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July / August '99

Deal Brings Sears Back to State Street

Fran Spielman, City Hall Reporter
The Chicago Sun-Times, August 31, 1999

Sears, Roebuck and Co. will return to State Street after a 16-year hiatus, thanks to a $12 million city subsidy from taxpayers, who will be protected even if the store closes or the building is sold.

Knowledgeable sources said Monday that the deal clears the way for Sears to open a 250,000-square-foot store on five floors of the building on the northwest corner of State and Madison, and it commits the retailer to match the city's investment dollar for dollar by pumping $12 million into its six neighborhood stores.

The Chicago Sun-Times reported that offer in March in response to Mayor Daley's demand that the neighborhood stores be improved. At the time, it appeared the deal would sail through City Hall with two former mayoral chiefs-of-staff--John Satalic and Roger Kiley--representing Sears in the negotiations.

But the deal nearly fell through amid concerns about what could happen to the city's investment if developer J. Paul Beitler turned around and sold the building or if Sears decided at a later date to close the new store.

The result of those concerns is a complex agreement that calls for Chicago taxpayers to be protected by a letter of credit, according to three sources familiar with the negotiations.

If Sears decides to vacate the store within 15 years, the city will get a "majority" of its subsidy back. If Beitler opts to unload the building, a portion of the money will also be returned, sources said.

Neither Beitler nor Sears spokesman Tim Conway could be reached for comment Monday. Their companies have reportedly agreed to bear the upfront cost of opening the downtown store. As developer and owner of the property, Beitler would, over time, receive $12 million in real estate tax breaks from the city.

In return, Sears would agree to upgrade the six Chicago stores within a year: at 1601 N. Harlem; 4730 W. Irving Park; 1334 E. 79th; 6153 S. Western; 7601 S. Cicero, and 1900 W. Lawrence.

For more than 51 years, Sears anchored the south end of State Street with an eight-level, 512,000-square-foot store at State and Congress. That store, which was Sears' first in a downtown business district, closed in 1983. The building at State and Madison, a former Boston Store, now houses a Walgreens drug store, one of three on State, which would be displaced.

The return of Sears to State Street is the most ringing endorsement to date that a street once known as "that great street" is on the rebound.

Said Ted Ratcliff, general manager of the Palmer House Hilton and co-chairman of the Greater State Street Council, "Sears is a great retailer. We're excited to have them coming back to the street."

Broken Promises by Another Company

The Chicago Tribune, August 29, 1999

The Chicago Tribune, Sunday, August 29, 1999 Business Section featured and headlined "A corporate pension headache." The article chronicles employee reaction to IBM's recent shake-up of its pension plan for its 140,000 U.S. employees.

Following is a quote of particular interest to Sears retirees:

"What this is all about is broken promises," said Karen Ferguson, an attorney and head of the Pension Rights Center, an activist group in Washington, D.C. " It is companies changing the rules of the game late in an employee's career, when they are particularly vulnerable." end quote.

Don't you just wonder how Ms. Ferguson would characterize a company that breaks a promise and "changes the rules of the game" for those who have been retired up to 20 years? I characterize it as an unconscionable act perpetrated by desperate and disillusioned senior executives. Hopefully, an act that will be reversed by a fair minded Judge.

Sears Roebuck Cut to Near-Term `Neutral' at Merrill

Bloomberg Data, August 25, 1999

Princeton, New Jersey -- Sears, Roebuck & Co. (S US) was downgraded to near-term ``neutral'' from near-term ``accumulate'' by analyst Daniel D. Barry at Merrill Lynch & Co. The long-term rating remained ''buy.''

WASHINGTON (Reuters) - The federal government proposed fines on Friday against major retailers Wal-Mart Stores Inc. (NYSE:WMT - news) and Sears, Roebuck and Co (NYSE:S - news), charging they had improperly shipped hazardous materials by air.

The Federal Aviation Administration said it proposed a fine of $55,000 against Sears for offering a battery to Airborne Express for shipment when it was not properly packaged or labeled. The package flew from Dallas to Wilmington, Ohio, in October last year where ground handlers noticed acid stains on the container's exterior.

The FAA said in a separate statement it was assessing a $50,000 penalty against Wal-Mart for offering a shipment of fire extinguishers that were improperly marked and prepared for transport from Hermiston, Ore., to Seymour, Ind. It did not say when the incident occurred or what air carrier was involved. Both companies were given 30 days to respond to the allegations. Airborne Express is a unit of Airborne Freight Corp. (NYSE:ABF - news)

Good Life at Great Prices, Will It Work?

Calmetta Y. Coleman
Wall Street Journal, August 18, 1999

Sears is setting aside "the softer side" in pursuit of the American dream according to Calmetta Y. Coleman of the Wall Street Journal article dated August 18, 1999. Every ad will close with a new tag line: "The Good Life at Great Price." Mark Cohen, Sears executive vice president of marketing, stated "Sears truly enables the American Dream unlike any other retailer." The new campaign is also highlighting credit according to Cohen.

Linda Garrison said "we're trying to pull together a whole picture of the store, so people can see all the ways their lives intersect with Sears." Ed comment: A new strategy? Had Sears decision makers been with company for more than a few months they would have known Sears successfully promoted the "house" for over 70 years. This is classic example of what happens to a great company when its corporate memory is erased.

Mr. Cohen, takes full credit for the new campaign. we wish him well. Sears stock price languishes near six year lows. Sears shareholders deserve a long overdue return on their investment.

Editor's Comment: While Mr. Cohen wasn't cost specific, he stated the company will spend roughly the same on advertising and marketing this year as it did last year, about $1.5 billion. According to W.J.S., WalMart spent about $405 million on advertising. WalMart's annual sales will near $140 billion, Sears $40 billion, including credit. Sears jettisoned Parts America and Home Life last year. How can Sears justify spending such a huge sum of money, when sales are soft and cost cutting is the name of the game at Hoffman Estates?

Sears Targets New Group with Appliance Line

Reuters News, August 12, 1999

She rakes in $150,000 a year. Her kids are grown, and she has money to burn. So why not burn it on a computerized convection oven?

That's what Sears, Roebuck and Co. is offering to a entice a whole new category of shopper -- the older and richer woman.

Starting this month, Sears, the largest U.S. appliance retailer with a 35 percent market share, said it will roll out a new Kenmore Elite line of appliances -- high-end ranges, washers, dryers, ovens and refrigerators that don't resemble grandma's domain.

The oven is convectionized; the stove, computerized; the washer has "Catalyst" cleaning action; and the refrigerator -- well it's sooo cool.

Chief Executive Arthur Martinez said that Sears has very high expectations for the line and expects Elite to start generating revenues of up to $500 million a year before too long.

The Kenmore Elite dishwasher will sell for $819. The refrigerator, depending upon color, will start at $1,699. The washer begins at $669.99. Cooking appliances, including microwave ovens, ranges and stove tops, will range from a cool $649 to a hot-to-the-touch $2,229.

The Kenmore line comprises about 60 percent of Sears' total appliance sales, Martinez said. Appliances count for about 10 percent of the company's annual $41 billion in revenues.

The Elite line is targeted at the woman between the ages of 35 and 55 who earns up to $150,000 a year and has teenagers or grown children, and for whom "quality is more important than mere price," said Mark Cohen, Sears executive vice president of marketing.

Editors Note: Since when did we start catering to women who earn up to $150,000.

Orchard Hardware & Garden turned out to be a less fruitful concept than Sears, Roebuck and Co. had hoped.

The Hoffman Estates-based retailer put the Orchard name on 10 Sears Hardware stores in Columbus, Ohio, area two years ago to see if a broader line of home and garden products would attract a bigger share of female shoppers.

But the new concept didn't take root. Research showed that shoppers preferred the Sears name and its in-house products such as Craftsman tools to Orchard or other competitors.

"Our Columbus customers voted on the shopping experience they want and it was Sears Hardware," said Sears spokesman Chuck Merydith.

Columbus was the only market where Sears tested the Orchard name outside of its home state of California.

Sears bought Orchard in 1996, attracted by the chain's broad selection of house wares, nursery supplies and hardware.

As part of the changeover, the Columbus stores, which will return to using the Sears name, will offer a bigger selection of Craftsman tools and will add Weatherbeater paint and Kenmore water heaters.

The 76 Orchard stores in California will continue to operate under the Orchard name.

Dear Senator, 

I am writing this letter as an officer of the National Association of Retired Sears Employees, (NARSE), headquartered in Chicago, IL and represents an organization of over 133,000 retired Sears Roebuck and Co. employees.

While we are not opposed to a moderate tax cut, we would like to propose this tax bill give relief to the maximum tax rate on Social Security benefits our members earned and enjoy. Retirees are continually being subjected to decreased benefits by their previous employers, under the CEO's desire to "increase shareholder value" at the expense of their retirees. All benefits not covered under ERISA are now methodically being decreased or eliminated.

The tax bill, as proposed, gives tax relief to corporations and wage earners, but little is being done to help those currently on Social Security, whose major other income is from pensions and/or investment income. The tax reductions corporations receive will not trickle down to their retiree populations, since corporations like Sears, look upon their retirees as "burdens" and as a large liability to their Balance Sheet, anxiously awaiting to be turned into Profit. We, NARSE, ask you to consider eliminating or substantially reducing the tax liability on Social Security that results from pensions and investment income. Sincerely,

Ben Cubito 
VP, Government Relations
NARSE

Sears plans to inundate consumers with marketing and merchandise initiatives this fall, as it tries to shore up its sagging retail performance. A new tagline for its ad campaign will break in late August. Expansion of its private label apparel collection will be rolled out in half of the chain by October. Tour sponsorship, including one for the pop group Backstreet Boys, will kick off. And a value-pricing initiative and credit card will be touted heavily.

"Our marketing message will undergo manifest changes in the second half," said Julian Day, Sears's chief financial officer. "We'll emphasize newness, urgency and value. We've got a great dal more substantive things to shout about in the second half."

It will be a critical five months for the Hoffman Estates-based retailer, whose much-touted retail turnaround has stalled. The second quarter performance, release (last) Thursday, provides ample evidence of Sears' woes.

Second-quarter earnings totaled $331 million, or 86 cents a share, compared with 336 million, or 85 cents a share, in the year ago period.

The performance beat the average estimates of analyst surveyed by First Call Corp. by a penny.

However, the improvement came in Sears credit business, where revenues were down but operating income rose 10.1 percent and Sears was able to lower its provision for uncollectables by 39 percent over a year ago.

Retail operating income plunged 13.1 percent for the quarter. "The results exhibit a trend very distinct from our plan going forward for the rest of the year," Day said in a conference call with analyst.

The new ad program, on which Sears remains tight-lipped, will replace the "softer side" campaign, a pitch that resonated well with consumers but outlived its effectiveness.

Analyst say they'll know in the fourth quarter whether it was worth the buildup.

"We've been waiting for this big ad campaign, and hopefully that will draw some traffic into their stores," said Asma Usmani, who follows the company for Edrward Jones. "What Sears has failed to do is get the value part of the equation, that message, to consumers."

Merchandise such as lawn and garden products and major appliances continue to sell well at Sears. The problem: Profit margins on big-ticket items such as washers and dryers pale compared with what Sears can make from selling more clothes.

Reuters News, July 23, 1999

CHICAGO, July 23 (Reuters) - A.G. Edwards said Friday it downgraded Sears, Roebuck and Co. to maintain from accumulate.

-- No further details were available, but A.G. Edwards said the company was being covered by a new analyst, Bob Buchanan.

-- On Thursday, Sears, the No. 2 retailer in the United States, reported second quarter earnings of $331 million, or $0.86 per share, narrowly beating analysts' consensus estimate of $0.85 a share.

-- The stock was down 3/16 at 40-15/16 Friday afternoon.

Gregory Crawford
Reuters News, July 22, 1999

CHICAGO, July 22 (Reuters) - Sears, Roebuck and Co. , the nation's No. 2 retailer, said on Thursday its second-quarter operating earnings rose 4 percent to $331 million, helped by strong results in its credit business.

Sears said the earnings translated to 86 cents per diluted share, topping analysts' consensus forecast of 85 cents as compiled by research firm First Call Corp.

In the 1998 second quarter Sears earned $336 million, or 85 cents per diluted share, including a special gain of $18 million, or 5 cents a share, from an accounting change.

Second-quarter revenues slipped to $9.99 billion from $10.31 billion a year earlier. The 1998 figure included Sears' HomeLife furniture and Western Auto stores, which it has since sold. Excluding those units, retail revenues rose 2.7 percent.

"Our actions and investments in our credit operations have been successful in significantly improving the quality of our portfolio and our financial performance in this area," Chairman and Chief Executive Arthur Martinez said in a statement.

Revenues from credit fell 13 percent in the quarter, to $973 million from $1.12 billion a year earlier, but operating profits at the unit climbed 10 percent to $315 million from $286 million.

The provision for uncollectable accounts was $215 million in the second quarter, down 39 percent from $355 million.

But the company's retail and service businesses struggled, with domestic same-store sales rising just 1 percent in the second quarter compared with 2.9 percent in the 1998 quarter.

"Results of credit were not reflected in the quarter by retail and services," Chief Financial Officer Julian Day said in a conference call with investors, analysts and reporters.

Total retail sales fell 3.5 percent, to $7.25 billion from $7.51 billion a year ago, and operating income dropped 13 percent, to $173 million from $199 million.

Day said Sears continued to expect that new marketing initiatives scheduled for the second half of the year will bear fruit and added that the company would focus on cutting expenses but not at the expense of customer service.

"During the second half, you ought to expect to see us increase our focus on the SG&A (selling, general and administrative) side of the business so as to allow us to remain competitive," he said.

"That focus on cost at this company will be finely focused on areas that certainly do not harm -- and in some ways will be used to enhance -- the customer experience," he said.

Revenues from Sears services, which include home and appliance repair, rose to $808 million from $798 million but operating income fell to $94 million from $97 million.

The company, based in Hoffman Estates, Ill., operates nearly 850 full-line stores and more than 2,100 specialty stores. Sears shares were off 50 cents at $41.69 in afternoon trade on the New York Stock Exchange.

CHICAGO (Reuters) - Sears, Roebuck and Co., the second largest retailer in the United States, is expected to meet second quarter earnings expectations, mainly because of strength in its credit business, analysts said.

Over the last three months, the Hoffman Estates, Ill.-based department store chain has continued to suffer from weak sales, but better results from its credit operations has helped the company post modest earnings gains.

Thursday, Sears said its domestic same-store sales in June rose 1.9 percent, the high end of most estimates. But total domestic store revenues slipped 3.1 percent to $2.8 billion from $2.9 billion in June 1998.

``There will probably be a very moderate increase in sales, which is consistent with what we've seen now for several quarters,'' retail industry analyst Richard Church at Salomon Smith Barney said, referring to Sears' second quarter results.

``Gross margins will be under a little pressure, but they've probably done a good job controlling expenses,'' he said. ``I don't expect any change in credit -- a little improvement year-over-year.''

Sears operates nearly 850 full-line stores and more than 2,100 specialty stores.

Church said he estimates Sears will earn 87 cents a share in its second quarter, two cents better than the consensus of analysts surveyed by First Call Corp. In the second quarter of 1998, Sears earned 85 cents a share, including an extraordinary gain of 5 cents a share. Revenues were $10.25 billion.

Sears declined to comment on profit expectations.

Patrick McCormack, who follows Sears and other retailers for Deutsche Banc Alex. Brown, said he also expects 87 cents a share earnings and expects the company to meet his forecast.

``Throughout (the second quarter) Sears has not seen any tangible improvement in both mall store sales or in service revenues,'' he said in a recent report. ``Despite these struggles, we believe that ongoing improvements in credit write-off trends along with reductions in the credit reserve, will ultimately enable Sears to meet our profit expectations.''

Analysts said that while the second quarter earnings, expected to be released the week of July 19, are not likely to hold any surprises, the third and fourth quarters will be closely watched for signs the retailer's new marketing initiatives are producing results.

``That's the critical period,'' Church said, referring to the second half of the year.

One analyst who asked not to be named said that if sales numbers from Sears begin to improve in the next several months, the stock, which has spent most of the year below $50, could rally.

Sears stock closed up 11/16 to 46 3/4 on the New York Stock Exchange.

 HOFFMAN Estates, Ill.- Arthur C. Martinez, chairman and chief executive officer of Sears, Roebuck & Co., is a man on a curious mission: trying to fashion his second turnaround at the big retailer in less than eight years. Which raises the question: If the first one was truly a turnaround - Mr. Martinez once called it "one of the most dramatic in business history" - why is a second one necessary? A closer look at Sears suggests its mid-1990s rebound in sales growth and profits may have masked for a time a long-term competitive decline at the retailer. And that decline now threatens to accelerate. There's no denying the "Softer Side of Sears" ad campaign was catchy, the merchandise was freshened up, and Sears's 850 department stores were made more presentable under Mr. Martinez. But what mostly brought him the favorable results was a goosing of the Sears credit-card operation, pulling Sears stores millions of new customers with billions of dollars of new buying power. Bad Debts Too many of them, it turned out, couldn't pay their bills. And only when the rising losses forced Mr. Martinez to pull back on the credit throttle did a clearer picture begin to emerge of the Sears predicament: Competitive forces in the retailing and credit-card industries are driving a wedge between the two businesses that for decades nurtured each other at Sears. Its stores for years have been outgunned at the low end by better-managed discounters Wal-Mart, Target and Home Depot. And now the sears credit card is being pummeled at the high end, as Visa-and MasterCard-issuing banks pick off many of its middle-class customers. The card thus does less for the stores than it once did. The percentage of Sears retail sales made on the Sears card slipped to 48% in 1999's first quarter, down from a peak of more than 60% in 1996, when Mr. Martinez had the credit throttle wide open. Sales at stores open at least one year rose just 1.1% last year, while, amid the best retail climate ever, rivals posted an average increase of 4.4%. Meantime loan balances, which produce most of Sears's profits, fell 2% last year, the first decline in Mr. Martinez's tenure. 'Unequivocally Real' Mr. Martinez, 59 years old, says the resurgence at Sears in the mid-1990s was "unequivocally real," and he prefers to call the more recent decline a "stall point" in a "continuing transformation" of the company. He rejects any suggestion that the Sears credit card played any greater role in the turnaround than improvements in the underlying retail operations. Pointing out that he restored the retail business to profitability after it had a loss of 266.8 million in 1992 Mr. Martinez credits the revival to his strategy of focusing on apparel lines and aggressively cutting costs. He acknowledges the tough competitive situation Sears faces in retailing and in credit cards. But he insists Sears isn't being pushed out of any demographic segments in either business and says the card can still support the stores. The recent downturn, he says, is the result of changes in the marketplace over the past few years: Discounters have become "more credible" rivals in apparel, while the higher- end department stores are making themselves affordable to Sears customers by running more sales. New Ads, Lower Prices Measured responses, not radical changes, are needed to deal with the new competition, Mr. Martinez says. He plans to cut prices on basic apparel items in a bid to get closer to, but not beat, the discounters' prices. A new ad campaign will pitch Sears as a place to buy brand-name fashions at lower prices. And Sears is test-marketing lower rates on the store card fore people with strong credit records. (Sears ha always rewarded card users with merchandise discounts.) These moves will rekindle growth, Mr. Martinez says. "I want to see this company back on the earnings curve we had in the '96-'97 period," he adds. Why did it seem to so many that the Sears problem was fixed? A part of it was certainly Mr. Martinez's salesmanship. Arriving in late 1992 from Saks Fifth Avenue, and following a generation of Sears management that was in apparent denial about the retailer's problems, he seemed a breath of fresh air. Moving quickly, Mr. Martinez closed money-losing stores and the famed Sears catalog operation. He started remodeling the remaining stores, expanding selling space and boosting the share allocated to apparel. He even started referring to the Sears customer as "she." Less remarked upon at the time was his acceleration of credit-card marketing. Sears mailed out millions of pre-approved card offers and hawked the card at tables positioned at store entrances. New accounts soared to a peak of 6.5 million in 1996 from 3.7 million in 1992. The increase in credit fueled a rise in store sales. Sales at stores open at least a year surged 8.9% in 1993, compared with a 3.6% rise in 1992 and outpaced industry averages every year until 1997. More of those sales were charged to the card than ever before 60% in 1996, up from historical rates in the mid-50% range. Between 1992 and 1997, total outstanding balances on the Sears card grew to $28.9 billion from $20.3 billion. In 1998, the credit business accounted for $1.1 billion of Sears's profit, compared with $734 million from retailing. Wall Street cheered as the twin engines of Sears roared in unison. Sears shares climbed 120% to a peak of $65 on Aug. 7, 1997, from $29.4375 on June 30, 1995, the day Sears spun off Allstate Insurance Crop., the last of its financial ventures. "The turnaround has been nothing short of a miracle," Edward Weller, then an analyst for Robertson Stephens & Co., in 1997 told Barron's, the financial weekly published by Dow Jones & Co., which also publishes The Wall Street Journal. Now at Sutro & Co. in San Francisco and no longer following Sears, Mr. Weller says: "The turnaround was real. It's just not continuing." Envy of the Industry With more holders than any other store card, the Sears card was long the envy of the retailing industry- and of some in the banking business as well. Mr. Martinez acknowledges that the magnitude of the Sears credit-card operation put the company in competition with bank-card issuers. But just as Sears was increasing its reliance on the card, banks were wooing lower-income prospects-once a group Sears had largely to itself- with Visas and MasterCards with lower interest rates than the stiff 21% Sears charges. All that competition made things ugly in the credit business. In the contest for new borrowers, Sears tended to get stuck with people who had more trouble paying their bills. By 1998, the default rate on the Sears card had sky-rocketed to 7.35% from 3.57% in 1992. By comparison, the loan-loss rate for Visa and MasterCard issuers was 6.56% in 1998, according to the Nilson Report, an industry publication. Household International Inc., a leading issuer of store cards for retailers such as Best Buy and Costco, reported a loss rate of 5.65% on its $10.4 billion in store-card balances in 1998. As more Sears-card holders filed for bankruptcy, the company's collection tactics came under legal scrutiny. Earlier this year, Sears pleaded guilty to criminal fraud for illegally collecting the debts of cutomers who had filed for bankruptcy. Sears paid a total of $475 million in fines and civil settlements arising from the practice. That incident further tarnished a corporate image already smudged by charges of foisting unneeded repairs on Sears Auto Center customers. The company paid $15 million in 1992 to resolve those charges, without admitting guilt, a Florida attorney general's probe of complaints that it sold used batteries as new. And last month, Sears was hit with a lawsuit in an Illinois state court alleging that it had charged customers for a tire-balancing service that it never performed; Sears denies the allegations. Card Holders Defect Meanwhile, longtime, better-heeled Sears-card holders were defecting. Many shifted balances from Sears cards to bank cards with so-called "teaser rates" as low 3.9%, or to tax-deductible home-equity loans. Sears offered nothing in response. Shirley Derrick, 28, a development manager for a children's museum in Milwaukee, carries about $4,000 in bank-card balances, but none on her Sears card. A few years ago she transferred "at least $500" from her 21% Sears card to a MasterCard charging only 13%. "Definitely, the interest rate is a big factor," she says. Her friend, Shawn Verdoni, ditched her Sears card after the stores started accepting bank cards in 1993. Ms. Verdoni, 31, a computer programmer, says she and her husband decided to keep only one credit card, a General Motors branded MasterCard that piles up points toward a car purchase. The Sears miracle fizzled when Mr. Martinez, hit by rising loan losses, had to cut back on new credit accounts in 1997, to 4.2 million. As the credit business sputtered, retail sales flattened out. For the 12 months ended July 1, Sears stock lost 23.8% of its value, while an index of department store retailers compiled by Media General Financial Services Inc. gained 26.8%. In Big Board composite trading Friday, Sears closed at $47,6875, up 37.5 cents. 'Lost Opportunity' By viewing its credit-card operation as a feeder for its stores, rather than as a stand-alone finance company that also helps the stores, Sears may have cost shareholders dearly: With $28 billion in credit-card loans, Sears has a stock-market capitalization of about $18 billion, Providian Financial Corp., San Francisco, a lender to lower-income consumers, has about $14 billion in credit card and other loans, and a market capitalization of about $14 billion - and Providian because it is growing, and the company maintains that growth by offering a variety of loan products, including low-interest Visas and MasterCards, to keep its customers and swipe those of other lenders. Sears doesn't. "There is a lost opportunity there," says Robert Hammer, chairman of RK. Hammer Investments, a credit card investment banking firm in Thousand Oaks, California. But Sears faces a conundrum: giving its store-card customers a Vis or MasterCard, accepted everywhere else, would probably boost loan volume. But would they still shop at Sears? In many ways, Sears is back to square one. As it was when Mr. Martinez arrived, Sears is a middle-market department store unable to compete with discounters on price or match the array of fashionable brand names at high-end department stores. Finding a Solution For a time, it seemed that Sears had found a solution that had eluded its fellow middle-market chains, J.C. Penney Co. and Montgomery Ward & Co. But as its retail and credit business diverge, Sears rejoins them in the slow lane. Growth in retailing these days comes at "big-box" discount chains like Wal-Mart Stores Inc. and Target Stores that offer customers low prices and one-stop shopping for everything from socks to soda. Minneapolis-based Dayton Hudson Corp., for example, has funneled most of its capital spending away from its traditional department stores and into its Target unit for more than a decade. Sales at Target have tripled during that time. Specialty stores also attract new customers with appealing new formats. Old Navy, Gap Inc.'s low-priced clothing concept, didn't exist six years ago, but is rapidly crushing its competition with 407 stores and plans to open another 130 this year alone. When Mr. Martinez took charge of the Sears stores in 1992, the company had not big-box entry. Playing the cards he was dealt, Mr. Martinez invested $4.2 billion in Sears's fleet of 850 mall-based department stores between 1993 and 1998. That investment has yielded a 31% increase in annual store sales - a fraction of the gain Dayton Hudson's Target investment has yielded. Nor has Sears come up with compelling specialty concepts. In modest forays beyond the mall, including furniture stores and hardware shops, haven't been strong enough to overpower competitors the way Gap's have. Still, Mr. Martinez sees no need to change the format of Sears stores. Sears won't start selling food, toothpaste or other household staples that make discounters Target and Wal-Mart one-stop shops for time-pressed consumers. Nor will it switch to the front-of-the-store checkout lanes and shopping cards that encourage Target and Wal-Mart customers to cruise the aisles and load up. Mr. Martinez acknowledges that consumers' preferences and competitors' tactics have changed. But he says Sears needs only to make "adjustments and refinements," like a sailboat skipper. "If you race in sailboats, you know two things," says Mr. Martinez, who enjoys the sport. "The wind and water are always changing, and the boats you're racing against are always changing their strategy."

Editor's Note: Joe Cahill's Wall Street Journal July 5, 1999 column "The Softer Side" tells a compelling story of what Arthur Martinez once proclaimed to be "one of the most dramatic (turnarounds) in business history" appears to have been short term at best. Cahill asks an appropriate question, if the firswt turnaround was so dramatic "why is a second one necessary?" Martinez, by his own statements, should arise a flag of concern for shareholders. He insists that Sears "isn't being pushed out of any demographic segments", while at the same time Target is moving aggressively to capture the exploding Hispanic market. He admits discounters have become "more credible" rivals in apparel "while the higher-end department stores are making themselves affordable to Sears customers by running more sales." He has positioned Sears in a shrinking box, with limited internal growth opportunities. His plan is to cut prices on basic apparel items in bid to get "closer" to, but not "beat" the discounters' prices. In other words . . . we will get a little closer to being competitive but not really competitive. By every indication his touted Off The Mall strategy for growth has hit the wall. Parts America (Western Auto) along with Homelife have been sold at a loss and another touted for growth area, Hardware Stores, grew a net 10 stores in 1998 while Orchard Supply's failed in the Midwest. Credit, Sears big profit producer, still reports higher than industry average writeoffs. Today, less than half of the Sears sales are being rung up on Sears Credit. A far cry from the good old days of 60%+. As shareholders, we wish Arthur well. However, if he would articulate a clear, consistent and compelling strategy, we could all sleep better knowing "our" company is in "good hands".

Sears, Roebuck Sets Cost-Cutting Push

Crain's Chicago Business, July 5, 1999

Sears, Roebuck and Co. has imposed a hiring freeze at its Hoffman Estates headquarters, a move that is linked to implementing a significant cost-cutting plan, according to sources familiar with the company. The hiring halt, which began in June and was scheduled to last a month, has been extended to July 15, sources add. Last month, Chief Financial Officer Julian Day told Wall Street analysts that the retailer was weighing expense reductions in areas that would not interfere with customer service. A Sears spokeswoman declined to elaborate on Mr. Day's statement or to confirm the hiring freeze, but said the company "is not weighing significant staff reductions."

Editor's Note: Assuming the rumors are correct and the Hoffman Estates Sears organization is now 6,000+ and the organization was 4,000+ after the 1998 ERIP… there has been a 50% increase under Martinez's tenure. How will this meteoric rise in associates be rationalized? How will Chairman Martinez justify another reserve, should one be needed, to cover the cost of firing/retiring hundreds of headquarters associates? Which of the numerous Presidents are accountable for "managing" headquarters expense"? Is this another case of acting on "faulty advice" proposed by outside consultants? Chairman Martinez has publicly denied speculation that there will be a reduction in force at Hoffman Estates. Are C.E.O. Martinez and C.F.O. Day on the same wave length?

News from Sears Retiree Center

July 3, 1999

John Sloan, Sears Senior Vice President Human Resources has informed NARSE of the positive actions being pursued to better serve Sears retirees. o Because there were some issues in 1998 regarding response times to telephone calls placed to the Retire Service Center, the company has responded. To raise service levels, the RSC increased staffing by 33%, from 15 to 20 employees, at an expense to Sears of more than $100,000. o The RSC generally provides good service, according to satisfaction surveys. Nonetheless, we are considering other vendors. The current vendor, MetLife, is not Y2K compliant. o We are considering a change in the timing of the annual benefits open-enrollment election, from autumn to mid-year. This change would allow retirees to contemplate important decisions earlier in the year, before the beginning of the busy holiday season. o We are also strongly considering the suggestion to lengthen the open-enrollment period which would allow retirees more time to think about these decisions. o As we know, rates for health care insurance are increasing rapidly. As we have done successfully in the past we will aggressively negotiate the best medical rates possible. o Sears plans to issue three newsletters a year for retirees. We are drafting the second issue now.