Compared with Allstate Financial, the company's core auto and home insurance business performed well last year, garnering an underwriting profit while rivals like State Farm Insurance Cos. were deeply in the red due to catastrophe losses. But there are significant threats in that unit as well.

The number of Allstate auto policies in force fell 2% last year as consumers bought fewer cars and shopped for cheaper insurers. By contrast, low-cost rival Geico's increased by 8%. The percentage of Allstate customers renewing their auto policies also slipped, to 88.9%, the worst in seven years.

CUSTOMER LOYALTY
Mr. Wilson says the company's biggest focus is on customer loyalty and that Allstate Financial could be a key to improving that: Those with more than one Allstate product tend to be more loyal than those with just car insurance. He has reset employees' incentive compensation to make retention the most important goal.

"For many years our customer-service levels have been below our aspirations, so significantly improving our customer service has the potential to create more shareholder value because it will drive long-term growth," he said in New York.

For now, investors are in wait-and-see mode. "I think there's a lot of concern," says J. Paul Newsome, a Chicago-based analyst at Sandler O'Neill & Partners L.C. "Most investors I talk to are willing to see what (Mr. Wilson) does before reaching any extreme conclusions."

Want to run a Sears store?
NEW FORMAT | Retailer wants local touch at renamed Hometown outlets
By Sandra Guy - Chicago Sun-Times
March 6, 2009

Sears Holdings Corp. is advertising for entrepreneurs to run its renamed dealer stores, and has recently opened two of its new-format appliance stores in Chicago's suburbs.

The dealer stores, renamed Sears Hometown stores, are opening in several unspecified markets where Sears believes shoppers will buy its tools, electronics, mattresses, workout equipment, lawn mowers, vacuum cleaners and washers and dryers, said Will Powell, who was named president of the Hometown stores four months ago after serving as head of Sears' outlet store division.
"We decided the name 'dealer' stores didn't reflect that these really are hometown stores" where the owner is usually a well-known person active in the community, Powell said.

Sears also has opened 60 appliance-only stores, including ones in Oswego, North Aurora and South Elgin, called Sears Home Appliance Showrooms, to try to capture some of the market share the retailer has lost to competitors.

The renewed emphasis on Sears' exclusive Craftsman tools, Kenmore appliances and DieHard batteries appear to reflect Sears Holdings Corp. Chairman Edward S. Lampert's pullback at last year's shareholders' meeting from his earlier plans to sell those brands at rival retail stores.

At that meeting, Lampert said Sears had to find a way to integrate online and brick-and-mortar sales. To that end, a Kmart store on Plainfield Road in Joliet is being transformed into a pilot program store called myGofer, as first revealed by the Joliet Herald News on Dec. 22. Customers can buy items online and pick them up at a drive-up window at the myGofer store.

A separate Kmart store at 5909 E. State St. in Rockford is a test site for a personal shopping service in which customers place an online order at my gofer.com and pick it up at the store within a few hours. If the item is out of stock or isn't carried at Kmart, the customer can pick it up at another store.

Retail Sales Show Signs of Life
By Ann Zimmerman - Wall Street Journal
March 6, 2009

Americans finally started spending again in February -- largely at discounters such as Wal-Mart Stores Inc. -- leading to the first monthly gain in retail-industry sales since September.

Wal-Mart stood above other retailers, posting its best sales performance in nine months. Sales at stores open a year rose 5.1%, the company said, twice the rate that analysts had expected, and helped by strong demand for electronics.

The world's largest retailer delivered a note of confidence by raising its annual dividend 15%.

While February same-store sales at stores like Wal-Mart, B.J.'s Wholesale Club and Aéropostale posted gains, upscale chains like Neiman Marcus posted same-store sales declines of 21% or more.

Shoppers are spending more on groceries, countertop appliances and cookware as they cut back on trips to restaurants, say retailers. Food sales, which account for about 40% of Wal-Mart's U.S. revenue, also contributed to better than expected results at membership clubs and other discount chains.

Luxury retailers, midpriced department stores and clothing chains are still struggling to attract shoppers. Upscale chains SaksInc. and Neiman Marcus Group Inc. posted same-store sales declines of 21% or more. But in many cases sales were down less than analysts had expected. Analysts said better February weather helped spur spring apparel sales and raised retailers' hopes that their troubled business is starting to stabilize.

Lower gasoline prices are helping get Americans out of the house and putting more cash in their pockets. Wal-Mart credited the drop with increasing the frequency of customer visits at its stores. With gasoline selling for about $1.92 a gallon last month, consumers had $14 billion more to spend elsewhere than they did a year ago, according to the National Retail Federation. Moody's Economy.com estimates that if oil stays below $50 a barrel for the year, America's overall energy costs will be $250 billion less than last year.

Wal-Mart's sheer size helped push industry sales up 0.7% at stores open at least a year, according to a Retail Metrics Index of 33 retailers. Other discounters also reported sharp gains, including B.J.'s Wholesale Club Inc., which posted an 11.5% same-store sales gain, and Costco Wholesale Corp., which reported sales climbed 4%. Both figures exclude gasoline sales.

Without the push from Wal-Mart, same-store sales fell 4.1%, an anemic showing but still better than January's 5.6% drop, said Retail Metrics. Its index doesn't include such retailers as restaurants, grocery chains or auto dealers. But it is closely followed as a proxy for consumer spending overall.

One month doesn't make a trend, and the economic news remains gloomy. Growing joblessness and difficulties in getting consumer credit continue to weigh on the economy. Consumer confidence also continues at record lows. Analysts caution the February results were compared with weak sales a year ago, when the recession first began. Retailers aren't ready to proclaim a budding upturn, either.

Midpriced department-store chain Kohl's Inc. said it is paring inventory despite exceeding its sales expectations for February.

Even so, "it seems that we are starting to see less negative trends," said Bob Drbul, a retail analyst and managing director at Barclays Capital. Stores have managed to cut their inventories to levels more in line with their sales, he said, and department stores have struck a better balance between clearance and full-priced merchandise.

There were other positive notes to the month as well, especially among the discounters. Family Dollar Stores Inc. beat analyst estimates with same-store sales gains of 6.4% for the quarter ended Feb. 28. A double-digit sales increase in food and cleaning supplies accounted for much of the increase, but analysts also attribute the gains to lower gasoline prices giving shoppers more buying power and the company's wider acceptance of electronic food stamps.

The Matthews, N.C., retailer, which reports its earnings Apl 8, raised profit estimates to between 59 cents to 61 cents a share, from 48 cents to 52 cents.

Wal-Mart for the first time pointed to improved results in several discretionary-product categories. It raised its annual dividend to $1.09 a share after notching its strongest same-store gains since June, when government rebate checks helped boost results. It was the ninth consecutive year of dividend increases. Its shares rose $1.26, to $49.75 in 4 p.m. trading on the New York Stock Exchange.

Wal-Mart posted sales gains in home products, including ready-to-assemble furniture to bedding, which has been a hard sell elsewhere. It also saw increased sales of products such as motor oil, and car batteries and paint.

Its U.S. discount stores open at least a year posted a 5% sales increase while Sam's Club sales jumped 5.9%. "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending towards discretionary categories," Vice Chairman Eduardo Castro-Wright said in a statement.

Troubles remained for Target Corp., which had been consistently lagging its rivals, but the company beat analysts' projections slightly with its 4.1% decline in same-store sales. But Moody's Investors Service on Thursday lowered its ratings outlook on Target to negative from stable, citing the weakness in its stores and credit-card portfolio. Its shares fell 3%, or 85 cents, to $26.31 in 4 p.m. New York Stock Exchange trading.

Sales at discount stores overall rose 2.9%, compared with a 1% increase a month ago, according to the Thomson Reuters Index of 31 top retailers. Department-stores sales fell 9%; apparel retailers slid 5.6%, and teen and children's retailers fell 8.1%, less than the double-digit declines they racked up in January.

Department-store and luxury chains have been weak performers for some time, and the trend continued in February. Macy'sInc. and Saks posted weaker-than-expected results with drops of 8.5% and 26%, respectively. Saks shares dropped 6%, or 13 cents, to $1.99 while Macy's fell 10%, or 77 cents, to $6.58, both in New York Stock Exchange trading.

In contrast, Kohl's Inc. saw same-store sales decline just 1.6%, exceeding the company's expectations, as the company returned to selling more merchandise at regular prices, according to Kohl's Chief Executive Kevin Mansell.

Falling retail sales have led to a wave of retailer bankruptcies, many of which have been forced to liquidate. Circuit City StoresInc. filed for bankruptcy protection late last year hoping to reorganize but will close all its stores by Sunday. On Thursday, the outdoor-equipment store chain Joe's Sports & Outdoors filed for Chapter 11 bankruptcy protection.

—Kerry E. Grace contributed to this article.

The March Mayhem Effect
By Rich Duprey - The Motley Fool.com
March 5, 2009

Investors sell stocks in December for tax reasons, only to buy them back in January, causing their price to jump.

All year long, we've been looking at stocks that also do better in other months. Retailers, for example, have some seasons that perform better than others, simply because of the nature of the business. And some stocks actually do best in March. Whatever the reason, investing based solely on the calendar is certainly not a Foolish strategy.

Still, wouldn't it be great to know ahead of time which stocks performed best at what times?

On Motley Fool CAPS, more than 130,000 members have weighed in on some 5,300 stocks, awarding five-star ratings to the companies that best command their confidence. We've paired their opinions with data going as far back as five years to see which stocks perform best in each month. The following five companies seem to do best in March:

Sources: America Online, Motley Fool CAPS.

What's made teen clothier Urban Outfitters bundle up in March while the rest of the year goes naked? The knowledge that fellow clothing retailer American Eagle Outfitters (NYSE: AEO) does better in February underscores why we don't recommend simply using this as a list of stocks to buy or sell. Instead, consider it a simple platform for further research. We may need to look closer for a reason, but Urban Outfitter's two-star CAPS ratings suggests investors think the future might be a little threadbare for the retailer. Yet if these companies really go nuts in March, let's take a look at some of those above that might live up to that promise.

Absorbing like a sponge

Sears Holdings remains the poster child for how difficult it is to be a retailer these days. Ever since it merged with Kmart, I've berated the stock as overvalued. Even to this day, it hasn't reported a single instance of increasing comparable sales; management has foolishly foregone making investments in its stores in favor of relying upon investing sleight of hand to boost results; it burned through its vaunted cash horde buying back overpriced shares; and the value of its ploy to be seen as a real estate play has come to naught.

While it's true that at some point, a stock just becomes too cheap to ignore any further, I still don't think Sears has reached such an inflection point. To me, its prospects remain scary. It might not be the worst stock in the world, but if you read Chairman Eddie Lampert's letter to shareholders, you'll see him defending his refusal to spend any money on revamping his stores while chiding those, perhaps including Home Depot (NYSE: HD) or Target(NYSE: TGT), who previously invested in their business but now are cutting back: "Perhaps they too are recognizing that unbridled expansion and investment rarely yield the types of returns forecasted by analysts and industry experts."

He further notes that Sears reduced its significant debt burden by $2 billion since the merger. While he the company has $1.3 billion in cash, he neglects to mention that at one time it was north of $4 billion when you included Sears Canada in the equation.

With that said, Sears does have some things going for it, so you might not want to irretrievably throw it away just yet. It has a host of well-regarded brand names, from Land's End to Whirlpool to Craftsman. It successfully relaunched its layaway program, which, if customers ever desire to shop at Sears or Kmart again, will be an attractive selling point. And surprisingly enough, even in these dire times, the retailer is cash flow positive though there's only so long that can continue without increasing sales before it collapses. There's also its real estate which at some point in the future may be worth what everyone hopes it will be.

In the end, I have to agree with CAPS All-Star member jstegma that the iconic retailer is no longer relevant in today's economy.

This store just doesn't seem relevant any more. I grew up reading the wish book and I like Craftsman tools, but it's probably been 2-3 years since I've spent any money at Sears. The wishbook and catalogue is long gone and if I am looking for tools and such I go to Lowe's. I think they'll suffer from a decrease in mall traffic as well.

Motorola, Ex-CFO At Odds on His Exit
By Sara Silver - Wall Street Journal
March 5, 2009

The circumstances behind the sudden departure of Motorola Inc.'s chief financial officer became unclear after a regulatory filing from the company provided an explanation that differed from Motorola's original account of the dismissal.

The former executive, Paul Liska, filed a wrongful termination suit against Motorola on Feb. 20 in the Circuit Court of Cook County, Ill., according to a person familiar with the matter. The existence of the case couldn't be independently verified.

On Wednesday, Mr. Liska released a statement saying he was surprised to learn that he had been fired for cause.

Motorola announced it was replacing Mr. Liska during its earnings call on Feb. 3, after posting a $3.58 billion quarterly loss. The company said its new controller, Edward Fitzpatrick, would also serve as interim chief financial officer.

At the time, Motorola said it was replacing Mr. Liska, a former restructuring expert from Sears Holdings Corp. who joined Motorola in March 2008, because it had postponed the spinoff of its troubled cellphone unit.

Motorola said in a Feb. 3 press release that it "appreciated" Mr. Liska's contributions and Co-Chief Executive Greg Brown praised Mr. Liska on the investor call.

"He did a lot of good work here and helped us get a lot of the heavy lifting done around this separation and preparation for separation...and he was also very helpful in getting after...cost reduction initiatives," Mr. Brown said. "That said, I think the business environment's changed, and given the environmental changes, we thought the change was appropriate at this time as well in that position."

But in a filing with the Securities and Exchange Commission Tuesday night, Motorola said Mr. Liska was "involuntarily terminated for cause" on Feb. 19 and asked that he repay a $400,000 cash signing bonus.

The filing defined "cause" in many different ways, but didn't specify which, if any, might apply in this instance. Among the definitions were: "failure to substantially perform duties," "engagement in any malfeasance, dishonesty or fraud," "gross misconduct" or "breach of one or more restrictive covenants."

Motorola declined to comment on the reason for the change in its description of Mr. Liska's departure.

"All I can tell you is that Motorola is in full compliance with all financial-reporting requirements and our financial statements have been reviewed by KPMG," the firm's auditors, a spokeswoman said.

In a statement to The Wall Street Journal, Mr. Liska said he was fired on Jan. 29, shortly after a board meeting. "For approximately the next three weeks, I and my attorney had been told I was terminated without cause," according to the statement, in which he stressed "without." "Neither I nor my attorney have been contacted about this 180-degree change in Motorola's representation concerning my dismissal."

Mr. Liska said he learned about the change in Motorola's characterization of his termination from reading a story about the SEC filing on the Web site of Crain's Chicago Business.

Former Motorola CFO Liska disputes reason for firing
By Sandra Guy - Chicago Sun-Times
March 5, 2009

Paul Liska, Motorola's former finance chief, is disputing the cell-phone company's statement for the reason he left his job in late January, according to reports.

Liska, a former chief financial officer at Sears, told the Wall Street Journal that he was let go after a Motorola board meeting, but without cause.

Motorola initially indicated it was replacing Liska because its executives had decided to postpone the spinoff of its cellular-phone business. But in a Securities and Exchange Commission filing on Tuesday, Motorola said Liska was let go for cause and asked that he repay a $400,000 signing bonus.

The Wall Street Journal reports Thursday that Liska has filed a wrongful termination lawsuit against Motorola, but it could not verify the suit's existence.

REAL ESTATE
Talk of Sears Tower makeover creates big buzz
By David Roeder - Chicago Sun-Times
Mach 4, 2009

Memorial service set for Bob Buzbee,
veteran Sears executive
March 4, 2009

Trading firm expanding at Sears Tower
By Todd J. Behme - Chicago Business.com
March 3, 2009

(Crain’s) — A trading firm has almost tripled its space at the Sears Tower, a much-needed boost for the landmark skyscraper, which recently lost its biggest tenant.

IMC Chicago is expanding by nearly 34,000 square feet, giving the firm the entire 43rd floor, or 52,286 square feet, according to U.S. Equities Asset Management, which leases and manages the building.

IMC extended its lease through March 2020 at the 110-story Sears Tower, 233 S. Wacker Drive, the release says. The firm, which currently has 18,390 square feet on the 46th floor, plans to move to the 43rd floor this spring.

“It was a competitive pricing structure,” Emir Al-Rawi, managing director of IMC Chicago, said of the decision to stay at Sears Tower.

The firm also wanted to be on one floor and likes the building’s infrastructure, Mr. Al-Rawi says.

He says the firm plans to build a better trading room in the new space that can accommodate more traders. He said the office has about 95 employees and that the he expects that to grow 30% to 35% this year.

IMC Chicago is owned by Amsterdam, Netherlands-based IMC Trading and is that company’s only U.S. office. IMC Chicago has increased its space several times in the Sears Tower after moving into the building in early January 2007 from its original office here at 440 S. LaSalle St.

Sears Tower’s biggest tenant, Ernst & Young U.S. LLP, has decided to move out of the building and into the new office building being developed by John Buck Co. at 155 N. Wacker Drive. Ernst & Young has a lease for 387,000 square feet that expires in 2012. The firm occupies about 237,000 square feet, subleasing the rest of the space to other tenants.

Jones Lang LaSalle Inc. represented IMC Chicago.

On soap box,
Edward Lampert no match for Buffett
By David Greising - Chicago Tribune
March 3, 2009

Sears Holdings Corp. Chairman Edward Lampert probably didn't expect it to turn out this way, but in writing a lengthy, policy-laden shareholders letter last week he performed what can only be described as a full Jindal.

Just as Louisiana Gov. Bobby Jindal failed to measure up while trying to rebut President Barack Obama's economic policy speech last week, Lampert displayed his wannabe status in publishing his letter just days before Berkshire Hathaway's Warren Buffett's famous annual treatise.

When Buffett's letter came out Saturday, Lampert was revealed as a pale imitation of the wise, witty and wonkish real thing.

Where Buffett astutely analyzed the complex causes and likely consequences of the current financial crisis, Lampert essentially boiled it all down to one cause and its inevitable effect. In his view, heavy-handed government interference with the all-knowing, all-powerful free markets caused the whole mess.

Buffett knows that B-school cant about the unerring wisdom of the free markets is not always right. "Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown," he wrote.

Here's Lampert's contrasting opinion: "As a believer in free markets and in capitalism's capacity to create growth and opportunity, I have been disheartened by many of the actions that occurred in the second half of 2008."

Lampert's analysis of the financial meltdown is fraught with internal contradictions. Despite his criticism of government intervention, he acknowledges that government efforts to provide and guarantee funding for struggling banks and businesses had a positive impact.

When he refers shareholders to the writings of economist Friedrich von Hayek—whose "The Road to Serfdom" and "The Fatal Conceit" are manifestos against government intervention—it's clear he is staking out a lonely position that the government last fall should have stood by and watched the economy break down. The markets, apparently, would somehow have taken care of the rest.

What this has to do with selling Kenmore washers, Craftsman tools and Lands' End clothing is anyone's guess. But then, when those washers, tools and jeans aren't moving, when profits are down 55 percent from an abysmal 2007, one can understand why Lampert is tempted to go light on details of Sears' poorly performing business when it can feel much better to rail against the evils of short sellers and mark-to-market accounting, and the unfairness of current pension-reform policies.

Buffett has waxed philosophical for years, but he has earned his soap box based on a virtually unrivaled track record in investment performance and a pretty darn good one in managing Berkshire Hathaway's portfolio of businesses. He opens his letter to shareholders, as Lampert cannot, by showing how Berkshire's stock has outperformed the broader market in all but five of the 43 years he has run the company.

Even last year, when Berkshire's stock had only its second annual decline of the Buffett era, it was down only 9.6 percent, while the broader market fell 37 percent.

Buffett also acknowledges when he has made a mistake. Amid the analysis of Berkshire's business performance, Buffett speaks of his own errors, taking the blame for an ill-timed foray into Conoco Phillips stock that has cost Berkshire shareholders several billion dollars.

And Lampert? With Sears' executive suite a revolving door and Lampert known for his bull-headed micromanagement of Sears' troubled strategy, he apparently was forced to publish a help-wanted ad in his shareholders letter.

"We encourage those who think they are up to the challenge to reach out to us to discuss opportunities at Sears Holdings," Lampert writes.

For years now, Lampert has encouraged comparisons of himself with Buffett, widely regarded as the greatest investor of recent times. It's clearer than ever that the comparison is one Lampert should stop trying to make.

Anastasia D. Kelly Named American International
Group Vice Chair
March 2, 2009

Sears' retreat accelerates
Two dozen more stores to close as profit falls 55%
 By Kim Mikus - Staff - Daily Herald - Suburban Chicago
February 27, 2009

Sears Holdings Corp., which Thursday announced plans to close 24 more stores on top of the eight it announced a few months ago, will probably be forced to close even more by year's end, analysts said.

"I would not be surprised if another 100 stores are closed by the end of the year," said George Rosenbaum, president of Leo J. Shapiro Assoc., a Chicago market research firm.

He predicted that by Christmas, Hoffman Estates-based Sears would be smaller with only the most viable stores remaining. He does not see Sears stores that hold anchor positions at large shopping centers closing anytime soon.

The announcement of the latest closings came after the largest U.S. department-store chain reported that fourth-quarter profit fell 55 percent after holiday sales plunged.

Only one Illinois Sears store, a Kmart in Lockport, is on the list to close with Thursday's announcement.

Sears is closing stores that are under performing in an effort to compete in a tough retail sector that has already claimed Linens 'n Things, Sharper Image and Circuit City, which have all filed for bankruptcy, analysts say.

"Oh sure, stores will close, but Sears will be around," said Paula Rosenblum, managing partner at Retail Systems Research in Miami. Four of the most recent closings, including three Kmarts and a Grand Essentials store, are set to close in Florida in May.

Analysts pointed out that Sears earnings, excluding items, beat Wall Street expectations.

In many cases, analysts believe retailers are using the struggling economy as an excuse to close stores.

"The funny thing about this economy is that every company is taking the opportunity to dump marginal stores and people. 2009 is a get out of jail free card for management," Rosenblum said.

She added that she was not surprised that additional stores were slated to close. Locally, the company announced late last year that it plans to close The Great Indoors store at 1321 E. Golf Road in Schaumburg on March 11.

The company reported Thursday that net income declined to $190 million, or $1.55 a share, from $426 million, or $3.17, a year earlier.

Revenue dropped 12 percent to $13.3 billion in the three months ended Jan. 31 as U.S. retailers experienced the worst holiday shopping season in four decades.

Sales at stores open at least a year have fallen every quarter since Chairman Edward Lampert combined Seras and Kmart nearly four years ago.

What should the company do?

"They need to stay with their core strengths - major appliances and Craftsman tools," Rosenbaum said. "While the retailer is strong in children's apparel, it needs to find a way to attract women looking for clothes. They don't attract enough women to the store."

Heavy Discounting Hits Sears Profit, Raising Doubts About Revival Effort
By Miguel Bustillo - Wall Street Journal
February 27, 2009

Billionaire financier Edward S. Lampert's ambitious attempt to transform retailer Sears Holdings Corp. snagged on heavy discounting that sent its profit plunging 55% in the company's fiscal fourth quarter.

The parent company of Sears and Kmart stores said Thursday that net income for the quarter fell to $190 million; sales fell 12% from a year earlier. The Hoffman Estates, Ill., retailer also said it will close 24 more of its 3,530 U.S. stores. Last year, the company closed 28 stores.

The results were another setback for Mr. Lampert, who serves as Sears's chairman and controls more than half its stock through his hedge fund, ESL Investments Inc. In 2007 investors sent the retailer's stock to $193 on the hopes that ESL would transform Sears into a cash-and-profit-generating machine similar to billionaire Warren Buffett's Berkshire Hathaway Inc.

The metamorphosis has been slow, however, and some investors say are increasingly mystified by the company's strategic direction under Mr. Lampert, who has stopped briefing retail analysts.

Sears shares fell 29 cents, to $35.54 in 4 p.m. trading on the Nasdaq Stock Market. Excluding restructuring costs and goodwill impairment, profit was $2.94 a share, in line with the company's January forecast.

In a lengthy written statement, Mr. Lampert defended his much-criticized decision to curb remodeling and upkeep money for stores as prescient, given the deepening recession.

Noting the dramatic spending cuts being made by other retailers, he wrote, "Perhaps they too are recognizing that unbridled expansion and investment rarely yield the types of returns forecasted by analysts and industry experts."

While Mr. Lampert's letter didn't address the company's plans, analysts and former employees say it is increasingly clear that Sears is consolidating its aging brick-and-mortar stores while quietly investing in Internet-sales projects.

Sears launched a beta Web site called ServiceLive.Com that aims to connect consumers with contractors and handymen. And it is planning to convert two stores into pickup locations for merchandise purchased through a new shopping Web site called MyGofer that aims to exploit a middle ground between Amazon.com Inc. and discounters such as Wal-Mart Stores Inc.

"Sears has to transition away from this retail goliath with these mall-based department stores," said Love Goel, chairman of private-equity firm Growth Venture Partners and board member of Whitney Automotive Group, which has begun selling auto parts through Sears's Web site.

Sears stores have been losing market share for years to discounters such as Target Corp. and home-improvement stores, including Lowe's Cos.

There were some positive signs for Sears in Thursday's report, including improved adjusted earnings for Kmart, which benefited from the popularity of its layaway payment plan among credit-strapped consumers, and sales at the Lands' End division, a strong online presence.

Sears, which has scant debt compared with other retailers, has enough liquidity to survive the downturn, analysts say.

Still, cash of more than $4 billion it possessed at the end of 2006 has dwindled to $1.3 billion, giving Mr. Lampert fresh urgency to meld his two fading retail icons into something more profitable. Sears faces a critical test in March 2010, when its current $4 billion credit line expires.

Sears's transformation has been made more difficult by the retailer's fruitless 13-month-long search to find a new chief executive to lead the company after the board forced out Aylwin Lewis, a former fast-food-chain executive. Company veteran W. Bruce Johnson has served as interim CEO ever since.

One chief executive of a multibillion-dollar business said he was repeatedly wooed by Mr. Lampert, but had no interest in the job because of Mr. Lampert's tight control. "You have to be comfortable with the notion that he's going to [effectively] be the chairman and CEO." Sears declined to comment.

—Joann S. Lublin and Mary Ellen Lloyd contributed to this article.

Sears chairman lets loose with 15-page letter to shareholders
Quarterly profit down 55% percent;
analysts say annual piece is short on details to turn around retailer
Friday Focus | CONSUMERS AND RETAILING
By Sandra M. Jones - reporter - Chicago Tribune
February 27, 2009

Most annual letters to shareholders are dry and perfunctory. A few, like those from investment oracle Warren Buffett, are revered for their wisdom. And then there are the writings of Edward Lampert, the one-of-kind chairman of Sears Holdings Corp.

Sears' business has been in trouble for years, and investors are eager to know how Lampert plans to fix it. In his 15-page letter released Thursday, he has plenty to say but sheds little light on Sears' strategy.

The hedge fund manager with the Goldman Sachs pedigree expounds for 8,500 words (about the length of a New Yorker article) on topics as far-flung as the government's missteps trying to contain the financial meltdown, short-selling rules, civil liberties, the writings of free-market Austrian economist Friedrich Hayek and the notion, repeated in past letters, that the credit rating agencies are unfairly rating Sears' debt junk.

"As for enlightening investors with specifics about his merchandising strategy and fiscal 2009 outlook, we guess he ran out of room," Carol Levenson, co-founder of Chicago-based Gimme Credit, said in a report.

Lampert, the majority shareholder and chairman of Sears, has no investor relations department and rarely speaks publicly, making his yearly letter a rare opportunity for investors to get a glimpse into his thinking.

Among the quirkier sections of Lampert's 15-page letter is a call for job candidates with turnaround experience.

"We encourage those who think they are up to the challenge to reach out to us to discuss opportunities at Sears Holdings," he wrote. Sears has been has been looking for a permanent chief executive to run the retail giant for more than a year. W. Bruce Johnson, a Kmart executive, has been interim CEO since Aylwin Lewis left in January 2008.

Lampert's reputation as a hands-on chairman has raised doubts as to how much freedom a CEO would have in attempting to turn around the ailing retail chain.

Lampert also said Sears has "begun exploring alternative ways to create value" from the Kenmore appliance, Craftsman tools and DieHard battery brands. In last year's letter, he raised the possibility of selling Sears' exclusive brands to other retail outlets.

The best shareholder letters—like those from Buffett or investor Martin Whitman—attract big followings because they are transparent, easy to understand and provide insight into what is working and not working at their firm, said Karen Dolan, director of fund analysis at Morningstar Inc. in Chicago.

"Not only do you not have to be a financial whiz to understand it, those that are successful are straightforward and honest and give information about what they're going to accomplish," said Dolan.

Morningstar equities strategist Paul Larson lauds Lampert's letter for "an above average frankness."

But, Credit Suisse analyst Gary Balter advises reading Lampert's letter only "if one wants to read an interesting analysis of the financial problems that the previous administration created and that continue to impact the world economy."

If it is "a well positioned retailer that we believe will be a winner on the other side of this recovery," look elsewhere, Balter said in a Thursday report.

Lampert's letter came as Sears announced that fiscal fourth-quarter profit fell 55 percent on weak holiday sales and a write-down of the value of its Orchard Supply Hardware unit.

Net income for the three months ended Jan. 31 was $190 million, or $1.55 a share, down from $426 million, or $3.17, a year earlier, the company said. Excluding charges for Orchard and other items, Sears earned $360 million, or $2.94 a share.

Revenue declined 12 percent, to $13.3 billion. Sales at stores open at least one year, a key measure of retail health, fell 8.3 percent in the quarter. Same-store sales fell 11 percent at Sears stores and dropped 5 percent at Kmart.

Sears also said it plans to close 24 stores in addition to the eight already announced.

Sears Chairman Edward Lampert's letter to shareholders
Chicago Tribune.com
February 26, 2009

Message from the Chairman

To Our Shareholders:

Our annual shareholder letter is a great opportunity to communicate ideas and actions that we are pursuing at Sears Holdings and the logic behind them. I strive to explain, rather than promote, because doing so gives you a framework from which to evaluate your investment and our overall performance. We are trying to create a great company that can stand the test of both good and bad times.

This past year was a very difficult year for the world economies and for retail in the United States, and 2009 needs to be the year of restoring confidence and trust in our financial system. We have witnessed the weeding out process that inevitably accompanies difficult economic times, with retail companies like Circuit City, Mervyn's, Linens 'n Things, and Fortunoff not just filing for bankruptcy, but undertaking complete liquidation. Other retail companies, many of whom are highly regarded, have seen their plans and expectations thwarted by events ranging from consumer distress and the tightening of credit markets to rating agency concerns, all of which have upset normal expectations about how a retail business should be run.

As discussed at the 2008 Annual Shareholder Meeting, there has been significant expansion over the past five years in big box retail square footage and significant capital expenditures by our competitors, primarily for opening new stores, but also to refresh and expand their existing store base and infrastructure. At Sears Holdings, our investment principle is guided by the belief that capital invested in any area of our business deserves a reasonable return on that investment. If that return is not forthcoming, significant investments in the business will destroy value rather than create value for shareholders.

Over the past several months, many of our competitors have announced dramatic reductions in their capital expenditure budgets for 2009 and beyond. Perhaps they too are recognizing that unbridled expansion and investment rarely yield the types of returns forecasted by analysts and industry experts. The dramatic increases in capital investment in the retail industry that took place in recent years are being reversed, and investment levels are being reevaluated. I think that ultimately this is a healthy dynamic for the entire industry. Retail is not immune from the economics of overexpansion experienced in other industries. At Sears Holdings, we will continue to evaluate opportunities based upon our expectations for returns and continue to experiment with a variety of options where the returns could justify higher levels of investment.

Public Policy and the Financial Crisis

It is hard to describe the environment we are operating in as a retailer without commenting on the overall economic environment in the United States. As an employer of over 300,000 people and as a company that serves millions of Americans every day, we are buffeted in very dramatic ways by the economic convulsions that surround us. As a believer in free markets and in capitalism's capacity to create growth and opportunity, I have been disheartened by many of the actions that occurred in the second half of 2008. Please permit me to describe some of the main points that may have been missed, overlooked, or underemphasized in the commentary and decisions that have brought us to where we are today before discussing our performance at Sears Holdings in more detail.

I believe that the primary problem with the financial system has been a funding problem rather than a capital problem. What this means is that our banks went into this crisis with significant levels of capital and several have raised considerable levels of additional capital since. Nevertheless, their ability to fund their business on a day-to-day basis was compromised at times during 2008 due to dislocations in the capital markets. When Bear Stearns ran into funding problems in early 2008, the Federal Reserve and Treasury stepped in to arrange a merger with J.P. Morgan. Only a few days before this happened senior Bear Stearns officials were assuring nervous constituents that the bank had significant capital and liquidity and could weather the storm. However, when confidence in a financial institution is compromised, very few can survive without some form of assistance, especially when events unfold with such speed and are accompanied by rumors, speculation, and fear that only time can dispel.

The involvement of the Federal Reserve in arranging the merger of Bear Stearns with J.P. Morgan came at a steep price for Bear Stearns shareholders. The original deal price of $2 per share was brokered by Federal Reserve officials, who feared criticism that they were "bailing out" Bear Stearns shareholders and creditors. In fact, shareholders had seen the value of their investment decline from over $100 per share to under $10 per share in a matter of months. Rather than provide funding that would allow Bear Stearns to continue to operate, the merger arrangement provided for J.P. Morgan's funding base to assume the obligations of Bear Stearns, with the Federal Reserve funding the purchase of roughly $30 billion of their assets.

Simultaneous with this announcement, the Federal Reserve made available to all primary dealers (which included many of the traditional investment banks) access to its discount window, which allowed these primary dealers to receive cash and treasury securities in return for pledging certain assets. This step was important, as it assured the primary dealers that they had a source of funds to meet obligations should they need it. Previously, the discount window was available solely to commercial banks and served as an important part of the funding system, especially in times of stress.

Despite this action, concerns continued throughout the spring and into the summer regarding the health of many financial institutions. At the same time, housing prices and housing activity continued to decline as financial institutions reduced their lending activities and increased their lending standards. In addition, more and more non-fixed rate mortgages reset, raising the cost of financing for many homeowners who had expected both that interest rates would remain low and that the choice of a variable interest rate with a low starting rate would enable them to buy a more expensive home than could be financed with traditional 15 and 30 year fixed rate mortgages. Many experts believe that the core of the problem in the financial system was the mortgage market and housing prices. They believe that if a way to stabilize housing prices and to increase funding for buyers of homes could be found, then a rebound could begin.

Pressure from foreign lenders and other significant participants in fixed income markets increased as concerns were raised about Fannie Mae and Freddie Mac, the two Government Sponsored Enterprises (GSEs) that are the largest providers of liquidity to the mortgage markets. The GSEs had been for a long time a political football, with some conservatives urging their elimination and some liberals urging them to do more lending to lower income communities. As investors reevaluated their risk tolerance, a flight to quality ensued, with many investors shifting their preference to cash and to risk-free Treasury securities. The credit spread over Treasury securities for high-grade corporate bonds as well as GSE debt increased (even though the absolute level of rates was still very low), generating losses amongst many fixed income participants, including foreign lenders and large fixed income mutual funds and investors.

In July 2008, Congress was persuaded to act. Under the advice and urging of the U.S. Treasury, Congress passed the Housing and Economic Recovery Act of 2008, which increased the oversight authority of the regulator of the GSEs, ultimately giving the Secretary of the Treasury a "bazooka" to fire at the GSEs and their shareholders under certain conditions. As the Treasury Secretary explained at the time, "if you have a bazooka, and people know you've got it, you may not have to take it out. You're not likely to take it out." This gave a temporary reprieve to worried GSE investors. Immediately after passage of the legislation, however, many in the media began to call for the nationalization of the GSEs. Depending on their vantage point, people argued either about the GSE's ability to fulfill both a social and an economic mission simultaneously, or about why they existed in the first place.

On September 7, 2008, in the largest nationalization in American history (executed expeditiously and without an obviously transparent process), the U.S. government announced that it was placing Fannie Mae and Freddie Mac into conservatorship. As part of the conservatorship, the government would provide capital support, if necessary, of up to $100 billion to each GSE through Preferred Stock Purchase Agreements. Although no cash changed hands, in consideration of this backstop, the U.S. government received 80% of the common stock plus $1 billion in preferred stock in each institution. This backstop has recently been increased to $200 billion as part of the Homeowner Affordability and Stability Plan. In the process, they suspended dividends on existing preferred stock of both Fannie Mae and Freddie Mac, eliminating approximately $36 billion in value, most of which was held by the major commercial banks in the United States.

Rather than help solve the housing and mortgage problem, the unintended consequences of this action were manifold. First, bank capital was depleted. Not only was $36 billion in GSE preferred wiped out, but the whole market for financial preferred securities went into a free fall, wiping out additional equity from financial institutions, including many large insurance companies. Second, despite the boards of directors of Fannie Mae and Freddie Mac consenting to conservatorship, neither company has ever given an explanation for its consent. For those who are sophisticated in finance, neither Fannie Mae nor Freddie Mac had a "funding" problem. Because each GSE's balance sheet was comprised of highly liquid Mortgage Backed Securities (MBS) that pay off on a monthly basis, it should have been easy for either to pledge securities to raise money or to shrink their balance sheet and meet their financial obligations as they came due. The logical explanation for the boards of directors giving consent rests with the presumption that if they did not consent, there was some other threat that would have been even worse for those directors. As for the shareholders the directors represented, it is hard to imagine anything worse than having their investment effectively wiped out, and they had no vote on the matter.

Investors in regulated industries rely on the fact that regulators will not behave in an arbitrary fashion and, if they do, that there are due process remedies that their managements and boards can pursue. Investors in financial institutions who experienced what can happen when funding was compromised earlier in the year in the case of Bear Stearns, now experienced what can happen when a regulator unilaterally decides that the rules of the game are not sufficient or appropriate. Both Fannie Mae and Freddie Mac had capital in excess of the required levels under regulatory guidelines and accounting rules in effect, with Fannie Mae's capital being significantly in excess of the required levels. However, if one were to use some other standard (and many were being suggested and recommended for quite a while), one could make the case that neither company had the capital desired by their critics, some of whom were not investors, while others had an academic or political interest in the housing and mortgage area that was adverse to the GSEs.

Once it became clear that regulators would act preemptively and with apparent disregard for the regulatory capital requirements and rules, it took less than one week for Lehman Brothers, AIG and Merrill Lynch to find their funding compromised. The government then made the decision to let Lehman Brothers fail, rather than to provide some form of funding bridge that would allow them to meet their short-term obligations and shrink or reform their balance sheet in an orderly fashion. Merrill Lynch agreed to be bought by Bank of America, thereby securing funding for its obligations. The government stepped in to provide bridge financing to AIG. Goldman Sachs and Morgan Stanley were allowed to become bank holding companies on an expedited basis, thereby strengthening their liquidity positions through an expansion in the types of assets they could pledge at the discount window. This provided both companies a strong boost and enabled their survival, while eliminating the last of the major investment banking firms.

The willingness to let Lehman Brothers fail, the stringent terms of the AIG bridge loan, and the arbitrary nature of helping some and not others was too much for many investors to bear. Confidence – which was already strained earlier in the year – was destroyed by this series of events, and unforeseen consequences continued. Shortly thereafter, Washington Mutual was seized and sold to J.P. Morgan, Wachovia agreed to be acquired, first by Citigroup and then by Wells Fargo, and National City was forced into the hands of PNC.

To simplify, there were two paths being pursued simultaneously to strengthen the financial system in general and individual companies specifically. First, there was the capital raising path. This path has generally not worked and has been both value and confidence destroying. Yes, it has given support to creditors (depositors, lenders and others) of financial institutions, but it has destroyed their stock prices, which for many are the primary indicator of confidence. Raising capital at any price or achieving the same effect through forced mergers, and doing so at a time when regulatory capital levels were at or higher than historical levels, made investors wary of buying financial securities and caused many investors to sell these securities. Second, there was the funding path. This path has worked very well and was buttressed later in the year by guaranteeing deposits at a higher level, allowing banks to issue government guaranteed debt, guaranteeing money market funds and providing access to commercial paper for higher rated borrowers. A business that has access to funding can continue to operate, generate earnings, and increase its capital to repair its balance sheet.

The market often has a short memory – but not that short. Recent speculation about bank nationalization, uncertainty regarding regulatory standards, and the loud drumbeat of speculation are eerily familiar. The dangers of regulatory action that is poorly understood and consequentially significant are fresh in the minds of investors and citizens alike. Just as our nation's leaders can contribute to a downward spiral of confidence they can also contribute to an uplifting of confidence. And this is not just about words. Any actions that contribute to respect for private property and the rule of law will be immediately greeted by improved investor sentiment. Whether as a bondholder or stockholder, investors need to know that they have rights and that the rules of the game are going to be fair and predictable. Any rule changes or actions should not simply be decided and announced over a weekend. Improved oversight can be constructive. Allowing significant policy changes to work their way through the system over time, rather than implementing them overnight because of stock price declines, can break the cycle of panic and fear.

The reason I have elaborated on these events is to put into perspective the environment in which companies like ours are operating. While all companies are impacted by the frozen credit markets, retail companies are impacted by reductions in funding from banks for their seasonal needs to build additional inventory during the Christmas holiday. This has had a crippling effect on some, both large and small, who are no longer in business. The credit markets have also impacted customers in terms of the availability of credit card financing and other funding for their purchases. When funding sources become less predictable, a retailer, or any other business for that matter, needs to adjust so that it doesn't find itself without the ability to operate successfully.

A typical Kmart or Sears store has a payroll of between 75 and 115 people, both full and part time, who collectively earn between $1.3 and $1.7 million per year. We are proud of our record of preserving these jobs over the past several years, despite the fact that some of the stores were unprofitable. As you know, we didn't do this as a charitable exercise. We had to believe that we could convert the money-losing stores to money-makers. When we are forced to close stores, many of these fine men and women will be forced to seek other employment, either at other Kmart and Sears stores or somewhere else. I can understand their frustration at the unfolding events in our society where some companies are afforded government assistance, whereas companies like Sears Holdings are forced to bear the anticipated and unanticipated consequences of these actions.

Over the past several years since the merger of Kmart and Sears in March 2005, Sears Holdings has reduced its borrowings and invested $1 billion in our pension funds to fortify our financial condition. While many other retailers increased their leverage, we reduced our debt by $2 billion since the merger. Of the $2.3 billion of consolidated borrowings at the end of fiscal 2008, $559 million is debt of Sears Canada and Orchard Supply Hardware and is non-recourse to Sears Holdings, and $442 million is short-term borrowings primarily under our revolving credit facility. Sears Holdings has $1.25 billion of long-term legacy Sears Roebuck debt, which will be less than $950 million in May – a modest amount for a company with our balance sheet and earnings power. Despite this, we have received very little credit for these actions from the rating agencies and we believe that our credit metrics and balance sheet compare favorably to competitors like Macy's and J.C. Penney, which carry higher and investment grade credit ratings.

We have taken steps to help our vendors, investors and the media understand our strong financial condition and our significant credit availability. This has helped in most cases to calm concerns driven by negative, damaging, and often unsubstantiated rumors about our company.

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2008 in Review

Our profit performance in 2008 at Sears Holdings continued to decline, with the last quarter of the year showing the best relative performance, which is gratifying since it is the most important quarter of the year. It also occurred during the worst part of the year from an economic standpoint, and our inventory levels were managed significantly lower than the year before. The decline in profit has been a source of concern, but we remain highly profitable with overall Adjusted EBITDA for the year in excess of $1.6 billion (please see our earnings release issued today for a reconciliation of Adjusted EBITDA to GAAP operating income). Our consolidated cash position at year end was roughly $1.3 billion and we continue to have our revolving credit facility in place through March 2010. We expect to renegotiate and extend our credit facility this year at a capacity more in line with our historical borrowing practices.

One of the unfortunate realities of the current environment is that we have closed a number of our stores during 2008, and we decided in the fourth quarter to close additional stores. We will be closely monitoring stores throughout 2009. Our approach has been to continue to operate money losing stores in the past so long as we believed that we could restore those stores to profitability, and that the level of losses could be recovered upon return to profitability. The higher the loss, the greater the probability that the store would one day be closed. Given that any store we operate has a significant inventory investment and in some cases can have value to others, and given that we operate in a highly competitive industry, we cannot afford to operate stores without the prospect for an adequate return. For those stores that have leases expiring, we have chosen in some cases not to renew the leases, thereby allowing us to convert the inventory to cash, relieve the loss on our income statement, and eliminate the lease expense from our debt calculations and obligations.

At the beginning of 2008, we announced the reorganization of the company into five different types of business units: Operating, Support, Brands, Online, and Real Estate. The reorganization was designed to decentralize decision making, allow us to attract high quality talent, and ensure that responsibility would be accompanied by accountability. Naturally, with change comes uncertainty, for some about whether or not change will be good or bad for them and for others about the realization that they are going to be held more directly accountable for results.

We have worked hard over the past year to implement this new structure. As with anything new, there are always growing pains. As a mature company with the mindset of a startup, it is natural to expect change in our employee population, at the senior levels and all the way through. Turnover is to be expected and welcomed, as long as it is based on performance and opportunity.

We have welcomed a number of new senior leaders to the company who take on the challenge of leading their respective business units to higher levels of performance. At the same time, we have seen some of our leaders leave or retire, for personal or performance reasons. To participate in a turnaround of this magnitude requires a level of drive and energy that is very different than in a company with performance at or above industry averages. We encourage those who think they are up to the challenge to reach out to us to discuss opportunities at Sears Holdings.

Over the past twelve months, led by Bruce Johnson, all of our associates have worked hard to build on the attractiveness of our platform while repositioning us for retail in the 21st century. We continue to hone our vision and define what it will take to achieve it. There are five key pillars of our strategy, and I would like to lay them out for you:

1. Creating lasting relationships with customers by empowering them to manage their lives

2. Attaining best in class productivity and efficiency

3. Building our brands

4. Reinventing the company continuously through technology and innovation

5. Reinforcing "The SHC Way" by living our values every day

Please allow me to illuminate these five pillars.

Creating lasting relationships with customers by empowering them to manage their lives: From our Kenmore appliances to our home and auto services to our Lands' End apparel to our Sears and Kmart stores and online experiences, we interact with millions of customers every day. This gives us the foundation to strengthen and extend the relationship with our customers. The success of our layaway program during the holidays demonstrates our understanding of our customers' needs in this challenging financing environment. After observing the early success of this program at Kmart this fall, we scaled and launched it quickly at Sears as well, making us one of the only retailers to offer this payment option to customers for the 2008 holiday season. Not only did this program contribute additional sales, but more important, we were able to deepen our relationships with our customers by providing unique services and solutions to address the financial challenges they are currently facing.

We made meaningful strides this year towards our goal of offering customers a broader and deeper selection of products and convenience through multiple channels. Online we have expanded our assortment and are now offering new categories to customers including books, music, and entertainment. Our web-to-store and store-to-web initiatives are designed to integrate and leverage our platform of stores and online sites to offer customers multiple ways to fulfill their shopping needs. We aspire to provide our customers with a platform for whatever they want, wherever and whenever they want it. Our online investment drove growth in calendar year 2008 significantly above the online industry growth rate. In further recognition of the progress we have made, e-tailing group, Inc. recently named Sears the top website in their "e-commerce gauge" survey with a total score of 88.25 out of 100, up 21% from last year.

The public launch of ServiceLive earlier this month is another example of how we are creating relationships with customers that empower them to manage their lives. ServiceLive.com is an online marketplace where homeowners and businesses can name their price for a wide variety of services, improvements and repairs. The site was designed to improve the often stressful experience of getting projects done around the home for both homeowners and service providers. We still have a long way to go in terms of building lasting relationships with our customers, and we have many more initiatives underway that continue to build on this one.

Attaining best in class productivity and efficiency: Last year we said we intended to manage the company's expenses and inventory position more tightly in 2008 in order to improve our productivity. The achievements in both these areas have helped position us for the present tough environment. Inventory was reduced by approximately $1 billion as of year-end. Multiple actions were taken to reduce our cost structure. Fourth quarter domestic selling and administrative expenses were down by over $200 million versus last year. Because many of these actions were not taken until midway through the year, they will generate additional savings in 2009 as well. We have a mindset of viewing expenses as investments, and we will continue to be vigilant about the return on all expenditures.

Despite these actions, we are nowhere near competitive levels of productivity or efficiency in all of our businesses. This is especially true in our apparel businesses at Sears and Kmart. We used business-unit specific competitive benchmarking in our financial and strategic planning for the first time this year. The new organizational structure also allowed us to draw each business unit leader's attention to the resources that support his or her business from space and marketing to labor and inventory. We must continue to optimize our resource management on a business unit basis and narrow the gap between our productivity and that of our competitors.

Building our brands: We consolidated the management of our brands within a separate business to give them the appropriate focus for growth. We have begun exploring alternative ways to create value from our Kenmore, Craftsman, and DieHard brands and to infuse them with even greater innovation. A lot of work remains to be done. Going forward, we intend to build our portfolio of brands in a way that gives customers additional reasons to engage with us.

Reinventing the company continuously through technology and innovation: We have continued to invest in reinventing the company despite reductions in expenses we have made in some more traditional areas of our business. We are also incubating several new businesses, all of which are still in their early stages but have the customer at the center of their development. Lands' End sets a great example for the rest of our business units on how to use technology and innovation to drive growth. Despite a very difficult year for the apparel industry, Lands' End had record profits in 2008 for the third consecutive year, with EBITDA up over last year in its direct business and up even more including the Lands' End shops at Sears. Our Lands' End brand is known for innovation, and also has an efficient direct business model. Over the past several years, Lands' End has re-invented itself by shifting the balance of engagement in its catalog business from phone and mail to online with a substantial majority of orders currently placed online. Our goal is to foster a similar culture of technology-driven innovation across all of our businesses and to accelerate the pace of change.

Reinforcing "The SHC Way" by living our values every day: The values we set out at the time of the creation of Sears Holdings four years ago are being exemplified by more and more of our associates. We are also continuing to bring in talented leaders from companies with well-respected cultures of their own, including General Electric, IBM, Home Depot, Motorola, and Gap, among many others. We are committed to attracting the best and brightest at all levels of the company. At the MBA level, this past year we had acceptances from students who turned down offers from companies such as Google and McKinsey to join our unique leadership development program. We have also been able to take advantage of opportunities due to upheaval in the job market to hire more diversely than we have in the past, which is helping us to develop a culture of excellence. When I worked at Goldman Sachs, one of the highest compliments was to be called a "culture carrier." I am proud of the progress that our associates are making towards helping us to build our own legendary culture.

Let me conclude the review of 2008 by commenting on our CEO search, where we have worked with a nationally recognized recruiting firm, Russell Reynolds. Members of our board of directors have had the opportunity to meet with a number of very talented individuals over the last year. We have been impressed with a number of those individuals and are confident that they have had and will have very distinguished careers. That said, public commentary regarding the search has been incorrect. To be clear: as of the end of the fiscal year, we have not made a single employment offer to anyone to serve as our CEO. That doesn't mean that we have not reached out to a number of people to explore opportunities or that we haven't had a number of meetings and interviews; we have. But, thanks to Bruce Johnson's efforts and our board's confidence in him as interim CEO, we can be highly selective in our search. The search for a new CEO has not detracted from our ability to attract extraordinary new senior executives, and I am continually impressed with Bruce's steadiness through these difficult economic times.

The Adaptive Organization

The pace of change over the past few years and the volatility of the last twelve months seem to have accelerated to the point where businesses and governments are struggling to keep up. In order to drive a strategy one needs to have a context in which that strategy is executed. When oil goes from $50 to $145 and then back to $35 all within a year, what type of strategy can contemplate and manage that? Those who hedged oil purchases looked very smart when oil went up, but when oil declined, some companies experienced huge losses and had to post collateral to maintain those hedges. Nobody wanted to buy trucks last summer and nobody wanted to buy a Toyota Prius in the fall. By winter, nobody wanted to buy any cars or trucks.

As discussed above, during the past year we underwent a major organizational transformation to help us adapt to the accelerated pace of change across all of our businesses. This change goes far beyond economic conditions. New technology and business models have forced many mature industries and businesses to reassess their ability to compete. We put in place boards and leadership teams and developed internal financial reports for each of the business units. We are working to align incentives to close the gap versus industry productivity metrics, as emphasized in our planning process this year. While several steps remain to finalize the processes and systems supporting this structure, we made rapid strides this year in laying the foundation for a more adaptive organization.

In the past, we have described a portfolio approach to managing the business at Sears Holdings. This includes the way we reorganized our business units as well as the way we have invested our capital and managed risk. This is a complicated and complex transition for any company that is used to thinking in a single scenario. For those who don't agree with the idea of a portfolio approach as the underpinning of strategy, I respectfully disagree. It is easier in theory to manage to a single scenario and a single plan. It is much easier to communicate based on a single scenario and a single plan. But the world is complex and it doesn't always cooperate. Whether it is changing events on a battlefield, changing events in a sporting contest, or changing events in an industry, being able to adapt and change faster than the competition is a huge advantage.

Companies like Sears and Kmart operated for years without enough appreciation for adaptability. Today, many major corporations continue to do so. When you are a market leader and everything is going your way, it is easy to be deluded by a feeling that you can predict the future and that strategy and execution based on that predicted future is the key. Ever since Kmart emerged from bankruptcy in 2003, we have had to operate under the assumption that we would have limited access to capital markets and that we would need to have a liquidity position that would allow us to manage through difficult times. At the same time, hoarding cash and ignoring long-term value creation isn't what shareholders desire. Despite a drop in our operating earnings in 2008, we continued to generate free cash flow in the business. While we built inventory in 2006, we reduced it significantly in 2008.

At Kmart and at Sears Holdings, we have demonstrated an ability to adapt. We continue to improve our offerings to customers, develop talent internally, and work to make Sears Holdings a company that creates lasting relationships with customers. Our combination of products and services is unmatched by other retail companies. We are striving to become more relevant to and engaged with our customers and communities. We are making investments in technology that should help transform the impression that some people have about our company. We are working not only to improve, but also to accelerate the pace of our improvement.

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As discussed above, a number of changes in the regulatory environment greatly impacted Sears Holdings and other companies. Three additional areas quickly come to mind.

Short-Selling Rules

From the middle of the summer through the fall, the Securities and Exchange Commission expressly prohibited short selling of securities of a number of financial institutions and companies with financial subsidiaries. We elected to have our shares included in that short selling ban for a number of reasons. First, the level of "naked" short selling of our shares was significant. The activity can be measured by the number of shares sold short as disclosed twice monthly by the NYSE and Nasdaq as well as by the reported number of instances of failure to deliver securities by short sellers to purchasers of Sears Holdings stock. Second, as fiduciaries for our shareholders, our decisions are governed by what we think is in the best interests of the owners of the company.

Since the time of the ban, the SEC has taken further actions to enforce "naked" short selling rules that had been in place, but not enforced, for a significant period of time. This is an important protection for shareholders and for property rights. The sale of property (shares in a corporation) that a seller does not own and can't deliver (naked short selling) is an affront to property owners, and a destroyer of confidence and trust. Much of the commentary around short selling ignores this simple fact.

While I understand (and often appreciate) the urge to critically evaluate possible regulation, it is interesting that there has been protest by those on the short side with regard to some of the rules that have been suggested. For example, the reinstatement of the uptick rule, which would require any short sale to occur at or above the last sale price on the stock exchange. Such a rule had been in place for over 70 years (to prevent "bear raids" in which short sellers aggressively sold stock at ever lower levels, undermining confidence) until it was repealed in 2007. It has been suggested that, because stocks are now traded in decimals rather than in 1/8 point increments, such a rule is obsolete or unnecessarily difficult to implement. However, what the opponents fail to point out is that companies who repurchase their own shares are advised to adhere to a rule that forbids those companies from initiating a plus tick when repurchasing shares. Why policymakers would favor an asymmetric application of a rule like this in favor of short sales and against company repurchases is a mystery.

Similarly, the SEC has required short sales of securities to be reported periodically beginning in the second half of 2008. Short sellers have prevailed on the SEC to allow this disclosure to be done privately on the basis of a claimed need to protect their investment strategies. While I respect this privacy right, investors who purchase and own stocks, however, are afforded no such privacy in their holdings. In fact, holders of securities are required to publicly file their holdings on a quarterly basis. Such public disclosures have been known to attract the interest of short sellers when institutional investors and hedge funds have found themselves under performance or redemption pressures. Again, it is a mystery as to why those who are owners of publicly traded companies are required to disclose their holdings while those who sell short those very same securities are permitted to keep their positions private.

Ultimately, the thing to remember about short selling is that the company's owners have the ability to regulate whether shares of their company can be sold short – even if regulations permit it. When shareholders choose to lend their shares, they are facilitating the ability to have those shares sold short. When they choose not to do so, the ability to sell short is reduced.

Pension Reform

Pension reform is an issue that I have highlighted in prior letters. Towards the end of 2008, in an attempt to provide clarity and relief related to the Pension Protection Act of 2006 (PPA), Congress enacted the Worker, Retiree, and Employer Recovery Act (WRERA). It was reassuring to hear that there was a legislative change giving companies with pension plans an ability to fund their plans over a longer period of time. Changes made only a few years ago forced plans to accelerate contributions to close any gap between their assets and liabilities. We are proud of the $1 billion we have contributed to our domestic pension plans since the merger to help close this gap. Despite reports of pension relief, however, not only was relief not given to companies including Sears Holdings, but in fact our funding obligations in 2010 were going to increase by over $120 million as a result of the "relief" granted in late 2008.

Sears Holdings is not alone in this situation. While we appreciate the sentiment of providing relief, we estimate that the relief of the WRERA did not extend any timing relief to the approximately 3,000 companies that had not funded their pension obligations to at least 90% as of January 1, 2007. Even for those who were funded above 90%, the relief is insufficient to address the enormous loss in pension values resulting from the turbulent capital markets of 2008 which significantly reduced the value of the pension assets. As a result of the accelerated funding requirements of the PPA--appropriate in a more robust economic environment--and the market-driven declines in pension assets, many of the country's largest employers are being forced to make short-term trade-offs between maintaining employment and funding long-term obligations. The appropriate response to this environment is for Congress to provide an additional two years over which these companies can amortize their 2007 and 2008 losses, with the first two years of this extended amortization period requiring only interest payments on the obligation.

To be clear, we are not looking to decrease our obligation. We are simply looking for additional time to fund this obligation. It would be tragic if in an attempt to protect workers' pensions, defenders of current policy are actually hurting these very same people. I trust that when they understand the practical reality, they will quickly give relief to companies with pensions. Not doing so will only exacerbate the unfairness I have cited in the past between companies with pension plans and those without, and further burden the employees of the former.

Mark-to-Market Accounting

At the end of the year, our accountants and auditors determined that all of the goodwill associated with the Orchard Supply Hardware business should be written off. The goodwill write-off has no impact on the cash flows of the business and is purely a non-cash accounting charge. I take absolutely no issue with this determination. Other companies find themselves with similar goodwill adjustments as a result of stock price and business performance declines. Interestingly, the amount of goodwill initially recorded was determined by an actual market transaction when Ares Capital purchased 19.9% of Orchard in 2005, and the write-off was determined based on the financial models developed by appraisers and accountants of what they project to happen in the future. In this case, it is not a mark-to-market, it is a mark-to-model or to assumptions that may or may not be reflective of what Orchard would be worth in a market transaction, were it for sale.

Accounting disciplines strive to provide information which is both relevant and verifiable. In the old days accounting rules were based on the concept of "historical cost," which means that items were valued based on actual transactions. This accounting model had the benefit of being highly verifiable as different parties could objectively confirm the value of a given transaction and the resulting cost. However, many believed that such historical cost-based financial statements did not provide information as relevant as current market price, so accounting has evolved from historical cost to fair-value-based financial statements.

In normal times, market values are volatile and in extraordinary times extremely volatile. For those entities required to sell assets because of their business model or because of their funding circumstances, they are subject to the whims of the market and their business may be severely impacted by wherever market prices may end up on a given date. For many companies, market values can be a guide for purchases and sales of assets, but they don't force actions by the companies.

Benjamin Graham said, as Warren Buffett paraphrased, that "in the short run, the market is a voting machine. In the long run, it's a weighing machine." Despite this caution, much of our financial system now rests on the shoulders of a "voting machine" rather than a "weighing machine." Don't be fooled by the term "mark-to-market." Mark-to-market is a regulatory convention and not a free market convention. As regulated entities, most financial institutions are required to account for their assets by regulatory convention. Similarly, all publicly traded companies are required to conform to GAAP (Generally Accepted Accounting Principles). This helps for comparability and it helps to assure investors that they can rely on the financial statements of publicly traded companies.

What has happened is that we have gone from a system which stressed objectivity and verifiability to a system in which the market price of an asset, under conditions of economic stress and financial dislocation, must be derived using a significant amount of judgment. But this is not where it stops. Once you accept the mark-to-market convention, you begin the debate of what is the correct market price. Different people and different firms end up pricing the same asset differently. This has been true for a long time in the derivatives markets, but it also is now true in markets in which asset prices are less liquid. This allows critics and commentators to charge that financial institutions are not marking their assets properly (regardless of whether the critics have any specific evidence or not). The incessant drumbeat of these charges leads to a loss of confidence among investors as well as concerns from regulators and rating agencies who are fearful of being accused of being lax in overseeing these institutions. The accounting profession, as well, is put into a position of being second-guessed for the financial statements they prepare and certify, so they too become "conservative." So much time and money ends up spent ensuring that the financial statements are immune from criticism that it can become much more of a distraction than a useful tool for investors and managers.

That doesn't mean that mark-to-market has no bearing or that it is wrong. It is important for investors as well as regulators to appreciate the consequences of certain conventions. Imagine you were accounting for an oil company and oil was trading at $140 when you had to produce financial statements. Three months later, oil is at $60 and you produce another set of financial statements, marked-to-market. Given the transparency of a single commodity, when the next set of financial statements is produced, the assets of the company are significantly lower. The company explains that with the drop in the price of oil, the value of the assets is significantly lower than three months before. To most investors this would make sense.

Now, take a similar company, but instead of oil as a single commodity, substitute thousands of financial instruments of different types. Each type of asset will have its own price path and level of volatility. When a financial statement is produced three months later showing dramatically lower assets and a significant loss, it is impossible for an outsider to conclude whether the financial statements of three months prior were inaccurate simply because the new financial statements show lower asset values. Sarbanes-Oxley rules were designed to improve the accountability and oversight of public company financial statements to increase investor confidence. Despite these rules, over the past year we have witnessed all kinds of accusations and assertions about company financial statements and management credibility. Instead of recognizing that price volatility, illiquidity, and mark-to-market rules are the primary reason for volatility in financial statements, many have concluded that you can't trust the "bankers" and that additional regulation and oversight is needed.

The tendency to overreact is very significant. The risk-reward calculation for regulators and rating agencies are heavily weighted towards assuming the worst and acting based on those assumptions. The result of these actions, however, is extremely harmful for the system as a whole. I believe that in a capitalist society we are always faced with the tradeoffs between freedom and tyranny. In a free society and free markets, what people say and what people write have been largely protected by the U.S. Constitution (this is not always true in any capitalist society). This is much less true in the economic domain, where constitutional protections of private property and economic rights have been watered down over time to permit significant levels of regulation and government intervention. Just as with free speech and a free press you will have people saying things that others view as harmful, hateful, or obscene, so too in a free economy you will have individuals and businesses doing things that others will disagree with. Some of those things may lead to great business success and others to failure or to disgrace. To expect or allow for excessive regulation of business, including financial businesses, is to stifle growth and creativity, which ultimately produce jobs and wealth that are the foundation for any successful and free society.

The two most important books that any student of current events should be reading in this environment are both by Friedrich Hayek, the esteemed Austrian economist. Based on events he witnessed beginning in the early part of the 20th century, Hayek wrote The Road to Serfdom as a warning to England and the United States against the damaging impact of socialist policies and The Fatal Conceit as a warning against heavy intervention in markets and society at large. Despite the almost universal belief today that more, but better, regulation is needed and that the role of the state needs to be not just temporarily larger, but permanently larger, Hayek's writings and logic should give everybody pause as to the consequences of these actions.

As a country, we need to rebuild confidence and trust and to understand what happened. Whether by business or by government, the misdiagnosis of situations leads to poor prescriptions for rehabilitation and recovery. When the misdiagnosis is done at the federal government level and involves large parts of a national economy, the consequences can be swift and significant. The unintended consequences are often swifter and even more significant. As the leaders in our nation continue to evaluate and evolve the policies and rules of the game, we would all be wise to heed the cautions raised by Friedrich Hayek. I appreciate that the free market can be a difficult master and that there is an important role for government and regulators, but I hope that as we move forward the rules of the game and the methodology for changing those rules will be more consistent and fair than they have been over the past year. Those who desire to protect civil liberties in times of war appreciate the importance of laws protecting individuals and institutions. In times of economic and financial distress we need to be similarly vigilant in protecting economic and contract rights so that we can continue to have a system that functions properly. Attempts to threaten or eliminate those rights will chase away the capital and investment that our country needs to restore prosperity and to thrive in the future.

* * * *

I believe that we are well positioned now at Sears Holdings to operate through a difficult economy, and we are preparing to rebound strongly when the economy stabilizes and turns back up. Many of our large businesses are highly related to the economy and to housing--appliances, tools, lawn and garden, electronics, and fitness. They are not just economically related, but credit related as well, as they are all big ticket items that are typically purchased on credit. As one can see from the results of Lowe's, Home Depot and Best Buy, nobody is immune to these macroeconomic impacts. When these sectors rebound, we expect our earnings to rebound as well.

Our goal remains to create long-term wealth for our shareholders. When you are leading a large organization, you need to lead by example and appreciate that this includes having targets that generate value, not simply targets that can be easily hit. When businesses don't create value over time for their owners, it is very difficult for them to create value for their employees, customers, suppliers and communities as well.

I am proud of the people at Sears Holdings, over 300,000 strong. For over one hundred years we have served customers through good times and bad, and have continuously adapted to changes in society and technology to do so. It hasn't always been easy but our associates have always been up for the challenge. In the future there will be many opportunities for us and we intend to seize them.

Respectfully,

Edward S. Lampert

Sears still hunting for new CEO
By Sandra M. Jones - staff reporter - Chicago Tribune
February 26, 2009

Sears Holdings Corp.hasn't given up on its search for a permanent chief executive, investor Edward Lampert said in his annual letter to shareholders Thursday.

Lampert, the chairman and majority stakeholder in Sears, has been looking for a CEO to run the retail giant since late 2007. The typical CEO search takes about three months.

In an unconventional method for seeking CEO candidates, Lampert puts a pitch for applications in the letter.

"We encourage those who think they are up to the challenge to reach out to us to discuss opportunities at Sears Holdings," he wrote.

The CEO post has been vacant since January 2008 when Aylwin Lewis, the fast-food executive Lampert handpicked to run the company created when Kmart Holdings Corp. bought Sears, Roebuck and Co., was forced out. W. Bruce Johnson, a supply-chain executive who came from Kmart, has been serving as interim CEO since then.

Lampert's reputation as a hands-on chairman has raised doubts as to how much freedom a CEO would have in attempting to turn around the ailing retail chain.

The Hoffmann Estates-based retailer has worked with executive recruiting firm Russell Reynolds to bring in candidates and the board has met with "a number of very talented individuals" in the last year, Lampert said in the letter. But Sears hasn't made "a single employment offer to anyone to serve as our CEO," he said.

Separately, Lampert said Sears has "begun exploring create alternative ways to create value" from the Kenmore appliance, Craftsman tools and DieHard car battery brands. Last year, the billionaire investor raised the possibility of selling Sears exclusive brands to other retail outlets.

He also said that Lands' End had record profits in 2008 for the third consecutive year.

Sears 4Q profit falls 55 percent on charges
Associated Press
February 26, 2009

Sears Holdings Corp. said Thursday its fourth-quarter profit dropped 55 percent due to store closing, impairment and severance charges, but adjusted results beat analysts' estimates.

For the period ended Jan. 31, the retailer earned $190 million, or $1.55 per share. That compares with a profit of $426 million, or $3.17 per share, a year ago.

Quarterly results were reduced by $187 million, or $1.53 per share, for an impairment charge for Orchard Supply Hardware as well as severance and store closing charges. The charges were partially offset by a 7 cents-per-share tax benefit; a 4 cents-per-share gain on the repurchase of some debt and 3 cents-per-share mark-to-market gains on Sears Canada hedge transactions.

Adjusted earnings were $360 million, or $2.94 per share.

Sales fell 12 percent to $13.28 billion during the quarter from $15.07 billion, while same-store sales declined 8.3 percent.

Analysts surveyed by Thomson Reuters expected the owner of Sears and Kmart stores to earn $2.68 per share on revenue of $13.99 billion.

Sears domestic same-store sales dropped 11 percent and Kmart same-store sales slipped 5 percent.

Same-store sales, or sales at stores open at least a year, are a key indicator of retailer performance since they measure growth at existing stores rather than newly opened ones.

The retailer blamed its same-store sales dropoff on the prolonged housing downturn, which weighed on home appliance sales at its domestic Sears locations, as well as a pullback in consumer spending, which hurt home, household goods and apparel sales at Sears and Kmart stores as well as lawn and garden sales at Sears stores.

Like many retailers, Sears has come under pressure as shoppers continue to reign in their discretionary spending due to economic and job concerns.

"Fiscal 2008 was a very difficult year for the U.S. economy, and its effect on consumer confidence reflects the turmoil that has enveloped the retail industry and our business. We maintained our focus on providing great product and service value to our customers, many of whom feel the impact of lower incomes and tighter credit," Interim Chief Executive and President W. Bruce Johnson said in a statement.

Full-year net income plunged 94 percent to $53 million, or 42 cents per share, from $826 million, or $5.70 per share, in the previous year.

Adjusted earnings were $215 million, or $1.69 per share.

Yearly revenue slipped to $46.77 billion, down 8 percent from $50.7 billion.

Same-store sales for fiscal 2008 dropped 8 percent, while Sears domestic same-store sales fell 9.5 percent and Kmart same-store sales declined 6.1 percent.

Sears has about 3,900 full-line and specialty retail stores in the U.S. and Canada.

Sears Profit Falls 55% on Charges, Sales Weakness
By Shirleen Dorman - Wall Street Journal.com
February 26, 2009

Sears Holdings Corp.'s fiscal fourth-quarter net income slumped 55% as the owner of the Sears and Kmart department stores recorded $336 million in goodwill write-downs and restructuring charges and posted continued sales weakness.

For the quarter ended Jan. 31, the company controlled by hedge-fund manager Edward S. Lampert posted net income of $190 million, or $1.55 a share, compared with $426 million, or $3.17 a share, a year earlier. Sears in early January projected $300 million to $380 million, much higher than analysts' then estimates.

But Sears said Thursday it subsequently determined it needed to record write-downs at its Orchard Hardware Supply business.

Excluding items, the latest earnings were $2.94 a share.

The company also announced that last month it decided to close another 24 stores. Sears said in December that more closings beyond the 22 then planned was possible.

Retailers, caught in one of the worst retail spending environments in years, have been slashing jobs, tightening credit card underwriting and reducing planned store openings. The sector also turned to margin-cutting markdowns that continued after the holidays.

Meanwhile, Sears faces other hurdles with its namesake and Kmart stores marked by a reputation for shoddy customer service, high out-of-stock levels and poor presentation, factors that in recent years have made it hard for the company to stem customer losses to more-focused rivals.

Revenue dropped 12% to $13.28 billion in the quarter as domestic same-store sales slumped 8.3% -- 11% at Sears and 5% at Kmart.

Gross margin slipped to 27.5% from 27.7% as the sales weakness was largely offset by higher margins at Kmart and fewer markdowns at Sears. Cash and cash equivalents were down 28% at $1.17 billion while inventories fell 12%.

During the quarter the company spent $120 million on stock buybacks. While most other retailers have suspended their existing share-buyback programs to conserve cash, Sears in December upped its authorization by $500 million. The company also said then it would also consider spending money on store remodels and repositionings.

Sears, which didn't provide expectations for the new year, did say that pension costs will likely rise $160 million to $175 million in 2009 amid the slumping markets.

Many companies have said recently they expect higher pension expenses. Sears stock has lost two-thirds of its value the past five months.

Sears Tower in silver?
By David Roeder - Chicago Sun-Times
February 25, 2009

REAL ESTATE | 110-story icon may get paint job to boost tenants, energy

The New York-based owners of Sears Tower want to know if adding silver will bring in some green.

Sources said the owners are considering an expensive paint job, recladding the tower in silver. Since its opening in 1973, Chicago's iconic tower and the nation's tallest building has been adorned in classic black.

A brighter look could draw fresh attention to the tower, which has struggled to hold tenants against newer generations of office buildings. Silver could figure into a broader effort to "rebrand" the building and highlight its advances in energy efficiency.

The owners, who include New York investors Joseph Chetrit and Joseph Moinian, could seek what's known as a silver LEED rating, bestowed by a group that promotes environmental advances in buildings. The Leadership in Energy and Environmental Design rating is third best after gold and platinum, but nonetheless an achievement for a building that's 36 years old.

To improve the tower's energy efficiency, the owners have been working with Chicago-based Adrian Smith + Gordon Gill Architecture, specialists in both supertall buildings and environmental design. Smith, formerly of the firm Skidmore Owings and Merrill LLP that designed the tower, declined to talk about the project.

A spokesman for the owners said the Sears has a strong record of becoming more ecologically sustainable. "We are actively looking for even more ways to save energy and improve the building," he said. "We are still examining our options and any details at this point would be speculative."

Switching to a lighter tint to complement the silver could cost $50 million, "and right now there's not enough money in the universe for that," said a source familiar with the tower.

Long-term elements of the Sears work include plans to add a building, perhaps a hotel, next to it at Jackson and Wacker. The tower's owners have been working with well-connected local partners, including U.S. Equities Realty Chairman Robert Wislow and the zoning law firm of Daley & George, to prepare its plans. Wislow couldn't be reached Tuesday, and Daley & George partner Jack George declined to comment.

Profit at Sears' Canadian unit plunges
Chicago Business
February 25, 2009

(Reuters) — Sears Canada Inc. said Wednesday its fourth-quarter profit dropped 34 percent, as waning consumer confidence hurt sales.

Canada's second-biggest department store chain, which is majority owned by Sears Holdings Corp., said it earned C$95.5 million ($76.7 million), or 89 Canadian cents a share in the quarter, down from C$145.4 million, or C$1.35 a share, for the same time last year.

Revenue dropped 5.9 percent to C$1.62 billion. Same store sales, a key measure which compares the performance of stores open for at least a year, dropped 6.2 percent.

Sears Tower co-owner faces suburban foreclosure
By Thomas A. Corfman - Chicago Real Estate Daily
February 25, 2009

(Crain’s) — An owner of one of the best-known skyscrapers in the world is facing a $5.8-million foreclosure lawsuit on one of the least-known office buildings in the suburbs.

A venture managed by Yisroel “Al” Gluck -- one of Sears Tower’s owners — in October stopped making the $44,500 monthly mortgage payment on a 100,600-square-foot building at 2155 Stonington Ave. in Hoffman Estates, according to a complaint filed Feb. 4 in Cook County Circuit Court.

Mr. Gluck, president of Skokie-based American Landmark Properties Ltd., declined to be interviewed but said in an e-mail that he is trying to work out a deal with the lender.

“This is primarily a small-tenant building and is reflective of a very soft Schaumburg-area market,” he said. The investor group that owns the Stonington property is “completely separate” from the group that owns Sears Tower, according to the statement.

The foreclosure case shows how Mr. Gluck’s career has changed since 1986, when he founded American Landmark, where he has mostly focused on humdrum real estate investments.

Like the Hoffman Estates property, Mr. Gluck was little known even in real estate circles until 2004, when he bought Sears Tower, 233 S. Wacker Drive, as part of a group that included New York investors Joseph Chetrit and Joseph Moinian.

They paid $840 million for the 3.8-million square foot structure, or more than 215 times the price of the Stonington building.

A venture managed by Mr. Gluck paid nearly $3.9 million for the two-story building in 1998. The next year, the venture obtained a $6.2-million loan, which was later packaged into a large portfolio of loans and resold as commercial mortgage-backed securities, or CMBS.

The exact reasons why the venture allegedly missed the mortgage payments could not be determined. The building’s vacancy rate has shot up to 43.2%, compared to 8.8% in the second quarter of 2007, according to real estate information provider CoStar Group Inc.

The loan was set to mature Aug. 1, and the more than 40-year-old property may not be worth the balance due on the loan.

The plaintiff in the foreclosure case is a trustee for investors who bought the CMBS. The trustee has asked a Circuit Court judge to appoint a receiver, Chicago-based Fulcrum Asset Advisors LLC, to take control over the property. That motion is scheduled to be heard March 24.

An attorney in the Chicago office of law firm Perkins Coie LLP, which represents the trustee, declined to comment.

Grim Results Drive Retail Strategies
Macy's, Home Depot and Target Seek New Ways to Outsmart Rivals
By Ann Zimmerman and Rachel Dodes - Wall Street Journal
February 25, 2009

Financial results from three of the nation's largest retailers Thursday showed the continued bite of the recession, while highlighting ways the three are crafting strategies to outmaneuver peers.

Profits at Home Depot Inc., Macy's Inc. and Target Corp. continued to fall amid the worst falloff in U.S. consumer spending in a generation. Consumer confidence hit a new low in February as consumers grappled with rising unemployment, falling housing prices and uncertain credit.

But even as the retailers issued grim 2009 forecasts, their results illustrated the measures each are taking to mitigate the spending downturn. Macy's and Home Depot are tailoring merchandise more closely to individual markets. Home Depot avoided deep margin declines by resisting the steep discounting of rivals. A basic strategy many share: cutting costs by shedding unprofitable units, reducing store openings, and trimming payrolls. Macy's Inc. reported profit declined 59% but said cost-cutting and localization helped it outperform department-store competitors such as NordstromInc. and Dillard's Inc.

After deciding to close 11 of its 860 stores in January, Macy's said earlier this month it would trim its work force by 7,000 jobs, or 4%, as it centralized a regional business structure.

Macy's Chief Executive Terry J. Lundgren hopes to strengthen Macy's by catering to local tastes in its stores. The plan, called "My Macy's" has shown some early signs of success in pilot markets, and will be expanded nationwide by the second quarter of this year, he said.

The Cincinnati-based department store operator said Tuesday it earned 73 cents a share in the fiscal fourth quarter, ended Jan. 31, compared with $1.73 a share a year ago. Excluding restructuring costs and other one-time items, earnings were $1.06 a share.

But the company also estimated it would take a write-down of between $4.5 billion and $5.5 billion on its August 2005 acquisition of the May Department Stores when it files its annual report on April 1.

Home Depot's swung to a fiscal fourth-quarter loss, but its stock rose 10%, or $1.96, to $20.67 in 4 p.m. trading Tuesday on the New York Stock Exchange as investors cheered the company's steadier margins and better-than-expected sales. The Atlanta home improvement retailer posted a 9.2% decline in same-store sales, less steep than rival Lowe's Cos.'s 9.9% decline.

"It is the result of everything coming together -- better customer service, our localization efforts, reducing 9% of" inventory in the stores, Carol Tome, Home Depot's chief financial officer, said in an interview.

Like others, Home Depot has been trying to halt the sales decline by better matching offerings and prices to local markets. In Chicago, it altered inventories to fit neighborhood preferences for charcoal barbecue grills over gas grills. It beefed up marketing of Makita power tools on the West Coast, where they sell particularly well.

Home Depot said it held profit margins steady by avoiding steep discounting. When Sears HoldingsCorp. put appliances on sale during the quarter, Home Depot declined to follow suit. As a result, Home Depot's gross profit margin declined 0.2 of a percentage point in the quarter compared to a drop of 1.15 percent points for Lowe's.

Target posted a 41% drop in fourth-quarter net income as the discount chain struggled with weaker-than-expected sales. The company's credit-card business swung to a pretax loss as bad-debt expenses nearly tripled and the 90-day delinquency rate on accounts jumped to 4.3% from 2.7%.

To boost customer visits, Target is increasing its proportion of food, health care, beauty and baby products to other merchandise in its stores.

Amid cost-cutting, including layoffs and slowed store openings, Target posted net of $609 million, or 81 cents a share, down from $1.03 billion, or $1.23 a share, a year earlier. Revenue fell 1.6% to $19.56 billion.

Allstate halves its dividend
By James P. Miller - Reporter - Chicago Tribune.com
February 24, 2009

Northbrook insurance giant Allstate Corp., in a move designed to retain more cash on its balance sheet, said Tuesday that directors voted to cut the company's dividend by just over half, to 20 cents from the previous 41 cents.

The dividend is payable April 1 to Allstate holders of record March 13, the company said.

Allstate's move comes just one day after the New York bank holding company JPMorgan disclosed that it is cutting its dividend by 86 percent in order to preserve cash.

Allstate "has a history of proactively and prudently managing our capital," while returning substantial amounts of capital to shareholders, said Chairman and Chief Executive Officer Thomas J. Wilson.

"In light of recent earnings, Allstate has decided to reduce our dividend for this quarter to a level we believe puts Allstate's payout ratio in line with our peers."

Based on the 536.1 million average shares that Allstate reported outstanding as of year-end 2008, the 21-cent dividend cut will allow the company to save $112.6 million each quarter.

Allstate Halves Dividend, Ending 14-Year Streak
By Erik Holm - Bloomberg.com
February 24, 2009

Allstate Corp., the largest publicly traded U.S. home and auto insurer, slashed its dividend 51 percent after posting two straight quarterly losses, ending a 14-year streak of boosting the payout.

The quarterly dividend was reduced to 20 cents a share from 41 cents, the Northbrook, Illinois-based insurer said today in a statement. Allstate will save about $450 million over four quarters, based on 536 million shares outstanding.

Chief Executive Officer Tom Wilson is cutting 1,000 jobs at the money-losing life insurance business after halting share buybacks last year to preserve capital. Allstate had its first unprofitable year as a publicly traded firm in 2008 amid more than $5 billion in writedowns and unrealized losses on holdings including mortgage-backed securities.

“We calibrate our dividends to company earnings and also ensure that Allstate’s payout ratio is competitive with the marketplace,” Wilson said in the statement. “In light of recent earnings, Allstate has decided to reduce our dividend for this quarter to a level we believe puts Allstate’s payout ratio in line with our peers.”

Allstate declared its first dividend in August 1993, two months after Sears, Roebuck & Co. sold 20 percent of the company in what was then the largest initial public offering in U.S. history, according to the insurer. The board raised the payout every February since 1995, the year Sears spun off the rest of the firm.

Hartford Financial
The insurer joins competitor Hartford Financial Services Group Inc. in cutting its payout after losses from life insurance overwhelmed profits from covering property. Allstate’s dividend is payable April 1 to shareholders of record on March 13, the company said.

Book value per share, a measure of Allstate’s assets minus liabilities, fell 25 percent in the three months ended Dec. 31 to $23.51 because of the quarterly loss and a $4.7 billion decline in the value of securities the insurer doesn’t intend to sell. The drop includes about $1.6 billion on corporate debt, $1.2 billion on commercial mortgage-backed securities and about $900 million on asset-backed securities.

“Allstate’s operating results will likely be hampered by continued investment losses,” this year Standard & Poor’s said Jan. 29 as the firm cut the insurer’s credit rating two grades to A-.

Jim Ryan, an analyst at Morningstar Inc., and KBW Inc.’s Cliff Gallant had predicted the declining value of assets would force the insurer to revisit its policy of annual dividend increases.

“When you start eating into the capital of a company, one of the first thoughts you have is, ‘How do I preserve it?’” Ryan said in January. “One of the easiest ways you have to preserve it is to start looking at the dividend.”

SEARS HOLDINGS ANNUAL MEETING
Have you got questions or comments for SHC?
February 23, 2009

Sears Holdings Corporation recently announced that their 2009 Annual Meeting would be held on Monday, May 4. It will be at the Company’s headquarters in Hoffman Estates, Illinois.

The company also announced that March 6, 2009 has been fixed as the record date for determination of the stockholders of the Company entitled to notice of, and to vote at the annual meeting of stockholders.

Under normal circumstances, fewer than 135 persons usually show up for these meetings. As has been done in years past, we anticipate that Chairman Lampert will field questions from the attendees.

If you are not planning on attending but you have questions or comments for Sears, please provide them to NARSE as soon as possible. NARSE will be in attendance at the May 4, 2009 Sears Annual Meeting and will ask to respond to the questions and comments of its retirees.

Questions and comments regarding Sears can be sent to Ron Sears Olbrysh, Chairman of NARSE at: cro922@comcast.net.

J.C. Penney Earnings Drop 51%
By Karen Talley - Wall Street Journal
February 21, 2009

J.C. Penney & Co. reported a 51% drop in fourth-quarter profit on weak margins and sales, and the department-store chain indicated its woes will continue in a tough retail environment.

For the current quarter, the company said it expects a loss of 20 cents to 30 cents a share, with revenue falling 10% to 13%. Analysts surveyed by Thomson Reuters expected a loss of 19 cents on a 9% drop in revenue. Traffic in shopping malls remains in a deep slump, and while Penney is doing better than other mall retailers, getting shoppers to make purchases hasn't been easy, J.C. Penney Chief Executive Officer Myron Ullman III said.

"The customer is very tentative, they are buying what they need and they are being smart about how they spend their money," he told analysts on a conference call to discuss the company's quarterly results.

For the period ended Jan. 31, J.C. Penney posted net income of $211 million, or 95 cents a share, down from $430 million, or $1.93 a share, a year earlier. Gross margin fell to 34.6% from 36.2% as the company increased promotions during the holidays.

J.C. Penney said three weeks ago that the quarter's revenue fell 9.8% to $5.76 billion. Women's apparel and family shoes were the best-performing segments, while fine jewelry was the worst. The Plano, Texas, company said it performed best in the Southwest and worst in the Southeast. Sales at stores open at least a year slid 11%. In the current quarter, it expects same-store sales to fall by 12% to 15%.

The company's gross margin fell to 34.6% from 36.2% in the fourth quarter as it increased promotions during the holidays. However, management has been taking steps to blunt the impact of the consumer-spending downturn, analysts said.

Uta Werner, retail analyst at Sanford C. Bernstein & Co., said J.C. Penney has been "tightly managing expenses over the past year, including a heightened focus on store productivity, balancing the need for ongoing customer service and traffic-driving advertising spending with expense reductions in other areas."

Coming into its new fiscal year, which began on Feb. 1, the chain is also in a much better position in terms of excess merchandise, with inventory down 13.5% on a comparable-store basis, executives said.

J.C. Penney is also trying to pick up customers from doomed competitors, like Mervyn's, Goody's Family Clothing and Linens N' Things. The company said it is working with vendors to make sure that popular items at those retailers are in stock at its own stores.

"We've seen success in recruiting those customers to our format when we were [competing] head-to-head with those stores," Mr. Ullman said. In the year ahead, J.C. Penney faces not only lower sales volume, but also higher noncash pension expenses. And last month, J.P. Morgan said the retailer was in danger of violating covenants on its revolving credit line.

But the company says its cash position is solid. So, while J.C. Penney is in the process of negotiating a new revolver, "if banks extract unfair terms we don't need one," Mr. Ullman said during the call.

—Kerry E. Grace contributed to this article.

300 laid off at Sears Canada
By Dana Flavelle - Business Reporter - Toronto Star
February 19, 2009

Sears Canada Inc. has confirmed it laid off 300 employees today, half of them in its head office in Toronto, citing challenging business conditions.

"We're preparing for what looks a difficult year in the current economy," company spokesperson Vince Power said.

The head office employees worked across "multiple functions," Power said. The other half of the layoffs are in its repair services across the country.

The layoffs represent just under 1 per cent of the company's total workforce of 38,000 people, Power said.

Power said there would be no impact on customer service levels either in the stores or the repair business.

"We'd made certain improvements in efficiencies and we're able to centralize more things," We have really smooth ways to get small appliances from a store to a central department. It's nothing a customer would notice in any kind of delay. "The department store retailer is majority owned by Sears Holdings Corp., of Hoffman Estates, Ill.

The Canadian head office is currently in the process of moving into new quarters, from its home on Jarvis St., to the upper floors of its flagship Sears store in the Eaton Centre.

The store, which once occupied eight floors, now fills just four-and-a-half floors, leaving the rest for head office employees.

Kmart fashions a shoe-in
FOOTWEAR | Basketball sneaker endorsed by Al Harrington, stylish sandals for frugalistas
By Sandra Guy - Chicago Sun-Times
February 19, 2009

Kmart has taken its shoe business in-house and is introducing low-priced sneakers endorsed by NBA player Al Harrington and women's shoes aimed at attracting the "frugalista," a retail executive said Wednesday.

"We were neglecting to serve our Hispanic and African-American customers," said Nick Grayston, who served as CEO of Foot Locker's U.S. business before becoming president of footwear for Hoffman Estates-based Sears Holdings Corp. last June. "We've injected some fashion in our shoes, which had been sadly lacking," he said.

While the styles feature none of the stilettos, ostentatious bangles or bohemian fringe shown on the runways at New York Fashion Week, they appeal to a growing number of women looking for bargains and comfort with style.

Kmart has introduced 1,000 styles in men's, women's and children's shoes since parent company Sears Holdings severed its relationship with former licensee Footstar Corp. Jan. 1.

The new looks include gladiator sandals, and mock crocs.

Sears is also introducing new styles while aiming to keep its longtime work-shoe customers, Grayston said.

Kmart launched the "Protege" men's and boys' sneaker, co-designed by New York Knicks player Harrington, priced from $19.99 to $34.99, at the NBA All-Star Block Party last weekend. Sears and Kmart are not alone in the trend of addressing footwear fashion on the cheap. The newly emerging frugalista is making her presence known at higher-end shoe stores, too. Tiffany Bullock, owner of House of Sole, 1237 S. Michigan, is looking for lower-priced shoes to satisfy fashion-conscious customers.

"I find I'm correcting myself" on price, she said.

Ric West Inducted into Retail Advertising Hall of Fame
RTO ONLINE
February 17, 2009

"Prior to joining Sears Holding Company, West spent 13 years at Best Buy rising to the level of Marketing Vice President." The Retail Advertising and Marketing Association announced today that Ric West, Divisional Vice President, Sears Holding Company, will be the newest member of the distinguished Retail Advertising Hall of Fame.

West will accept his award during RAMA's Retail Advertising Conference in Las Vegas on February 26 at 7:00 p.m. during the RACie Awards dinner.

"Ric is an industry veteran who has made a living out of connecting with shoppers through creativity and branding," said RAMA Executive Director Mike Gatti. "Having served as a valuable member of the RAMA community for over 20 years, we are extremely grateful for the expertise, knowledge and professionalism he has bestowed on all of us."

Prior to joining Sears Holding Company, West spent 13 years at Best Buy rising to the level of Marketing Vice President. His first career role was with Coast to Coast Stores, a "mom and pop" hardware franchisor. West is a graduate of St. Cloud Technical College and carries a Bachelor of Arts from the University of Minnesota Journalism School, Twin Cities campus.

West has been actively engaged with RAMA through its Retail Advertising Conference for 24 years, serving as a board member as well as chairman and vice chairman. He championed RAMA's regional events called the Action-Taker series and helped advance interactions of chief marketing officers from around the country through RAMA's DecisionMaker series. Additionally, West also chaired the RACie Awards committee, introducing the live vote and adding a special 4Q judging section.

Wal-Mart Profit Slides 7.4%, Same-Store Sales Rise
By Kerry E. Grace - Dow Jones Newswire
February 17, 2009

Wal-Mart Stores Inc.'s fiscal fourth-quarter net income fell 7.4% on costs from wage-lawsuit settlements along with weak results internationally and at the Sam's Club warehouse chain.

The world's largest retailer also projected first-quarter and fiscal-year earnings at the high end of analysts' estimates.

Wal-Mart has been faring better than most nondiscount retailers, benefiting from its low-price position as shoppers curtail discretionary purchases and seek bargains.

In contrast, sales at department stores and specialty retailers have been lagging behind, in part because of their bigger exposure to discretionary merchandise.

Wal-Mart's shares edged higher to $46.75 in premarket trading. The stock is off 14% so far this year.

Chief Executive Mike Duke, who replaced Lee Scott on Feb. 1., noted the company recorded the strongest sales in its history during the fourth quarter, calling its performance was strong compared to competitors and that the momentum is expected to continue.

For the period ended Jan. 31, Wal-Mart posted net income of $3.79 billion, or 96 cents a share, down from $4.09 billion, or $1.02 a share, a year earlier. Earnings from continuing operations fell to 96 cents from $1.03. The company warned last month that profit was seen coming in between 91 cents and 94 cents.

Net sales increased 1.7% to $108 billion.

Analysts polled by Thomson Reuters expected earnings of 99 cents on revenue of $109.42 billion

Excluding fuel sales, U.S. same-store sales rose 2.8%, up 2.8% at namesake stores and 2.5% at the Sam's Club warehouse chain. Until December, Wal-Mart's same-store sales results showed it was benefiting from the slumping sales seen by other retailers as consumers trade down and do more bargain shopping. Results rebounded somewhat in January.

International sales declined 8.4%, hurt by the stronger dollar, as profits slid 14%. Meanwhile, earnings at Wal-Mart U.S. stores rose 2.2% and Sam's Club profits fell 3.8%.

The company said earlier this month it will stop providing monthly sales forecasts and will instead provide projections on a quarterly basis. Wal-Mart said last week it was targeting 1% to 3% growth for the fiscal first quarter.

The company noted Tuesday it was forecasting earnings of 72 cents to 77 cents for the quarter and $3.45 to $3.60 for the year. Analysts, on average, predicted 77 cents and $3.59, respectively.

Retiree health care issue 'goes nowhere' in Nebraska
By Dennis Cauchon, USA TODAY
February 16, 2009

Nebraska's state government is one-of-a-kind. Its Legislature has only one chamber — a Senate — and senators don't use party labels.

The state now has another distinction: It is the only state that doesn't subsidize the medical care of retired government employees.

"We bring up the issue of retiree medical care, and it goes nowhere," says Mike Marvin, executive director of the Nebraska Association of Public Employees, a union. "Heck, we can't even get decent wages."

Nebraska is the only state in the country that owes nothing for the medical care of retired government workers. The other 49 states have an unfunded obligation of $445 billion, according to a USA TODAY survey.

New accounting rules require that states and local governments report how much they owe for medical benefits promised to workers after they retire. This previously unreported obligation is the third leg of a stool — along with debt and pension liability — that accountants use to compute the financial health of a government.

Some state governments take financial responsibility for the medical insurance of retired teachers and local police officers. Elsewhere, school districts and cities pay the bill. So the same $25 billion liability can fall on a state legislature or be sprinkled around hundreds of towns, school districts, water authorities and other agencies.

The USA has 89,437 branches of local government, according to the Census Bureau. A USA TODAY survey of 25 midsize to large governments found a retiree medical obligation of $126 billion.

Similar places vary:

•Big — New York City has a $60 billion obligation, more than its $43 billion in debt.
•Small — Los Angeles has a tab of $544 million.
•Big — The University of Texas and the Texas A&M systems have a combined $7 billion obligation.
•Small — The University of Colorado and Colorado State have a $274 million tab. A few state and local governments have started to set aside money to prepare for paying retiree medical costs. Others have been cautious because of the expense and legal issues. The value of these benefits varies enormously between governments. Some pay nearly all the cost. Others contribute a fixed amount, such as $200 a month or 50% of the health insurance premium.

Even seemingly modest benefits can be costly because police officers, teachers and other civil servants often retire many years before qualifying for Medicare at 65.

"People are going to ask, 'Why does this place have higher taxes?' or 'Why does this place have high water rates?' " says Kenneth Rust, president of the Government Finance Officers Association. The reason will be retiree medical costs, he says.

Florida requires local governments to let retirees buy the same medical insurance provided to current workers. This can cost governments more than $5,000 annually per retiree, even when retirees pay 100% of the premium, because retirees use more medical care, driving up costs.

Actuary Becky Sielman of Milliman Inc., a benefits consultant, says the obligation among 35 governments her firm works with in New England ranges from $3,000 to $95,000 per worker and retiree. That amount reflects the money needed today, set aside and earning money, like a pension fund, to produce enough income to cover medical benefits after workers retire.

A few governments have resisted reporting their numbers. "There's no legal requirement in Texas to pay these health benefits. For that reason, it's misleading to report them as a liability," says Suzy Whittenton, state director of fiscal management.

University of Texas accounting professor Michael Granof disagrees. "The liability exists, whether you report it or not. The new surgeon general can't solve illness in America by recalibrating the thermometer," he says.

Although Texas doesn't report the number in its financial report, it has calculated the total obligation, including its universities: $48.7 billion, second biggest among states.

By contrast, Nebraska reports no liability. "Nebraska is a fiscally conservative, pay-as-you-go state, and that's the biggest reason we don't have this benefit," says state Sen. Dave Pankonin, chairman of the Legislature's retirement systems committee.

"Private sector employees rarely have this benefit," says Pankonin, a farm equipment dealer. "The era of early retirement before Social Security age and Medicare is becoming unrealistic."

Nebraska shuns all long-term financial commitments, not just for retirement benefits. The state has no debt. Its Constitution forbids it.

One thing Nebraska does have: A balanced $3.5 billion budget and a $563 million cash reserve.

Walmart Boosted Media Investment by $300 Million
Spending Hike of 55% in '08 Indicative of Retailer's Increased Respect for Ads
By Jack Neff  - Advertising Age
February 16, 2009

How the retail giants' spending stacks up

0.5% Macy's Inc. and Sears Holdings store and sales figures include all store banners inside and outside the U.S.

1. Based on Advertising Age 100 Leading National Advertisers 2008 report.
2. Based on the most recent full-company annual data.

BATAVIA, Ohio (AdAge.com) -- The No. 1 reason for Walmart's buck-the-market success in recent months is its long history of low prices, but advertising is also playing its part.

The retail behemoth, long known for its penny-pinching prowess, has gone on a massive media-spending spree in the past year, hiking measured media outlays some $300 million while much of the market pulled back.

By spending so much more as rival retailers cut, Walmart is on track to go from the ninth-biggest to the second-biggest spender in the category, just behind Macy's. Walmart somewhat shockingly spends less than 1% of sales on advertising, less than half the ratio for leading competitor Target and well below the 4% to 4.5% for Sears Holdings. Even after last year's big rise, Walmart's total measured spending clocks in below that of Macy's -- a retailer with less than one-tenth its sales.

Of course, Walmart, famed for wrangling deals from suppliers, could have paid less than the measured $300 million by negotiating off the rate card. Still, it was a massive jump by any standard, as Walmart's spending on measured media soared 55.7% to $835 million compared with the same period the year before, according to TNS Media Intelligence (the data exclude outdoor, as well as December figures for cable TV networks and national spot radio in both years because TNS has yet to report December 2008 data for those sectors).

Walmart's comparatively low ad-sales-to-spending ratio also indicates that the company has room to grow if it chooses to. But it also seems to indicate that Walmart -- which still spends a lot less per sales dollar on marketing -- is getting more bang for its bucks than rivals. In fact, the company turned in same-store-sales growth in recent months of 2% to 3% while most of the retail world was seeing declines, some steep. Successful retailers

There were exceptions. Similarly value-positioned club retailers Costco and BJ's have seen better same-store gains than Walmart for the most part in recent months without similar jumps in ad spending and traditionally much smaller ad budgets than Walmart either absolutely or relative to sales. And CVS, which cut spending 10% to 12.5% last year, based on available TNS data, posted same-store-sales growth similar to Walmart's in recent months.

But Walmart's spending hike appears to be one indicator that marketing, once a "red-headed stepchild" there, as one supplier executive put it, has attained new status. Another is that merchandising, which once clearly had the upper hand in the corporate pecking order, now must clear many of its decisions through the marketing department, he said.

Clearly the increase indicates a new emphasis on marketing by the giant retailer, another supplier executive said.

The question now is whether the spending increase will last under newly appointed CEO Mike Duke, who last week, less than two weeks into his new position, took the unprecedented step of announcing up to 800 layoffs in Walmart Stores' corporate office, including the flagship chain's marketing department. To some suppliers, that reflects continued pressure for Walmart to deliver margin growth under tough economic circumstances, leaving less allowance for future ad increases.

To be spending so much more on advertising at a time the company is laying people off won't set well with some in a Northwest Arkansas community where both big layoffs and big ad-spending hikes are unheard of. Hiring elsewhere

"Our purpose is saving people money so they can live better, so we're going to continue to do the things we need to do in order to communicate with our customers," said spokesman David Tovar, who said Walmart, notwithstanding the central-office layoffs, likely will increase its overall head count by "tens of thousands" at stores this year. He declined to comment on the spending increase.

For Walmart's competitors, generally losing both sales and share, the general downturn in ad spending combined with a ramp-up by their big competitor seems not to bode well.

But Mike Boylson, chief marketing officer of JCPenney, said the retailer has maintained its ad-to-sales ratio (despite TNS data indicating a 9.5% spending decline) and said the marketer is investing in new media not tracked by TNS. Nor does he believe Walmart spending more necessarily threatens JCPenney, he said.

"Our mix is different. We share a lot of the same customers. I would argue that we are probably the department store of the Walmart customer."

Rob Price, senior VP-marketing and advertising at CVS, said key elements of his chain's marketing also aren't captured by TNS, such as its ExtraCare loyalty program.

Contributing: Natalie Zmuda

Discover: Credit Where Credit Is Due
Long derided as second-rate, the card issuer is gaining on competitors during the downturn
By Jessica Silver-Greenberg - Business Week
February 23, 2009

During the era of easy money, Discover Financial Services (DFS) was dismissed as a second-rate credit card company that lacked the cachet and retail acceptance of rivals. Its profits paled next to those of titans American Express (AXP) and Bank of America (BAC). The company's low-rent image was even lampooned on the Fox TV cartoon series Family Guy.

Discover, the sixth-largest credit card issuer, is the one laughing now. Earnings jumped 57% in the past fiscal year, compared with a 34% decline at AmEx and a $46 million loss at Capital One Financial (COF). The company is trying to capitalize on others' pain to gain market share and boost its international presence. "This is the classic tale of slow but steady winning the race," says Dennis Moroney, a research director at TowerGroup.

Discover is performing better during the bust because of sound strategy—and a measure of luck. In the later stages of the mortgage boom, while other issuers were still courting customers with multiple mortgages, Discover flagged borrowers with two home loans, keeping their credit limits low. As a result, say analysts, Discover has less exposure to the riskiest markets, including California and Florida, where borrowers' mortgage woes are translating into credit card problems. Those two states account for 15% of Discover's customers, vs. 26% for AmEx and 22% for Citigroup's (C) credit card operation. "Managing our business conservatively has helped [us] weather a tough economic environment," says David W. Nelms, Discover's CEO.

The newly independent Discover, for years the ugly stepchild of department store Sears (S) and later Morgan Stanley (MS), also benefited from a brand problem. Consumers, many of whom considered Discover an ancillary card, used it less often than their Visas or MasterCards—or snubbed it altogether. It also didn't help that only some 65% of merchants take Discover, compared with near-ubiquitous acceptance for Visa and MasterCard. Those weaknesses have turned out to be strengths. Discover's total outstanding loan balances increased just 15%, to $47.5 billion, over the past three years. Peers' portfolios rose by 40% or more in the same period, a time when lending standards slipped.

All that has served Discover well. Delinquent accounts stand at 4.7%, up from 3.7% last year. But that's mild compared with 7% or more at Capital One and others. Discover is "one of the few issuers where credit quality is going to outperform even optimistic expectations," says analyst Sanjay Sakhrani of Keefe, Bruyette & Woods.

So while competitors are working to simply survive the credit crisis, Discover wants to grow. The company picked up a rival, Diners Club, for $165 million this past summer from Citigroup. Management plans to continue offering the card, which is accepted in 185 countries. The new platform should help Discover expand overseas, where it has been weak.

Management is also trying to encourage customers to use their cards more frequently. It revamped its loyalty program for all cardholders last year, increasing cash-back earnings from 1% to as much as 5% in categories such as travel and home goods.

Discover is also retooling the rewards program to strengthen existing relationships with merchants by enticing cardholders to spend more at specific retailers. For example, if a customer earns $30 in cash-back rewards throughout the year, the cardholder can decide to instead collect a $40 gift card at Macy's (M). Says Nelms: "I couldn't be more enthusiastic about Discover's position to seize the many opportunities that will come."
Silver-Greenberg is a reporter for BusinessWeek.com.

The Sears Tower, the tallest building in the United States, has another thing to brag about: becoming a leader of large-scale recycling in skyscrapers.

Recycling efforts increased 235 tons from the prior year at the Sears Tower as part of its recycling program and greening efforts, according to a release from Sears.

Tenants recycled 445 tons of paper in 2008, up from 120 tons in 2007, the release said. The 370 percent increase is the equivalent of saving more than 3,500 trees and more than 1.5 millions gallons of water.

With high rises generating roughly 30 percent of Chicago's total waste, Sears Tower's management and leasing agent made recycling a priority.

"More than 8,000 people work in the Sears Tower, and we are grateful to have tenants who are dedicated to greening efforts," said Randy Stancik, vice president of the Sears Tower.

The Sears Tower also recycled more than 12 tons of electronics, began a free tenant bike-riding program, and initiated a hybrid vehicle incentive program.

Sears launching ServiceLive to connect clients, contractors online
Internet-based matching service focuses on home improvement projects
By Sandra M. Jones - reporter - Chicago Tribune
February 13, 2009

Just in time for Valentine's Day, Sears is getting into the matchmaking business.

This isn't for people looking for love. Rather, the connections Sears hopes to make are of another sort, the kind that can turn your life upside down, make your stomach do back flips and generally leave you unhinged: the relationship between you and your contractor.

Sears Holdings Corp. plans to unveil Friday a home service marketplace called ServiceLive that matches consumers and contractors online. The business, which Sears describes as its first online start-up, lets customers choose a service, such as painting the bathroom or fixing the computer, then upload project photos, solicit bids from potential contractors, agree on a price, schedule the time and day of the service, and pay for it—all online. Then, customer and contractor rate their experience with each other.

"The economy is tough, and a lot of small businesses and people want to be smart about how they spend their money," said George Coll, Sears senior vice president of new services.

Sears' chairman and majority stakeholder, Edward Lampert, has been loath to invest in the thousands of Sears and Kmart stores owned by Sears Holdings, but he has taken a liking to Internet businesses, given their lower capital requirements and the relative ease with which new concepts can be tested.

Sears has spent the past year expanding its online presence. It added tens of thousands of products such as books and music to Sears.com, prompting comparisons to an Amazon-style online portal. And last month the retailer began transforming a shuttered Kmart in Joliet into a warehouse called MyGofer that lets shoppers pick up online purchases at a drive-through.

The goal for ServiceLive is to be what Coll calls a "neutral marketplace." Sears plans to generate revenue through fees. Service providers pay Sears a 10 percent commission on each sale. Customers pay a $10 fee each time they post a project, but Sears is waiving the fee initially to encourage people to try the service.

For the past year Sears has recruited contractors and has registered 23,000, with 9,000 so far vetted by Sears employees. Sears doesn't guarantee the work but will arrange mediation if a dispute can't be resolved.

While ServiceLive is a subsidiary of Sears Holdings, the venture doesn't trade on the Sears name. But it does rely on Sears' long history as a provider of home services, such as fixing appliances, which could help attract contractors.

Like most start-ups, ServiceLive doesn't have much money for marketing and relies on paid searches, online ads and word-of-mouth to generate initial interest.

"One of the biggest problems with any dot-com start-up is generating mass or generating enough eyeballs," said retail consultant Don Delzell. "We've educated the consumer to believe that the Internet is this great big free place where you can get everything you need. Connecting communities isn't difficult. It's doing it in a way that's a sustainable business model that is hard."

Whirlpool's Fort Smith employees told Sears contract ends in 2010
Fort Smith, Arkansas City Wire
February 13, 2009

Third on Whirlpool Corp.’s list of 15 “risks, contingencies and uncertainties” is the company’s ability to “continue its relationship with significant trade customers,” including Sears, which accounted for 11% of Whirlpool’s 2008 consolidated net sales of $18.9 billion.

The relationship with Sears is in doubt based on comments made during three employee meetings held Thursday (Feb. 12) at Whirlpool’s Fort Smith plant. Whirlpool managers, including plant chief Ken Thompson, told Fort Smith employees that 2009 marks the last year of the refrigerator contract with Sears, according to sources who attended meetings between employees and Whirlpool management.

According to the sources, the contract to provide the Kenmore-branded refrigerator to Sears ends in January 2010. (Although Whirlpool did not begin to make refrigerators until 1955, Whirlpool has had a product relationship with Sears that dates back to 1916.)

The sources said it was clear that the lost Sears contract was with all Whirlpool refrigerators and not just those made in Fort Smith.

However, Jill Saletta, director of external communications for Benton Harbor, Mich.-based Whirlpool, said the contract with Sears is secure.

“I am confirming that Whirlpool Corporation absolutely will continue to produce product for Sears in 2010 and beyond, and Sears will continue to sell our products in their stores,” Saletta noted in a response to The City Wire. “The details of our relationships with all trade customers are confidential, so I am not able to provide any further comment on the subject.”

Whirlpool makes several products for Sears in addition to refrigerators. The loss of the refrigerator contract would be a blow to Whirlpool, a global appliance manufacturer that saw its North American segment shipments decline by 10% in 2008.

Whirlpool’s North America segment — to which the company’s Fort Smith plant belongs — saw fourth-quarter sales of $2.5 billion, down 18% from the prior year. U.S. industry unit shipments of major appliances declined approximately 10%.

Based on current economic conditions, the company expects full-year 2009 U.S. industry unit shipments to decline approximately 10 percent from 2008. The downturn in product sales is noted by the company as a key reason it has reduced employment at its Fort Smith plant from about 4,500 in early 2006 to about 1,340 today.

Whirlpool employees also were told Thursday that the expected production decline related to the loss of the Sears contract will not necessarily result in layoffs.

Instead, it is hoped a “normal attrition” rate of 5% to 10% will keep employee levels at the appropriate level for production.

However, to keep pace with lowered demand resulting from the downturn in the national housing sector, the employees were told to expect production cutbacks in April, with no more than 100 layoffs possible.

There was some good news, according to the sources.

Whirlpool employees were told the plant will continue to produce the counter-depth models, including 22-, 25- and 27-cubic foot counter-depth refrigerator that stands alone, and a 22-, 25- and 27-cubic foot counter-depth freezer.

Also, the employees were told that new and innovative refrigerator production will remain in Fort Smith. A provision in the Sears contract required new refrigerator features to first be placed on Kenmore refrigerators, with Whirlpool allowed to use the new features on other branded products six months later. Without the Sears contract, new models can now be fast-tracked through the Whirlpool production, logistics and sales departments.

At Wal-Mart, a Health-Care Turnaround
Once Criticized, Company Is Now an Innovator in
Employee Coverage
By Ceci Connolly - Staff Writer - Washington Post
February 13, 2009

Washington policymakers contemplating a fundamental overhaul of the nation's troubled health-care system may want to study the saga of Wal-Mart.

Once vilified for its stingy health benefits, the world's largest company has become an unlikely leader in the effort to provide affordable care without bankrupting employers, their workers or taxpayers in the process. From its headquarters in Bentonville, Ark., the retailer is doing in the real world what many in Washington are only beginning to talk about.

At a time when other firms are scaling back or eliminating health coverage, Wal-Mart has made a serious dent in the problem of the uninsured. New figures being released today show that 5.5 percent of its employees now lack health insurance, compared with a nationwide rate of 18 percent.

The company has also put into practice many of the innovations that experts say will lead to higher-quality, more efficient care. Using its high-tech marketing savvy, Wal-Mart has introduced digital records, partnered with prestigious organizations such as the Mayo Clinic, and begun targeting costly health problems such as obesity and premature births.

Yet for all of Wal-Mart's achievements, the story of its immersion in the world of health policy is also a warning about the depth and breadth of one of the thorniest challenges facing the country today.

In attempting to strike a balance between healthy profits and healthy workers, Wal-Mart, like many businesses, still falls short of the comprehensive care that President Obama says he wants for Americans.

To reach near-universal coverage, the largest private employer in the nation relies heavily on the government and other employers to play a role. Of the company's 1.4 million workers, 52 percent are in a Wal-Mart health plan. Despite revenue that is expected to exceed $400 billion for 2008, the company charges its low-wage workers a substantial portion of their income for medical coverage.

Though proud of what it sees as dramatic progress, Wal-Mart itself warns that in a global market with a weakened economy, it cannot -- or will not be able to -- accept annual health-care increases of about 8 percent indefinitely.

"It starts to impact us competitively," said Linda Dillman, the company vice president tapped to oversee the health plan.

To Andrew Stern, president of the Service Employees International Union and a frequent Wal-Mart critic, the company's health contributions are not commensurate with its financial success. The moral, he said, is that "volunteerism has its limits."

But to Mark Smith, head of the California HealthCare Foundation, an independent nonprofit focused on health-care quality and efficiency, Wal-Mart's experience provides a different lesson.

"Even a company as big and successful as Wal-Mart cannot possibly solve this problem on its own," he said. "There are limits to what one company can do." 'It Had to Do Something'

It began with an internal memo, union agitators and some awfully bad press. In fall 2005, the union-sponsored Wal-Mart Watch got its hands on a company memo outlining ways to clamp down on soaring health-care bills. Among the suggestions: Stop hiring unhealthy people.

Frustration with Wal-Mart had been building. Main Streets across the country chafed at the big-box store's arrival; labor activists complained that workers had to wait up to two years to qualify for the company health plan, which in many cases cost nearly 10 percent of the typical $20,000-a-year salary.

Yes, some U.S. companies did not provide any health insurance. But the skimpy Wal-Mart coverage seemed particularly galling compared with the billions in personal wealth amassed by the company's founding family, the Waltons.

The retailer symbolized by a bright-yellow smiley face was suddenly tagged with a red bull's-eye. Unions underwrote two aggressive anti-Wal-Mart campaigns, staffed primarily with Democratic political operatives. Teachers boycotted the back-to-school shopping season.

Several states, including Maryland, considered legislation in 2006 requiring that large employers commit a certain portion of their revenue to employee health care. Though the bills never said so, they were aimed at just one company.

The criticism stung, but more important, it began to affect the bottom line. Between 2000 and late 2005, Wal-Mart's stock fell 27 percent.

"It was hurting them when they tried to open a new store," Smith said. "For normal competitive reasons and its corporate image, it had to do something."

In 2006, then-chief executive Lee Scott appointed Dillman, his technology guru at the time, to take over health care. Though she maintains that Wal-Mart's program was never as bad as opponents suggested, Dillman moved quickly to make changes.

First, the wait to enroll in the health plan was reduced from two years to one for part-time employees and to six months for full-time workers. By the following year, an additional 50,000 workers were eligible.

Next, Wal-Mart put its marketing genius to work, doing sophisticated research on its own personnel.

"Any retailer will tell you that's what they do with their customers," Dillman said in a recent interview. "There are very sophisticated methods of doing this. If you want people to sign up, go find out what they need."

Employees said they wanted more choices, especially low-cost emergency coverage options. Wal-Mart responded with a menu of deductibles, co-payments and maximum out-of-pocket costs. It teamed up with the Internet site WebMD to simplify enrollment, created electronic health records and expanded its $4 generic drug plan from the 350 medications available to customers to more than 2,000 for employees.

Many workers have chosen low-premium, high-deductible plans that analysts say provide less coverage for preventive and primary care. The company tries to mitigate that with an upfront credit of between $100 and $500 that can be used on any medical expense.

"We're seeing utilization on types of care you would hope," such as checkups and the generic drugs, Dillman said. "And they're managing costs at the same time."

From 2007 to 2008, the retailer saw a 78 percent increase in 16-to-24-year-old workers who opted for the high-deductible plans. "It's better to have them in that than to have nothing, which is where most of them were," Dillman said.

Others, such as Cynthia Murray of Hyattsville, say a $180 premium out of a biweekly paycheck that averages $489 after taxes is too steep. Murray and her husband have been without health coverage for the nine years she has worked at Wal-Mart. "I just pray a whole lot I don't get sick," she said. Seeking the Best Value

At the opposite end of the spectrum, Wal-Mart contracted with the Mayo Clinic for all transplant services, calculating that it could save money by using a single provider with a sterling performance record.

Whether purchasing toasters or transplants, "Wal-Mart looks for value," said Brooks Edwards, director of Mayo's transplant center in Rochester, Minn., one of several Mayo centers around the nation. "One of the most cost-effective things we do is weed out the patients that don't need a transplant."

Where other medical centers might recommend a heart transplant, for example, Mayo might opt for a simpler valve surgery. The strategy of evaluating various treatments, known as comparative effectiveness research, is gaining currency in policy circles. The economic stimulus bill sets aside $1 billion to pursue it.

Wal-Mart's newest initiative, "Life With Baby," is aimed at reducing the rate of premature births among employees, which is double the national average, Dillman said. Mothers-to-be are matched with a registered nurse who counsels them on issues such as diet, stress and smoking. The support continues with lactation instruction and vaccinations for the child's first year.

"Wow, it was really good. It helped me so much," said Cristina Majano, a 23-year-old new mother who works at a Wal-Mart in Northern Virginia.

For her first four years on the job, Majano did not purchase health insurance. "I was younger and didn't think I needed it," she said.

The coverage, even with a $1,000 deductible, is worth it for her and her daughter, Majano said. But she and her husband decided they could not afford to add him to the plan.

Wal-Mart, taking a cue from leading policy analysts, hopes to continue to focus on major cost drivers, moving next to back pain and diabetes.

"This is like the national discussion," Dillman said. "First you've got to get them in the plan, then figure out how to help them take care of themselves, stay healthy and get the care they need." Research editor Lucy Shackelford contributed to this report.

The Wrong Stimulus for Health Care
By William Winkenwerder, Jr. and Grace-Marie Turner
February 10, 2009

As part of the stimulus bill, the House wants to pump least $160 billion into our already-bloated health sector, and members say they intend to fight for every penny when the bill goes to conference with the Senate.

The health-related provisions take a sharp turn toward greater government control over our health sector, without any hearings or serious debate in Congress and without telling the American people what the changes would mean for their personal health care. This is the biggest land grab in the health sector ever attempted by the federal government, and it would be a major step toward thrusting full responsibility for health-care financing onto the American taxpayer—today and for decades to come.

For starters, the bill would create a 15-member federal health board, composed entirely of federal employees appointed by the president, charged with running “comparative effectiveness” research to assess which drugs and other medical treatments are most effective. The board’s decisions would determine what medical treatments the federal government would or would not pay for. The treatments some patients desperately need might not be on the list. House Appropriations Chairman David Obey (D., Wis.) explained that drugs and treatments “that are found to be less effective and in some cases, more expensive, will no longer be prescribed.”

The bill would also establish a $400 million slush fund, which the secretary of health and human services would use to give government, not doctors and patients, more control over health-care decisions.

There will be a substantial burden on employers: The bill would impose a back-door mandate for them to continue providing health insurance to workers long after those workers have left. PricewaterhouseCoopers says the ten-year cost of this provision would be up to $65 billion just for those workers currently eligible for COBRA (the current program through which people can participate in ex-employers’ health plans). The estimated costs would be even higher if many more workers retire early, as they likely will if they know they can continue their employment-based coverage indefinitely.

Further, under the bill, the federal government would reimburse workers for part of their COBRA bills—at least 65 percent under the House bill and 50 percent under the Senate version—creating a major new health spending program without the slightest debate over the economic distortions this would cause.

Also, having already repositioned SCHIP as a program for middle-income children, Congress wants to do the same with Medicaid. The House bill would have the federal government pay 100 percent of the costs for states to extend Medicaid coverage to unemployed workers and their families, no matter what the families’ income or assets…

Finally, the bill would allocate more than $20 billion to health information technologies, despite the fact that no one has been able to come up with a workable plan to spend even a fraction of that amount wisely. Speaking from experience in managing these types of initiatives, one of us (Winkenwerder) can say it is simply impossible to spend sums that huge wisely—not to mention quickly enough to stimulate the economy.

The U.S. already spends $2.2 trillion a year on health care, and it is widely acknowledged that we are not getting anything close to our money’s worth. Can we invest an additional $160 billion wisely? Highly unlikely. The health-related provisions of this bill are too consequential to be rushed through in this gigantic spending bill.

—William Winkenwerder, Jr., M.D., MBA, is Chairman of The Winkenwerder Company and served as Assistant Secretary of Defense for Health Affairs in the U.S. Department of Defense from September 2001 until April 2007. Grace-Marie Turner is president of the Galen Institute, a think tank specializing in health reform, and previously served as a member of the federal Medicaid Commission.

© National Review Online 2009. All Rights Reserved.

Sears closes Naperville call center
By Sandra M. Jones - Reporter - Chicago Tribune
February 10, 2009

Sears Holdings Corp. closed a call center in Naperville, eliminating 145 jobs, according to an employment report from the state of Illinois.

The center closed Jan. 27, confirmed Kimberly Freely, a spokesman for the Hoffman Estates-based retailer. The Naperville call center fielded customer service calls for Sears' home services business, she said. Those calls are being routed to other Sears call centers around the country.

The job cuts are separate from the 300 corporate layoffs announced late last month, Freely said.

Sears is scheduled to announce fourth-quarter and year-end earnings Feb. 26.

Wal-Mart cutting 700-800 jobs at headquarters
Associated Press
February 10, 2009

Wal-Mart Stores Inc. will cut 700 to 800 jobs at its northwestern Arkansas headquarters as it builds fewer new stores this year and makes other operational changes, the world's largest retailer announced Tuesday.

The cuts are in Wal-Mart's real estate, apparel and health and wellness departments, spokesman David Tovar said. Wal-Mart would not say how many jobs will be cut in each segment.

Tovar said employees will be told of the cuts in the next couple of weeks and there was no immediate plan to make other positions within Wal-Mart available to them.

But he said the company also plans to add jobs at its New York apparel office and expects "to add thousands of jobs" at Wal-Mart stores and Sam's Club warehouses this year — a figure that includes hires at new stores.

Last year, Wal-Mart opened 166 new stores, but this year that number will be between 125 and 140 — leading to the cuts in the real estate unit.

"Obviously, we don't need as many people to do the work to site a new store, to build a new store," Tovar said. But since Wal-Mart is expanding its program to renovate and expand stores, it will hire more workers in that area, he said.

Tovar said Wal-Mart added 33,800 jobs last year from new stores. "We expect growth in the tens of thousands this year as well," he said. Worldwide, it has more than 2 million employees, and 14,000 work at the headquarters.

The company is moving positions in its apparel buying and planning group from Bentonville to New York.

"New York City is the fashion hub and we needed to have more people located there," Tovar said.

In health, Wal-Mart is consolidating three areas into one. Pharmacy, optical and in-store health clinics have operated as separate units. Combining them will result in job cuts.

Workers whose jobs are cut would be paid for 60 additional days and will receive health coverage for that time, he said. Those eligible will be given severance pay, based on their tenure. He said the company would waive its policy of not letting employees immediately take jobs with vendors, and outplacement services would be available.

Wal-Mart shares fell $1.56, or 3.2 percent, to end at $47.72 in an overall sharply lower market Tuesday.

In July 2001, the company laid off 100 workers at its headquarters and kept 300 position unfilled, which Wal-Mart attributed to economic conditions after a review of its home office operations. Last year the company cut some positions in the apparel office.

In recent weeks, major retailers and manufacturers including Macy's Inc., Bon-Ton Inc. and Liz Claiborne Inc. have announced massive job cuts and other cost-cutting measures as they aim to preserve cash in the wake of an unprecedented pullback in consumer spending.

Wal-Mart was one of only a handful of merchants that reported a sales gain in January, while most others suffered deep declines. The overall industry sales decline marked the fourth consecutive sales drop since October.

Sam's Club rival Costco Wholesale Corp. has said its profit for the quarter ending in February will "substantially" miss Wall Street estimates due to poor sales and margins.

Penney to Focus Advertising on Trendier Fashion Lines
By Cheryl Lu-Lien Tan - The Wall Street Journal
February 10, 2009

For the first time, J.C. Penney Co.'s spring advertising campaign will focus only on its most fashion-forward clothing lines, designed by trendy names such as Kimora Lee Simmons and Nicole Miller.

The move is part of a bid by the midtier retailer to appeal to shoppers who in the past have turned to high-end stores and boutiques for the latest looks in fashion but have cut back on spending.

The ads will highlight five lines that Penney carries exclusively: Ms. Simmons's Fabulosity line, Ms. Miller's nicole line, Bisou Bisou by Michele Bohbot and two new lines that the retailer is introducing this spring, ALLEN B. by Allen Schwartz and I "Heart" Ronson by contemporary designer Charlotte Ronson.

The TV ads, which will be unveiled in New York Tuesday, will appear for the first time during the Academy Awards on Feb. 22. Print versions will appear in magazines such as Cosmopolitan and People. Penney's Web site also will feature runway shows of the looks, along with fashion tips from the lines' designers.

"We're reinforcing how J.C. Penney has significantly stepped up its style over the last several years -- yet continues to deliver on the affordability that's so important to our customers, especially right now," said Mike Boylson, Penney's chief marketing officer.

Mr. Schwartz's dresses for Penney, for example, will sell for $70 to $80, far less than the $200 to $400 that dresses in his ABS line fetch at Neiman Marcus and other high-end stores.

Highlighting the lines makes sense now because "customers are responding to newness and innovation in our assortment," Mr. Boylson said. Penney wouldn't comment on how much it is spending on the campaign.

Penney, which has 1,093 stores, has been hurt by the sharp drop in consumer spending. Last week, it reported that its January same-store sales fell 16.4%.

Charming Shoppes Names Tony Romano,
Bill Bass to New Posts
NEWS RELEASE
February 9, 2009

HEARD ON THE STREET
Sears: Only High Rollers Are Welcome
By John Jannarone - The Wall Street Journal
February 7, 2009

Getting a seat at the table to bet against Edward Lampert doesn't come cheap. Brokers now charge an annual interest rate of between 30% and 40% for investors wanting to borrow Sears Holdings shares to sell short. A year ago, Sears could be borrowed with no interest, just like most stocks. But the company's weak business has attracted a swarm of short sellers to feed on a small float of available shares, allowing lenders to extract a premium.

Shares of companies sometimes become hard to borrow, but normally the company's stock price would already reflect a business on the brink of collapse. Sears shares have fallen 58% over the past year, but the company still has a market capitalization of $5 billion, hardly scrap value.

At least for a while, Sears shares were being supported by hopes that Mr. Lampert, a hedge-fund investor and the chairman of the company, would steer Sears to health. Also, Mr. Lampert's hedge fund owns roughly half of Sears, greatly reducing the amount of stock available to sell short. But pessimism seems to be winning out. Some analysts expect Sears to post a loss this fiscal year, which ends next January, and it has a $4 billion credit facility that expires in March 2010. Renegotiating that facility could be a challenge.

Even with the steep borrowing cost, speculators had short positions on 18 million shares as of Jan. 15. That is 29% of the shares available to trade.

With such a steep cost to bet against Sears, those die-hard short-sellers must be supremely confident that the shares still have a long way to fall.

Economist predicts downturn will end May 15, at the latest
Housing will rebound first, then vehicle sales,
consumer confidence, says James F. Smith
By Greg Burns - Chicago Tribune
February 6, 2009

Insurers' Finances Clouded by Bookkeeping Changes
By David S. Hilzenrath - Staff Writer - Washington Post
February 6, 2009

Allstate, the big insurer, last week declared that despite unprecedented trouble in the markets, it remains financially strong.

But tucked deep inside a company report is evidence that Allstate changed its bookkeeping last year in ways that improve its financial appearance. One accounting change added $347 million. Another delivered a year-end boost of $365 million.

Allstate's actions illustrate a broader risk to investors, policyholders and people looking for insurance. Insurers have been asking regulators to let them operate with thinner financial cushions or to pad those cushions with assets they could not otherwise count. For anyone trying to assess the companies' financial strength, the changes can cloud the picture. That could make it harder for people to make sound decisions when buying policies or annuities to protect their families.

For regulators, the insurance companies' requests can pose a dilemma. At a time of financial peril, is it better to loosen financial standards for insurers and hope they pull through the crisis still able to keep their promises to policyholders? Or would it be more prudent to hold insurers to existing standards, even if that forces them to take costly and painful steps to shore up their financial stability?

Using accounting changes to make companies look stronger can actually make them weaker. Increasing companies' reported capital could enable them to pay out more money in the form of dividends, leaving them with less money in hand to deal with unexpected problems and make good on their policies.

Late last year, a life insurance lobbying group sought emergency industry-wide relief from an array of standards governing the reserves and capital that insurers must maintain. A national committee of state regulators last week rebuffed that request. Nonetheless, companies have been pursuing special dispensations from individual states, and some are finding a sympathetic ear.

Allstate's home regulator in Illinois approved one of the company's accounting changes during the fourth quarter of last year, retroactive to Sept. 30, Allstate reported.

The company made the other change anticipating that the National Association of Insurance Commissioners would later endorse the approach, Allstate spokeswoman Maryellen Thielen said. Instead, the NAIC executive committee rejected the proposal on Jan. 29, leaving the question for individual states to resolve, Thielen said in an e-mail.

In a Jan. 29 conference call with investment analysts, Allstate executives said they already had regulators' blessing.

"They look at it favorably because it's indicative of the strength of the company," Allstate Controller Samuel Pilch said when an analyst asked about the approximately $700 million of capital the company generated through accounting changes.

"I think, as Sam said, regulators are involved in it and aware of it and approve it," Allstate Chairman and chief executive Thomas J. Wilson added, according to a transcript of the call.

'Stimulus' Bill May Change Health Care Forever
By Amy Menefee - The Washington Times
February 5, 2009

The "stimulus" bill in Congress would fundamentally change the way health care is delivered to all Americans. It would hand over decisions about your care to a group of bureaucrats you won't have the chance to elect.

The "stimulus" establishes a new government body to assess Americans' health care and to make sure drugs and treatments "that are found to be less effective and in some cases, more expensive, will no longer be prescribed." That's how House Appropriations Chairman David Obey (D-Wis.) described it. The words have changed, but the effect stays the same. Where is the outrage?

The predecessor of this new bureaucracy operates in the United Kingdom. The British National Health Service (NHS), revered by fans of government health care, has a body that compares and assesses drugs and treatments. It's called the National Institute for Health and Clinical Effectiveness (not-too-aptly nicknamed NICE). It became infamous for denying cancer patients new drugs that had proven to be effective. They were deemed medically effective - but not cost-effective.

Patients can opt to buy these drugs out of their own pockets, while still paying the taxes that fund the NHS, of course. One man has wanted a similar board to govern the treatment of U.S. patients: Tom Daschle, who just ended his quest to be the new Secretary of Health and Human Services after being investigated for tax evasion. He laid out his entire vision in a book, "Critical: What We Can Do about the Health Care Crisis."

The focus is a federal health board modeled on the Federal Reserve. This board would oversee the entire health sector, including research on drugs and treatments known as comparative effectiveness research. And, like the British version, it would concern itself not only with helping patients, but with the costs of treatment.

"We won't be able to make a significant dent in health-care spending without getting into the nitty-gritty of which treatments are the most clinically valuable and cost effective," Daschle wrote.

Health care spending is indeed a problem. But having the government decide which treatments are acceptable is beyond frightening - and it doesn't make sense.

The House bill calls for this appointed board, dubbed the Federal Coordinating Council for Comparative Effectiveness Research, to be at least 50 percent "physicians or other experts with clinical expertise." However, there is no way the Council's 15 members - all of whom also must be employed in federal government agencies - can determine which drug or treatment is going to work .

You are a unique human being, with genetic and environmental factors influencing your health. Perhaps Benadryl has the predictable effect of making you drowsy; or, perhaps it does the opposite and keeps you awake. Take that a step further to prescription medicines for serious illnesses. Your sister has severe depression, and she responds only to one antidepressant. What if it isn't the one that works for most people? Or it's the most expensive one?

Peter Pitts, head of the Center for Medicine in the Public Interest and a former FDA associate commissioner, explained why "one-size-fits-all" medicine doesn't work: Most comparative effectiveness studies "don't capture the genetic variations that explain differences in response to medicines by different patients."

Having a board that excludes any treatment on the basis of comparative effectiveness is a danger to the health of those who fall outside the norms - and with the government setting those norms, any of us could end up as outliers.

The "stimulus" bill passed by the House creates this board. It allocates more than $1 billion for comparative effectiveness research. And it gives the new health and human services secretary (whoever that turns out to be) an additional $400 million at his or her discretion.

The supposed purpose of the bill - to "stimulate" the U.S. economy - is long gone.

As The New York Times's Robert Pear so eloquently put it: "For Democrats, it is also a tool for rewriting the social contract with the poor, the uninsured and the unemployed, in ways they have long yearned to do." He noted this was taking place "with little notice and no public hearings."

That fits perfectly with the plan Daschle laid out - he never intended for Americans to know what was happening to their health-care structure. "I do not believe we should draft a bill laying out this vision in excruciating detail," he wrote in "Critical." "I believe a Federal Health Board should be charged with establishing the system's framework and filling in most of the details."

If his plan continues in his absence, this board will "fill in the details" of a completely government-driven health care overhaul.

Amy Menefee is director of communications for the Galen Institute, a nonprofit research organization that focuses on health policy.

S&P may cut six retailers;
JC Penney near junk
Reuters
February 5, 2009

NEW YORK, Feb 5 (Reuters) - Standard & Poor's on Thursday said it may cut its ratings on six retailers and send Macy's Inc and J.C. Penney Co (JCP.N: Quote, Profile, Research) into junk territory, while Moody's Investors Service warned it also may cut Penney to junk. Rating downgrades into junk can significantly increase a company's borrowing costs.

The rating changes "reflect our deepening concern about the impact of the U.S. recession on the increasingly troubled department store sector which felt the full brunt of the declining U.S. economy and weakening consumer confidence in 2008," S&P said in a statement.

The ratings agency also said it may cut Dillard's Inc (DDS.N: Quote, Profile, Research), Neiman Marcus Group Inc and Sears Holdings (SHLD.O: Quote, Profile, Research) deeper into junk territory. Nordstrom, which is rated investment grade, is also on review for a possible downgrade.

"The recession is likely to worsen through the first half of 2009 given weakening employment, the still poor housing market, and continuing turmoil in financial markets," S&P added.

S&P also revised its outlook for Bon-Ton Stores Inc (BONT.O: Quote, Profile, Research), Kohl's Corp (KSS.N: Quote, Profile, Research) and Saks Inc (SKS.N: Quote, Profile, Research) to negative, indicating a downgrade of these companies may be likely over the next one to two years.

S&P rates Macy's and Penney "BBB-minus," the lowest investment grade. Nordstrom is rated "A-minus," the seventh highest investment grade and Kohl's is rated "BBB-plus," the eighth highest investment-grade rating.

Sears is rated "BB-minus," three notches below investment grade and Dillard's and Neiman Marcus are ranked one step lower at "B-plus."

Saks is rated "B," five steps below investment grade, and Bon-Ton Stores is one level lower at "B-minus."

Moody's also said on Thursday it may cut J.C. Penney into junk while Fitch Ratings cut the company to its lowest high-grade rating with a stable outlook.

"We believe that the company is at risk, that this decline in earnings could push credit metrics to a level more appropriate for a non-investment-grade rating," Moody's said. (Reporting by Karen Brettell; editing by Gary Crosse)

Wal-Mart Says Sales Rose, Abandons Monthly Forecasts
By Chris Burritt - Bloomberg
February 5, 2009

Wal-Mart Stores Inc., the world’s largest retailer, reported January sales that exceeded its projection and said it will stop giving a monthly forecast, citing difficulty in predicting consumer behavior.

Revenue from U.S. stores open at least a year advanced 2.1 percent last month as discounted groceries and $4 medicines brought in more customers, the Bentonville, Arkansas-based company said today in a statement. That beat Wal-Mart’s forecast for no change to a 2 percent increase.

Wal-Mart said it is switching to quarterly forecasts and anticipates comparable-store sales in the U.S. will rise 1 percent to 3 percent in the period from Jan. 31 through May 1. Last month, the company reduced prices on hamburger buns, Hormel Foods Corp. chili with beans and Sony Corp. flat-panel televisions to grab customers eating and entertaining more at home.

“Wal-Mart sees tremendous volatility month to month, and it may face rough sledding ahead,” Howard Davidowitz, chairman of retail-consulting and investment-banking firm Davidowitz & Associates Inc. in New York, said in a telephone interview today.

Wal-Mart advanced 2.5 percent to $47.60 in early trading. The shares have declined 17 percent this year in New York Stock Exchange composite trading, after last year’s advance of 18 percent outpaced the other 29 Dow Jones Industrial Average stocks.

Football Discounts

The last week of January, Wal-Mart discounted flat-panel TVs, Kraft Foods Inc.’s DiGiorno frozen pizzas and PepsiCo Inc. soft drinks to lift sales before the Super Bowl, the Feb. 1 National Football League title game in which the Pittsburgh Steelers beat the Arizona Cardinals. U.S. companies slashed an estimated 522,000 jobs in January, threatening to extend the longest recession in a quarter of a century.

“Because our value proposition is so relevant to our customers and members, we believe our underlying business around the world will remain very healthy,” Wal-Mart Chief Financial officerTom Schoewe said in the statement.

The decision to abandon the monthly forecasts is one of Wal- Mart’s first announcements since Mike Duke took over as chief executive officer Feb. 1. Wal-Mart disappointed investors last month when it reported same-store U.S. sales rose 1.7 percent in December. The company had forecast weeks earlier that it expected sales to advance at the “high end” of its prior guidance of 1 percent to 3 percent.

By sales, the retailer has outpaced Target Corp., which sells fewer groceries and generates a larger percentage of revenue from clothes and other discretionary merchandise. Target said today that fourth-quarter earnings were probably “somewhat lower” than the median First Call analyst estimate of 86 cents a share.

Sears: Washer that killed OC girl lacked 'lockout'
San Jose Mercury
February 4, 2009

MISSION VIEJO, Calif.—Sears Holdings Corp. on Wednesday said a front-load washer that killed a 4-year-old girl this week was the only model that its Kenmore brand sells without a "control lockout" feature that could have saved the girl's life. Sears' comments came three days after Kayley Ishii was found by her mother in the water-filled washer at their Mission Viejo home. Orange County sheriff's officials said the girl's 1-year-old brother managed to start the device after she climbed in, either by bumping the machine or hitting the start button.

Sears spokesman Larry Costello said the washer—model 40412—has a two-step start process, and its controls are 30 inches from the floor. A person would have to set the dial to a cycle and press a button to start the machine.

Costello said he is not sure how a 1-year-old could start the washer but urged parents with young children to buy washers with "control lockout." The feature temporarily disables a machine if a parent hits two keys and holds them down for 10 seconds.

"We want to reassure the public that this is the first such incident we've heard of involving a Kenmore laundry product," Costello said in a statement.

In an interview with The Associated Press, he said, "We're still reeling from this. ... We just ask parents to be aware of their children."

Investigators ruled Kayley's death accidental.

Big tenant narrows choice to two towers
By Thomas A. Corfman - Chicago Real Estate Daily
February 4, 2009

(Crain’s) — London-based insurance broker Willis Group Holdings Ltd., which has been scouting the downtown market for more than 100,000 square feet for a new local office, has narrowed its search to Citigroup Center and Sears Tower.

The new location would combine local brokers from Willis; InsuranceNoodle, a Chicago-based Web site that Willis acquired in 2007, and Hilb Rogal & Hobbs Co., a Virginia-based brokerage that Willis acquired in October, according to people familiar with Willis’s search.

Smaller suburban offices could also be involved the consolidation, and Willis might lease as much as 125,000 square feet, those sources said.

James Wylie, who in April was named a Willis executive vice-president and partner in charge of the central region, declined to comment.

Spokesmen for Citigroup Center and Sears Tower also decline to comment. Landing Willis would be a key win for Sears Tower, 233 S. Wacker Drive, which has lost several important tenants, including Ernst & Young U.S. LLP.

Sears Tower and Citigroup Center, 500 W. Madison St., have tangled over tenants before. In 2007, as part of a consolidation of downtown operations, Citigroup Inc. decided to keep about 150,000 square feet in its namesake skyscraper but move out of Sears Tower.

The new lease would be a small boost to the downtown office market. Willis currently has about 91,000 square feet in three locations, according to real estate research firm CoStar Group Inc.

• At 10 S. LaSalle St, Willis has about 42,000 square feet.

• At 1 E. Wacker Drive, the former Hilb office totals about 27,000 square feet.

• At 222 S. Riverside Plaza, Insurance Noodle has about 22,500 square feet.

Willis is the world’s third-largest insurance brokerage, with brokerage revenue of $2.46 billion in 2007, according to Crain’s sister publication Business Insurance. Chicago-based Aon Corp. ranked second on BI’s 2008 list, with 2007 brokerage revenue of about $7.1 billion; Hilb ranked eighth, with brokerage revenue of about $780 million.

Willis renamed its North American business Willis HRH after its acquisition of Hilb for $2.1 billion, including assumed debt. The transaction increased Willis’s presence in the U.S. market but also increased its debt at load at time when insurance prices are softening, analysts say.

Sears: Washer That Killed Girl Lacked 'Lockout'
CBS2, Los Angeles
February 4, 2009

MISSION VIEJO, Calif. (AP) ― Sears Holdings Corp. says a front-load washer that killed a 4-year-old Orange County girl this week was the only model that its Kenmore brand sells without a "control lockout" feature that could have saved the girl's life.

The feature temporarily disables a machine if a parent hits two keys and holds them down for 10 seconds.

Sears' comments came three days after Kayley Ishii was found by her mother in the water-filled washer at their Mission Viejo home. Orange County sheriff's officials say the girl's 1-year-old brother somehow managed to start the device after she climbed in.

A Sears spokesman told The Associated Press the company is "still reeling from this."

Investigators have ruled Kayley's death an accident.

Date:    Jan. 30, 2009
To:       All Sears Holdings Associates
From:   Bruce Johnson, Interim CEO and President
Re:       Ongoing Review of the Business

In this challenging economy, we must constantly analyze all aspects of our business while continuing to tightly manage our expenses, headcount, inventory and cash. We have to remain aggressive and flexible in our ability to adjust the company's cost structures so that we are well-positioned when the retail environment improves.

As we previously announced, we will be suspending the company matching contributions to the U.S. and Puerto Rico 401(k) Savings Plans. Effective immediately, we are also taking the following actions that will provide significant savings to the company in fiscal 2009.

* We are freezing salaries and wage rates for associates in most business units.

* In markets where the company's hourly start rate is above the minimum wage, it will be lowered back to the minimum wage for that market, in light of prevailing labor conditions.

* After having significantly restricted the use of our two corporate jets, we will be selling the planes.

* We have taken non-associate related cost-reduction actions in the areas of information technology, procurement, supply chain, marketing, legal and telecommunications.

This week, we also released approximately 300 associates from our support center locations after a careful review of our business needs. Eligible associates will be offered severance packages and outplacement to assist in their transition. We will continue to review staffing needs across the organization.

As you are seeing in daily news reports, significant operational changes are similarly occurring inside many other U.S. businesses. In a very rare step, Google and Microsoft, two companies whose businesses are growing and thought to be recession proof, let go a significant number of associates linking the reductions to the state of the economy. Local companies such as; Allstate, Boeing, Motorola, United Airlines and fellow retailers such as; Best Buy, Home Depot, Office Max, Target and Walgreens are feeling the same effects and taking action similar to ours. In this month alone, as this article indicates over 20 companies announced layoffs with numbers reaching possibly as high as 30,000 for Circuit City . The decision to eliminate jobs is never easy. However, as we continue to navigate in these tough economic headwinds, we will continue to look for ways to operate our business units more effectively and efficiently, and where we reasonably can, without reducing headcount.

In response to associate interest, and in an effort to provide you with the ability to take additional time off, we also will be offering the option of unpaid time away from work to all associates. More details will be available shortly. We will continue to look into these types of options based on associate interest.

To remain successful in this difficult economy and fast changing retail environment, we need to do more. We must remain diligent in our ongoing review of all aspects of our business, committed to our financial priorities and equally as important, focused on giving customers more reasons to spend their hard earned dollars with us everyday.

Thank you for your support.

Is the Traditional Department Store Dead?
We think stronger players stand to benefit from market share gains as consolidation continues.
By Kimberly Picciola - Morningstar
February 4, 2009

The emergence of category killers, discount chains, and specialty retail stores over the past couple of decades have put traditional department store chains on the defensive.

Pair the competitive pressures with a challenging economic backdrop, and the futures of many of these firms are bleak.

Yet, despite the sector's decline from its heydays in the mid-1900's and the near-term challenges department stores face in this recessionary environment, we don't think that it is reasonable to tar the entire group with the same brush.

There is a large gap between the leaders and the laggards in this industry, and we believe that the best department stores still have the product differentiation, the exceptional service, and value proposition that should allow them to survive and perhaps thrive over the longer term.

We do expect the macroeconomic-driven shakeout in the department store sector to continue as the weaker players disappear and as specialty retailers chip away at their market share. However, we believe that department stores with strong balance sheets, a national presence, and a differentiated and relevant product offering are in a position to benefit from market share gains as lagging retailers shutter stores.

Market Share and Consumers' Spending Dollars up for Grabs

We are already seeing the downfall of many regional chains, with players like Mervyn's, Gottschalks, and Goody's filing for bankruptcy in 2008. The three chains are shuttering their combined store base of over 500 stores, and we think this is just the beginning of more store closures to come from local chains. We believe other small, more regionally focused players like Bon-Ton and Belk are under pressure in this environment, having leveraged up their balance sheets to buy various regional chains in recent years. Additionally, we estimate regional player Dillard's (DDS) will have closed over 20 stores in 2008 and 2009 (accounting for nearly 6% of its store base) as it looks to shutter underperforming locations to preserve cash in this difficult environment.

In all, we estimate that over $10 billion in sales could be available for the taking over the next couple of years from small regional department stores either going out of business or closing a sizable portion of their stores. While we expect a portion of these sales will evaporate as consumers reset their discretionary spending behavior and a portion will go to competitors outside of the department store space, we do think that national department store chains are in a position to pick up sales once the economy improves.

National Players Have a Leg Up

National midtier chains like J.C. Penney (JCP JCP), Kohl's (KSS), and Macy's (M) should benefit from their size, given they have more levers to pull on the cost side as sales continue to contract. For example, they can leverage their fixed costs in markets where they have a large presence; they have the ability to demand better pricing and other concessions from their suppliers (especially the apparel manufacturers); and their marketing dollars have an exceptionally long reach due to having a national presence. Additionally, the fate of a national chain is not tied to one region, potentially putting them in a better financial position to invest in markets where regional chains are closing their doors, thus taking advantage of the current downturn in order to shore up their long-term competitive position.

Differentiation Is Key

While we think being a national player will be key to survival, we believe those that can also provide relevant, differentiated products are most likely to thrive in the longer term. Department stores are no longer the de facto choice for American families looking to purchase goods and services.

With today's consumer placing a greater emphasis on convenience, value, and brands, department store chains have struggled to respond, letting big-box off-mall retailers and specialty stores gain share in categories they once dominated. Those department store chains that have evolved their product offering and provided some differentiation through their exclusive/private label brands, customer service, or overall product assortment are having greater success than chains that haven't responded to the change in consumers' tastes and behaviors.

Nordstrom (JWN) has emerged as a leader in the group given its superior service and has garnered a loyal following, making it a destination location for some consumers. We believe both Kohl's and J. C. Penney have demonstrated their ability to evolve their apparel offering by partnering with reputable designers--Kohl's with Vera Wang and J.C. Penney with Nicole Miller as an example--to compete with retailers capitalizing on the fast fashion trend. Kohl's convenient off-mall locations have also been key to its success and have prompted J.C. Penney to follow suit and increase its footprint of stores located outside of the traditional mall.

Size Is No Guarantee of Success

While Macy's and Sears (SHLD) are benefiting from their size and national presence, we think they have lagged the competition in terms of their ability to differentiate their product offering and maintain a certain level of relevance with consumers.

We recognize Macy's attempt to differentiate its product with brands like INC International Concepts and Martha Stewart's home goods line, but we believe its efforts have fallen short, particularly as it has tried to connect with customers in markets where it operates stores formerly owned by May.

Sears continues to struggle on the apparel side of the business but does have some valuable brands on the hardlines side with Craftsman tools and Kenmore appliances. In our view, Macy's and Sears will have to step up their merchandising efforts to keep up with the competition in this cutthroat retail landscape.

Nordstrom, Kohl's, and J.C. Penney Are in the Best Position Overall In conclusion, we are not writing off the entire department store industry. Although we think there will be fewer chains and stores as a shakeout in the industry continues, we do believe there is a place for those that have a national presence and a differentiated and relevant product offering in this crowded retail landscape. Of the chains we cover, we think Nordstrom, Kohl's, J.C. Penney, Macy's, and Sears will make it through this challenging environment, with Nordstrom, Kohl's, and J.C. Penney in the best position from a balance sheet and product assortment perspective, in our view.

Although we don't see any near-term liquidity risks for Macy's or Sears, we do give them a very high fair value uncertainty rating given that they have more financial leverage and weaker competitive positions, which could result in more store closures and pressure from their vendors in the near term compared to their peers. We also give Dillard's a very high fair value uncertainty rating as it fights to stay alive in this highly competitive environment, given its regional position and poor operating history.

Sears Holdings names new CIO
Chicago Business
February 3, 2009

(AP) — Sears Holdings Corp., which operates Sears and Kmart stores, said Tuesday it named Timothy Kasbe as senior vice president and chief information officer.

Kasbe, 43, replaces Karen A. Austin, 47, who is becoming president of the company's home electronics business unit, a new position, effective immediately.

Kasbe was previously chief information officer of Reliance Retail Ltd., part of a startup retail chain in India. Before that, he was an executive at IBM for 10 years.

Austin had been chief information officer since 2005.

Sears also confirmed news reports last week that it cut 300 corporate jobs at its headquarters in Hoffman Estates, as well as in Troy, Mich., and New York.

Shares shed 11 cents to $39.80 on Tuesday.

Amid job cuts in financial arm,
Allstate looks into outsourcing
By Becky Yerak - Reporter - Chicago Tribune.com
February 3, 2009

Allstate Corp., which plans to cut 1,000 jobs in its underperforming financial arm, is in the midst of a review that might result in some of those positions being outsourced or sent off-shore.

Last November the Northbrook-based company hired Boston Consulting Group to find ways to trim costs at its financial unit.

Since 2004 Allstate has moved certain operations to foreign countries. In December, for example, it opened a service center in Manila with 10 representatives fielding calls from financial customers. Allstate also has sourced several life and annuity processes to Allstate Northern Ireland and to EXL, a self-described "provider of offshore business outsourcing solutions."

"We must look for ways to increase our sourcing efforts," Allstate said in a Jan. 23 memo to customer service workers in its financial unit.

EXL representatives will spend weeks at Allstate offices in Lincoln, Neb., and Vernon Hills to study how the centers handle duties such as annuity processing and claims, said the memo obtained by the Tribune.

Motorola dumps CFO after less than year on the job
Liska had been brought in to help straighten out "royally screwed up" company
By John Goff - Financial Week
February 3, 2009

The tough times continue at Motorola.

The besieged mobile phone and set top-box maker reported a fourth-quarter net loss of $3.6 billion, then forecast a deeper-than-expected first-quarter loss and suspended its quarterly dividend.

In a surprise move, Motorola also indicated it was on the lookout for a new chief financial officer, having dumped Paul Liska after less than 12 months on the job.

The fourth quarter net loss worked out to $1.57 per share. Around .91 cents of that per share loss came from a deferred tax asset valuation allowance. Another large chunk of the loss stemmed from goodwill and investment impairment.

“We have our work cut out for us in 2009 as we focus on the future success of Mobile Devices,” said co-CEO Sanjay Jha, who is also head of the mobile phone division, on a conference call. Mr. Jha said Motorola’s sales volumes were falling faster than the industry’s in the current quarter.

Indeed, revenue at the company’s battered mobile devices unit plunged, down by over 50% from a year ago. And the operating loss for that operation widened to $595 million from $388 million a year ago.

Mr. Liska will be replaced by corporate controller Edward Fitzpatrick, at least on a temporary basis.

“We appreciate the contributions Paul made toward the company’s planned separation and in managing our cost-reduction activities,” said Greg Brown, Motorola’s other co-CEO.

Maybe so, but the company didn’t stick with Mr. Liska very long, having hired him on Feb. 21. Mr. Liska took over for Tom Meredith, the former Dell CFO, who Motorola credited with improving the company’s cash conversion cycle and cost structure. Mr. Meredith remains a non-management board member at Motorola.

At the time of Mr. Liska’s hiring, Mr. Brown noted that “Paul will be a very valuable addition to our team and he is well-suited to drive forward the important work already underway to enhance our financial performance.”

Motorola gave no explanation for giving Mr. Liska the quick hook. But given his resume, it’s doubtful he will be out of work for long. From 2004 to 2006, Mr. Liska served as executive chairman of US Freightways. He also served as executive chairman at Weekly Reader Companies. From 2001 to 2004, Mr. Liska held several positions with Sears, Roebuck, including president of credit and financial products and CFO. Prior to joining Sears, Mr. Liska was executive vice president and chief financial officer of The St. Paul Companies.

Prior to joining Motorola, Mr. Liska also worked at a number of private equity firms, including MidOcean Partners, CVC Capital Holdings and Ripplewood Holdings LLC. That experience, in fact, gave rise to rumors that Motorola might be looking to sell its troubled handset unit to a PE firm.

During today’s announcement, Motorola’s management said it remained committed to hiving off its mobile devices division from the rest of its business. But it added that it did not expect the restructuring to happen this year.

The company’s management had resisted such a spin-off. But in March, shareholder Carl Icahn waged a way with CEO Brown—and eventually convinced the company to split off its handheld devices business.

Whether the plan helps revive Motorola remains to be seen. In an interview with CNET given at the end of the company’s third quarter, Sam Wilson, senior analyst at JMP Securities, said “We're either witnessing a slow death here, or the darkest night before the dawn. But one thing is clear. This is a company royally screwed up in a brutally competitive market. And it won't be easy to turn things around.”

Macy’s Cuts Dividend and 7,000 Jobs
By Stephanie Rosenbloom - New York Times
February 3, 2009

Macy’s, one of the nation’s largest department stores, said Monday that it would cut 7,000 jobs, or 4 percent of its work force, making it the latest retailer to streamline operations. The steps will save cash, but like other companies, Macy’s is also using the economic downturn as a moment to make broad changes.

“Our history has been regional department stores with regional names and regional managements,” Terry J. Lundgren, chairman, president and chief executive of Macy’s, said in a telephone interview on Monday.

No more. Macy’s four hulking divisions — East, Central, West and Florida — will be consolidated into a single organization for the first time in the company’s history.

It is a radical move, but one Mr. Lundgren said would position Macy’s for 2010, or whenever the consumer feels good enough to reach for her wallet again.

“We want to be in place, we want to have our people trained, we want to have our structure set, we want to have the right brands in the store,” Mr. Lundgren said. “Now I think is the time to address all of those structural changes that are required.”

Indeed, Mr. Lundgren said in a conference call with investors and retailing analysts that this is a time “when nothing should be considered a sacred cow.”

Last spring, Macy’s began testing an initiative it calls “My Macy’s,” in which the merchandise in stores is tailored to appeal to the particular preferences and needs of customers in a specific region of the country. Macy’s said Monday that the program, which was tested in 20 markets, would be rolled out across the nation.

Macy’s is also taking steps to cut costs, including eliminating merit salary increases for executives’ performance in 2008, and reducing its matching amount to employee 401(k) retirement contributions.

The company cut its 2009 capital expenditure budget to about $450 million — $100 million to $150 million less than previously announced.

And it cut its quarterly dividend to 5 cents a share, from 13.25 cents a share. The retailer is also planning to buy back $950 million in bonds maturing this year.

Macy’s executives said the changes will save the company $250 million this year, and $400 million a year beginning in 2010.

“It’s very clear that the company will emerge in a much stronger position for consumers and investors alike,” said Bill Dreher, senior retailing analyst with Deutsche Bank Securities. “I’m a big fan of this transaction.”

After years of swift and sometimes excessive store growth, many retailers are shrinking their businesses.

Last month, Home Depot said it would cut 7,000 jobs, or 2 percent of its work force; luxury chain Saks said it would eliminate 1,100 jobs, or about 9 percent of its workers; Neiman Marcus said it would slash 375 jobs, or 2.3 percent of its workers.

Even lesser-known chains are downsizing. Also last month, Bon-Ton Stores said was reducing its staff by 1,150; Wet Seal said it was cutting 41 jobs; and Chico’s FAS said it had dismissed 180 people.

Despite the litany of actions taken by Macy’s, its 2009 forecast worried some analysts.

Moody’s Investors Service said Monday that it would review Macy’s ratings for a possible downgrade, citing concerns over the retailer’s lower earnings forecast.

Macy’s gave fiscal year 2009 earnings guidance of 40 cents to 55 cents a share, down from its fiscal year 2008 guidance of $1.10 to $1.20 a share. And the retailer said sales at stores open at least a year, an important measure of retail health, would probably be down 6 percent to 8 percent this year.

Bloomingdale’s, which is owned by Macy’s, will continue to operate separately.

Shares of Macy’s fell 36 cents, or 4 percent on Monday, to $8.59.

LOOKING BACK: Sears, Roebuck and Co.
By Mary Braswell - Albany, GA Herald
February 3, 2009

It was 115 years ago when Richard Sears illustrated the cover of his 1894 catalog declaring it the “Book of Bargains: A Money Saver for Everyone.” Here is an abbreviated look back at the long history of Sears, Roebuck and Co.

In the beginning

• In 1886, a single general store was the only source of supplies for most people in the 38 states, and prices were often high. Richard Warren Sears was a railroad agent in Minnesota when he received a shipment of watches. The local jeweler did not want them so Sears purchased the watches and sold them to station agents up and down the line. With the profit, he ordered more watches and soon began selling watches and jewelry through a mail order catalog.

• After moving to Chicago in 1887, Sears was joined in business by watchmaker Alvah C. Roebuck. The corporate business name became Sears, Roebuck and Co. in 1893. The partners were both under the age of 25 when sales topped $400,000.

• In 1894, the Sears catalog had 322 pages. Just one year later the catalog included 532 pages. Sales exploded to $750,000.

• Julius Rosenwald became a part owner in 1894 and was the “organizer” for the business. His expertise made the mail order business efficient and economical. Roebuck left the company shortly thereafter with ill health but the corporate name never changed.

• The advent of Rural Free Delivery in 1896 made distribution of the catalogs economical. Also, the classification of mail order publication as “aids in the dissemination of knowledge” allowed them to be shipped at the rate of 1 cent per pound. Beginning about that same time, there was a 25-cent charge for the catalog but, when a customer spent more than $10, the catalog fee was applied to the order.

• From 1905-1915, automobiles were manufactured to be sold through the Sears catalog by Lincoln Motor Works of Chicago.

Modern Homes

• From 1908-1940, about 70,000-75,000 homes were sold through the Sears catalog and the Modern Homes program. Over the years, there were 447 different styles and floor plans.

• The Honor Bilt homes were the most expensive and of the finest quality. Features included cypress siding and cedar shingles. The interior had knot-free hardwood floors, trim of yellow pine, oak or maple. One such plan was the multi-story Ivanhoe with French doors and art glass windows.

• The Standard Homes were mid-priced. While of good quality, some corners were cut to save money. They were often advertised as good for warmer climates, another way of saying the house did not hold heat very well.

• The Simplex Sectional line included very basic floor plans. One such plan was the Goldenrod with three rooms and no bath. Separate outhouses were available.

Kenmore

• It was 1927 when the name Kenmore was first associated with washing machines and in 1929, the name appeared on a wringer washer. The new Gyrator, which sold for $79.50, promised to “wash clothes clean in three to seven minutes.”

• Sears introduced the Kenmore vacuum cleaner in 1932 with a full money-back guarantee for the price of $24.50.

• The 1933 Kenmore Toperator marked historic achievement in washing machine technology. The automatic washer featured the wash, drain and wringer controls in a central location all in a speckled porcelain-finished tub.

• By 1936, the 1 millionth Kenmore laundry appliance was sold.

• Manufacturing ceased and sales of existing Kenmore appliances were limited as materials were rationed in the efforts of World War II.

• After the war, Kenmore resumed production. Gas and electric stoves included the pre-heat switch and a very popular see-through door.

• The first agitator-type automatic washer went on sale in 1947 for $239.95. Two years later, the first Kenmore automatic electric clothes dyer hit the market for $164.95.

• A few other Kenmore milestones include the 10 millionth appliance sold (1957), the first trash compactor (1970) and the first Kenmore microwave (1971).

Allstate

• The Allstate brand began in 1925 as a part of a national contest to name the new line of automobile tires at Sears. By the time the contest ended, 937,886 people submitted a total of 2,253,746 names. Entries came from every state and in 25 different languages. Hans Simonson of Bismarck, North Dakota, received a $5,000 prize for the name “Allstate.”

• Allstate tires and tubes were guaranteed for 12,000 miles and are credited with much of the early success of the retail stores.

• Low-cost automobile insurance became available under the name Allstate in 1933, first through the catalog only and later in the stores.

• While still not standard equipment, Sears offered seat belts, heaters, air conditioners and radios under the Allstate name in the 1950s and ‘60s.

• The only unsuccessful item to carry the Allstate name was its automobile. The cars lasted just one year before disappearing in 1953.

• In 1995, Sears ended its 70-year relationship with Allstate.

DieHard

• It took nine years of research and $1 million for Sears to develop the DieHard automobile battery.

• Introduced in 1967, the DieHard battery got its name after technicians reported not one failure after 26,000 starts in temperatures ranging from below zero to above 100 degrees.

• In 1970, DieHard batteries were used in sets of three to provide the 36-volt starting power for nearly all of the cars in the Indianapolis 500.

• After 40 years on the market, consumers chose the DieHard 3 to 1 over all other batteries.

Craftsman

• In 1927, Sears paid the Marion-Craftsman Tool Company $500 for the rights to use the name Craftsman on its tools.

• Soon after acquiring the new name, Sears threw out all its big, clumsy, cheap, cast-iron hammers and wrenches. The new Craftsman tools were heavy duty and chrome-plated. The new quality and look increased sales six times over in the first year.

• It was 1948 when the name Craftsman first appeared on lawn and garden equipment with the company’s first power mower.

• The unlimited lifetime warranty program for hand tools began in 1927 and still exists today, except for those used commercially which carry a limited warranty.

Tidbits

• The 1895 catalog added eyeglasses, including a self-test for “old sight, near sight and astigmatism.”

• Full-color and textured paint and wallpaper samples were included in the 1906 catalog.

• Before he was famous for writing the “Tarzan” series of books, Edgar Rice Burroughs worked for Sears.

• The first retail store (Chicago, 1925) featured an optical shop and a soda fountain.

• Julius Rosenwald, the part owner not included in the company’s name, funded schools in the southern United States for Africa-American children. By 1932, 4,977 new schools, 217 teachers’ homes and 163 shop buildings in 883 counties and 15 states became a part of his legacy. In Georgia, 271 schools and/or houses for teachers were built including one in Dougherty County, three in Lee County and six in Sumter County.

Macy's to Shed 7,000 Jobs, Cut Payout by 62%
By Rachel Dodes - Wall Street Journal
February 3, 2009

Macy's Inc. said it is eliminating 7,000 jobs, or 4% of its work force, and taking other steps to cut costs, in the latest sign that slumping consumer spending is forcing retailers to change the way they do business.

The Cincinnati-based operator of 840 department stores also said it is cutting its dividend by 62%, ending merit pay increases for executives and slashing its 2009 capital-spending budget by another $100 million to $150 million to around $450 million. The original budget was $1 billion.

"This is a time where nothing should be considered a sacred cow," said Macy's Chief Executive Terry Lundgren in a conference call with analysts Monday.

The moves are expected to save the company $250 million this year and $400 million a year thereafter. Separately, Macy's said it is launching a tender offer to buy back $950 million in debt maturing in 2009, using cash on hand. The offer will expire at 5:00 p.m. EST next Tuesday. Chief Financial Officer Karen Hoguet described the decision not to refinance the maturing debt as part of a "deleveraging strategy."

Macy's shares were down 36 cents, or 4%, at $8.59 Monday in 4 p.m. composite trading on the New York Stock Exchange.

The job cuts are part of a broad reorganization that will merge four different buying and planning offices into one centralized unit. Macy's said it will also roll out nationwide an experimental program called "My Macy's," in which 15% of a store's merchandise is tailored to local tastes. Launched in 20 markets in the spring of 2008, the program will be extended to 49 more "districts" in the second quarter.

Mr. Lundgren said the program has shown early signs of success: 13 of Macy's top 15 performing geographic markets in December were in "My Macy's" pilot regions. "That has given us the confidence we can expand 'My Macy's' across the country," he said.

The company, which had revenue of $25.5 billion in the 12 months ended Nov. 1, offered a gloomy outlook for the rest of the fiscal year ending this month, predicting sales at stores open at least a year would be down 6% to 8% from a year earlier.

It forecast earnings in the range of 40 cents to 55 cents a share, well below consensus estimates of 87 cents a share, according to Thomson Reuters. Moody's Investor Service said it put Macy's credit ratings under review for a possible downgrade, citing the lower forecasts. Thursday, Macy's plans to announce sales figures for January, which analysts expect to be down 6.3%.

As part of the reorganization, two top members of Mr. Lundgren's team said they will retire when their contracts expire. Susan Kronick, 57 years old, who oversaw Macy's four divisions and will now work on the transition to one, will retire in early 2010. Janet Grove, 58, who had been chairman and chief executive of Macy's Merchandising Group, will oversee international store development initiatives until she retires 2011. Another senior executive, Tom Cody, 67, will retire in 2010.

Mr. Lundgren said in an interview that all three executives had been planning to retire, but "none of them wanted to leave at a time when the company was going through these changes."

Macy's cuts 7,000 jobs, slashes dividend
By Aarthi Sivaraman - Reuters
February 2, 2009

February 2, 2009 Macy's Inc said on Monday it would slash about 7,000 jobs and cut its quarterly dividend as it forecast earnings for fiscal 2009 that fell far below Wall Street expectations, sending its shares down 4 percent. The department store operator said it took the steps to counter what it expects will be a very tough retail market this year, and that it would plan conservatively despite efforts by the U.S. government to build an economic stimulus package. Macy's expects these initiatives, which also include integrating its divisions into one unit, to reduce its previously planned expenses by about $400 million per year starting in 2010, and $250 million in part of 2009.

"We just believe that this is a time when nothing should be considered a sacred cow," Chief Executive Terry Lundgren said in a conference call following the announcement.

On a pretax basis, Macy's expects costs of about $400 million in cash, mostly in fiscal 2009, tied to the steps.

Its Bloomingdale's stores will not be affected by these initiatives, Macy's said. In 2008, retailers saw their worst holiday sales in almost four decades as recession-hit shoppers clamped down on spending or hunted for deep discounts.

For Macy's to win consumers over in the recession, it would have to be more promotional, said Patricia Edwards, a retail analyst with Storehouse Partners.

"The retail environment has changed so much. They have not been competing on a value proposition and this is a value market," she said.

OUTLOOK DISAPPOINTS

The job cuts announced on Monday are about 4 percent of the company's workforce and should mostly be completed by May 1, Lundgren said. Macy's also cut its quarterly dividend to 5 cents a share from 13.25 cents.

The company said it expected to earn 40 cents to 55 cents a share, excluding restructuring costs, for fiscal 2009, below the average analyst view of 79 cents per share, according to Reuters Estimates. Same-store sales are expected to decline between 6 percent and 8 percent, Macy's said.

The outlook assumes a steeper decline

Macy's to Cut 7,000 jobs
By Kerry E. Grace - Dow-Jones Wire
February 2, 2009

February 2, 2009 Macy's Inc. said it will cut about 7,000 positions, or 4% of its work force, and slash its dividend, as the retailer looks to lower expenses amid slumping sales. The layoffs will stem in part from a decentralization of its operations that Macy's said it is accelerating.

With the recession weighing heavily on consumer spending and retailers, the department-store operator projected earnings for its new fiscal year of 40 cents to 55 cents a share -- analysts surveyed by Thomson Reuters had projected 86 cents. It also pegged capital spending this year at just $450 million. The target was originally $1 billion and has been cut several times.

Through the store decentralization, Macy's said it will eliminate nearly 40% of executive positions, and that a higher proportion of the job cuts would be in central office positions. About 1,400 jobs will be cut at the Macy's West headquarters offices in San Francisco; with nearly 850 cut in regional headquarters in Atlanta and 600 in Miami.

Other cash-saving moves will be to forego merit raises this spring and reduce its level of matching employee 401(k) contributions.

The Cincinnati-based company said Monday it aims to save about $400 million annually starting next year and $250 million this year. Macy's expects to take a $400 million charge, mostly this year, for severance and relocation costs.

With the new structure, the company will have one buying organization, one