert than a typical corporate get-together.

Mr. Walton cooked up VPI decades ago to inspire employees to push certain items without relying on the sales promotions common to other retailers. Mr. Walton picked Moon Pies as an early VPI but they never did sell as well in states like Wisconsin as they did in Tennessee. "The people up there never heard of Moon Pies before, and they weren't too interested in learning about them," Mr. Walton wrote in his autobiography.

The outdoorsy Mr. Walton later chose a minnow bucket as a VPI. Eventual CEO David Glass instructed several store managers each to fill the buckets with ice to cool samples of his own VPI -- Seneca apple juice -- which were then handed out to shoppers at store entrances. "I particularly did it in stores I knew he was going to visit," Mr. Glass said in Mr. Walton's autobiography. "It drove him crazy, and he got off that minnow bucket pretty quick."

Former Vice Chairman Tom Coughlin, currently serving a 27-month home-confinement sentence for wire fraud and tax evasion, was the king of VPIs before he fell from grace. He once packaged together duct tape and WD-40 lubricant as his VPI. Employees deemed it "the perfect redneck gift," says Mr. Coughlin, reached at home.

At a meeting of Wal-Mart's store managers in 2002, Mr. Coughlin and former Wal-Mart executive Bob Hart put on boxers' robes and gloves and climbed into a ring to try to spur sales of their respective VPIs, both Nabisco products. Actor Carl Weathers -- who plays Apollo Creed in the "Rocky" movies -- served as Mr. Coughlin's trainer. Mr. Hart's trainer, actor Mr. T, did some woofing in Mr. Coughlin's corner before the fake bout. "We staged it where Bob pasted me one time pretty good," Mr. Coughlin recalls.

That same year, Anheuser-Busch Cos. promoted its Bud Light 20-pack -- the chosen VPI of merchandising executive Doug Degn -- by producing a video based on its "Whassup" commercials to be shown at a big conference of Wal-Mart managers early in the year. The three-minute video portrays a conference call in which 15 high-level Wal-Mart executives -- including Mr. Glass and CEO Scott -- blurt "Whassup?" into their phones with their tongues hanging out of their mouths. The campaign helped propel the 20-pack that year to become a top-selling product in Wal-Mart's beer aisles.

Manufacturers pull out all the stops to get Wal-Mart executives to pick their products as a VPI. Kellogg Co. promoted its Special K cereal as a 2003 VPI by distributing collector cards within Wal-Mart's ranks depicting Wal-Mart executives as superheroes. One card has a doctored photo of Wal-Mart Vice Chairman John Menzer in a tight "Captain Wal-Mart" outfit. Mr. Menzer signed on to tout Special K, but company officials couldn't say whether that was before or after the "Captain Wal-Mart" card was made. Kellogg declines to discuss the program.

Last year, General Mills Inc. found an unexpected champion for its Cheerios cereal as a VPI. General Mills discovered that Pam Pike, a two-decade Wal-Mart employee in Bentonville, Ark., had shed 50 pounds by eating Honey Nut Cheerios, reducing her meal portions and walking for 30 minutes a day. General Mills stationed in Wal-Mart's headquarters cafeteria a life-size poster of Ms. Pike touting Cheerios and printed her weight-loss story on fliers it distributed to Wal-Mart workers. Mr. Scott, Wal-Mart's CEO, chose Cheerios as one of his VPIs that year. And Ms. Pike, now 57 years old, has lost an additional 14 pounds.

Now, Wal-Mart, under relentless attack from unions and other critics, is trying to change its image1. And the VPI program has changed along with it, losing some of its wackiness. Unilever's All Small & Mighty won Mr. Scott's nod for 2006 just a few weeks after the CEO made a major speech pledging to cut Wal-Mart's waste and rely more on renewable energy.

Unilever executives met with the CEO in November 2005 to outline how the detergent could save 4.3 million gallons of water, 30,000 gallons of diesel fuel, 1.3 million pounds of plastic resin and 6.8 million square feet of cardboard over a year. It could do so, they said, because it is concentrated to one-third the volume of regular 100-ounce bottles yet does the same number of washes. Unilever then played a PowerPoint presentation listing the product's advantages, accompanied by the score of "2001: A Space Odyssey"
and images of an astronaut walking on the moon.

Mr. Scott became a missionary for the product. While taping a segment of the "Charlie Rose Show" on PBS last year, Mr. Scott hoisted a bottle of All Small & Mighty and rattled off its environmental benefits.

Unilever did its part by temporarily lowering the price so Wal-Mart could sell a bottle of the stuff for $3.98 last year instead of its usual $4.37.

There is no limit to how many Wal-Mart employees can pick a product as their personal VPI, so Unilever didn't stop with Mr. Scott. Unilever tried to enlist more champions within Wal-Mart with tactics such as placing signs in the parking lots at Wal-Mart's Bentonville headquarters stating "Pick All Small & Mighty as your VPI" and "One small step for man, one giant leap for mankind."

Message from the Chairman
From Sears Retirees Website
March 1, 2007

To Our Shareholders:

We completed our first full fiscal year as a combined company on February 3, 2007. Consistent with the practice initiated last year, I will use this opportunity to look back and to look ahead. I will discuss some of the challenges we have faced and the progress we have made thus far. And, more important, I will address the challenges ahead of us and offer my perspective on the future of our Company.

2006 and Fourth Quarter Financial Performance

For the 2006 fiscal year we reported net income of $1.490 billion, up from $858 million in reported net income for fiscal 2005. On a per-share basis, earnings were $9.57 in 2006, as compared to reported earnings per share of $5.59 last year. For the fourth quarter of 2006, net income was $820 million ($5.33 per share), as compared to $648 million ($4.03 per share) in the fourth quarter of 2005.

Because GAAP net income includes more than just operating results (it also includes financing and investing results), we use an Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) measure to evaluate operating performance. It is called "Adjusted" EBITDA because we also exclude certain transactions (like gains from asset sales) that we believe are not reflective of ongoing operating performance. For the 2006 fiscal year we generated $3.657 billion of Adjusted EBITDA, an increase from prior years as follows:

The "pro forma" Adjusted EBITDA figures for 2004 and 2005 are derived by combining the results of Kmart and Sears, Roebuck for those years - i.e., using an assumption that the two companies were already merged at the beginning of the 2004 fiscal year. Please see our earnings release issued today for a full reconciliation of Adjusted EBITDA to GAAP net income.

Challenges and Successes in 2006

As the above numbers show, we improved our EBITDA this year - which I consider a significant achievement in the context of the third-warmest December on record and a slowing housing market. While that provides an overall snapshot of the Company’s performance, drilling down to examine the business close-up is instructive and reveals some ups and downs. I have described Sears Holdings as a start-up, and like all start-ups we should expect to experience rapid changes as well as our share of both challenges and successes. That was certainly the case in 2006.

First, the challenges. It is absolutely clear to me that we had it within our capabilities to overcome the fourth quarter headwinds, had we executed better within a number of our businesses. Lawn and garden and home fashions are two examples of businesses where the failure to perform in 2006 was largely our own. We have not yet found the right formula for Sears Grand (originally called Sears Essentials) as an off-mall offering for Sears. We are aware of the success of our off-mall competitors in many of our core businesses. We remain convinced that this represents a big opportunity for Sears Holdings, and we continue to work at identifying the right formula for success off-mall.

Facing these and other major challenges, we are learning what it means to be accountable across the organization. As in any good start-up, each of our executives needs to be responsible for the performance of the business as a whole. Our compensation philosophy, which I address below, strives to align our senior leadership on common goals and a common mission for the organization.

While it is important to acknowledge these challenges, it is also worth pausing to recognize some of the major successes we achieved in 2006. Many areas showed significant improvement, a number of which stand out and warrant mention here.

Lands’ End had a record year in profitability in its traditional business (i.e., catalog, online, and inlet stores). In addition, we saw a significant improvement in the profit performance of Lands’ End merchandise in our Sears stores. With a new leadership team and a more integrated approach to working across Sears Holdings, the business is moving in the right direction. Our customers are embracing the opportunity to buy Lands’ End quality merchandise in our stores, on the phone, and on the Internet, and we are working hard to make Lands’ End available across more of the chain.

Home Services is another business that achieved a record year of profitability in 2006. Home Services is not only a highly profitable business for us, but also an important strategic asset as it provides a point of differentiation from many of our competitors.

The apparel businesses at both Kmart and Sears also showed continued improvement. Kmart is further along in partnering with our sourcing and design groups, and we believe that we have improved our offering for our customers with higher quality, better fit, and appropriate fashion at great value. Sears apparel has turned around the decline that occurred in 2005 when it moved away from the styles our customers wanted to buy. The team has made significant progress this year, and is focused on creating the kind of breakthrough improvement that would return Sears to its previous levels of profitability in this area.

More broadly, I believe that the Kmart business is showing signs of being more stable overall: Despite continued pressure from competitor expansion, comparable store sales were relatively flat for the second straight year, with 2006 comps at -0.6% (after 2005 comps of -1.2%).

And our successes have not been limited to the front lines. Our supply chain has continued to improve, and its increased efficiency and focus on our businesses are vital to our overall success. Information Technology has become a fast enabler for problem-solving, with a can-do team accustomed to setting challenging goals and achieving them. And our online business is focused on transforming itself. We recognize we have significant competitors in this area (including the online leaders without brick-and-mortar operations), but we are committed to incorporating the online experience into the core of our customers’ relationship with us.

We will never bat 1.000 - no company will. Every year will, like 2006, bring its own mix of strong performances and weak ones. But it is important and instructive to take a frank look at both successes and challenges, to understand not only what has worked but also what our opportunities are going forward.

Cash Flow and Balance Sheet Capacity

While we like to think of ourselves as a start-up, we are different from most start-ups in our cash flow generation. Since the merger closed in 2005, we have demonstrated a consistent ability to generate cash flow. This strong source of cash provides us the flexibility to deploy capital in the manner that we believe is best calculated to create long-term shareholder value. Domestically, we generated $1.69 billion of after-tax cash flow in 2006, in a year in which our inventory increased by $822 million.

We allocate capital to initiatives that we believe will provide the greatest returns and create the most value for our shareholders. 2006 was no different, as we deployed $2.14 billion of capital to repurchase shares, invest in our business, and reduce debt, as follows:

$816 million used for share repurchases (we repurchased over 6 million shares in the year at an average price of about $133 per share);
$474 million used for capital expenditure reinvestments in our businesses;
$318 million contributed to fund our legacy pension obligations;
$282 million used to purchase an additional interest in Sears Canada. Our ownership level is now 70%, up from 54% last year; and
$250 million used for net debt reductions as our domestic debt balance declined to $3.0 billion (or $2.3 billion excluding capital lease obligations).

We have improved our operating performance, as well as the strength of our balance sheet. The Company’s outstanding debt is small relative to our enterprise value. In fact, we ended the year with more cash on hand than debt. On a combined basis (including Sears Canada) we have $4.0 billion of cash and only $2.8 billion of debt (excluding capital lease obligations of $0.8 billion). Domestically, our $3.3 billion of cash exceeds our debt balance of $2.3 billion (excluding $0.7 billion of capital lease obligations).

Furthermore, approximately $350 million of the outstanding domestic debt represents borrowings by our Orchard Supply Hardware subsidiary, which is non-recourse to Sears Holdings. Despite the conservative nature of our capital structure and our improved profitability, the rating agencies have not upgraded us and continue to hold a non-investment grade rating on our debt. We believe Sears Holdings is an investment-grade company; the lack of response by the agencies is puzzling and is certainly something we continue to hope will change. Then again, we have taken these measures not out of a desire to please the rating agencies, but rather because we believe they are the right moves for our Company at this time.

As noted above, our year-end domestic inventory balance increased by $822 million over last year, to $9.2 billion. The increase is due to a number of factors, including timing of inventory receipts ($200 million) primarily due to earlier receipt of spring goods and a higher level of in-transit import inventory; planned increases in certain basic fashion categories ($130 million); and increased inventory in hardline categories ($120 million) to place Sears products (Craftsman and appliances) in Kmart stores and pursue incremental home decor / furniture business. About $140 million of the inventory increase is attributable to lower-than-expected sales levels.

All retailers face the challenge of determining an optimal level of inventory for their stores, balancing the goal of satisfying customers (by carrying broad assortments of product and maintaining high in-stock levels) against the financial cost of carrying such goods. We are diligently working to improve our analytical capabilities and operating disciplines so we can optimize our investments in inventory. Toward the end of fiscal 2005, we cut purchases of spring product in our Sears apparel and home fashion categories while we worked to improve the merchandise assortments in those categories, which were struggling at the time. As a result, we believe our overall inventory levels at the end of fiscal 2005 were probably lower than optimal. Moreover, some of the inventory increase in 2006 reflected conscious, accelerated buys that we believed made economic sense. This is a key point. Being a large, well-funded company provides us with the ability to capitalize on market opportunities as they come up, including those arising in inventory management. And while we have certainly not yet optimized our inventory investment (our inventory levels at the end of this year may have been higher than required by the business), we are working to become much smarter about managing this key asset. Please be assured that we are very focused on improving our inventory productivity while not compromising our customer experience.

Pension Liabilities Revisited

Last year’s Letter to Shareholders addressed our Company’s pension obligation as well as the overall pension regulatory environment. It is a good time to update those comments to reflect the events of 2006.

In 2006 our Company’s unfunded U.S. pension obligation decreased by almost $800 million - from over $1.8 billion last year to less than $1.1 billion this year. The decrease was attributable to the following three factors:

Funding. We contributed $318 million to our U.S. pension plans in 2006.

Favorable investment returns. The pension plans are funded with a substantial amount of assets (over $4.5 billion) to meet our pension obligations to current and future retirees. These pension assets are invested in financial securities by professional advisors and 2006 was a good year for investment returns. Indeed, our pension plan assets returned over 11% in 2006, exceeding our 8% expected return on these assets.

Actuarial gains. Calculating pension liabilities is a complicated concept because large numbers of uncertain future events are involved. It is important to understand that this calculation is an estimate of today’s cost for payments that will occur in the future. To develop that estimate requires professional actuaries to predict future events for hundreds of thousands of individuals (for example, how long will they work and receive benefits?). Then the estimated future payments have to be converted to today’s dollars using current interest rates. As last year’s letter noted, the reported amount of the pension liability is very sensitive to changes in the interest rate used to convert it to today’s dollars. Interest rate changes are by far the largest driver of actuarial gains and losses. In 2006, interest rates increased so that the rate used to convert the future payments to today’s dollars rose to 5.9% (from 5.5% last year), resulting in a reduction of approximately $300 million
in the pension obligation.

This summary illustrates how pension funded status can swing significantly in relatively short time periods. This is something that I believe was not adequately taken into account by the Pension Protection Act ("PPA"), which was enacted in 2006. Generally speaking, the PPA accelerates pension funding requirements so that a pension plan will be fully funded over a seven-year period. While it is our intention to fully meet our pension obligation, it was never our intention to fully fund the obligation, especially in today’s low interest-rate environment. Instead, we targeted funding 90% of the obligation in order to avoid creating a pension surplus. Surpluses are undesirable because they effectively "trap" assets: Once amounts are contributed to a pension plan, it is extremely difficult and costly to recapture them, even if the plan later becomes overfunded. We feel that the PPA is unduly burdensome to the companies sponsoring pension plans because it requires that estimated pension obligations be fully funded, but provides no practical means for a company to bring back excess assets if a plan becomes overfunded. A full-funding requirement should be accompanied by a mechanism for companies to easily and cost-effectively recapture any excess funding.

It also bears mention that the PPA further increased the fees that pension plans pay the Pension Benefit Guaranty Corporation ("PBGC"). In considering this issue, it is important to keep in mind that companies with pension plans do not have the choice of opting out of participation in the PBGC. Rather, the PBGC is a mandatory, government-imposed program, funded only by the dwindling number of companies that have pension plans. The PBGC annually assesses us $31 for each person in our pension plans, for a total annual cost of more than $11 million. Furthermore, we are subject to additional PBGC fees based on our funding level, and those fees could amount to an additional $10 million per year. Sears Holdings and other pension plan sponsors pay for the ills and legacy decisions of the airlines, steel companies, auto manufacturers, and others - while more recently established companies do not shoulder this burden. This hardly seems appropriate in our competitive marketplace.

Derivative Instruments

Our disclosure in 2006 that we had entered into total return swap transactions generated a fair bit of media attention and speculation. Perhaps this was prompted by the disclosures that we provided relating to the risk of the investments. As we disclosed in our filings, these total return swaps are derivatives, a term used broadly to describe a vast spectrum of financial instruments, which often have very different characteristics and purposes. Derivatives are so labeled because their value is tied to, or "derived" from, the value of one or more defined underlying indices, prices, or other variables. But it is important to remember that derivatives come in a myriad of forms and carry various levels of risk.

In our case, we entered into total return swaps, whose value is directly derived from changes in the value of the underlying securities. We could have purchased the underlying securities directly, but we elected to make our investments in the form of total return swaps because it can be a more efficient and cost-effective means of managing capital. As of February 3, 2007, the notional value of these derivatives was less than $400 million.

While we chose to include risk disclosures to make clear that, as with all investments, there is risk associated with the total return swaps, it is also the case that every company takes risks every day. Indeed, business is about managing risk. When these risks come in other forms, they are not always accompanied by the same level of detailed disclosure in public filings. Doing business in California will always carry "earthquake risk" and doing apparel business in winter clothing will carry "weather risk." Investors and executives focus on some of these risks and tend to overlook others. If a company’s risk-management process is a robust one, the level of focus will be proportionate to the amount of risk and the probability of the risk occurring, as well as whether or not the risk can be effectively managed. At Sears Holdings, we try to manage risk in an effective way - whether it is in our investment decisions, our real estate decisions, or our product line decisions - and we are
prepared to take risks where we believe the probability of success justifies the investment. We will not always be successful, but if we do a good job of evaluating opportunities and executing on them, we believe that our shareholders will be well rewarded.

A Strategy of Disciplined Growth

As we look ahead, I want there to be no doubt about one thing: It is certainly our intention to grow Sears Holdings. Some commentators have asserted that we want to shrink the Company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not. But before embarking on a growth plan, it is critical to provide a sound base from which to grow. To this end, we have set out to improve the profitability of our business model. Our objective is disciplined growth. We do not want to grow simply for the sake of becoming bigger. Rather, our aim is to become more profitable, and as such we need to ensure that any revenue growth occurs at an appropriate level of profitability.

Since the closing of the merger in March 2005, we have significantly improved the profitability of our business. We have done this in large part by eliminating unprofitable sales and by challenging our expense structure. Certainly, we will continue to perform these tasks routinely in the future. But in order to reach the level of profitability we believe we can achieve, we must do more. To succeed, our Company will have to think differently and become more innovative - in both the products and services we offer and the manner in which we offer them.

A fundamental part of this effort is improving our understanding of Sears Holdings’ customers, including existing customers, former customers, and potential customers. Our Chief Executive Officer Aylwin Lewis and I have been emphasizing this point in Hoffman Estates, both at town hall meetings and in informal discussions with associates. This sounds like it should be fairly simple: After all, our associates not only serve customers but are themselves customers. But in practice, understanding customers is a challenge for every retailer (indeed, for every business). We need to listen to our customers, to learn what they want to buy, how and where they want to buy it, and the different ways they prefer to be served. We have to become responsive to the needs and wants we uncover. And as these needs and wants change, we will have to be innovative to continue to serve our customers effectively. All this will be more challenging than what we have accomplished so far, but it is crucial in order to achieve disciplined growth in a manner that is attractive for shareholders.

"You Can’t Cut Your Way To Success"

In charting a path toward disciplined growth, it is worth exploring the role of spending cuts. The expression "You can’t cut your way to success" often surfaces when someone suggests cutting spending for one resource or another. But this maxim, like so many others, can be more or less true depending on context. If the context is a company like IBM in the early 1990s - where cuts had previously never been a way of life and where far too many resources were dedicated to far too many projects producing far too little benefit - then it is hard to dispute that spending cuts were a prerequisite for success.

Healthy companies stay that way by constantly reevaluating their resources and their decisions and pruning spending that doesn’t make sense. Just as it is important to prune a tree or a garden or even a wardrobe, it is critically important to prune a company, not as a one-time event, but on an ongoing basis. Words carry meaning, and the idea of "cutting" carries a lot of baggage; but in reality the best companies in the world are ones that constantly reallocate resources in order to deploy them in other, more productive areas.

Spending reductions can be achieved fairly quickly in most instances. Investments, by contrast, often take months or years to be developed and implemented. Ordinarily, at healthy companies both are going on all the time, and at the same time. Turnaround situations, by contrast, highlight the inconsistent timelines between spending reductions and investments, and increase the risk of doing both. However, doing neither is not an option. I have yet to see a company turn itself around without addressing the spending part of the equation, or become great without making the appropriate investment decisions. At Sears Holdings we are working to address both sides of the ledger.

Compensation

Perhaps the most critical investment decision is the decision to invest in the people that make up a company. I have always believed that people should be paid for performance. This is something I learned first-hand working at Goldman Sachs, and I have gained a greater understanding of the value of this philosophy as an investor. If ESL Investments, of which I am chairman and CEO, is not providing attractive returns to its investors, they will choose to invest elsewhere.

It is not always easy, however, to set the appropriate measurements for performance-based pay, and a company can easily lose its way in attempting to do so. For example, many corporations embraced the notion of pay-for-performance and sought to compensate individuals deep in the organization on that basis. Through the use of stock options, these companies based their "pay-for-performance" system on stock price volatility. This proved to be a particularly tempting approach when a rising stock market made option-based compensation a sure thing for employees and a way for executives to quickly create wealth for themselves as a result of short-term price movements that may or may not have been related to the health of the associated company.

I believe one of the causes of the many well-known accounting abuses was this myopic focus on moving share price by driving short-term earnings. As we have explained, we do not attempt to manage earnings or expectations, we generally do not meet with Wall Street analysts, and, except in a few select cases, we have not provided options to our associates. Stock options can play an important role in compensation arrangements if handled correctly, and many companies have used them to motivate and compensate their executives and employees appropriately. The requirement that companies account for stock options as an expense is helpful in highlighting to investors and directors the cost of these programs.

At Sears Holdings, we have linked a very significant part of our executives’ variable compensation to the EBITDA of Sears Holdings or one of its businesses, adjusted for certain items that are not within the control of our associates. We consider EBITDA a superior measure of operational performance, as it provides a clearer picture of operating results and cash flows by eliminating expenses that are not reflective of underlying business performance. We have both a one-year EBITDA goal used for annual bonuses and a longer-term goal that is generally based on EBITDA performance that we have used for our Long Term Incentive Plans (LTIPs). Unlike some companies, which set targets at levels that are difficult to miss, we set targets that are achievable but require us to perform - it is important to set goals that challenge and stretch us.

It has been difficult, in a Company that previously operated in distinct silos, to create accountability for performance across the Company, not just in one’s division or region. We are in the process of creating a culture of accountability and cross-functional collaboration. Our mission is exciting, challenging, and unique, and we are assembling a team of executives who are motivated by the challenge of completing that mission and not just by a paycheck. As most observers realize, retail is an industry that often experiences significant executive and employee turnover for a variety of reasons. In particular, retail is a fast-paced, ever-changing business that requires constant innovation and reinvention. This means that job opportunities and challenges can change markedly and quickly, which can have a strong effect on what company and what job are the best fit for a given individual’s skills.

We are building a strong bench of leaders that I am personally committed to developing to their fullest potential. We invite anyone with integrity, smarts, a strong work ethic, and a team-based commitment to winning to come join us. I have always been comfortable making bets on people, judging them based on results rather than age or experience. This is the philosophy I have sought to bring to Sears Holdings, and I believe Sears Holdings is a great place for people seeking a challenge and a chance to succeed.

Retail Challenges and Opportunities

It is important each year to consider the challenges and opportunities that lie ahead for Sears Holdings, and in doing so it can be instructive to ask how we stack up against our peers. Today’s U.S. retail marketplace is characterized by fierce competition. Consumers have a wide array of choices available to them both in the physical realm and online. As we have said before, we believe it is important for Sears Holdings not only to recognize, but also to welcome, the challenge of competing against the best players in the industry.

Rather than look inward, we must always keep a vigilant eye on the needs of our customers and the behavior of our competitors. Our customers, after all, are comparing our stores and our offerings with their alternatives on a daily basis. While we have made much progress since the merger, our competitors are not standing still, so we must continue to accelerate this change in mindset and compare our performance with that of the leaders in our industry.

Benchmarking ourselves against the best illuminates the clearest opportunities for improvement, category by category. JCPenney’s turnaround efforts included a challenge to the company’s merchants to benchmark their results against those of their best-in-class competitors in each category. Based on those comparisons, in 2001, they established a target of 6-8% EBIT margins by 2005. JCPenney not only achieved that goal, but then set the bar even higher. The Company set a new goal in 2005 of 9-9.5% EBIT margins by 2009, which would put them in a position of leadership within the retail industry.

High EBITDA Standards

We too are striving for leadership - by improving our productivity and relevance in order to enhance our profitability. At present, there is a large margin gap between our business and that of the other top ten retailers by market capitalization. Among the top ten retailers, Sears Holdings is fifth in terms of sales but we are further down, at ninth, based on EBITDA margin.

With 6.9% EBITDA margins, we have the second-lowest margins among the top ten - ahead of only Costco, whose membership-based business model is by design low-margin. Today, Lowe’s, Kohl’s, Home Depot, and Target all have EBITDA margins above 10%. We also lag many of our competitors on a sales and profit-per-square-foot basis. Narrowing these gaps in margins and space productivity represents a significant value-creation opportunity for Sears Holdings shareholders.

Capital Allocation Discipline

We believe capital allocation discipline is another source of long-term value for Sears Holdings shareholders. One of our first priorities when we became involved at Kmart, and then again upon its merger with Sears, Roebuck, was to instill fiscal discipline in both expenses and capital expenditures. We want our associates to think like owners when spending shareholders’ money. We want them to act responsibly to determine the best use of our capital.

As we have said before, we do not want to spend $1 too much or $50,000 too little on our stores. Unless we believe we will receive an adequate return on investment, we will not spend money on capital expenditures to build new stores or upgrade our existing base simply because our competitors do. If share repurchases or acquisitions appear to be more productive, then we will allocate capital to those options appropriately. We will seek superior returns, wherever they may be found.

Achieving Returns for Shareholders

Many of our largest competitors, on the other hand, are primarily focused on growing their top line. To that end, and consistent with the conventional wisdom, they are quickly building new stores. This is a highly capital-intensive way to try to drive returns for shareholders, but provided the return on their investment in new stores is more attractive than their alternatives, it may be the best use of capital for them. Over the past three years, by contrast, we have shown that there are other ways to create value for shareholders. Sears Holdings’ stock has been one of the top retail performers for each of the past two years, as was its predecessor Kmart in 2004, in spite of this non-traditional approach.

We believe we have managed to create a lot of value for shareholders without excessive spending partly because of our disciplined stewardship of our shareholders’ capital. For Sears Holdings, in the near term we believe the greatest value will come not from increasing our store base, but primarily from better utilizing our existing assets to deliver more value to our customers and ultimately our shareholders.

Litigation Reform

We have a reputation for being very expense-conscious, and we do indeed challenge every expense to make sure it is both necessary and as low as possible. But one significant expense is largely out of the control of companies like ours: the cost of defending against frivolous lawsuits.

Sears Holdings faces, on average, several new lawsuits each day. Unfortunately, the current legal environment requires us and companies like us to expend tremendous amounts of resources - both money and management time - addressing or avoiding litigation that is brought with one primary goal in mind: to generate fees for plaintiffs’ lawyers.

America’s litigation crisis is well documented, and as a large American corporation we certainly witness it firsthand. In many cases, plaintiffs’ lawyers bring suit alleging millions or even billions of dollars of supposed damages. The cost of defending even one of these cases can run into the hundreds of thousands of dollars - sometimes the millions - even when the claims asserted have no basis. The lawyers who bring these cases against corporations figure that rather than paying defense lawyers and taking a chance on the judicial system, companies will pay the plaintiffs (or, rather, plaintiffs’ lawyers) to go away. They boast that if they can get a case to trial, even a case without merit, they have some chance of convincing a jury to award enormous damages. This situation is wrong, and at the end of the day it hurts our economy and costs us jobs.

I fully agree with those who have called for changes in the American litigation system. There have been some important strides made in recent years toward litigation reform - the Private Securities Litigation Reform Act of 1995 and the Class Action Fairness Act of 2005 were good steps in the right direction. But more needs to be done. Within the past few months, we have seen important reports relating to litigation reform - including the Report of the Committee on Capital Markets Regulation and the Schumer-Bloomberg Report - which rightly point out that the litigation culture in America is doing serious harm to the competitiveness of our capital markets. Litigation reform should remain a priority for Congress, and for each and every state legislature. We must develop rules that limit the ability of plaintiffs’ lawyers to game the system to collect millions of dollars for a frivolous case. We must make parties who swing for the fences in the face of countervailing facts and law pay for their decision to do so when it is unsuccessful (a loser-pays system). We must institute appropriate caps on damages and punitive awards. Of course the truly aggrieved ought to be fairly compensated; but in today’s system the big winners too often are the lawyers.

While we wait for reform, we’re doing what we can at Sears Holdings to address the situation. We run the Company with the long term in mind, and our litigation policy is no exception to that. We will work hard to prevent and defend claims against Sears Holdings. We have challenged our Company’s lawyers to try cases when doing so makes sense. This means that, from time to time, we will lose some cases. Sometimes, we may even lose big - but even then, we will continue to fight as long as we believe we are right and can find a forum that will fairly adjudicate the controversy. Over time, we believe this strategy will achieve the best long-term results for our shareholders. We know that our Company and our associates are good and fair and ethical, so we are confident we will win far more cases than we will lose.

Legacy and Heritage

As we work to modernize and improve our operations, it is important that we continue to preserve our Company’s proud and distinct heritage, which dates back to the nineteenth century.

For decades, one important aspect of that heritage has been our commitment to military servicemen and servicewomen and their families. This commitment of course long predates my own involvement with Kmart and Sears. Credit for establishing and maintaining this longstanding policy goes to our predecessors, beginning with Julius Rosenwald, and continuing with General Robert Wood and all the way through the modern era. It is a Company commitment of which we are immensely proud and which we intend to continue.

One aspect of Sears Holdings’ commitment to the military - our Military Service pay differential and benefits continuation program - has received a fair bit of grassroots attention in the past couple of years. I have seen a number of emails and blog entries about this program, most of which ask whether it’s true or an urban legend. The initial skepticism is understandable, given the unfounded rumors and exaggerations that can circulate on the Internet, but in this case the program is real. For associates of Sears Holdings (other than certain part-time and seasonal associates) who are called to duty in the National Guard or Reserve, we make up any difference between the associate’s pay at Sears Holdings and his or her military pay - for up to five years. We will also hold a comparable position for an eligible deployed employee for up to five years, and allow those employees to continue most benefits while deployed. Since 2001, we have had over 3,500 associates participate in our military leave program; at present, there are about 400 Sears Holdings associates in the program. We are proud to support these individuals as they serve our Nation.

We are by no means the only company that offers special benefits to its men and women in uniform, but we have long been at the forefront of supporting employees who make this commitment. Sears, Roebuck has provided support to employees serving in the military since World War I, and this commitment has been reaffirmed in numerous instances in recent years. Our military leave program is one prominent example, but there are many more. Over 2004 and 2005, for example, Sears, Roebuck contributed $2.5 million to sponsor Operation Purple Summer Camps, a series of camps run by the National Military Family Association for children of deployed military personnel. We also participate in several programs designed to help members of our military make a smooth transition to civilian employment upon completion of their military service.

Sears Holdings is proud that our customers have also joined us in showing this spirit. In early February, we worked with Fisher House, an organization that provides a "home away from home" for injured troops and their families. Fisher House has built 37 houses at military hospital facilities around the country and is planning to build more. Our "Have a Heart for Military Families" initiative encouraged Sears and Kmart customers to contribute to Fisher House to help make these future houses a reality, and our customers responded by donating over $300,000 to Fisher House over a single weekend.

Our commitment to military personnel and their families has been recognized by the military. In 2005, Sears, Roebuck was one of 15 companies to receive the Secretary of Defense Employer Support Freedom Award, the highest employer-support award conferred by the Department of Defense. And in 2006, Aylwin Lewis represented the Company in accepting the Distinguished Service Award from the Military Officers Association of America, in recognition of the support we give to our military associates and to military families nationwide.

While supporting military members and their families has been Company policy for more than 90 years, it is in my view especially important in times of war such as we face today. Regardless of one’s viewpoint on any particular military campaign (past, present, or future), I believe all Americans can agree that our soldiers, sailors, airmen, Marines, and Coast Guardsmen deserve our firm and unwavering support at all times - and all the more so when they are called to risk their own lives to keep us safe and defend our values and our way of life. This is the sentiment that led Sears, Roebuck to adopt its policies a century ago, and it’s a sentiment that is still strong here at our Company today. Sears Holdings is not alone in this, and many other companies - including DuPont, GE, and Home Depot - have also committed to supporting America’s men and women in uniform. It is heartening to see American corporations support those who serve proudly and sacrifice so much on our behalf.

* * * *

2006 has been an exciting, challenging, and rewarding year here at Sears Holdings. We have seen a number of successes, and I believe we have a clear idea of how to create value, grow in a disciplined way, and strive for leadership in the retail industry. We could not do any of this, of course, without your continued support as shareholders. We sincerely thank you for allowing us to work on your behalf, and we look forward to continuing our efforts in 2007 and beyond.

Respectfully,

Edward S. Lampert, Chairman

Sears chief airs gripes about lawsuits
By Ameet Sachdev - Chicago Tribune
March 6, 2007

The lawyers at Sears Holdings Corp. are very busy, according to the company's chairman.

Edward Lampert, in his annual letter to shareholders last week, laments that the Hoffman Estates-based parent of Sears and Kmart "faces, on average, several new lawsuits each day."

That Sears Holdings gets sued so often is not as far-fetched as it sounds. Deep-pocketed Fortune 500 companies are easy targets for lawsuits, ranging from slip-and-fall nuisance cases to bet-the-company securities litigation, said Susan Hackett of the Association of Corporate Counsel, a legal trade group representing attorneys who work in-house for companies.

Lampert disclosed the information to tell shareholders that the costs of defending what he called "frivolous lawsuits" are largely out of the control of a company known to pinch pennies since he took over in 2005. His letter continued with an attack on the U.S. civil justice system. His No. 1 target: plaintiffs' lawyers.

"The lawyers who bring these cases against corporations figure that rather than paying defense lawyers and taking a chance on the judicial system, companies will pay the plaintiffs (or, rather, plaintiffs' lawyers) to go away," Lampert wrote. He later added, "This situation is wrong, and at the end of the day it hurts our economy and costs us jobs."

While many corporate chieftains feel the same way, they don't usually air their feelings as publicly as Lampert did. They usually let business trade groups, such as the U.S. Chamber of Commerce, speak for them on the issue of corporate litigation.

But Lampert used his annual shareholder letter as a platform to express his views on other hot business topics of the day. In his March 1 letter (at www.searsholdings.com/invest), he goes on for about 600 words about the need for litigation reform.

He calls for caps on punitive damages and other measures to stop plaintiffs' lawyers from "gaming the system."

The letter sounds similar to President Bush's political agenda. The president has made litigation reform one of his priorities since he entered office and has had some success. He signed legislation that sharply curtailed the ability of people to file class-action suits against companies.

Sears Holdings last year agreed to settle a class-action suit related to its credit card business for $215 million.

But Lampert says he won't be bullied into settlements, shedding some light on the company's legal strategy.

"We have challenged our company's lawyers to try cases when doing so makes sense," he said. "This means that, from time to time, we will lose some cases."

Wal-Mart Tapings Spark Probe
Tech Who Intercepted Calls,
Text Messages Draws Federal Inquiry
By Gary McWilliams - Wall Street Journal
March 6, 2007

Federal investigators are probing a Wal-Mart Stores Inc. employee's electronic interception of telephone conversations and text messages of other employees and outsiders, including a New York Times Co. reporter.

People familiar with the issue said the criminal probe targets an employee who was searching for the identities of those who had leaked embarrassing company memos to the newspaper and others. Wal-Mart has been the subject of articles by the Times and others for its health-care, wage and benefit policies.

* News: Investigators are probing a Wal-Mart employee's interception of phone conversations and text messages of other employees and outsiders, including a New York Times reporter.

* Background: Wal-Mart has been the subject of articles by the Times and others for its health-care, wage and benefit policies.

*  The Law: U.S. law prohibits intercepting wireless communications without a court order.

The U.S. attorney for Western District of Arkansas confirmed it has begun a probe after being notified by the Bentonville, Ark., retailer of the recordings and electronic interceptions. Deborah Groom, first assistant U.S. attorney, declined to say whether it had subpoenaed records or interviewed employees of the world's largest retailer.

Mona Williams, a Wal-Mart vice president, said the retailer fired two employees of its computer-systems department as a result of a nearly two-month internal review. One was a manager, who was dismissed yesterday. A third employee, also a computer-systems unit manager, was disciplined but not fired for "failure to carry out management duties," Ms. Williams said.

The technician, who Ms. Williams wouldn't identify further, had programmed the company's computers to search for calls originating from or directed to a Times reporter and to record those calls. A handful of other calls also were recorded, the Wal-Mart spokeswoman said. While she wouldn't name the reporter, people familiar with the issue said Times staff reporter Michael Barbaro was the primary target of the interceptions.

Wal-Mart Chief Executive H. Lee Scott Jr. personally apologized to Janet Robinson, chief executive of the New York Times, in a telephone call yesterday. The spokeswoman also personally contacted the Times reporter to deliver the news, she said.

In a statement, the Times said: "We are troubled by what appears to be inappropriate taping of our reporter's conversations. At this point we don't know many of the key facts such as what the purpose of this taping was and the extent, if any, to which the action was authorized."

The effort captured calls for a four-month period beginning in September and continuing until January of this year, Ms. Williams said. She added the technician used wireless equipment brought into the retailer's headquarters to capture text messages from personal digital assistants and pagers within a several mile radius of its Bentonville headquarters. She described the wireless equipment as the employee's personal gear.

Those text messages, from a variety of sources, were stored on company-owned computers and later scanned for unidentified "key words" that the employee had designated. Wal-Mart declined to identify the words.

Ms. Williams also wouldn't reveal the technician's motivations for recording the calls and messages, citing the federal investigation. She confirmed agents of the Federal Bureau of Investigation were carrying out the probe for the U.S. Attorney's office.

The recordings began about the same time that a former Hewlett-Packard Co. board member publicly exposed a similar effort at the Palo Alto, Calif., computer maker. There, company-paid investigators had improperly obtained phone records and text messages of employees and news reporters in an effort to identify the source of embarrassing leaks about its former chief executive. Those complaints led to indictments of Patricia Dunn, the company's former chairwoman, and others.

U.S. law prohibits the interception of wireless communications without a court order. Wal-Mart said the technician's recording of phone calls involving its employees isn't against the law in Arkansas, but violated its corporate policies. It said recording text messages violates its corporate policies as well as U.S. law.

The two employees fired include a computer technician who allegedly intercepted and recorded phone calls, pager and text messages, and the technician's boss. Ms. Williams declined to further identify them.

"As far as we know, he was acting on his own," she said of the fired technician. "We can't speak to why the technician did what he did." She declined to say how many messages were intercepted during those four months.

Wal-Mart said it launched an internal investigation and contacted the U.S. attorney in January after an employee reported the interceptions. An internal investigation found phone, pager and text messages were captured and stored on its computers.

In the case of Hewlett-Packard, director Thomas Perkins had complained of the tactics being used by outside investigators hired to find the source of information leaks to reporters. Private investigators hired by H-P were accused of illegally accessing phone records of reporters, employees and directors. Criminal charges were filed by the California attorney general against Ms. Dunn, who pleaded not guilty, and security experts used by the company.

Wal-Mart Says Worker Taped Reporter¹s Calls
By Julie Creswell - New York Times
March 6, 2007

Federal investigators are looking into the actions of a computer systems technician at Wal-Mart Stores who, over a period of several months, intercepted pager and text messages and also secretly taped telephone conversations between Wal-Mart employees and a reporter for The New York Times, the company said yesterday.

The United States attorney¹s office for the Western District of Arkansas and the Federal Bureau of Investigation are assessing the actions of the employee and others inside Wal-Mart to determine whether federal and state laws were broken and whether they have jurisdiction in the matter, according to spokesmen for the investigators¹ offices.

Wal-Mart said the technician was not authorized to monitor and tape the conversations between members of its media relations staff and Michael Barbaro, a retail reporter for The Times.

The company did not say what led the technician to make the recordings or why Mr. Barbaro¹s conversations were the target.

Over the last year, Mr. Barbaro has written dozens of articles about Wal-Mart, including some that were based on internal company documents that were given to him by union-financed groups that were critical of Wal-Mart¹s business practices.

Mona Williams, a spokeswoman for Wal-Mart, which is based in Bentonville, Ark., said the company fired the technician and a supervisor yesterday. A third manager in Wal-Mart¹s information technology group was disciplined. Ms. Williams declined to identify the technician or his supervisors.

H. Lee Scott Jr., Wal-Mart¹s chief executive, called the chief executive of The New York Times, Janet L. Robinson, early yesterday to explain the situation and apologize, Ms. Williams said.

Ms. Williams added that she contacted Mr. Barbaro and personally apologized to him, as well.

Wal-Mart said it began an internal investigation into the matter on Jan. 11 after executives were notified by an employee about the recordings. It then notified the United States attorney¹s office two days later.

Over the course of a two-month internal investigation, Wal-Mart discovered that the technician had used a program that identified calls coming in from, or made to, Mr. Barbaro at The Times¹s New York headquarters from last September to mid-January, Ms. Williams said. The inquiry involved an outside technology firm that scoured more than 100 computer drives and other devices, she said.

Members of the media relations group, including Ms. Williams, were unaware they were being taped, Ms. Williams said.

³"No one knew he was recording these conversations," Ms. Williams said in a conference call with reporters yesterday afternoon."As a matter of fact, I¹m not even sure he knew whose conversations he was recording. He simply programmed in the reporter¹s phone number and captured those calls."

It is unclear whether the technician was able to sort Mr. Barbaro¹s calls from those other Times reporters might have made to Wal-Mart since all calls from the newspaper¹s New York office register on caller ID screens as a series of numeral 1s.

The technician told investigators of some motives for his actions, Ms. Williams said, but she declined to say what they were because of the continuing investigations.

In a statement, a spokeswoman for The Times, Diane C. McNulty, said: "We are troubled by what appears to be inappropriate taping of our reporter¹s conversations. At this point, we don¹t know many of the key facts, such as what the purpose of this taping was and the extent, if any, to which the action was authorized."

Mr. Barbaro declined to comment.

At first blush, it does not appear that the taping of the conversations was illegal.

Under federal and Arkansas state law, a telephone conversation can be recorded if one party has given consent. Wal-Mart said that under its policy, all employees give their consent to the monitoring and recording of their calls made through Wal-Mart systems and equipment.

Wal-Mart said, however, that calls were monitored only in cases of suspected criminal activity or fraud and only with written consent from the company¹s legal department. No approval for the recordings was sought or given, the company said.

Ms. Williams added that in the course of the investigation only one person ‹ a "senior-level lawyer" at Wal-Mart ‹ listened to parts of the tapes between Mr. Barbaro and the media group.

The focus of any criminal investigation might be on the text messages and the pages transmitted near company headquarters by people who were not Wal-Mart employees; the technician made those interceptions using his own personal radio-frequency equipment.

"He captured all of the text messages that were within a range of his equipment," Ms. Williams said. "Some of those messages had key words in them that he was watching for. Those were captured and put into a separate file or bucket from the others." She declined to provide details of the messages or motives for those actions by the technician.

Federal and most state laws forbid the unauthorized interception of messages, said Rodney Smolla, dean of the University of Richmond Law School.

The Best Chairman's Letter Yet
By David Meier - Motley Fool.com
March 5, 2007

The chairman's letter I've been waiting for finally arrived.

I'm not talking about the one from Berkshire Hathaway Chairman Warren Buffett (although I read that, too). I refer instead to the letter from Sears Holdings' (Nasdaq: SHLD) Eddie Lampert, whom some consider the "next" Warren Buffett.

Why the anticipation? Lampert has much to teach about being a better businessman and a better investor.

Value creation 101

Mr. Lampert clearly has value creation on the brain. There are four ways to create value, so I'll briefly explain each, then point out how Lampert uses that principle to create value for himself -- he owns tons of Sears Holdings shares through his ESL Investments vehicle -- and his fellow shareholders.

Reduce the cost of financing

The least sexy method merely requires reducing a company's cost of capital, whether by issuing debt at lower interest rates or reducing the risk associated with equity capital. I don't think this is Lampert's main focus, but he's not ignoring it.

Lampert took a shot at credit ratings agencies in the letter. Given its huge cash hoard, reduced debt, and more stable operations, Lampert openly questioned why Sears Holdings' debt rating hasn't improved. An upgrade would allow the company to pay lower interest rates and reduce future costs of financing.

Increase cash flows from the assets in place

This is Lampert's No. 1 goal. Kmart and Sears weren't managed well in the past, but Lampert aims to improve the company's profitability. He's especially focused on improving "adjusted EBITDA margins."

Admittedly, I cringed when I read this. I'm not a huge fan of EBITDA (earnings before interest, taxes, depreciation, and amortization), more commonly known as "earnings before all of the bad stuff." Fortunately, this is not the company's sole focus, and Lampert also provided the amount of maintenance capital expenditures required to sustain the business. That lets me compare the company's required maintenance capital expenditures against its depreciation and amortization charges, giving me an even better measure of performance.

Last year, the adjusted EBITDA margin increased 140 basis points to 6.9%. That's no small feat. In his letter, Lampert focused on the following ways to make current improvements and sow future ones: rational capital allocation, better inventory control, innovating ways to improve customer service, and creating a culture of accountability.

Culture changes and rational capital allocation are very broad topics that can be difficult for individual investors to measure. In my opinion, customer service and inventory management are the respective levers we should observe for those metrics -- the lifeblood of retailing. Retailers must not only know what customers want, but also when they want it, how they want to buy it, and what price they're willing to pay. All the while, employees must have the freedom and flexibility to carry out these tasks in the face of continually changing customer needs. If retailers can meet these steep challenges, they should be rewarded with greater sales, margins, and inventory turnover, creating value for shareholders.

Increase the expected growth rate and lengthen the period of high growth

These two points are Lampert's future goals, the building blocks that will help Sears Holdings reach its ultimate goal of profitable long-term growth.

The financial press has criticized Lampert's "whining" regarding the incompleteness of same-store sales as a measure of a company's worth, especially since Sears Holdings' same-store sales have been declining. But in this case, Lampert's got it right; Kmart and Sears need to be stable and profitable before they can grow again. Without both of those qualities, capital allocation becomes a fruitless exercise in value destruction.

Before you condemn Lampert for the declining sales caused by closing non-performing stores and selling assets, look at how his company's profitability has changed. Sales are beginning to produce higher margins, which create better returns, which in turn attract the capital necessary to grow. Lampert clearly grasps this process.

Performance comparisons

Lampert specifically mentioned a number of Sears Holdings' competitors in the letter, including Kohl's (NYSE: KSS), Target (NYSE: TGT), Lowe's (NYSE: LOW), Home Depot (NYSE: HD), and J.C. Penney (NYSE: JCP). (Should I be surprised that Wal-Mart (NYSE: WMT) was not mentioned?) Lampert conceded that Sears' adjusted EBITDA margin still trails margins at the companies he cited. But if you don't think he's got value creation on the brain, consider this quote: "Narrowing these gaps in margins and space productivity represents a significant value-creation opportunity for Sears Holdings shareholders."

Is Sears a bargain?

To answer this question, I'll start with some relative valuation metrics. Fools, beware: These are shortcuts to valuation, not an estimate of value. Valuation requires a discounted cash flow analysis or an economic-value-added analysis. Don't make buying decisions based on metrics alone, or you'll find me on your doorstep in a lecturin' mood.

The companies above, excluding Wal-Mart, have an average EV/EBITDA multiple of 9. If Sears' sales decline 2% next year as store rationalization continues, adjusted EBITDA margin increases to 8% from 6.9%, and, for some reason, debt, cash, and shares outstanding remain constant, then the company could sell for $251 a share. That's 42% higher than Friday's closing price.

Can it happen? It all depends on whether you believe Lampert has the right value-creation strategy in place.

The Foolish bottom line

I recently wrote that I based my investment philosophy on value creation. That's why I waited with bated breath for Lampert's letter, to learn more about how he's leading his business. Ignore all of the rumors that Lampert's buying this or that. He's not simply going to give you a fish; instead, he'll teach you how to catch your own. That's why, for Foolish reading, I find Lampert's letter even better than Buffett's.

Value creation is at the core of the Motley Fool Inside Value newsletter. That's why lead analyst Philip Durell recommended Wal-Mart and Home Depot. To follow in the footsteps of greatness, try Inside Value free for 30 days.

Retail editor and Inside Value team member David Meier learned about value creation at Wake Forest. He does not own shares in any of the other companies mentioned. He is ranked 298 out of 23,710 investors in Motley Fool CAPS. You can view his TMF profile here. The Fool takes its disclosure policy very seriously.

In Mexico, Wal-Mart Is Defying Its Critics
Low Prices Boost Its Sales and Popularity In Developing Markets  
By John Lyons - Wall Street Journal
March 5, 2007

BORDER CROSSING

SOUTHERN HOSPITALITY

JUCHITÁN, Mexico -- For as long as anyone can remember, shopping for many items in this Zapotec Indian town meant lousy selection and high prices. Most families live on less than $4,000 a year. Little wonder that this provincial corner of Oaxaca, historically famous for keeping outsiders at bay, welcomed the arrival of Wal-Mart.

Back home in the U.S., Wal-Mart Stores Inc. is known not only for its relentless focus on low prices but also for its many critics, who assail it for everything from the wages it pays to its role in homogenizing American culture. But while its growth in the U.S. is slowing, Wal-Mart is striking gold south of the border, largely free from all the criticism. Like Wal-Mart fans in less affluent parts of America, most shoppers in developing countries are much more concerned about the cost of medicine and microwaves than the cultural incursions of a multinational corporation.

That fact is making Wal-Mart a dominant force in Latin America. Wal-Mart de México SAB, a publicly traded subsidiary, is not only the biggest private employer in Mexico -- it's the biggest single retailer in Latin America.Sales at Wal-Mex, as the Mexican unit is called, are forecast to rise 16% to $21 billion this year, representing a quarter of Wal-Mart's foreign revenue. International revenue soared 30% to $77.1 billion, accounting for 22% of Wal-Mart's sales, in the fiscal year ended Jan. 31. Wal-Mex profits are forecast to grow 20% to $1.3 billion this year.

Meanwhile, Wal-Mart's biggest stumbles have occurred in more affluent foreign markets like Japan. It incurred roughly $1 billion in charges last year to depart Germany and South Korea.

Wal-Mart is now betting on the world's most populated developing nations as its engine for future growth. The retailer is acquiring a retail chain in China, for instance, and seeking to open in India, where it's been kept at bay, with new local partners.

"Wal-Mart can have a dramatic effect in emerging markets," says Mark Husson, who covers Wal-Mart for HSBC Securities. "If you look where Wal-Mart has been less successful, it's the developed economies like Germany and Japan, where you have sophisticated urban dwellers who have a whole host of other concerns."

Wal-Mart's revenues in the U.S. grew 7.8% last year. In an attempt to import some of Wal-Mex's success, the company promoted Eduardo Castro-Wright, a top Wal-Mex executive from 2001 to 2005, to serve as chief executive of its U.S. stores. Mr. Castro-Wright is also a board member of Dow Jones & Co., publisher of The Wall Street Journal.

When Wal-Mart was building a store in Juchitán in 2005, local shopkeepers and leftist groups tried to rouse popular sentiment against the American invader. The efforts failed, and by the end of opening day sales were so strong "the place looked like it had been looted," says Max Jimenez, the store's 31-year-old manager. The store's sales nearly doubled Wal-Mart's initial projections last year, and it still attracts customers from hours away.

Wal-Mart bet on Mexico just as the country was opening to global trade.
After Mexico's devastating currency crash and economic collapse in 1994, Sears Roebuck & Co. and former rival Kmart both pulled up stakes, but Wal-Mart stuck it out. Carrefour SA, a key global rival for Wal-Mart, pulled out in 2005 after failing to gain share in an increasingly competitive market.

A Counterweight

In Mexico, Wal-Mart has been a counterweight to the powers that control commerce. One of the most closed economies in the world until the late 1980s, Mexico was dominated for decades by a handful of big grocers and retailers. All were members of a national retailing association called ANTAD, and cutthroat competition was taboo. At the local level, towns are still hostage to local bosses, known here as caciques, the Indian word for local strongmen who control politics and commerce.

Wal-Mart's jobs pay well by Mexican standards and serve as a gateway to the state health and pension systems. Full-time jobs with regular salaries are scarce. About half Mexico's labor force -- 20 million people -- work in a so-called informal economy of day laborers, unregistered taxi drivers and street vendors. Their salaries are in cash and they pay no taxes. Because they aren't in the tax system, they are also not eligible for the state-run health-care system and government mortgage subsidies, and they have no pensions.

In a country where family connections often matter more than skill, Wal-Mart trains floor workers to rise to management. Plus, Wal-Mart lowered prices on thousands of staples from tomatoes to diapers, helping stretch low wages here for millions of middle-class and poor consumers.

The retailer entered Mexico in 1991, teaming up with local retailer Cifra SA. When Wal-Mart started to publish price comparisons showing how much cheaper its prices were, other retailers were outraged. In 2002, Wal-Mex was forced to resign from ANTAD. Then rivals were forced to improve service and keep up with price cuts to stay in business. In January alone, Wal-Mart cut prices on 7,500 items.

Some in Mexico aren't happy with the fact that Wal-Mart now accounts for half of the country's entire supermarket sales. Mexico's beloved open-air food markets, where hawkers buff up the fruit and offer tasty sample slices, have been hit hard. Over the past few years, local shopkeepers have teamed up with leftist intellectuals to try to block the construction of new Wal-Marts in several places.

"When the small-business owner goes out of business, the middle class gets smaller," says Sebastián Alvarez, a 34-year-old liquor-store owner who is part of a group in the tourist mecca of Los Cabos, at the southern tip of the Baja California peninsula, seeking to block a Wal-Mart. Though opposition is small today, he said he expects criticism of Wal-Mart to grow in coming years -- just as it did over time in the U.S.

For now, however, such efforts have been largely unsuccessful. Global Exchange, a San Francisco-based antiglobalization group, is advising Mr. Alvarez and others in Los Cabos who want to prevent Wal-Mart from entering Baja California Sur, the only Mexican state without a Wal-Mart store. The group figured it might sway the town's new left-wing mayor, Luis Diaz, a member of a political party that opposes free trade.

But Mr. Diaz is welcoming the American retailer. "I can understand that some businesses might be hurt by Wal-Mart, but the fact is that the people here want it. It increases the purchasing power of people with very little money," Mr. Diaz says in an interview.

Hero With Politicians

Wal-Mart's success among the poor of Mexico has made it something of a hero with politicians here. Compare how Wal-Mart's applications to move into banking were received in the U.S. and in Mexico. North of the border, labor unions and banks have all but killed the plan. U.S. Federal Reserve Chairman Ben Bernanke raised concerns about regulating a combined lender and retailer.

In contrast, Mexico's central banker Guillermo Ortiz is a Wal-Mart fan, once crediting its price cutting with helping control inflation in the years after Mexico's 1994 currency collapse. Mr. Ortiz and other regulators hope Wal-Mart will change Mexican banking, which is dominated by a few foreign-owned financial firms that cater mainly to the wealthy. Wal-Mart got its Mexican banking license quickly, and branches of its Adelante bank (which means "forward" in Spanish) are set to open this year.

Wal-Mart's success in Mexico is on display in Juchitán, a sun-soaked desert village of 90,000 residents near southern Oaxaca state's Pacific coast. The town, a hotbed of left-wing politics, fought off the Aztecs, the Spanish and the invading French over the centuries. Many people here still prefer to speak Zapotec rather than Spanish.

When Wal-Mart started to build one of its "Bodega Aurrera" stores -- austere versions of the Super Center designed to meet small-town needs -- a scattering of marchers gathered on a few days to protest that the new store would put local merchants out of business, and harm the local culture. But the protests died out because most people wanted the store, the first big national retailer to venture in.

In Juchitán, as in other small Mexican towns, consumer goods often cost far more than in cities, partly because of transport costs. But Wal-Mart's huge fleet of trucks and computerized logistics allow it to sell a microwave at the same price in Juchitán as in Mexico City. To do it, Wal-Mart squeezes out overhead even more aggressively in its small-town stores. The floors of the Bodega store are concrete, which requires a smaller cleaning staff.

In recent months, as rising prices for U.S. corn pushed up the price of Mexico's corn tortilla, a staple for millions of poor, Wal-Mart could keep tortilla prices largely steady because of its long-term contracts with corn-flour suppliers. The crisis turned into free advertising for Wal-Mart, as new shoppers lined up for the cheaper tortillas.

Wal-Mart also overcame a Juchitán cacique, or local boss: Héctor Matus, a trained doctor who goes by La Garnacha, the name for a fried tortilla snack popular in town. Dr. Matus, 55, owns six pharmacies, stationery stores and general stores. He has also held an array of political posts, including Juchitán mayor and state health minister. As town mayor from 2002 to 2004, he says he blocked a national medical-testing chain from opening in town because it meant low-price competition to local businessmen doing blood work.

But Dr. Matus couldn't persuade local and state officials to block Wal-Mart, and he is feeling the pinch. Sales are off 15% at his stores since Wal-Mart arrived, and he is now lowering prices in response. Even so, he's still more expensive. A box of Losec stomach medicine costs 80 pesos ($7.30) at one of Dr. Matus's stores, marked down from 86 pesos. The price at Wal-Mart is 77 pesos ($7.20).

Dr. Matus isn't happy about the competition. "I could still kick them out of town, because I know how to mobilize people," he said, sitting in his living room surrounded by pictures of him with leading Mexican politicians dating back to the 1970s. Despite his bravado, town officials say Wal-Mart is staying. "The ones who have benefited the most [from Wal-Mart] are the poorest," says Feliciano Santiago, the deputy mayor. "I hope another one comes."

Fitting In

When Wal-Mart opened its doors here, it tried hard to fit in. It found Zapotec-speaking interviewers to put applicants at ease. At the morning sales meeting here, the obligatory Wal-Mart cheer is shouted in Zapotec ("Gimme a W!" is "Dané Ná Ti W!"). Product announcements are broadcast in Zapotec by saleswomen in traditional flowing skirts and ornate blouses. Shoppers hear the strident trumpets and cymbal clashes of local tunes, called sones de Tehuantepec.

In Mexican towns like Juchitán, shopping at a Wal-Mart is a high-end experience. The air conditioning and lights are on. Across town at an outdoor market, flies swarm on buckets of shrimp and fish piled on counters without ice, let alone refrigeration.

Gisela López, the 31-year-old head of billing at the Juchitán store, benefited from the retailer's system of promoting from within. Raised by her uneducated, Zapotec-speaking grandparents, Ms. López earned a computer degree at Juchitán's small technical college and then left for the booming northern city of Monterrey in search of opportunity.

Lacking connections, she couldn't find the office job she dreamed about, and took a job at one of Wal-Mart's stores. After three months, Ms. López made cashier supervisor, and later moved over to the billing department. When Wal-Mart opened a store in Juchitán, Ms. López jumped at the chance to move home -- and was promoted to billing chief in the process.

"It's a very different place to work, because you can succeed by your own effort," says Ms. López, whose $12,000-a-year salary now puts her in Mexico's middle class.

Ms. López's story of economic mobility is a rare one. Most of her childhood friends don't have steady jobs, she said. The success stories are friends who inherited jobs from their parents at the state oil company's big refinery in Salina Cruz, about an hour away.

RadioShack CEO: Mission is to execute
By Heather Landy - Staff Writer - Fort Worth Star Telegram
March 4, 2007

FORT WORTH -- Last week was the first time RadioShack Corp. Chairman and Chief Executive Julian Day talked publicly about his strategies for the retailer, but for anyone who has been following the company in recent years, the words had a familiar ring.

Like several of his predecessors, Day said he wants to improve the chain's "in-store experience," aggressively manage expenses and test a pricing system that would let the company charge different amounts for products in different markets, depending on local demand.

"All of these can be found in the RadioShack graveyard of ideas the former management teams never executed on," said analyst Richard Weinhart at BMO Capital Markets in New York. "But we'd give current management much better odds on achieving them."

The difference this time may be Day's experience with turnaround situations, like those he faced at Kmart Corp. and Sears Roebuck & Co., and his intense focus on costs.

Costs have been closely minded by plenty of former RadioShack CEOs. Len Roberts cut 200 headquarters jobs in 2001 to counter an earnings shortfall and bring expenses back in line with the chain's performance. His successor, Dave Edmondson, was known for being a tough negotiator with suppliers and for relentlessly monitoring a wide variety of store expense ratios on spreadsheets he kept in his office. And Claire Babrowski, who held the CEO post temporarily before Day was hired, oversaw the closing of hundreds of poor-performing stores.

But Day, who has spent more of his career as a chief financial officer than as a CEO, has brought cost-cutting to a new level at RadioShack.

In less than eight months with the company, he has eliminated 500 jobs, reduced the advertising budget and cut back on everything from cleaning crews to color copying at the company's Fort Worth headquarters.

RadioShack's overhead expenses in the fourth quarter of 2006 totaled $482.8 million, down almost $90 million from the same quarter of 2005. And there are other cuts to come. The company's capital-spending budget, which includes investments in store improvements and technology systems, will range between $60 million and $80 million this year, down from $90 million in 2006 and $170 million in 2005.

Aside from providing a much-needed boost in profitability, Day's cost cuts have bought him extra time to develop a merchandising plan for the stores, analysts said.

In the past, RadioShack's merchandise strategies have bounced back and forth, sometimes emphasizing high-margin parts, batteries and accessories, and other times highlighting low-margin electronics that could draw customers into the stores. The chain was on the forefront of the cellphone revolution but well behind the competition on digital sensations like digital music players.

In a conference call with analysts Tuesday to discuss RadioShack's financial performance, Day sounded motivated to hone in on a few things that RadioShack could figure out how to do well.

"In retrospect, it appears clear that the company suffered somewhat in the past from a lack of a consistent and common focus, from a failure to successfully execute, as well as what seems like constantly shifting strategy changes," Day said. "This management team believes that is not the right way to run this company. What our current mission is about is focused, high-quality execution."

Day was less than specific in explaining what ideas he would focus on executing.

In broad terms, he spoke about improving the store experience for customers, a goal shared by all of Day's recent predecessors.

He said he wanted to avoid merchandise shortages and make sure that the stores had enough hot products in stock. That was a key piece of Babrowski's strategy, although her tenure as acting CEO may have been too short to have allowed her to make a lasting impact in that regard.

Day also mentioned a need to optimize staffing, so that the stores will have more help available during peak shopping hours and less during slow periods.
That was a priority of Edmondson's, but it backfired during the 2005 holiday season, when sales fell well short of expectations.

Day also said he had instilled a change in the way corporate employees view their relationship with RadioShack stores.

"I think it is now true to say that everybody at headquarters understands that the only value headquarters has today is conferred on it by the stores," Day told analysts Tuesday. "The only reason headquarters is here is because of the stores. And even though to many of you that sounds so obvious that it doesn't need to be said, that philosophically is a little bit of a change around here."

But it's not much of a change from the message Roberts famously delivered during his first day on the job in 1993, when he sought to change a clubby, bureaucratic culture by telling his staff, "From this day forward, your job will change. As far as I'm concerned, there are only two jobs within this company: one, you either serve our customers directly, or two, you serve someone who does."

Of course, that pronouncement was made 14 years ago. Day may have decided that it is worth repeating.

The executive, who declined to comment beyond the conference call, also promised to apply increased levels of "analytical rigor" to the company's study of inventory levels, accounts receivable and other financial measures -- a strategy found in Edmondson's playbook.

And Day's plan to break away from a strict, national pricing policy so that stores can take advantage of local trends and make more profit on particular products is also borrowed from RadioShack's past, although the strategy sputtered the first time around.

"As I recall, they had put in some expensive information-technology hardware to go ahead and do this, and yet they failed," said Weinhart of BMO Capital Markets. "But if the infrastructure is still there, and it's just going to take a management team with expertise to get it done, there's potential there."

Although investors are betting on Day's potential -- RadioShack's stock (ticker: RSH) has climbed 46 percent since the start of the year, closing Friday at $24.56 -- Wall Street analysts are taking a more cautious stance. Only two have a "buy" rating on the shares, while nine have a neutral rating and seven advise selling the stock.

But if Day can reshape RadioShack into a lean, nimble competitor by turning old ideas into fresh accomplishments, he should have little trouble persuading anyone on Wall Street to forgive him for what his strategies might lack in originality.

Corporate Strategy - Leaders of the Pack
A look at strategies for securing market domination
 -- and keeping it
By Richard A. D'Aveni - Wall Street Journal
March 3, 2007

It's harder than ever for a company to dominate its market these days -- or to defend a dominant position. That makes it all the more important to have a strategy to try.

A company with a so-called stronghold is so powerful in a geographic, product or customer segment that it sets the standard for all others in the market in terms of price, performance, reliability and other characteristics.

A stronghold represents a company's key source of profitability, its platform for expansion and its power base for attacking its rivals. Companies without one are often spread too thin across many markets or segments, making them vulnerable to more competitors.

For most companies, however, strongholds have become much more difficult to obtain and to hold. Among the reasons: With so much market-research data available, it's typical for several players to converge on the same new territory at once; trends, needs and government regulations change faster than in the past, making strongholds more temporary; and some barriers that once helped defend strongholds are weakening due to converging technologies and globalization.

Yet having a stronghold has never been more important. Increased volatility in financial markets has made Wall Street a less-steady source of capital for many companies. Businesses with solid strongholds, on the other hand, generate the kind of continuous cash flow that Wall Street likes to see, and that a company needs to grow.

Knowing your way around a landscape of strongholds requires familiarity with basic stronghold strategies. Studying such strategies focuses one's attention on competitive questions central for any company: Where will your company dominate? Where will it concede to rivals? How can you secure a stronghold once it is captured? And how does this stronghold need to change to ensure success in the future?

What follows is a look at the essentials -- the Five S's of stronghold strategies: securing a defensible stronghold; separating strongholds into nonoverlapping parts of the market; surrounding rival strongholds to contain them; storming a stronghold by direct or rapid assault; and shape-shifting strongholds by radically redefining the boundaries among strongholds in a market.

SECURING A STRONGHOLD

A company's ability to defend a stronghold depends on the strength of its walls, and on the relative strengths and weaknesses of the defender and the attacker. In the absence of strong walls, the ability to secure a stronghold depends upon willingness to take risks inherent in giving up territory before counterattacking.

A traditional stronghold defense is to create strong walls, or barriers to entry that block competitors from a market. These can include building economies of scale and a full line of products, making heavy capital investments and limiting access to distribution channels. Walls, however, develop holes as time goes on and companies grow. Walls are vulnerable to technological change, globalization, mergers, deregulation and convergence of industries.

From the 1960s to the 1980s, International Business Machines Corp., for example, had a stronghold in mainframe computers in part by relying on entry barriers of switching costs and a full line of mainframes. Its customers faced huge costs and potential disruptions if they attempted to replace their IBM mainframes with those of a competitor.

And the company's full line of mainframes made it difficult for others to find a hole through which to enter. However, in the 1980s, competitors simply flew over IBM's walls as companies started switching from mainframes to PC-based computer networks. IBM was forced to migrate to a new stronghold, establishing itself in information-technology services and business software.

When fixed barriers can no longer be relied on, more flexible defense strategies can be used, including proactively counterattacking outside the stronghold, in markets or segments not crucial to the control of the stronghold. These act to deter, distract or deflect potential entrants.

In 1985, Ralston Purina dominated the biggest part of the U.S. pet-food market, with a 52% share of dry cat food and 39% of dry dog food. Ralston's stronghold dry pet food was secured mainly by two barriers: Ralston's economies of scale in purchasing and processing grains for humans and animals, and its ability to command supermarket shelf space as a major food producer.

Threats to Ralston's stronghold could be contained as long as the rest of the market remained divided like it was -- with Quaker Oats Co. and Gaines Foods Inc. occupying the small and declining soft-dry and moist dog food segments, respectively, and Carnation Co., H.J. Heinz Co. and Alpo -- a division of Grand Metropolitan PLC at that time -- battling over canned dog and cat food. With the market divided in this way, no rival was strong enough to launch and finance attacks into Ralston's stronghold.

To break out of this situation, Heinz and Carnation tried to build full-line cat brands that cut across dry, canned, moist and soft-dry foods. Similarly, Quaker acquired Gaines to create a stronghold in soft-dry and moist dog food, and to build a full line of dog foods. These rivals were attempting to resegment the market into a dog stronghold and a cat stronghold, and to switch the basis of competition from economies of scale in production, which favored Ralston, to economies of scale in advertising and branding, which favored the rivals.

Ralston successfully defended its stronghold by regularly using product launches in the canned, soft-dry and moist segments to keep its rivals off guard, signaling that it could undermine their profitability if it wished, and to stir up price competition among rivals. Ralston thus used mobile and pre-emptive maneuvering outside its stronghold, in its border territories.

SEPARATING

A second strategy is to make tacit alliances with competitors that allow a peaceful coexistence of nonoverlapping strongholds in the same market.

Home Depot Inc. and Lowe's Cos. initially coexisted by tacitly dividing the home-improvement market along lines based on store format and customer types. Home Depot went for a warehouse format and focused on do-it-yourselfers and professionals -- the part of the market traditionally served by lumberyards and construction-supply businesses. Lowe's used a hybrid between retail and warehouse formats and focused on women. Geography, too, played a role, with Lowe's focusing on secondary cities and the Southeastern U.S. Both companies also offered different product mixes and brands, with each pushing for exclusive distribution deals.

Separation can widen over time, but mostly it doesn't last without using the securing strategies discussed above. Indeed, the uneasy truce between Lowe's and Home Depot has been eroding, as Lowe's attempts to serve more contractors and Home Depot adds more services and fashion items to appeal to women. Lowe's began copying Home Depot's large-warehouse model and moving into high-traffic suburban and urban areas.

Other times, rivals in the same competitive space maneuver to get out of each other's way. For example, France's Bic Group and Gillette, now a subsidiary of Procter & Gamble Co., formerly competed in two key areas: disposable lighters and razors. When Bic introduced a disposable razor in the mid 1970s, Gillette had no choice but to introduce its own disposables. But these products cannibalized Gillette's higher-margin cartridge razor business.

GIVE US STRENGTH

The Goal: To become a stronghold, where a company is so dominant in a geographic, product or customer segment that it sets the standard in its market. It is a company's key source of profits, its platform for expansion and its power base for attacking rivals.

Why It's Important: In times of equity-market volatility, strongholds generate the kind of continuous cash flow that Wall Street likes and a company needs to grow.
How to Achieve It: To acquire and preserve a stronghold, it's important to learn the Five S's of stronghold strategy: securing, separating, surrounding, storming and shape-shifting. After a decade of brutal price wars, Gillette moved to make a separation. It pulled out of the cigarette-lighter business, leaving it to Bic. Gillette then poured its resources and attention into the successful introduction of its Sensor cartridge razor in 1990. By the end of that year, Gillette had two-thirds of all razor users. The remaining third of the market went to Bic and other competitors. Gradually, Gillette has been pulling back on its disposable razors as well, further separating its stronghold in cartridge razors from Bic's in disposable plastic products.

SURROUNDING

Some companies surround a rival's stronghold by riding the fastest growth segments outside the stronghold. This strategy positions the company to contain or constrict the rival's stronghold gradually. It is often used to box the rival into a less-attractive part of the competitive space.

In the late 1980s, Wendy's International Inc. launched an initiative that had the effect of pinning down McDonald's Corp. and Burger King Holdings Inc. in their core stronghold, fast-food burgers, while Wendy's surrounded them with a shift to nonbeef menu items like salads. Wendy's began by introducing its 99-cent Super Value Menu in 1989. McDonald's and Burger King later adopted their own 99-cent Big Macs and Whoppers, which led to intense price cutting between the two, and culminated in McDonald's much criticized and draining 55-cent Big Mac promotion over two months in 1997.

Wendy's, meanwhile, maintained its original 99-cent menu but didn't discount its premium beef sandwiches. Moreover, while McDonald's and Burger King remained pinned down in price wars for control of the less-profitable burger market, Wendy's carried on with a menu that included higher-quality items, such as signature sandwiches and Garden Sensation salads, and higher prices. In 2001, Wendy's market share in the fast-food-burger segment grew 1.6 percentage points from a year earlier, while McDonald's and Burger King lost share. Wendy's also maintained a higher average customer check than McDonald's ($4.75 versus $4.42 in 2002).

Adrienne Hayes, Burger King vice president, public relations and marketing communication, says Burger King's decision to discount Whoppers in the mid-1990s was not in response to Wendy's introduction of the 99-cent menu. A spokeswoman for McDonald's, Lisa Howard, says, "We continue to be absolutely focused on our customers and on our brand."

A variation of the surround strategy uses a rival stronghold's inflexibility and entry barriers against the rival itself, in effect trapping the rival behind its own walls, like a city under siege.

Take a look at fast food again. As the battle among the Big Three raged, so-called fast-casual restaurants burst upon the scene, such as Panera Bread Co. These restaurants have margins more than double those of quick-serve restaurants because they cater to customers who are less price-sensitive. The Big Three, meanwhile, have been unable to attract these kinds of clients in large numbers because of the very things that defended their strongholds to begin with: ubiquitous franchising systems and powerful brand images that stand on low prices and a core customer of children and families.

STORMING

Sometimes companies storm a rival's stronghold by breaking through, going around or neutralizing its entry barriers.

When the U.S. auto makers built massive service networks that would take years to replicate, they thought they had an invincible barrier to entry. But the Japanese simply made cars that needed less service.

In shock treatment, the attacking company uses overwhelming force to push a rival out of a stronghold it has targeted. Circuit City Stores Inc. appeared to use this strategy in local geographic markets against Sears, Roebuck & Co., which held the leading national share in retailing of small and large home appliances and consumer electronics. Circuit City became the largest retailer of consumer electronics and small home appliances in the U.S. -- for a while -- by going into local or regional markets like gangbusters. The goal, according to its annual report, was to quickly "gain a dominant position in any market we enter." By 1991, Circuit City had 156 free-standing stores and had achieved 23% market share for retail consumer electronics in its markets. Circuit City has since been overtaken by Best Buy Co.

There are risks to using shock. Rivals may counterattack. If the attacking company uses overwhelming force, it must be sure the defender is left with too little strength to strike back. The defender also may concede its stronghold only in order to regroup and move aggressively into other markets.

Because of the risk of retaliation, many companies prefer attack strategies with more finesse. In a stripping strategy, rivals slowly pick away at a stronghold piece by piece -- often so gradually that the competitor doesn't respond and suffers death by a thousand cuts. Sears, for example, once defined its stronghold as being the general store for the middle class. But bit by bit, the old department-store and catalog company was stripped of its business: Chains like Kmart and Wal-Mart arrived, offering more discounts on many goods; other department stores consolidated, giving them more purchasing power to lower prices for higher-end goods; big-box stores specializing in electronics, home appliances and hardware carved new territories out of what were once steadfast Sears departments. Even the Sears catalog came under attack as specialty books began to multiply.

In a domino, or steppingstone, strategy, a single company moves toward the stronghold of a rival in a series of steps, each of which adds capabilities, resources and momentum for the next move. Toyota Motor Corp. started with a stronghold in small cars, a peripheral zone for General Motors Corp. and Ford Motor Co. It then moved into luxury cars with Lexus, and is now moving into the core profit zones of the U.S. manufacturers -- SUVs and trucks.

Finally, guerrilla attacks can be staged on different strongholds or on different parts of a single stronghold. Small skirmishes keep the rivals guessing where the next attack will come from. PepsiCo Inc. did this in 1976 with the Pepsi Challenge, a blind taste test in which participants indicated they preferred Pepsi to Coke. The tests, launched in Dallas, proved so successful that PepsiCo eventually staged challenges in 100 cities and towns nationwide in random patterns a few cities at a time. The ability to move quickly and strike without warning -- a key feature of guerrilla attacks -- left Coca-Cola Co. vulnerable to these attacks.

Coke's resulting loss in market share gave Pepsi a temporary but significant victory in the cola wars. A few years later, Coca-Cola changed Coke's formula to New Coke to make it sweeter, as Pepsi continued to make inroads in the cola market.

Scott Williamson, a spokesman for Coca-Cola, responds that while it might be an interesting exercise "to look back decades," Coke is still the No. 1 soft drink in America and "the world's most valuable brand."

SHAPE-SHIFTING

Shape-shifting strategies change the borders -- and size -- of strongholds by changing the competitive landscape. There are three basic methods: convergence, or redrawing the boundaries of once-separate markets into a new, larger playing field; reinventing strongholds by creating new customer and product segments; and recombining existing segments.

Convergence, which redraws boundaries between industries, is seen often these days. Apple Inc., by introducing the iPhone, which combines the iPod music player with a cellphone and Internet-browser features, is attempting to carve out a new stronghold in the mobile-device market. Banking companies that add stock-brokerage services and insurance, and health-maintenance organizations that sell both insurance and the delivery of health care, are using convergence strategies, too.

Reinventing strongholds, by contrast, involves identifying new types of customers and products within existing industry definitions. In the 1950s, for example, motorcycles were largely judged by their engine power and unique style. Motorcycle segments were largely divided based on lightweight and heavyweight. Even though it offered lightweight machines, Harley-Davidson Inc.'s stronghold was in heavier bikes, making it king of the road. In the 1950s and '60s, British rivals made performance more important. Using superior technology, the British started producing lighter motorcycles with better fuel efficiency, less noise and vibration, and better handling. This redefined the competitive landscape into two new segments: high and low tech, with the British establishing a stronghold in the high-tech segment.

Then, in the mid- to late 1960s, Japanese competitors created a new customer segment -- and a new stronghold -- based on inexpensive, high-quality and small-displacement motorcycles, and marketing campaigns that targeted respectable people. Over time the Japanese marketed larger motorbikes to responsible but adventurous riders, commuters looking for reliable transportation and thrill-seeking sports bikers. So by the 1980s, strongholds were based on the type of user, with Harley strong among the rebels -- and weekend rebels -- and the Japanese among the other types of riders.

With each redefinition of motorcycle strongholds over the past 50 years, the successful initiator gained ground. While Harley was initially weakened when the emphasis shifted to technology, reliability and lower prices, it later helped shift the division of the market again to branding and lifestyle, which gave it a new clear stronghold from which to base its future growth moves.

In the third method of shape-shifitng, companies try to increase market share by recombining existing product or customer segments. Microsoft's stronghold in desktop operating systems, for instance, expanded by incorporating adjacent segments into its suite of software. Windows rapidly added spreadsheet, presentation and word-processing programs, an encyclopedia and an Internet browser. Microsoft thus widened the boundaries of its operating-system stronghold, giving itself a strong base from which to stage attacks into the strongholds of others -- including network and server software, Internet portals and user-interfaces for mobile devices.

* * *
While the Five S's are presented as separate strategies, they are often used in combination or in sequence, and the lines between them are not always distinct. They form a spectrum of options. Companies might use a defensive strategy on one front, for example, while using storming strategies on another.

Companies need to think through the impact of moves and countermoves that can lead to chain reactions and ripple effects. As companies move out of the way of each other, voluntarily or not, and as strongholds shift in shape, very different market landscapes emerge.

In the end, to protect and leverage the power of strongholds, the use of the Five S's must be governed by four principles:

Anticipate Ripple Effects:

By understanding the changes in positioning of companies on the playing field and the potential redefinitions of the playing field, companies can become more skilled in repositioning and redefining the field to their advantage. It isn't always possible to think through every possible endgame (in reality, there is no endgame because the competitive interactions always continue), but it is important to be aware of the dynamics and to develop scenarios about where they might lead.

 Strengthen your stronghold to hold back the ripples:

The strength of a stronghold's barriers to entry, the relative financial attractiveness of the stronghold, the ability to use the Five S's to advantage, and the deep pockets generated from years of controlling a stronghold are just a few factors that affect the company's relative balance of power.

Avoid the pressure of overpowering ripples:

Companies not strong enough to resist ripples in their competitive space must flexibly move to re-establish a stronghold in new space, as IBM did when it migrated from its stronghold in mainframes to one in services. A company can also sidestep the ripples -- for instance, by focusing on international markets if the battle in the U.S. is too intense, or by creating a new distribution channel. Once companies achieve new strongholds, they often signal one another through public announcements in the hopes of maintaining separation among their strongholds, which in turn allows them to build strength.

Build a sphere of influence to create your own ripples:

The sphere is not just the stronghold and the territories adjacent to it. It is how far the ripples from your stronghold extend throughout the marketplace. A powerful sphere can maneuver competitors into corners, reduce the risk of price wars through the threat of mutually assured destruction, or shape the market to the mutual advantage of separate strongholds. It can also create a favorable balance of power, as Ralston did against its rivals in the pet-food space.

For companies seeking market power, the object is ultimately to extend the power of the sphere. This strategy can involve more than just the core product segments of the stronghold. Any part of a company's portfolio is important if it serves to preserve and protect value in the stronghold.

Don't think only about whether a product segment contributes directly to the bottom line. Consider how noncore products and segments may prevent the erosion of the core by blocking steppingstone strategies of rivals or constraining the aggressive instincts of a rival, or whether they can be used to force or lure rivals into less-favorable product segments.

This is something often overlooked by securities analysts who believe in "pure-play" portfolios, and by those who believe a portfolio must be built by leveraging a core competency without regard to protecting a core stronghold.

The best strongholds can be more than a mere safe haven. They create power.
And the purpose of stronghold strategy is to keep the balance of power in your favor.

--Prof. D'Aveni is a professor of strategy management at the Tuck School of Business at Dartmouth College. He can be reached at reports@wsj.com15.

Despite profit, Sears stock takes a hit
By Sandra Guy - Business Reporter - Chicago Sun-Times
March 2, 2007

Sears Holdings Corp. stock took a hit Thursday after the retailer reported a lower-than-expected cash balance even though its net profit gained 27 percent in the fourth quarter and 74 percent for the year.

The stock ended the day Thursday down $4.26, or 2.36 percent, at $176.

The company also confirmed that Sears is struggling to find a winning strategy for its Sears Grand off-mall stores, as the Sun-Times reported Nov. 28.

Kmart and Sears are doing better selling clothes, and the company will continue to improve by focusing on profits, rather than building new stores, according to a letter to shareholders from Chairman Edward S. Lampert, a billionaire hedge-fund manager.

The Hoffman Estates-based retailer, owner of Sears and Kmart stores, reported its profit margins improved even though sales dropped -- a situation that reflects Sears' focus on selling merchandise at full price and on cost-cutting, or what Lampert called "pruning." The report reflected the first full fiscal year of Kmart and Sears as a combined company.

Sales for the three months ended Feb. 3, including the holiday season, declined 4.9 percent at Sears stores and dipped 0.9 percent at Kmart stores.

The good news: Sears' Lands' End clothing and its home-repair and delivery services achieved record profits in fiscal 2006.

The bad news: Sears' core businesses, appliances and lawn-and-garden, and its home fashions, performed poorly.

For the fourth quarter, revenue inched up 1 percent to $16.29 billion from a year ago, boosted by an extra week versus the year-ago quarter.

Earnings totaled $820 million, or $5.33 a share. Analysts had expected $5.18-per-share profit on revenue of $15.95 billion.

The cash balance of $3.3 billion, versus the forecast $3.5 billion, occurred because Sears paid more federal and state taxes than expected and had lower-than-expected sales in January.

For the year, Sears' net income totaled $1.49 billion, or $9.57 a share, and revenue gained 8 percent to $53 billion.

It¹s Not Only About Price at Wal-Mart
By Michael Barraro - New York Times
March 2, 2007

For 44 years, Wal-Mart¹s message was "Low prices, always."

Then in early 2006, it invited customers to ³Look beyond the basics,² and try costlier products like 500-thread count sheets.

Now, after a tumultuous year of experimentation, abrupt reversals and admissions of missteps, Wal-Mart Stores is finding its raison d¹être in the middle of these two extremes: ³Saving people money so they can live better lives.²

The new, and so far internal, definition of what Wal-Mart, the nation¹s largest retailer, stands for will soon become a very public strategy, evident on the shelves of 4,000 stores and in advertisements seen across the country.

In their first interviews since a management shuffle last month, John Fleming, the new chief merchandising officer, and Stephen Quinn, the new chief marketing officer, said that after a year of intense research, the discount giant is seeing its 200 million customers as belonging to three groups.

There are ³brand aspirationals² (people with low incomes who are obsessed with names like KitchenAid), ³price-sensitive affluents² (wealthier shoppers who love deals), and ³value-price shoppers² (who like low prices and cannot afford much more).

The new categories are significant because for the first time, Wal-Mart thinks it finally understands not just how people shop at its stores, but why they shop the way they do.

The recalibration might seem subtle. But when the company is Wal-Mart, whose
$345 billion in sales exceeds those of its next four rivals combined, the stakes are unusually high, especially for Mr. Fleming and Mr. Quinn.

After all, these two executives will be responsible for putting into practice the new strategy, which is intended, in many ways, to fix the old strategy they championed.

That idea ‹ to squeeze more dollars out of every shopper by stocking higher-end products and marketing them in sleek ads ‹ was the company¹s best hope for correcting its biggest problem: achieving growth by relying on opening new stores, at a rate of more than 300 a year.

Sales growth at Wal-Mart¹s older stores, a major measure in retailing, trails those of rivals like Target, and for the first time in a decade, they fell during the most recent holiday season.

But the upscale strategy has not worked, at least not yet.

Wal-Mart has begun remodeling its aging stores and has changed how it schedules employees, to bolster customer service at the busiest times of day. To turn around the United States business, executives said, they must fix merchandise and marketing, the biggest priority of 2007.

Mr. Fleming said that for all the new insights Wal-Mart gleaned from its research into its shoppers, it was also reminded that its most powerful lure was low prices.

³It explains why people who have to shop here do and why there are BMWs in the parking lot,² Mr. Fleming said.

So what does this mean for Wal-Mart¹s upscale designer-inspired ambitions, which promised to nudge shoppers who dwelled in the land of $5 shampoo into the territory of $31 trench coats by Mark Eisen?

Those ambitions are still there, Mr. Fleming said, but they are scaled back (the contemporary urban women¹s clothing line Metro 7 is in 1,000 stores now, down from 1,500 last year) and proceeding more judiciously. The company is now focusing more on consumers who already shop at Wal-Mart, rather than on people who executives would like to shop at its stores.

From now on, all product decisions will be organized around the three groups ‹ brand aspirationals, price-sensitive affluents and value-price shoppers ‹ that, Wal-Mart says, represent the majority of its business.

What do they have in common? They want deals, of course, but they do not want cheap products. In fact, they all put a high value on names like Motorola and Samsung.

So Wal-Mart is creating teams, each with a marketing executive and a merchandise executive, to tackle five so-called ³power² product categories with these consumers in mind ‹ food, entertainment, apparel, home goods and pharmacy.

A model for this is the electronics department at Wal-Mart, where the company improved sales not by merely offering the lowest prices, but by carrying well-known national brands, like flat-screen TVs from Sony and Magnavox.

Customers ³really need the assurance of brands,² said Mr. Quinn, the former Frito-Lay advertising executive who succeeded Mr. Fleming as head of marketing. ³In the past we were so focused on low price,² he added, ³but low price on what?²

A customer in the electronics department, Mr. Quinn said, would see shelves of no-name TVs and think, ³I can see it¹s low price, but I will not buy that television.²

But having one or two name-brand products scattered in each department is not enough, he said. Wal-Mart must build a reputation for brands in each category, so that when it is time for a customer to make a purchase, they think of Wal-Mart, rather than Best Buy, Macy¹s or Home Depot.

Under Mr. Fleming¹s direction as chief marketing officer, Wal-Mart deliberately strayed from its single-minded focus on price, opening a design office in Manhattan, staging fashion shows and buying ads in stylish magazines like Vogue.

Mr. Fleming, a former executive at Dayton Hudson, which became Target, based the new strategy on research that showed millions of Wal-Mart shoppers bought only household staples like paper towels and orange juice.

But the research was not deep enough, Mr. Fleming said. For example, the ³selective shopper,² as Mr. Fleming labeled such customers, would buy only household staples at Wal-Mart, never clothing.

The response ‹ introducing stylish dresses from Metro 7 and George ME to satisfy this shopper ‹ apparently misfired precisely because Wal-Mart did not know exactly what motivated their clothing purchases.

³Our decision at the time was to take action,² based on the behavior of shoppers, Mr. Quinn said. ³It was not perfect.²

He added, ³It was not wrong, but it was limited.²

It was, however, costly. In the fall, when sales at Wal-Mart stores open at least a year fell for the first time in a decade, top executives pointed to the new stylish merchandise as the culprit. H. Lee Scott Jr., the chief executive, said the company ³moved too far too fast.²

This time around, Mr. Fleming and Mr. Quinn said, the research is more refined. Wal-Mart knows, for example, what motivates brand-obsessed shoppers. As a result, new advertising, being developed by the Martin Agency in Richmond, Va., is likely to play up that message with the slogan, ³Saving people money so they can live better lives.²

Mr. Quinn said the marketing will be more consistent this year. ³Last year represented a lot of experimentation to learn what works and what doesn¹t,² he said. ³We will narrow the range.²

The head of Wal-Mart¹s United States division, Eduardo Castro-Wright, has told executives that after a tough year of store renovations and a new scheduling system in the stores, 2007 will be the Year of Merchandise.

³There is a lot of pressure,² Mr. Quinn said.

"But we like our chances," Mr. Fleming added.

Sears posts 27% profit gain
Sales slide; stock falls on investor worries about inventory,
cash on hand
By Sandra Jones - staff reporter - Chicago Tribune
March 2, 2007

Sears Holdings Corp.'s profit jumped nearly 27 percent in the fourth quarter, reflecting an improvement in the apparel business and better expense management even as sales faltered.

The Hoffman Estates-based retailer said sales at stores open at least a year fell 3.1 percent in the quarter ended Feb. 3, dragged down by a 4.9 percent decline at U.S. Sears stores, where most categories except women's clothing performed poorly. Kmart same-store sales fell about 1 percent.

Ignoring profit improvement, Wall Street focused on an inventory buildup and a lower-than-expected cash position, sending Sears Holdings' shares down $4.18, or 2.3 percent, to $176.07 on the Nasdaq stock market. Sears had $3.3 billion in cash, excluding Sears Canada, less than the $3.5 billion analysts expected.

Investors have been waiting for Sears Chairman Edward Lampert, the hedge-fund billionaire, to sell off Sears' real estate and use the cash to buy other companies, turning Sears into an investment vehicle rather than a retailer. There was no sign in Thursday's earnings announcement of that happening anytime soon.

"What investors really want is to lower the working capital and free up the cash to deploy for other uses," said Arun Daniel, analyst at ING Investment Management, a New York-based firm that owns 250,000 Sears shares.

In a 6,500-word annual letter to shareholders, Lampert sidestepped the issue, instead stressing his intent to expand Sears in spite of falling sales and limited capital spending, without saying how he plans to do it.

"As we look ahead, I want there to be no doubt about one thing: It is certainly our intention to grow Sears Holdings," Lampert wrote. "Some commentators have asserted that we want to shrink the company, but that is simply not so. No great company would aspire to become smaller, and we certainly do not."

Fashioned after legendary investor Warren Buffett's storied annual shareholder letters, Lampert's dispatch spanned a wide range of business topics, from executive compensation to litigation reform to pension reform.

He held up rival J.C. Penney Co. as a model for a turnaround and lamented Sears' lagging margins and sales-per-square-foot performance compared with rivals Target Corp., Kohl's Corp. and Home Depot Inc., among others.

As Sears aspires for "disciplined growth," cost cuts will continue, according to the letter.

"Just as it is important to prune a tree or a garden or even a wardrobe, it is critically important to prune a company, not as a one-time event, but on an ongoing basis," Lampert wrote.

He cited the lawn and garden and home fashions businesses as categories where the company failed to perform. Sears also continues to struggle to find the right formula for Sears Grand, the freestanding stores that sell everything from milk to refrigerators. The stores, many former Kmart stores, are designed to compete with Target and Wal-Mart and attract shoppers who avoid the malls.

On the bright side, Lands' End and the home-services businesses are two solid profit generators. And Sears turned around the decline in apparel sales that happened in 2005 when Sears veered off into too-trendy clothing.

Since engineering the combination of Sears, Roebuck and Co. and Kmart Holding Corp. into one company in 2005, Lampert has steadily boosted Sears'
profitability by cutting jobs and keeping a tight reign on budgets. Capital spending for the fiscal year just ended totaled $474 million, half of what Sears spent on its own before it was combined with Kmart.

Sears shares rose 45 percent in 2006 on the hope that Lampert would put his much-heralded investment acumen, previously reserved for his elite hedge fund, to work for Sears shareholders. The stock hit a record high of $189.97 last month.

"Lampert does believe he's superhuman," said Mohnish Pabrai, managing partner at Pabrai Investment Funds, an Irvine, Calif.-based hedge fund with $400 million under management and no Sears shares. "I believe he's at least near superhuman, but he's got his work cut out for him. He will need every one of those superhuman skills to turn this ship around."

In the quarter, net income rose to $820 million, or $5.33 a share, from $648 million, or $4.03, a year earlier. Total revenue increased slightly, to
$16.29 billion, from $16.09 billion a year ago, due to an additional week of sales.

Full fiscal year net income was $1.49 billion, or $9.57 a share, compared with $858 million, or $5.59 a share, the previous year. Revenue was $53.01 billion, up from $49.12 billion in fiscal 2005.

Sears Profit Increases 27%
By James Covert - Wall Street Journal
March 2, 2007

Sears Holdings Corp. said fiscal fourth-quarter profit rose 27% on a modest sales increase, with the company citing improved margins on apparel at its Kmart and Sears chains as well as an added week during the fiscal year.

The results for the quarter ended Feb. 3 were near the high end of a forecast the company gave in January.

But shares of the Hoffman Estates, Ill., retailer were down $4.18, or 2.3%, at $176.07 in 4 p.m. composite trading on the New York Stock Exchange, after Sears said it had about $3.3 billion in cash on its balance sheet, less than expected because of lower-than-expected January sales.

Same-store sales, or sales at stores open at least a year, dropped 3.1%, weighed down by the company's U.S. Sears stores. The company said competition cut into its core appliance business, while improved women's fashions, as well as a focus on profits rather than sales, fueled a gain in operating income at the Sears and Kmart stores.

Sears's cash position is watched closely because the company has authorized Chairman Edward Lampert to throw excess cash into investments that are unrelated to the retail operations.

Sears said U.S. inventories at the end of the quarter were 9.8% higher than a year earlier.

Sears' Lampert rails, reflects on challenges
'No great company would aspire to become smaller,'
letter states
By Jennifer Waters, MarketWatch
March 1, 2007

CHICAGO (MarketWatch) -- Sears Holdings Corp. Chairman Edward Lampert, who doesn't typically talk to his shareholders or Wall Street analysts, on Thursday used his second annual earnings letter to rebut criticism that the retail company is shrinking and to expound on other issues that have been bugging him.

In tandem with reporting sharply higher fourth-quarter profit, Lampert talked candidly about the challenges the operator of Sears Roebuck and Kmart stores dealt with last year and what it faces this year.

Sears Holdings shares (SHLDsears hldgs corp com SHLD ) moved lower by 2.3% to $176.07 Thursday.

The company turned a profit of $820 million, or $5.33 a share, compared with $648 million, or $4.03 a share, a year ago. The results include the vagaries of financing and investing actions, rather than reflecting only the company's core operations. On the basis of earnings before interest, taxes, amortization and depreciation, or EBITDA, Sears' domestic operations improved margins to 6.8% of revenue, compared with a year-earlier 5.3% of revenues. That was a notable jump, but it lagged rivals'.

In his missive, Lampert -- a renowned financier who acquired Kmart in bankruptcy, later using its richly valued stock to buy Sears, and who has labeled Sears Holdings a $53 billion startup -- said that the year was full of ups and downs, including the trouble the company faced in figuring out how best to squeeze profit out of the off-mall Sears Grand format.

"It is absolutely clear to me that we had it within our capabilities to overcome the fourth-quarter headwinds, had we executed better within a number of our businesses," he wrote in a filing with the Securities and Exchange Commission. Appliance sales -- an important category for the Sears Roebuck stores -- were off in the quarter, as were lawn and garden and home fashions for the year.

"We have not yet found the right formula for Sears Grand as an off-mall offering for Sears," he added. "We are aware of the success of our off-mall competitors in many of our core businesses. We remain convinced that this represents a big opportunity for Sears Holdings, and we continue to work at identifying the right formula for success off-mall."

Overall, however, Lampert seemed pleased with the direction in which the retail operations are marching. Lands' End, for example, raked in record profit from its traditional catalog, online and bricks-and-mortar sales channels and is improving significantly as a unit in the Sears stores.

The home-services business, which runs the gamut from furnace installations to carpet cleaning, also reaped record rewards. "Home services is not only a highly profitable business for us, but also an important strategic asset as it provides a point of differentiation from many of our competitors," the chairman said.
Lampert denied that he's shrinking the business, as many analysts assert, but that's he's building a better base for growth.

"No great company would aspire to become smaller, and we certainly do not,"
Lampert said. "To this end, we have set out to improve the profitability of our business model. Our objective is disciplined growth."

That includes risky investments, such as controversial total-return swap deals, but he bristled at the notion that companies shouldn't gamble. "Every company takes risks every day," he wrote. "Indeed, business is about managing risk.

"We try to manage risk in an effective way -- whether it is in our investment decisions, our real-estate decisions or our product-line decisions -- and we are prepared to take risks where we believe the probability of success justifies the investment."

Deutsche Bank analyst Bill Dreher said Lampert wants to "avoid profitless prosperity."

'Trapping' money

Lampert's also irritated that the ratings agencies haven't yet graded Sears Holdings. "We believe Sears Holdings is an investment-grade company; the lack of response by the agencies is puzzling and is certainly something we continue to hope will change."

He used his missive to complain again this year about the Pension Protection Act and added grievances about lawyers' rapidity in filing suits against retailers.
Sears Holdings, which has one of the biggest legacy pension funds in the United States, contributed $318 million to its plan last year for total funding of more than $4.5 billion. But Lampert doesn't believe he should have to fully fund the pension plan to meet current and future retirees because it is "trapping" money that could be invested elsewhere.

The pension act calls for full funding of pension plans within seven years, while Sears is "funding 90% of the obligation to avoid creating a pension surplus," Lampert said. "Surpluses are undesirable because they effectively 'trap' assets: Once amounts are contributed to a pension plan, it is extremely difficult and costly to recapture them, even if the plan later becomes overfunded."

He also railed against the pace of litigation reform, accusing attorneys of filing suits against businesses like his in hopes that cases will be settled for heady sums rather than dragged through the courts.

"We must develop rules that limit the ability of plaintiffs' lawyers to game the system to collect millions of dollars for a frivolous case," according to Lampert. "We must make parties who swing for the fences in the face of countervailing facts and law pay for their decision to do so when it is unsuccessful -- a loser-pays system.

"Of course," he conceded, "the truly aggrieved ought to be fairly compensated; but in today's system the big winners too often are the lawyers."  Finally, Lampert's message included as a help-wanted advertisement of sorts. Noting that he's building a "strong bench of leaders," he said Sears Holdings is a "great place for people seeking a challenge and a chance to succeed."

"We invite anyone with integrity, smarts, a strong work ethic and a team-based commitment to winning to come join us. I have always been comfortable making bets on people, judging them based on results rather than age or experience."

Jennifer Waters is a reporter for MarketWatch based in Chicago.

Julian Day Speaks
By Nathan Vardi - Forbes.com
February 27, 2007

RadioShack's chief executive has outlined a four-point turnaround plan for the struggling retailer that places little emphasis on sales growth.

Sales "are the lifeblood of a company," said Julian Day in his first detailed comments since taking over at RadioShack in July. "Sales in themselves are not the goal. What we believe is that we must not sacrifice profitability to drive top-line sales."

Day's four-point plan includes working to improve the in-store experience for customers, increasing gross profit dollars, continuing to manage expenses and only investing in projects that maximize returns. Day also reiterated that RadioShack's first-quarter revenues would weaken. "Our top-line performance for the first quarter will be challenging," he said.

RadioShack's stock rocketed up 12% in trading following the call and the release of 2006 fourth-quarter and full-year financials. The company reported fourth-quarter earnings today of $84 million, or 62 cents a share, beating analyst estimates. In a press release, RadioShack trumpeted "a 65% increase in reported net income," but those fourth-quarter earnings look less impressive, up only 5% or so, when accounting for a special $62 million inventory write-down charge RadioShack took in the fourth quarter of 2005.

RadioShack's newly released financials continue to betray the company's eroding competitive position, as fourth-quarter revenue slid 13% to $1.5 billion. Sales at RadioShack for the full year declined 6% to $4.8 billion, and 2006 comparable-store sales were down 5.6% versus calendar year 2005.

RadioShack has been in a terrible funk because its stores--close and convenient for most Americans looking for a trusted name in consumer electronics--have increasingly seemed irrelevant due to big-box retailers.

Companies like Best Buy and Wal-Mart Stores, which offer one-stop shopping and deep discounts, have simply hammered RadioShack's traditional model. RadioShack's key wireless products business has long been deteriorating.Then, a year ago, just as a new 18-month turnaround plan was being announced, the company's chief executive, David Edmondson, resigned after it was revealed that he had lied about his academic credentials on his resume.

Day was brought in because of his past turnaround successes. In the 1990s, Day helped revive Safeway as chief financial officer of the company. He took over as chief executive of Kmart Holding when the discount retailer was in bankruptcy court in 2003 and presided over a stunning re-emergence.

Day took over a turnaround plan sketched out by his predecessor, which included closing 505 underperforming corporate-owned stores, consolidating distribution centers and laying off employees from corporate headquarters.
Day's efforts have thus focused on improving profitability at RadioShack's 4,500 corporate-owned stores and 778 kiosks. RadioShack's stock has gained 85% since Day took over.

Still, Day has yet to articulate a vision to make RadioShack a relevant player in the consumer electronics business. The company's new leader struggled on Tuesday to respond to questions pressing him for a strategy that would boost same-store sales.

"They performed well for the fourth quarter with the maximizing profit strategy," said Edward Mui, an analyst at CreditSights. "We are still concerned about the top-line growth strategy, which we felt was kind of lacking--there is clearly no laid-out plan for growing the top line."

Sears Profit Rises 27% on Increased Apparel Sales
By Lauren Coleman-Lochner -Bloomberg.com
March 1, 2007

Sears Holding Corp., the largest U.S. department store company, said fourth-quarter profit climbed 27 percent, exceeding analysts' estimates, after the retailer sold more apparel.

Net income rose to $820 million, or $5.33 a share, from $648 million, or
$4.03 a share, a year earlier, the Hoffman Estates, Illinois-based company said today in a statement. Revenue rose 1.3 percent to $16.3 billion.

Profit was helped by its home services unit and improved apparel sales at both Kmart and Sears stores. Chairman Edward Lampert has boosted earnings at the expense of sales at older stores by limiting discounts and cutting back on store remodels. A hedge fund manager, he's used the company's cash to make investments and says he'll consider acquisitions outside retail.

``I don't think anyone investing in Sears is investing because it's a retailer,'' said Keri Spanbauer, an analyst at Minneapolis-based Thrivent Investment Management, with $67.5 billion in assets. ``You're investing in it because of Eddie Lampert.'' Thrivent doesn't own Sears among its retail portfolio, she said.

Sears has $3.3 billion in cash, excluding its stake in Sears Canada Inc. That was less than the $3.5 billion the company forecast in January.

``The balance sheet did not look as strong as the company projected,'' said New York-based Gary Balter, an analyst with Credit Suisse who has an ``outperform'' rating on the stock.

Shares of Sears fell $5.34, or 3 percent, to $174.91 at 10:03 a.m. in Nasdaq Stock Market composite trading. Shares have declined 6.1 percent in the past three days amid a selloff of global equities.

Kmart, Sears

Kmart Holding Corp. and Sears, Roebuck & Co. merged in 2005. The company has about 3,800 stores in North America and sells exclusive brands including Kenmore home appliances and Craftsman tools.

Excluding some expenses and gains including investment losses and a tax benefit, Sears earned $5.36 a share. Four analysts surveyed by Bloomberg on average estimated profit of $5.16 a share.

"They set high expectations, they beat the high expectations,'' said Scott Rothbort, president of Millburn, New Jersey-based Lakeview Asset Management, which counts Sears among its top investments. "You have a core retail business, which he's fixing up, and he's going to use the strong balance sheet of that business to diversify Sears.''

Sales at stores open at least a year fell 3.1 percent in the quarter, comprised of a 4.9 percent decline for at Sears stores and a 0.9 decrease at Kmart. For the year, same-store sales declined 3.7 percent

Sears has posted declining sales at stores open at least a year in every quarter since Kmart and Sears combined.

`Intent to Grow'

"I want there to be no doubt about one thing: It is certainly our intent to grow Sears Holdings,'' Lampert said today in a letter to shareholders.
``Some commentators have asserted that we want to shrink the company, but that is simply not so.''

Lampert, 44, said the company had emphasized the profitability of its operations by closing stores and reducing expenses.

"Our objective is disciplined growth,'' he said. ``We do not want to grow for the sake of becoming bigger.''

Lands' End merchandise saw a ``significant improvement'' in stores and posted record profit in catalog and Internet sales, Lampert wrote. Lawn and garden and home decor struggled during the year, Lampert said. Its Sears Grand stores, standalone stores not located in malls, also are not performing well.

Profit was reduced by $45 million, or 29 cents a share, after a Texas state court said Sears breached a contract with bondholders by redeeming notes in 2004. The company said it will appeal. The company also lost $17 million, or
11 cents, on investments in total-return swaps.

Swap Agreements

Total-return swaps are agreements in which one investor makes payments based on any coupons and capital gains or losses of an asset and the other makes fixed or floating-rate payments. Sears earned $101 million before taxes in the third quarter on swaps investing and said today its swaps are worth less than $400 million.

Sears gained $25 million, or 17 cents, on a tax benefit, and $31 million, or 20 cents, from the sale of Kmart's headquarters.

J.C. Penney Co., which like Sears operates the bulk of its stores in malls, may be capturing customers along with Kohl's Corp, Spanbauer said. Both have prospered by offering their own brands of designer clothing and home goods.

J.C. Penney, the third-largest department store company, on Feb. 22 said fourth-quarter net income fell 13 percent to $477 million after a year-earlier tax benefit. Profit from continuing operations beat analysts' estimates. Same-store sales rose 2.2 percent. Kohl's reports later today.

Federated Plans Corporate Name Change
Shareholders to Vote on Conversion to Macy's Group, Inc.
Company News Release
February 27, 2007

CINCINNATI--(BUSINESS WIRE)--Feb. 27, 2007--Federated Department Stores, Inc. (NYSE:FD) (NYSE Arca:FD) today announced that its Board of Directors will ask shareholders to change the company's name to Macy's Group, Inc. A vote to amend the corporation's charter to accommodate the new name will be conducted in conjunction with Federated's Annual Meeting on May 18, 2007.

If approved, the company will be known as Macy's Group, Inc., effective June 1, 2007.
"Macy's Group is a name that more accurately reflects the transformation of our business in recent years. Today, we are a brand-driven company focused on Macy's and Bloomingdale's, not a federation of department stores," said Terry J. Lundgren, Federated's chairman, president and chief executive officer. "By aligning our corporate name with our largest brand, we will increase the visibility of the company with customers, leverage the world-famous Macy's brand name, and get more credit for our accomplishments in the marketplace.

"Macy's Group is the appropriate name for our company, given that about 90 percent of our sales involve the Macy's brand. That said, Bloomingdale's is - and will remain - a very important part of the company. Becoming Macy's Group will in no way limit or constrict us from growing in any direction in the future," Lundgren added. Federated Department Stores, Inc. was originally chosen as the company's name in 1929 by a group of family-owned department stores that joined together under a corporate holding company umbrella.

Federated became an operating company in 1945, and its portfolio over the years has included various regional department store names. In 2005 and 2006, all regional nameplates were converted to Macy's. The company today operates only Macy's and Bloomingdale's stores, with both brands expanding nationwide.

Federated, with corporate offices in Cincinnati and New York, is one of the nation's premier retailers, with fiscal 2006 sales of $27 billion. Federated operates more than 850 department stores in 45 states, the District of Columbia, Guam and Puerto Rico under the names of Macy's and Bloomingdale's. The company also operates macys.com, bloomingdales.com and Bloomingdale's By Mail.

2007 Break-Up Values: Sears $205 or $325?
(Current Price $187.65)
By Ryan Barnes. Edited By Douglas A. McIntyre - 24/7 Wall St.
February 26, 2007
Sears Holding Corp. (SHLD) ­ Price $ 187.65;
Break-up Value $205(1), $325(2)

Sears Holding has a few things going for it, and a few things going against it. Eddie Lampert and real estate are both big pluses. Sears and Kmart, as stores and as brands, are both minuses. Lampert is generally considered one of the top ten investing minds at the helm anywhere today, having put up crazy-sounding returns like 30% annualized over a 17-year period at his hedge fund. But can a break-up value include the value of a manager¹s ability to generate investment returns? Our analysis of Sears Holdings Corp. will try to answer the question, or at least dress it up real nice and send it back to you.

Much has been made of Lampert¹s Buffett-molded, value-laden approach to running Sears Holdings since the Kmart ³merger² in 2005. Sears being bought out by a third party in a private equity deal is laughably impossible, as Chairman Lampert owns over 40% of SHLD stock at present, and he was known as a lethal shareholder activist before coming to his current post. Nobody is getting his shares, at least not as long as he¹s able to manage the assets ­ and who in their right mind would really want to detach him from that job?
By all accounts he¹s been doing a fantastic job, adding over $110 million in income last year from investing activities, and that was off a relatively small asset base. No, any major shakeup in the asset and operating structure will be thought up and spearheaded by Lampert himself.

Buffet has said in Berkshire¹s letters for years that he wouldn¹t buy back stock unless it was trading at a massive discount to intrinsic value. Since SHLD bought back some $400 million in the first quarter of 2006 and 289m in the last, you better believe that when Lambert crunches the numbers, that massive discount is there.

Investors rarely think of retailers being classic cash cow business models, and rightly so. The margins just aren¹t there. So retailing is taught to be a volume story, where someone like Wal-mart becomes a winner by outselling everyone on the planet. But consider the scenario in play at Sears Holdings.

Kmart is the worse brand, but its locations are what retailing is all about now ­ the ³big box² store. Sears has the bulk of the real estate, but it¹s mostly stuck at the end of shopping malls. So start moving the Sears product - the Kenmore and the Craftsman and the Lands End ­ into the preferred big box Kmart stores (a.k.a. Sears Essentials, or Sears Grand or whatever they¹re called these days), while simultaneously paring off the Sears real estate as you can, using the cash infusions along with predictable, if not growing, cash flows from retail operations to fund an investing unit run by Lampert.

And given that retailing is spinning off $50b plus a year in sales, every extra basis point that Lampert can squeeze out of operating margins amounts to a whole lotta¹ extra cash to invest. Sears Holdings squeezed out 600 of them last year, bringing operating margins back in line with peers at around 5%. He shouldn¹t try, and we shouldn¹t expect, too much more improvement to be had.

The ironic thing is that the Berkshire Hathaway textile company that Buffet used to provide his beginning cash flow was methodically buried after years of avoiding capital expenditures of any kind. If he tries to pinch too many pennies, Lampert is likely to do the same thing over at Sears Holdings. For our analysis, we¹re going to assume that most of the operating performance improvements have peaked, and that the story going forward is how much money Lampert can put safely into the investment pool without cutting off blood flow to the retailing business.

To this end, we have calculated the value of the Sears real estate and the run-rate in operating cash flow that would be left over after the hypothetical sale of these assets. The real estate, comprising over 450 Sears stores, would take a couple of years to sell off at reasonable rates.

The scattered sales of 2005 were done at nearly $125/sq ft, levels almost unheard of and reflecting their status as truly prime properties. More moderate estimates would call for the remaining real estate to go for in the range of $70-$100/sq ft. Our estimates will use the mid-point of $85, giving us a value of $11.9 billion based on last reported square footage figures. Figure Lampert to use part of these proceeds to whittle down debt to minimal levels.

The loss of the revenue from these stores will obviously cut revenue and op income figures, but based on a 5% operating margin the remaining 2,900 stores (not including Sears Canada) would still generate over $2b per year in operating income for investment use.

As for Sears Canada, now 70% owned by Sears Holdings, the stock has soared on the takeover attempt, with Sears Holding¹s share currently worth over $2b at market prices. To account for this we won¹t count Sears Canada¹s operating results in our analysis.

So what are we left with? We¹ve got a poorly-performing retailer with flat sales at best, only deserving of a .4 or .5 P/S multiple (or $18b), and one of the most sought-after money managers in the world sitting on potentially $13 billion in liquid assets.

This takes us back to the original question of whether a money manager deserves their own break-up value. If you are in the camp that says no, then the total break-up value of the company is just north of $205 bucks per share, and Lampert is treated like any other executive. If, however, you think the guy can deliver 20% or so returns on his assets annually, you¹ll be interested in a break-up value that instead of cash includes an investment portfolio/hedge fund at a PEG of 1 (much less than Fortress Group) and gives a total-breakup value of $325/share. The question may be left unanswered for now, but it appears there¹s some solid upside either way.

Ryan Barnes

Ryan Barnes has over 10 years¹ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.

Crittenden Is Named Citigroup Finance Chief
He Has Background Investors Demanded;
Is He CEO Successor?
By Clint Riley - Wall Street Journal Online
February 26, 2007

Citigroup Inc., an institution struggling to match the financial and stock performances of competitors, named Gary L. Crittenden, a veteran finance executive with experience in restructuring, as chief financial officer.

He will report directly to Charles Prince, chairman and chief executive officer, effective March 12.

Mr. Crittenden is the chief financial officer and executive vice president at travel and financial-services firm American Express Co., which he joined seven years ago.

Mr. Crittenden, 53 years old, has precisely the kind of experience Citigroup went looking for a little more than a month ago when it moved 42-year-old Sallie Krawcheck out of the finance chief's post and into a job as head of the bank's global wealth-management division, after the abrupt ouster of that business's chief.

In joining Citigroup, Mr. Crittenden positions himself with five other senior executives inside the company to potentially succeed Mr. Prince. The others are: Manuel Medina-Mora, head of Citigroup in Latin America; Tom Maheras and Michael Klein, co-presidents of the corporate and investment bank; Ajay Banga, head of the international consumer business; and Ms. Krawcheck, who top executives maintain still is in contention, although investors and analysts view her almost 2 1/2-year tenure as finance chief as less than stellar.

Mr. Crittenden will join Citigroup as investors continue to question whether Mr. Prince is the right person to lead the world's largest bank by market value. Some investors speculated during the company's search for a finance chief that the bank needed to find an outsider who could immediately succeed Mr. Prince. Several large investors told the company they wanted Citigroup's next finance chief to have deep experience in managing the balance sheet of a large financial-services firm, according to two people familiar with the search.

Unlike Ms. Krawcheck, who spent much of her career as a top Wall Street research analyst before joining Citigroup, Mr. Crittenden is a pure finance executive. Before joining American Express, he served as the chief financial officer of Monsanto Co. (now Pharmacia Corp.), a world-wide agricultural concern, and Sears, Roebuck & Co., whose credit-card portfolio is now owned and managed by Citigroup.

Mr. Crittenden will be expected to help the bank navigate a difficult interest-rate environment for financial institutions, as well as manage the company's exposure to declining credit quality in its loan and credit-card portfolios.

Allstate sets CEO's salary at $960,000
By Becky Yerak - staff reporter - Chicago Tribune
February 23, 2007

Allstate Corp. has approved 2007 base salaries for top officers, including $960,000 for Thomas Wilson, who became chief executive for the Northbrook-based insurer last month, according to a company regulatory filing Thursday.

Chief Financial Officer Danny Hale was awarded a base salary of $609,312, and Eric Simonson, president of Allstate Investments, was awarded a base salary of $625,248.

The base salary of Edward Liddy, the former CEO who remains chairman, remains unchanged at more than $1.1 million.

The salaries will take effect April 1, except for Wilson's, which became effective when he took the top job on Jan. 1.

The annual proxy statement, which has the most comprehensive executive compensation information, will be filed in a few weeks, Allstate spokesman Mike Trevino said Thursday.

Liddy also received 78,709 restricted shares of stock, valued at $4.9 million, and 234,936 stock options, according to a separate filing made Thursday with the Securities and Exchange Commission.

Wilson was awarded 22,385 shares of restricted stock valued at $1.4 million and 262,335 options, according to another of the approximately 15 SEC filings Allstate made Thursday.

The restricted stock units, based on a price of $62.24 a share, vest in 2011.

Shares of Allstate closed at $62.01, up 18 cents, on the New York Stock Exchange.

Robert W. McConnell Jr., retired Sears Eastern Territory legal counsel, dies at 88
Philadelphia Inquirer
February 22, 2007

Robert W. McConnell Jr., 88, a lawyer and community activist, died of heart failure Feb. 17 at Bryn Mawr Hospital.

Mr. McConnell lived in Rosemont before moving last fall to Waverly Heights, a retirement community in Gladwyne.

From 1961 until retiring in 1987, he was eastern territory legal counsel for Sears, Roebuck & Co. Previously, he was general counsel for American Waterworks in Philadelphia; an associate with the Dechert law firm in Philadelphia; and law clerk for the chief justice of the Pennsylvania Supreme Court.

Mr. McConnell graduated from Frankford High School and earned a bachelor's degree from Haverford College. He earned a degree from the University of Pennsylvania Law School, where he edited the Law Review.

While serving in the Army during World War II, he contracted polio and was in an iron lung for a year. He recovered, his son, Geoffrey said, and was assigned to the State Department to edit a newsletter to educate German prisoners of war about democracy.

Mr. McConnell was a volunteer with the Main Line chapter of the American Red Cross. He served on the boards of Ludington Library in Bryn Mawr and Horizon House, a Philadelphia agency for the homeless and for adults with addictions and mental disabilities. He was a trustee and a deacon at Bryn Mawr Presbyterian Church. For 50 years he was an active member of the Union League in Philadelphia.

Mr. McConnell's wife of 61 years, Jane Royle McConnell, died in October. In addition to his son, he is survived by daughters Daphne Graham and Alexandra; and three grandchildren.

A memorial service will be at 11:30 a.m. tomorrow at Bryn Mawr Presbyterian Church, 625 Montgomery Ave. Bryn Mawr.

Rod Birkins Joins QVC as Senior Vice President
QVC News Release
February 21, 2007

WEST CHESTER, Pa., Feb. 21 /PRNewswire/ -- QVC, Inc. announced today that Rod Birkins has joined the company as Senior Vice President of Global Sourcing and Design & Development, effective immediately. The position was previously held by Bob Ayd who was promoted to Chief Merchandising Officer in October 2006.

In his new position, Birkins will manage the company's design and sourcing team. He will also be responsible for crafting and implementing a strategy for driving and sustaining long-term growth. Additionally, he will be responsible for maximizing sourcing efficiencies and broadening sourcing for the company's various merchandise categories.

Birkins brings more than 30 years of merchant and supply chain experience, most recently with Sears, Roebuck and Co., where he served as President of Sears Buying Services. In this role, Rod was responsible for all sourcing, quality control, legal compliance, technical design, and international office operations. Previously, Birkins served as President of JCPenney Purchasing Corp., where he was responsible for all sourcing and international office operations.

"Rod has a unique understanding of the overall retail process - from design inception to final sale to the customer. QVC will also benefit greatly from his expertise in international sourcing, quality control, offshore operations, and management of large diverse groups of people," said Bob Ayd, to whom Birkins will report. "Rod's proven history of increasing sales, improving operational efficiencies, and driving profits using entrepreneurial and creative approaches will be of tremendous value in his new role."

And on this floor, a comeback
Recent success of department stores shows reports of their impending demise were greatly exaggerated
By Jayne O'Donnell, USA Today
February 21, 2007

When Federated Department Stores CEO Terry Lundgren graduated from college in 1975, he had 13 job offers, including one for a good-paying position at IBM. When he took a job as an executive trainee at Bullock's department stores, his roommate said he was crazy: Department stores were dying. When Lundgren left Neiman Marcus in 1994 for Federated, friends again questioned why he would stick with a "dinosaur industry."

Lundgren has an answer for the naysayers: "I say, 'Listen, we're doing $27 billion in sales. Someone is coming to these stores.' "

Department stores are on a roll, recently trouncing the specialty stores that were supposed to be the winners in a long-running retail battle. The department store/specialty store rivalry dates to the growth of regional malls in the late 1980s and early '90s, when the smaller specialty stores filled in the spaces between the department store anchors.

More recently, department store sales, led by Federated, Nordstrom and Neiman Marcus, have been climbing. Meanwhile, specialty stores, including Talbots, Ann Taylor, Chico's and the beleaguered Gap, have been stumbling.

There are exceptions among specialty stores. Luxury and teen retailers continue to shine. Retail analyst Jennifer Black cites Coach, Abercrombie & Fitch and J. Crew as examples of retailers that know their customers and are largely immune to economic downturns.

But analysts and consumers agree that, as usual, it comes down to product.Some specialty stores have erred by going either too dowdy or too trendy, while department stores have made the most of their square footage by adding more designer and private-label merchandise to distinguish their offerings.

Department stores have "done a really good job focusing in on how to make their assortments more compelling," says Michelle Bogan, a retail strategist at global consulting firm Kurt Salmon Associates. Some "specialty stores started to rest on their laurels, thinking people would keep coming if they just kept doing what they were doing. But if the customer has a better option, that's where she's going to shop."

"The department stores are using some exciting new vendors, while also keeping the old ones, and they kept the pricing affordable and the quality good," says Nanci Lee Mora, a frequent shopper and former Bloomingdale's manager from Los Gatos, Calif. "The smaller stores have become boring, (and) their prices are too high."

Mora, who wears petite sizes, says she used to frequent Chico's, Talbots and Anthropologie but is now particularly fond of Macy's, where she can shop both for higher-end designers and in the juniors department. "Specialty stores do not offer the variety, prices or size variation that Macy's or the other department stores offer."

'Everything that I need'

Talbots was among Soroya Pierre-VanArtsen's favorite stores when she was single. Now that the Grand Rapids, Mich., aerospace industry accountant is a working mom, she sticks mostly to department stores, especially Macy's and Lord & Taylor. "I can find everything that I need for the entire family in one store," Pierre-VanArtsen says. "It's definitely a time saver."

Department stores have an easier time compensating for problems such as the unseasonably warm weather that battered cold-weather clothing sales late last year, says Ann Taylor spokeswoman Maria Sceppaguercio. She says having to discount cashmere scarf sets and other winter wear, which makes up about half of Ann Taylor stores' merchandise around the holidays, contributed to their disappointing sales. "Department stores carry a much broader range of products ‹ men's, women's, children's and housewares ‹ and have a lot of other places where they can make up for what they're not selling," she says.

Among department stores leading the current bounce-back:

€Nordstrom. Spokeswoman Deniz Anders says Nordstrom, which has had growth in same-store sales for the past five years, never really was in a slump.
Still, Black notes that Nordstrom's women's apparel hadn't kept pace with growth in the shoe, children's and men's departments over the past few years, a situation Nordstrom acknowledges.

"Any time we go through challenges in any part of the business, it's a chance to look at things in a new light," says Pete Nordstrom, president of merchandising and a great-grandson of the founder. "The relative struggles motivated us to dig deep and get after it again."

Black says the women's apparel turnaround is almost complete, and Nordstrom is "stealing market share from the huge group of specialty retailers who have not been trend-right."

€Federated. Last September, all of the remaining May department stores owned by Federated became Macy's, creating an 860-store retail powerhouse. Now, Lundgren says, "We have more shots at encouraging customers to try us," and the company's same-store sales increases of 4.4% and 8.6% for December and January, respectively, suggest it's working. He also credits brands such as Ralph Lauren and private-label merchandise, including the recently launched Oscar de la Renta and Tahari lines that are only for Macy's. Federated, which also owns Bloomingdale's, is now the largest seller of Ralph Lauren in the country.

Renovations at Macy's stores have helped. "Department stores, especially Macy's, used to take the approach that 'We'll just put a lot of product in and let customers sort it out,' but now they've pulled some things out and given a clearer point of view on what the store is about," Bogan says. "It's making department stores much easier places to shop."

€Neiman Marcus. The high-end retailer, which also owns Bergdorf Goodman and teen retailer Cusp, had comparable revenue growth for each of the last four years, with more than 6% increases in quarterly same-store sales since July 2003.

Other retailers say one of Neiman's biggest accomplishments is doing about as much business as rival Saks while having less than half the number of stores. Neiman credits its loyalty program, which begins offering rewards after customers have spent $5,000, for some of its sales increases. Members of the program spend 20 times more at the stores than non-members.

€J.C. Penney. After a near-death experience in 2000, Penney's is well into a comeback. CEO Mike Ullman says the 1,000-store chain is one of the few department stores with positive same-store sales every year. Same-store sales were up 3.6% in January, 2.6% in December.

Ullman says Penney's is capitalizing on its spot between Macy's and Kohl's to emphasize low prices and high quality. He also says the chain has the largest department store website owned by a retailer, has the only "big book" catalog business and is the largest department store in terms of private brand merchandising.

It hasn't been as merry at some of the smaller stores:

Ann Taylor/Ann Taylor Loft. Ann Taylor company's January same-store sales were down 10.2%, and the previous few months were also bleak. Ann Taylor has acknowledged missing the mark with some of its especially fashion-forward selections at the Loft stores, which had to be heavily discounted. The chain is predicting continued problems into spring at Loft until it can reconfigure the percentage of trendy vs. classic clothes.

The company says it has been more careful to buy what it thinks it can sell at full price so it didn't need 40%-off sales mid-summer or last month. That meant the company had lower same-store sales in January but made more money on what it sold than it did a year ago.

Ann Taylor's "current spring assortment is on trend and selling, and inventories are very clean," Black says. "We believe Ann Taylor is turning its business around."

Chico's and White House/Black Market. Chico's same-store sales were down 3.5% in January and down 2% in December. "Chico's went gangbusters so long, but it's unheard of to have such a streak for such an extended period of time," Bogan says. "Chico's is starting to get better market saturation, but it will be just impossible to keep up double-digit growth."

Black says the company has begun improving the selections at Chico's stores and applauds White House/Black Market's return to only black and white apparel. She says Chico's "has a great management team," which will help the company get back on track.

Talbots/J. Jill. Talbots, which saw same-store sales decline 1.6% in the fourth quarter, is now predicting growth in the "low single digits" for Talbots and "mid-single digits" for J. Jill this year. The company has cut back its expansion plans to 70 Talbots and J. Jill store openings this year, down from about 90 new stores last year.

Some customers have noticed Talbots' recent efforts to make apparel trendier, but because Talbots does very little advertising outside of its catalogs, that message may not have gotten to potential new customers.

"Baby-boomer women's closets are already full," Black says. "They're not going to buy something unless it stands out."

Devoted fans

Despite the downturn, specialty stores have their devoted fans. Lisa Jones of Mariemont, Ohio, says she often finds department stores overwhelming and catches herself shopping for, say, towels when she sets out to find a dress.

"I can stay on track at a smaller, specialty store," says Jones, who favors Ann Taylor Loft. "At the holiday season, department stores are great, but after-season deals can be found anywhere."

Lettie Corkhill says she has limited time and doesn't like "to spend it flipping through rack after rack."

"The specialty stores have a good mix of merchandise without being overwhelming, and their sales are just as good if not better than department stores," says Corkhill, who lives in St. Louis.

Nobody's declaring the department vs. specialty store battle over. "Part of what's happening is definitely cyclical. From channel to channel, you will see peaks and valleys," Bogan says.

Over the years, Lundgren says, he was warned the department store killers were first going to be catalog retailers, then specialty stores, discounters Wal-Mart and Target, TV shopping channels and online retailers. Indeed, some of the most successful retailers have beefed up their websites and become competitive in catalog sales.

But it still comes down to product. "Customers don't make a big distinction Š as long as you offer a compelling reason to be there," Pete Nordstrom says. "They just like shopping where they can find the things they can want."

 

Medicare Benefit Appears to Slow Spending Growth on Drugs
By Christopher Lee - Washington Post Staff Writer
February 21, 2007

Federal number crunchers said yesterday that the new Medicare drug benefit appears to be slowing the growth in national spending on prescription medicines because the drug plans are negotiating lower prices with drug companies.

But the analysts also forecasted that overall health-care spending would continue to rise and would account for nearly 20 percent of the economy -- or more than $4 trillion a year -- by 2016. In contrast, health-care spending was about $2.1 trillion in 2006, accounting for about 16 percent of the economy. In 1985, it was just over 10 percent.

The findings provide new fuel for the debate about whether Medicare could get better drug prices if the government negotiated with pharmaceutical companies. Many Democrats in Congress say it would, and the House has already passed legislation requiring the government to use its negotiating muscle. President Bush maintains that the current system achieves the best prices, and he has threatened a veto.

The figures are being published today by actuaries and economists at the Centers for Medicare and Medicaid Services (CMS) in the journal Health Affairs. The figures cited in the study for 2006 are forecasts as well because data are not available yet, federal officials said.

Karen Davis, president of the Commonwealth Fund, a nonprofit research institution, said the projections show that the United States still has a serious problem with rising costs despite a slowdown in health-care spending growth in recent years.

"The cost problem isn't solved," Davis said. "In the 1990s we thought managed care was the solution. In the 2000s we thought consumer-driven health care and higher deductibles for patients was the solution. Now, when you look at these numbers, you realize we've got to get serious about transforming the health-care system."

Analysts said they expect to see that spending on prescription drugs rose more slowly in 2006 because of the Medicare Part D drug benefit that began last year. In the program, private insurers negotiate prices with drug companies as they compete to attract Medicare beneficiaries.

That has helped hold down prices even as more seniors are able to get drugs, John A. Poisal of the CMS said in a briefing. National spending on prescription drugs was expected to rise to $214 billion in 2006, from $201 billion in 2005. But that increase is 0.4 percentage points less than it would have been without the new drug benefit, he said.

Several national polls have shown that a majority of the public believes government negotiations would hold down drug costs even more. A survey of 1,000 adults released yesterday by AARP, for instance, found that 87 percent of respondents -- including majorities of Democrats, Republicans and independents -- supported allowing the government to use its bargaining power.

Government Pays Growing Share Of Health Costs
By Jane Zhang and Vanessa Fuhrmans - Wall Street Journal
February 21, 2007

WASHINGTON -- As pressure grows for the government to pick up more of the nation's health-care tab, new data show its contribution is already at 45% and is expected to approach 50% within 10 years.

The government's widening role in financing health care stems from the recent expansion of Medicare to include prescription drugs, the growth of relatively new initiatives like the State Children's Health Insurance Program, increased spending by enrollees in programs like Medicaid -- which covers many of the sickest patients -- and cutbacks in employer-sponsored health coverage.

Overall, health spending in the U.S. is expected to double to $4.1 trillion by 2016, consuming 20% of the nation's gross domestic product, up from the current 16%, according to a new federal study. By then, the study predicts, the government will be paying 48.7% of the nation's health-care bill, up from 38% in 1970 and 40% in 1990.

The stark projections come amid increasing ferment over health care in the states and Washington. They could bolster the argument of some analysts that the U.S. is creeping toward a single-payer system in a disorganized, piecemeal way. Under such a system, the government essentially pays for health care and covers the cost by collecting taxes and premiums.

In any case, the changing landscape has already prompted some insurers to rethink their growth strategies, at least in the short term, focusing more on the government end of the market.

"We are moving incrementally away from traditional sources of insurance, such as employer-based coverage, to a system comprising more federal and state government-provided health care," said the study's authors, who work for the agency that runs Medicare, the federal health program for the elderly and disabled. Their projections are being published today in the journal Health Affairs.

Health care has moved to the fore of public debate recently, as several states have followed Massachusetts's lead in fashioning plans to cover uninsured residents through a combination of subsidies and new state pools designed to make it easier for individuals to buy insurance. In Washington, meanwhile, lawmakers across the political spectrum are discussing the importance of expanding coverage for children, and many Democratic lawmakers, as well as diverse coalitions of businesses, insurers and health-care advocates, are talking up the need for universal coverage.

But there are sharp differences about how to get to universal coverage, and especially how to pay for it.

Some advocates of a free-market approach warn that the U.S. is nearing a tipping point in the debate between publicly financed and privately financed health care, and urge the White House to press its market-friendly approach now -- before the 2008 elections. They fear a new Democratic president might press for more government-centered solutions.

Indeed, Democratic presidential contenders have pledged to make helping the uninsured a focal point of their campaigns.

Medicare's drug benefit, introduced in January 2006, increased the program's share of the nation's prescription-drug spending to 22% last year from 2% in 2005. The drug benefit, though subsidized by the federal government, is offered through private insurers. Those private plans come in two types:  stand-alone prescription-drug plans, which supplement traditional Medicare, and managed-care plans called Medicare Advantage, which cover other benefits as well as drugs.

Humana Inc., one of the biggest providers of the new drug benefit, has made no bones about becoming more government-focused. In the run-up to the drug benefit's launch, Chief Executive Michael McCallister declared that Humana would "get very heavily weighted toward the government space in terms of earnings over the next couple of years."

Humana threw itself into the new market by manning its own kiosks in Wal-Mart stores across the country, hiring an army of sales agents and contracting with State Farm Insurance Co. to help sell the drug plans. By the end of last year, 4.5 million Medicare beneficiaries were getting their drug benefits through Humana. That includes one million people who signed up for Humana's Medicare Advantage plans, which are even more profitable for the company.

Earlier this month, Humana said its heavy bet on Medicare helped its fourth-quarter net income more than double to $155 million. Its pretax profit from government business alone more than tripled.

Robert Berenson, senior fellow at the Urban Institute's health-care center, said the projected rise in health spending in coming years means that the government should organize various parties -- including public and private payers, employers, workers, providers and consumers -- to discuss ways to curb costs and reform the system.

"We need some kind of comprehensive approach to control costs" that goes beyond merely shifting costs among the payers, Dr. Berenson said. Among the reform options he said should be discussed are a single-payer, government-run system; an expansion of Medicare to cover younger people, starting with 55- to 64-year-olds; and new limits on the use of high-tech medical equipment.

Joseph Antos, a health analyst at the American Enterprise Institute, a conservative think tank, said the new pressures facing the government "translate into a big political question: Can we continue on with the program the way it is now, given continuing demand by the baby-boomer generation?" With Medicare covering more people, the current public-private health system will eventually be primarily a public-health system, and "at some point Medicare will be the largest system," Mr. Antos said.

A lot of "volatility" underlies the overall growth rate in health-care spending, including shifts in whether public or private sources are paying the bills, said John Poisal, who wrote the report with colleagues at the Office of the Actuary at the federal Centers for Medicare and Medicaid Services.

"We will continue to face tough questions about how we finance our health care bill," he said. Americans' out-of-pocket spending is expected to grow to $440.8 billion by 2016 from $250.6 billion last year.

According to the study's projections, Medicare spending grew by 22% to $418 billion in 2006, up from $342 billion in 2005. The study said the growth would slow to 6.5% this year, due to scheduled cuts in payments to physicians and smaller payment increases to Medicare Advantage plans. But because Congress has already reversed the cuts in physician payments for this year, the actual growth rate will likely be higher. The authors also assume that by 2016, 32% of those eligible will be enrolled in Medicare Advantage plans, up from 13.5% in 2005.

Federal and state spending on Medicaid last year was estimated at $313.5 billion, roughly the same as in 2005. Medicare now provides drug benefits for low-income Medicaid enrollees, resulting in a 36% decrease in Medicaid drug spending in 2006. Medicaid spending in several other areas, such as hospitals and physicians, is also expected to grow at a slower pace, because of slower enrollment and state cost-cutting. But spending on some categories will grow sharply. The growth rate for home health spending, for example, was an estimated 20% for 2006, compared with 14% in 2005.

Meanwhile, spending growth by private insurance was estimated to have slowed from a peak of 9.5% in 2001 to a low of 4.7% in 2006.

With little overall growth in commercial or private health insurance, other insurers have sought to tap the market for government-financed health care.
That strategy has driven some of UnitedHealth Group Inc.'s biggest deals in recent years.

In 2002, UnitedHealth bought AmeriChoice Corp., a big Medicaid plan provider, for $560 million, to become one of the biggest players in that market. In 2005, it purchased PacifiCare Health Systems Inc., one of the biggest Medicare players, for $8.1 billion just ahead of the launch of the new drug benefit. It also campaigned hard to win a deal to sell AARP-branded drug plans. UnitedHealth currently has 5.74 million Medicare drug-plan members, more than any other insurer.

Drug companies also have profited from the drug benefit. In the first seven months of 2006, prescriptions funded by Medicare drug plans accounted for nearly 9% of medicines bought in retail pharmacies, according to Verispan LLC, a Yardley, Pa., firm that collects prescription data.

One of the biggest winners was Bristol-Myers Squibb Co. Nearly 14% of U.S.
retail prescriptions for its drugs, particularly the popular blood thinner Plavix, were financed by the Medicare drug benefit during that period, according to Verispan. Medicare-funded prescriptions accounted for more than 10% of AstraZeneca PLC's and Merck & Co.'s retail prescriptions as well.

What shoppers want
By Sandra Guy – Business Reporter – Chicago Sun-Times
February 20, 2007

A study that charts shoppers' attitudes toward retailers reveals that CVS has captured more hearts than Walgreens, and that Federated Department Stores, owner of Macy's, has fallen to a three-year low.

The study, to be released today, shows that shoppers seek top-line products and good customer service.

Today's shoppers are more powerful than ever because they can order items online from companies worldwide, and can inflict penalties on companies that fail to live up to their expectations, said Claes Fornell, head of the American Customer Satisfaction Index.

"Shoppers go elsewhere more quickly than in the old days," Fornell said.

The University of Michigan compiles the satisfaction index based on responses from people who have bought goods at retail stores, e-retail sites and online auction sites. The index is based on 15,000 surveys conducted in the fourth quarter of 2006 in order to capture retailers' busiest holiday season.

Walgreens' rating remained at 76 out of a possible 100, but CVS gained 5.4 percent from a year ago to score 78.

A Walgreen Co. spokesman said the Deerfield-based retailer sees no significant difference in the scores.

CVS Corp., embroiled in a battle to take over benefits manager Caremark RX, has been opening new stores and expanding its 24-hour drugstores in the Chicago region in the last few years. Last year, the Woonsocket, R.I.-based CVS acquired 60 Osco stand-alone drugstores from Albertson's, the former owner of Jewel-Osco grocery chain.

Federated Department Stores saw its ranking fall 4.1 percent in 2006 from the prior year, giving it a score of 71. The ranking -- Federated's lowest score since 2003 -- included both Macy's and Bloomingdale's stores.

A department store that makes a large acquisition, such as Federated taking over May Department Stores, including Marshall Field's, usually has trouble satisfying employees and customers in the first few years after the transition, Fornell said.

A Federated spokesman said the survey is incompatible with a 2006 study by the National Retail Federation which showed Macy's as one of the top 10 retailers nationwide in customer service.

Spokesman Jim Sluzewski said last year was one of "profound changes," but added "we are hearing many, many compliments from customers about the level of service at Macy's."

Kmart and Sears store rankings remained unchanged, with Kmart scoring the lowest at 70, and Sears scoring in the middle at 73.

The leaders among department stores are Kohl's with a score of 80 and J.C. Penney at 78.

Among grocery stores, Supervalu, owner of Jewel-Osco, dropped 3.9 percent from 2005, to a score of 74.

Safeway, owner of Dominick's, jumped 4.2 percent to tie Supervalu at 74. A Safeway spokeswoman said the Pleasanton, Calif.-based retailer's own research disputes the findings and shows that Safeway has a much higher reputation for customer service.

The top grocery ranking went to Publix Super Markets, with a score of 83.

Wal-Mart Names 9 Cities for Jobs Plan
By Chuck Bartels – Associated Press – Forbes.com
February 19, 2007

Wal-Mart Stores Inc. announced Monday its plans for nine stores in areas in need of economic revitalization and said it will use those stores to help other businesses in the area develop.

Wal-Mart (nyse: WMT - news - people ) Vice Chairman John Menzer, who heads the company's U.S. operation, was traveling to Indianapolis and Pittsburgh to announce that the company is moving into neighborhoods in each of those cities where commerce has faltered.

Menzer said Wal-Mart is working with local chambers of commerce, business groups and minority-owned businesses with the goal of guiding new suppliers and helping new or existing shops thrive.

"We're looking at working families that need us the most," Menzer said. "That's where we want to go."

As jobs are created around the new Wal-Mart stores, tax revenue will rise and the neighborhood economy will improve, Menzer said. Two of the stores are already open - in Chicago and Portsmouth, Va.

In April, Wal-Mart Chief Executive Lee Scott said the company planned to build 50 stores in areas with high crime or high unemployment. At the store on Chicago's west side and at the nine identified Monday, Wal-Mart will offer advertising to the other businesses in local newspapers and through the in-house audio feed in Wal-Mart stores.

At each of the 10 stores, five small businesses will be picked each quarter for the special treatment, the ultimate focus of which will be "how to take advantage of having a Wal-Mart in your market," Menzer said.

Near the Chicago store - the first in the city limits for the retail giant - Menzer said a number of new businesses are under development nearby, including a coffee shop, a drug store and a home improvement center.

"It could be any type of small business in the area that would draw on our traffic," Menzer said.

The Lafayette Square site in Indianapolis is to get a Supercenter, which is planned to open next year. A Supercenter combines a Wal-Mart discount store with a grocery store. A Supercenter is also planned for the site near Pittsburgh, at East Hills, Pa. The company said a religious group had urged new businesses to come into a former mall site. The new Wal-Mart there is to open in 2009.

Pennsylvania Gov. Edward G. Rendell was to be on hand at the Pittsburgh announcement and Indiana Gov. Mitch Daniels was scheduled to be at the Indianapolis location.

Other stores announced Monday:

_Cleveland - a Supercenter is to open in the fall at the site of a former steelyard. Other retailers are to have storefronts in the development.

_Decatur, Ga. - the community outside of Atlanta is to get a Supercenter in early 2008 at the site of a former mall.

_El Mirage, Ariz. - a Supercenter is to open during the summer near Luke Air Force Base.

_Landover Hills, Md. - is to be the site of the first Wal-Mart store to open inside the beltway of Washington, D.C. The store will be in Prince George's County at the former Capital Plaza Shopping Center.

_Portsmouth, Va. - a Supercenter opened last month in the city's midtown at an area targeted for redevelopment.

_Richmond, Calif. - a Wal-Mart is to open in the spring at a former department store location in the Bay Area community.

_Sanger, Calif. - A Supercenter is to open in the spring at a former commercial building in the community near Fresno.

 

Joan Chow Joins ConAgra Foods
as Chief Marketing Officer
ConAgra News Release
February 16, 2007

OMAHA, Neb.--(BUSINESS WIRE)--ConAgra Foods announced today that Joan K. Chow has joined the company and assumed the new role of executive vice president and chief marketing officer. She will report to company Chief Executive Officer Gary Rodkin, and she will lead the company’s marketing function.

ConAgra Foods Names Joan Chow Exec VP, Mktg Chief
Dow Jones Newswires
February 16, 2007

Merck to Pay $2.3 Billion in Tax Case
By Jesse Drucker- Wall Street Journal
February 15, 2007

Wal-Mart Adds to Changes Within Management Ranks
By Kris Hudson - Dow Jones Newswires
February 15, 2007

Wal-Mart Stores Inc., which in recent months has shuffled its merchandising and marketing executives, unveiled changes within its online and strategy divisions.

Carter Cast, a top executive at the retailer's walmart.com Web site subsidiary since 2002, has been reassigned to oversee business strategy and strategic planning for the U.S. stores division of nearly 3,500 supercenters, discount stores and Neighborhood Markets. Succeeding Mr. Cast as chief executive of walmart.com is Raul Vazquez, formerly the Web site's chief marketing officer.

Both men will report to Eduardo Castro-Wright, the head of U.S. stores who is spearheading an effort to boost sales by tailoring merchandise in Wal-Mart's stores to the tastes of each store's clientele.

"My interpretation of this is that Eduardo has basically been doing the strategy role for the U.S. [operations] on his own, and he needs some help," Bear Stearns Cos. analyst Christine Augustine said.

During Mr. Cast's tenure at walmart.com, he helped boost the unit's sales and lure more online shoppers into Wal-Mart's stores. Wal-Mart declines to divulge walmart.com's sales, but Ms. Augustine estimates the figure to be between $1 billion and $3 billion. Walmart.com, based in Brisbane, Calif., is a subsidiary of Wal-Mart.

The promotions of Mr. Cast and Mr. Vazquez come after Wal-Mart in January shifted former Chief Marketing Officer John Fleming into a top merchandising role and announced the impending retirement of merchandising executive vice president Doug Degn. The Bentonville, Ark.-based retailer also shuffled several senior vice presidents in its merchandising operation and narrowed executive vice president Claire Watts's responsibilities to the apparel division.

Wal-Mart has estimated $344 billion in sales for its latest fiscal year, including a 2% gain in sales at stores open for at least a year. The retailer is set to release its final results for the fiscal year on Tuesday. It expects to report earnings per share for the fiscal year of $2.85 to $2.89.

Wal-Mart's Radio-Tracked Inventory Hits Static
By Gary McWilliams – Wall Street Journal
February 15, 2007

• The Issue: Wal-Mart has pushed its suppliers to use RFID smart-tags on shipments to the giant retailer in hopes of cutting labor and inventory costs, but savings have been illusory.

• The Background: The retailer's costs are climbing faster than rivals'. Wal-Mart needs a new breakthrough to maintain its price advantage.

• The Bottom Line: Without a demonstrable return on investment soon, suppliers may reduce their involvement, crimping potential savings.

Wal-Mart Stores Inc.'s next leap forward in ultra-efficient distribution is showing signs of fizzling.

A pioneer in low-cost practices widely copied by competitors, Wal-Mart has pushed its suppliers to use exotic radio-activated tags to chop labor and inventory costs anew. But tests using the tags aren't showing any savings, and suppliers forced to invest in the relatively expensive technology are grumbling.

Wal-Mart once hoped to have up to 12 of its roughly 120 distribution centers using the Radio Frequency Identification, or RFID, technology by January 2006. But so far it has installed the technology at just five, plus 1,000 stores. Wal-Mart expects to add a further 400 stores this year.

The world's largest retailer needs another breakthrough in its logistics operations, the main driver of its pricing advantage. While its costs are still the industry's lowest, rivals such as Target Corp. and CVS Corp. are catching up. Wal-Mart's operating costs have risen sharply in recent years, blunting its edge. Expenses rose to an estimated 18.4% of sales in 2006, nearly two percentage points higher than in 2001. In contrast, expenses at Target and CVS rose less than one percentage point each from 2001 to 2005, to 21.8% and 19.7%, respectively.

Wal-Mart declined to make an executive available to comment on its RFID efforts. In response to questions about whether it was saving money with the technology, spokesman Kevin Gardner replied that the tags had improved product availability on store shelves and store managers worked more efficiently in replenishing inventories. "We look for our RFID expansion to build on these results," Mr. Gardner wrote in an email.

Manufacturers and retailers have long wanted an efficient way to track individual items from production to sale, and RFID seemed ideal for the task. RFID was to replace the 25-year-old bar-code technology printed on labels for everything from tubes of toothpaste to diamond rings. The bar codes help track inventory and can match a product to a price, but they lack the electronic tags' ability to store more detailed information -- such as the serial number of a product, the location of the factory that made it, and when it was made and when it was sold.

While the tagging of individual products is still years away, Wal-Mart began setting deadlines in 2003 for its suppliers to start using RFID tags on larger shipments. Since then, it has required its largest 600 suppliers to affix the smart tags to cases and pallets sent to Texas and Oklahoma, which have been the company's key test bed. An additional 700 suppliers soon will be added to the mandate.

When the technology works as envisioned, product data are transmitted from the computer chip inside the tag to electronic readers through radio waves. Products can be scanned remotely and in bulk quantities, while bar codes are more labor intensive because they must be scanned manually, one at a time. The tags are made by Intermec Technologies Corp. and Motorola Corp.'s Symbol Technologies, among others, using chips from suppliers such as Texas Instruments Inc., Impinj Inc., and STMicroelectronics NV.

Wal-Mart is pushing the RFID technology on the idea it will increase efficiency and eventually save everyone money -- manufacturers as well as Wal-Mart. Yet as Wal-Mart searches for an answer to its rising costs, suppliers are saying RFID isn't it.

The current generation of RFID tags cost about 15 cents apiece while bar codes cost a fraction of a cent. Beyond the tags, suppliers have had to bear the cost of buying hardware -- readers, transponders, antennas -- and computer software to track and analyze the data. The suppliers have had to pay for additional programming to integrate that software with their current inventory and manufacturing applications. On top of that, suppliers say that instead of saving labor, RFID tagging actually takes more: While bar codes are printed on cases at the factory, because most manufacturers have yet to adopt RFID, those tags have to be put on by hand at the warehouse.

Suppliers are being careful not to publicly criticize a company that buys $260 billion worth of products annually, but they say they don't expect any return on their RFID investments for years, if at all. Some say Wal-Mart hasn't achieved any savings, itself. Other retailers, including Target, Best Buy Co., and Albertson's, and the U.S. Department of Defense are also pursuing RFID projects and facing similar hurdles to finding cost savings.

The lack of any discernible return on investment has manufacturers pulling back. Last summer, VF Corp., the maker of Wrangler jeans and Nautica sportswear, curbed internal development efforts, concluding a payback wasn't on the horizon. "We'll let others drive the technology," says Martin Schneider, VF's recently named global chief information officer.

An RFID scanner at a Wal-Mart facility.

Another early supporter, Navin Chandaria, chief executive of LePage's 2000 Inc., began tagging a line of fireplace products in 2004 and committed $2 million to outfit factories that served Wal-Mart. The project languished when Wal-Mart never expanded the program significantly beyond its original test facilities, says Mr. Chandaria. "We expected them to say, 'Guys we're moving forward.' But everything just fell between the cracks." Last year, he sold the product line to another company.

A Wal-Mart supplier, who doesn't want his company identified, laments the lack of any clear savings despite investments of $200,000 and up a year. "It's a big black box with nothing out there for a return [on investment]. A lot of people, if given a true choice, would not be in it," he says of the mandate.

Raymond Blanchard, co-founder of TrueDemand Software Inc., a Los Gatos, Calif., company whose products analyze RFID data to help retailers improve delivery efficiency, says suppliers have told him they would have preferred to move more slowly in adopting the technology, using it only occasionally to identify opportunities for savings. "It doesn't make sense to tag everything," he says.

John Fontanella, a vice president at AMR Research Inc., a Boston firm that studies supply chains, counsels most businesses to wait for the development of off-the-shelf software that will make RFID easier and more profitable to use. "The [RFID] payoff is reducing human labor and replacing it with technology. For most companies, there are no software applications that can even approach the problem like that," he says.

To some Wal-Mart suppliers, achieving a return on their investment comes second to keeping the retailer happy. Executives at Beaver Street Fisheries Inc., Blyth Inc.'s Blyth Wholesale Group and Thomasville Furniture Industries Inc., say they don't expect to recoup their RFID investments for several years. But each hopes the effort puts it in good stead with an important customer. "Do you want to risk the business by not being in the game?" asks Howard Stockdale, Beaver Street Fisheries' chief information officer.

Wal-Mart's slower-than-planned rollout has some RFID advocates revising their view of the technology's prospects.

More problems have come into play in recent years, including the high cost of retrofitting warehouses and stores with electronic readers, and consumer concerns that once the tags are on each item on a store's shelves -- from tubes of toothpaste to personal computers -- that they could be used to track individual buyers. Wal-Mart says it has already endorsed industry-backed guidelines for notifying consumers the tags are in use.

David Donnan, a manufacturing consultant and former president of radio-frequency-device maker Checkpoint Systems Inc., says the technology faces a Catch-22. To get the cost-per-tag down to an affordable level, every retail product would have to be tagged. But there is currently no financial justification for a manufacturer to tag every product, he says.

As a result, the enthusiastic announcements two years ago of new RFID pilot programs have become a wall of disappointed silence. Retailers are expected to move more cautiously in expanding their use of the technology. "They're not going to say, 'Stop' " to suppliers, says Mr. Donnan, "they'll say, 'Go slower.' "

Upside Arrives for Department Stores
Bear Stearns & Co.
Barron’s Online
February 13, 2007

DEPARTMENT STORES ARE LIKELY to meet or exceed fourth-quarter guidance.

While we believe that the fourth-quarter retail earnings season could yield a mixed bag of results among the discounters, we expect that department stores in our coverage universe will post solid earnings growth, driven largely by strong top-line trends throughout the fourth quarter.

More specifically, we estimate a 190% increase in year-over-year earnings per share at Federated Department Stores, a 16% increase in earnings per share at J.C. Penney, a 30% increase in EPS at Kohl's, and a 29% increase in EPS at Nordstrom.

We are looking for a 76% EPS gain at Family Dollar, a 25% decline at Dollar General, a 19% EPS increase at Target, a 17.3% gain at Dollar Tree Stores, a 2.1% increase at Wal-Mart Stores, a 9.3% decline at Costco Wholesale and a 13.3% decrease at BJ's Wholesale Club.

In our view, unfavorable weather, shoppers' tendency to procrastinate during the holiday season and a heightened level of competitive promotional activity may have put pressure on retailers' fourth-quarter margins.

Though many retailers posted solid sales during the fourth quarter, the overall sales mix was dominated by lower-margin goods. We therefore believe that fourth-quarter earnings upside, particularly among the discounters, may be limited.

We believe there is less risk among the department stores, given that sales gains were generally strong across a wide swath of product categories.

We believe upside to our fourth-quarter EPS estimates may exist for Federated and Sears Holding, both of which are sitting on a significant cash balance, which may have been used to repurchase shares during the period. Our current fourth-quarter estimates assume a modest amount of share buybacks at Federated and no share buybacks at Sears.

Sears and Federated have the highest free cash-flow yield in the broadlines universe at 8.3% and 8.1%, respectively, compared with our coverage universe average of 3.9%.

-- Christine Augustine
-- Shelly Henbest
-- Sharyn Uy

Get Ready for the Fall?
By Rich Smith - THE MOTLEY FOOL.COM
February 13, 2007

"The bigger they are, the harder they fall." This old saying sums up the worst nightmare of every homeowner, every gold buyer, and every investor in today's market. Dare ye buy at the top?

Every day, MSN Money publishes a list of the market's top stocks -- the companies whose shares have just hit their highest intraday price of any time in the past 52 weeks. Every day, investors read this list and tremble -- some with greed (big mo', baby!), and others in pure, unmitigated, acrophobic terror (whatever you do, don't look down).

Over on Motley Fool CAPS, thousands of investors just like you are watching these same companies and voting their gut on whether they'll keep rising or stumble and fall. Usually, the ratings wax optimistic as stocks hit new highs -- because everyone loves a winner. But what do you make of it when some of the smartest investors out there are panning a hot stock?

You could heed them. You could ignore them. You could take the stock tickers and construct anagrams from them. For my money, though, the best course of action is to use the "52-week highs" list as just a starting point for further research. After all, stocks can go up for many reasons, and it's up to you to decide how worthy those reasons are. But thanks to Motley Fool CAPS, now you don't have to make the decision alone.

With that said, let's meet today's list of contenders, drawn from the latest "52-week highs" list at MSN Money. What does our panel of more than 22,000 stock gurus (and counting) have to say about them?

One year ago today
Currently fetching
CAPS rating (out of five)

Sears Holdings (Nasdaq: SHLD)
$118.89
$181.47
****

CBOT Holdings (NYSE: BOT)
$106.45
$171.25
***

Alexandria Real Estate (NYSE: ARE)
$83.19
$112.08
**

Essex Property Trust (NYSE: ESS)
$96.14
$145.00
**

Cigna (NYSE: CI)
$123.52
$137.99
**

Alexander's (NYSE: ALX)
$237.75
$465.00
*

Companies are selected from the "New 52-Week Highs" list published on MSN Money on the Saturday following close of trading last week. CAPS ratings from Motley Fool CAPS.

Where's the love?

Around the globe, Cupid's set to let loose his arrows on Wednesday. On Wall Street in particular, affection abounds for stocks hitting their 52-week highs. But on CAPS, the love buzz fades rapidly as we move down the list. Sears starts strong with four stars. But move just two slots down, and you're already wading in the swampy waters of one- and two-star stocks -- expected underperformers all.

What's Sears got that Alexander's hasn't got? Perhaps the most striking thing -- to this Fool's mind, at least -- is Sears' ability to inspire CAPS players to become CAPS writers. With Sears, CAPS members don't just rate the stock an "outperformer" and move on; they linger a moment or three and pen a few lines on why they love the stock. More than 900 investors have rated Sears over the past few months, and more than 200 of them have prepared "pitches" explaining their ratings.

More important to you, the reader of these pitches, is that fully 57 of them come from "All-Stars" -- the top 20% of CAPS investors. Here are a few of the better comments you'll find:

gameguru writes: "Sears Holding is the kind of investment vehicle I love -- solid cash returns in the hands of a smart manager to redeploy the capital for you. I conservatively value the current business at about $200/share, but that fails to consider any potential for future deals. My guess is that in 20 years, no one will remember K-Mart, but Lampert's holding company will still be around and earning market-beating returns on investment."

aj350 expresses affection for Sears in the universal language of mathematics: "SHLD still looks like its undervalued, adjusted FCF looks like it will hit 2.7-2.8 billion this year. (adjusted because I know eddie will fix working capital volatility) giving a EV / FCF of 10."

And for any investors wishing they had been around to see -- and invest in -- the beginning of Berkshire Hathaway, heed the words of OConnorCapital: "Eddie Lampert ... a stable business in which produces incredible amounts of free cash flow ... and an intelligent asset allocation strategy in place, SHLD is a patient long term investors dream. There are very few, if any, people I would rather have allocating capital for me over the next 10-20 years."

But what do you think? Is Eddie Lampert Warren Buffett, reincarnated before he's been de-incarnated? Come on over to CAPS and give us your two cents. It doesn't cost a dime to play -- and if you're right, and can write, it just might make you famous.

Fool contributor Rich Smith was personally challenged to work the phrase "love buzz" into a column today. He does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked 43 out of more than 22,000 raters. Berkshire Hathaway is a Motley Fool Inside Value choice. The Fool's disclosure policy never stumbles, never falls.

A Home Depot Blueprint
Selling Direct-Supply Unit Could Help Regain Focus, Stem Decline in Margins
Wall Street Journal
February 13, 2007

Home Depot spent some $8 billion under ousted boss Bob Nardelli cobbling together stores peddling lumber and pipes directly to builders. That diluted returns and distracted management from catering to its consumer base of do-it-yourselfers. But now it looks as though new chief Frank Blake might actually salvage a profit from his predecessor's adventure into the supply business.

The problem with the supply arm is that it doesn't generate the profitability Home Depot shareholders demand. In the first nine months of 2006, it generated operating income equal to about 7% of its $9.1 billion of sales. By contrast, Home Depot's core retail operations minted operating margins of 12%. This is why shareholders criticized the strategy. One, Relational Investors, even launched a proxy battle against management, which it only withdrew last week.

Now that Home Depot is considering getting rid of the supply operations, the question for shareholders is what value the company can extract for it. Happily for them, Home Depot should be able to recoup the capital it has invested -- and then some. How much more depends on whether Home Depot pursues a spinoff of the business to investors or an outright sale.

The supply business should generate about $1 billion of earnings before interest, tax, depreciation and amortization this year, assuming a slightly higher growth rate than Home Depot's core retail arm. With a multiple of 9 times -- in line with similar companies like W.W. Grainger -- the business would be valued at $9 billion. A 12.5% profit on an $8 billion investment isn't great, but it isn't the worst outcome.

Moreover, it could be twice as good if Home Depot sells the supply arm for a premium. It is probably unrealistic to expect any private-equity firm to pay what Home Depot did during its charge into the industry. For example, the company paid 11 times estimated Ebitda when it acquired Hughes Supply a year ago for $3.5 billion.

But if it managed to sell the supply arm for 10 times those earnings, that would be an extra $850 million or so after taxes that Mr. Blake could hand back to shareholders. More importantly, he would return his focus to getting shoppers back into Home Depot stores.

Pride of India

Keeping up with the Joneses is getting awfully expensive for India's metal moguls. Just weeks after the Tata family acquired Anglo-Dutch steelmaker Corus Group for what many considered a high price, along come the Birlas. The aluminum company they control through their Aditya Birla Group conglomerate, Hindalco Industries, is buying Canada's Novelis for $6 billion.

At first blush, the $44.93 a share cash offer for Novelis might not shock -- after all it is just a 17% premium to Friday's closing price. But it followed weeks of takeover speculation. Novelis shares had already rocketed up from $27.85 at the start of the year. Factor this in and one could argue the Birlas are paying a hefty 60% premium to the undisturbed stock price.

And the returns on offer look slim. Hindalco may be Asia's largest integrated primary producer of aluminum and among the most cost-efficient producers globally. But these don't necessarily create efficiencies with Novelis. Even if the Birlas can improve their target's operating income by a tenth in two years' time, the return on investment looks unlikely to surpass more than 4% -- that's well below its cost of capital.

So why do it? For the same reason Ratan Tata overpaid for Corus in a deal that has wiped out 15% of his company's value in recent weeks: the pride of India. Echoing his fellow countryman, Kumar Mangalam Birla, chairman of Aditya Birla, said the Novelis deal "is consistent with our vision of taking India to the world."

That may be a noble pursuit among the politicians in New Delhi. But for investors in Mumbai, where Hindalco shares plunged 14% yesterday, it stings.

--Rob Cox and Lauren Silva

• This column is written by breakingviews.com1, an online financial commentary site.

Home Depot Bows to Whitworth Again
Chain May Sell or Spin Off Wholesale-Supply Unit In a Reversal of Strategy
By Ann Zimmerman and Joann S. Lublin – Wall Street Journal
February 13, 2007

• The News: Home Depot, under pressure from Ralph Whitworth, is considering the sale or spinoff of its supply business.

• The Background: The wholesale business has been criticized by the activist investor as a distraction.

• A Victory Notched: This is another victory for Mr. Whitworth and his fund, which has made changes at several big companies.

When activist investor Ralph Whitworth accumulated a stake of about 1.3% in Home Depot Inc., he used that platform to argue for big changes at the home-improvement retailer. Yesterday, in a signal of the power of a single investor to affect a behemoth, the company said it would adopt his central plank as its own.

The Atlanta chain said it would consider selling or spinning off its wholesale-supply business to focus on its retail operations. It was the second time in a week Home Depot's board has bent to the will of Mr. Whitworth, a co-founder of Relational Investors LLC. The company said Feb. 5 it was naming Mr. Whitworth's colleague David Batchelder to a board term beginning Feb. 22.

For Mr. Whitworth and other activist shareholders, the change at Home Depot shows the clout they have in their attempt to reign in what they consider outsized pay packages for executives, to break up clubby boards of directors, and to more closely align company strategy with shareholder interests. Companies, fearing a costly and distracting battle, are giving in more quickly. Activists say they have a better chance of winning a proxy fight now that mutual funds have to make public how they vote. Even the threat of a fight can bring about the changes they want.

The strategy to build up a wholesale-supply business was championed by former Chief Executive Robert Nardelli as a way to boost Home Depot's growth. The company spent more than $7 billion in the last two years acquiring 27 companies that sold items ranging from sewer pipes to commercial lighting, targeting large construction companies and municipalities.

But investors such as Mr. Whitworth saw the lower-margin supply business as a distraction, taking time and money from the company's more than 2,000 stores that were losing market share to smaller, faster-expanding rival Lowe's Cos.

Now, Home Depot CEO and Chairman Frank Blake, a former lieutenant to Mr. Nardelli, is hopping on the Whitworth wagon. "We are undertaking this action today because of our desire to increase our focus on our retail business," Mr. Blake said.

While Home Depot was building the new business, customer service and same-store sales deteriorated. The supply unit contributed 15% of the company's revenue, but only an estimated 9% of its operating profit in fiscal 2006, according to Sanford C. Bernstein & Co. Still, the company's board gave the strategy its support as recently as December.

Mr. Nardelli's plan, which called for revenue in the supply business to double again in the next three years, had numerous detractors outside the operation. The unit "overemphasized acquisitions at the expense of building an integrated business," said Adam Fein, president of Pembroke Consulting Inc. of Philadelphia.

There is little question Mr. Whitworth was the driving force behind the board's move to explore strategic alternatives for the supply business. In December, Relational Investors informed the home-improvement retailer that it planned to launch a proxy battle for at least one board seat if the company didn't form an independent committee to reassess its business strategy and management.

Mr. Nardelli stepped down Jan. 2 after refusing to curb his compensation package significantly, but Mr. Whitworth said at the time that his fund still would seek a seat on the board. Shareholders were concerned Mr. Blake would hew to Mr. Nardelli's strategy on the supply business. Mr. Blake had followed Mr. Nardelli from General Electric Co. and was his chief architect and strategist on his acquisition spree.

Three weeks ago, Mr. Blake and two board members, Bonnie Hill and John Clendenin, traveled to Los Angeles to meet Messrs. Whitworth and Batchelder and hear their ideas. Mr. Whitworth told the board members the supply unit was diluting the company's returns -- a situation, he said, that wouldn't turn around for at least 30 years, according to a person present at the meeting. In addition, rather than serve as a countercyclical hedge, more than 50% of the companies Home Depot purchased sold products to major home builders, whose pace of construction had declined.

Mr. Whitworth convinced the board members they were operating on faulty assumptions. The company had told Wall Street analysts its return on capital for the retail stores was 22% and 13% for the supply business. Mr. Whitworth told the board members his financial analysis showed the return on capital for the supply business was half that. He said Home Depot used beginning-of-period equity and end-of-period earnings to derive that number, but had they used end-of-period earnings for both, returns would be 7%. He also said Wall Street penalizes a company for diluting its returns below 20%.

"Our [return on invested capital] calculation methodology is very clear in our public communications and is consistent with that used by our major competitor," a Home Depot spokesman said, adding the company wouldn't comment on conversations with Relational Investors.

For the fiscal year ended in January, the wholesale-supply business had projected revenue of about $12 billion. Overall, revenue totaled roughly $90 billion.

Sanford Bernstein estimated Home Depot's supply business, consisting of more than 30 acquired companies over the past eight years, is valued at somewhere between $10 billion and $13 billion.

Relational manages about $7 billion and invests in about five to seven companies at a time. It owns about $1 billion of Home Depot shares.

Armed with research and their skills of persuasion, Messrs. Whitworth and Batchelder believe they can make a difference with only one or two board seats.

Inside a boardroom, Mr. Whitworth makes his presence felt fast. "He always comes armed with a lot of independent research," said Richard Koppes, a longtime acquaintance of Mr. Whitworth and an attorney for Jones Day in San Francisco.

Consider Apria Healthcare Group Inc. In January 1998, the board elected Mr. Whitworth amid its review of strategic alternatives for the home-health company. Relational Investors had become Apria's biggest shareholder, and Mr. Whitworth had complained that recent management changes didn't go far enough.

By April, Mr. Whitworth had become Apria's nonexecutive chairman. Mr. Koppes joined the board a month later. When the Apria board hit an impasse, Mr. Koppes recalled, Mr. Whitworth sometimes asked a recalcitrant board member to step outside, saying, "I need to talk to you." (Mr. Whitworth is no longer an Apria director.)

Mr. Whitworth had a quick impact at Sovereign Bancorp Inc., too. Mr. Whitworth won the promise of two board seats this past March after threatening a proxy fight. Relational Investors, the biggest investor at the Philadelphia bank-holding company, had concluded that longtime CEO Jay Sidhu wouldn't address complaints the stock was underperforming. Mr. Whitworth took his board seat in the spring; another new director backed by the activist joined in September. Mr. Sidhu resigned three weeks later.

In an interview earlier this month, Mr. Whitworth conceded his prescription for a troubled company isn't always right. "There are a lot of variables to these deals," he said. Mr. Whitworth said Home Depot is a two- to three-year turnaround that could fairly quickly lift the stock about 50%.

His track record is good. Randy Lampert, the head of the shareholder-activist group at investment bank Morgan Joseph & Co., looked at total shareholder returns at five underperforming companies Relational had targeted over the past four years. After 12 months, the returns ranged from a 1.7% loss to a 143% gain; after 24 months, they had an average total gain of 125%.

Home Depot's shares yesterday rose 1.1%, or 44 cents, to $41.44 in 4 p.m. New York Stock Exchange composite trading.

Penney's Updated Image, the Sequel
By Cheryl Lu-Lien Tan and Brian Steinberg - Wall Street Journal
February 13, 2007

'Every Day Matters' Ads Aim to Drive Home A More Stylish Picture

J.C. Penney Co. today will unveil a new marketing campaign centered around the slogan "Every Day Matters," the latest step in its long-running push to update its image to reflect more stylish offerings.

The new campaign comes just a few months after J.C. Penney abruptly switched its account to Publicis Groupe's Saatchi & Saatchi, ending a six-year relationship with Omnicom Group's DDB Worldwide. The new ads attempt to create an emotional connection between the store and its customers, rather than emphasize its broad selection of merchandise, as its six-year-old "It's All Inside" slogan does, says Chief Executive Myron "Mike" Ullman III.

"We needed a rallying cry that would resonate with our customers," says Mr. Ullman, who adds that he hopes the new slogan will be as powerful as Nike's "Just do it."

The campaign will kick off with 60-second television spots during the Academy Awards on Feb. 25 and print ads in the April issues of such magazines as Vogue and In Style. Each ad features the phrase "Today's the day to..." and is intended to inspire people to do something that involves an item that can be purchased at Penney.

One TV spot, for example, follows a woman as she does things like take earrings out of a J.C. Penney box. Another shows a man and a woman -- both attractive and well-dressed -- catching each other's eyes across a crowded train station. It ends with the phrase "Today's the day to make a first impression...Every Day Matters." The company declined to disclose the amount it is spending.

Long saddled with a frumpy image, Penney in recent years has put much effort into persuading shoppers that it has changed. It has introduced new designer lines -- last month it announced a partnership with Polo Ralph Lauren Corp. to create a brand called American Living that will include apparel, accessories and home merchandise and is set to arrive in stores in spring 2008. Penney also struck an exclusive deal with Liz Claiborne Inc. to create Liz & Co., a new line for women, and Concepts by Claiborne for men. Both are hitting stores now.

Penney, which creates private-label goods under names like Arizona, also has rapidly expanded its design team. It doubled the number of designers to 100 last year in an effort to be more nimble in churning out clothing that follows fashion trends.

The strategy has paid dividends, producing rapid growth in both sales and profit. The new slogan is meant to build on the steps taken thus far. With the slogan "It's All Inside," adopted in the fall of 2000, Penney boosted its image beyond that of a place where shoppers can get bargains. Now, say retailing experts and image consultants, Penney is perceived as a more-fashionable brand, able to compete with such places as Federated Department Stores' Macy's or Target Corp.

"We have seen them gain some ground against the discounters, and they are now fighting their battle against specialty retailers," says Peter Dixon, senior partner at branding consultant Lippincott Mercer.

Still, erasing a popular slogan can be an expensive task for an advertiser. "It's very hard to unseat or change a tagline that has been burned into people's consciousness over a period of a couple of years," says Denis Riney, group director at Siegel + Gale, an Omnicom Group branding consultant. Some taglines can be as recognizable as a company's name, he says.

Saatchi executives spent months talking with J.C. Penney customers and sales associates, in the hopes that their research would help them devise an organizing principle for the campaign that would be memorable to consumers and employees.

Researchers found that many customers were looking for "little things" to help make their lives better, says Mary Baglivo, chief executive of Saatchi's North America operations. Customers were seeking such items as a fashionable new dress that would make a husband or boyfriend take a second look, or something that would turn a regular dinner into an event.

Penney's Mr. Ullman says the effort also will involve training for sales associates that begins next week. The goal is to get them to make personal connections with customers, who will then come back, he adds. "The idea is to make a friend -- not a transaction," he says. "People will come back to shop with people they like and trust."

Wal-Mart Eyes Expansion Into Russia's Growing Retail Sector
Dow Jones Newswires
February 12, 2007

BENTONVILLE, Ark. (AP)--Wal-Mart Stores Inc. (WMT) is interested in moving into Russia after strong growth in that giant country's retail spending, the world's largest retailer said Monday.

Wal-Mart's international division is smaller but is growing faster than the company's flagship U.S. business. Russia would mark another move into large but underdeveloped markets like Latin America and China, where it is already established, and India, where Wal-Mart plans to open stores with a local partner company.

Angela Hofmann, a spokeswoman for Wal-Mart International, said Wal-Mart has been watching the Russian retail market for several years and likes what it sees.

"We've been watching impressive growth and it has piqued our interest," Hofmann said. "We are definitely interested in the Russian market."

But Hofmann said it was too early for any specific plans on how or where Wal-Mart might move into Russia or what Russian company it might partner with.

In the past, Wal-Mart has moved into new countries by teaming up with a local company, either through an acquisition or some kind of partnership. That way it can build on existing stores and the partner's experience with consumer demand in a new market.

Hofmann confirmed that a Wal-Mart executive in Russia last week was accurately quoted by Russian media as voicing interest in that market.

"So far, we are currently studying the market, but the decision on how to enter it has not yet been made," Wal-Mart vice president Mike Bratcher told a Moscow conference Thursday, the English-language Moscow Times reported.

The Moscow Times said Russia's food retail market accounts for less than 2% of gross domestic product but has seen annual growth of more than 25% since 2001.

Wal-Mart's international business accounted for about 22% of the company's total sales in the first nine months of last year.

That share is growing faster than the large U.S. business. International sales in the first nine months last year rose 30% from a year earlier, compared with 8% for Wal-Mart U.S. stores.

Wal-Mart pulled out of two wealthy, developed countries last year - Germany and South Korea - after racking up losses there. It remains active in Britain and Japan.

We Tip our Hat to Dan Laughlin
From Sears Retiree Website
February 10, 2007

World’s Best Discounter - Everybody's Store
By Andrew Bary – Barron’s
February 12, 2007