Breaking News
April 2002 - October  2002

Sears Names New CFO
Reuters - October 4, 2002

Sears, Roebuck and Co., the No. 4 U.S. retailer, Friday said it promoted Glenn Richter, its senior vice president of finance, to the role of chief financial officer, replacing Paul Liska.

Liska was named executive vice president and president of credit and financial products.

Liska, who joined Sears as chief financial officer in June 2001, succeeds Kevin Keleghan, who has left the company. He will retain his responsibilities for overseeing Sears' information technology, supply chain, real estate and corporate procurement functions.

Richter joined Sears in 2000 as vice president and controller. Prior to that, he was chief financial officer for St. Paul Cos. Inc.

Shares of Sears closed up 5 cents at $37.64 in New York Stock Exchange trade.

Health Insurance Cuts Hurt Retirees

By Julie Appleby, USA TODAY - October 3, 2002

Harry Nieman always thought he'd retire and Medicare would cover his health care. But his bank folded the division he worked for when he was 64 — too young for Medicare.

And even though he had put in 10 years at the bank, he didn't qualify under its retiree health benefit plan.

"It comes as a shock. You're unprepared for the expense," says Nieman, who suddenly found himself paying $600 a month for insurance coverage for himself and his wife — a plan that cost him $100 a month as an employee.

An increasing number of Americans will find the same thing when they hit retirement age: Fewer companies are offering assistance with health coverage after retirement — or are charging retirees an increasing share of the cost.

As health care spending continues to rise — employers are seeing double-digit inflation in insurance premiums this year — more companies are likely to scale back on retiree coverage, especially for new hires. But some companies are also cutting benefits for those already in retirement or increasing the amount the retirees must pay.

The cutbacks represent another challenge for a country where too few people are saving enough for retirement costs. Many are not factoring in health care costs at all.

"These are not protected benefits, like pension plans," says Randall Abbott, senior consultant with consulting firm Watson Wyatt Worldwide. "We can no longer assume that retiree health benefits will be a given."

Recent studies show:

Only 34% of large companies offer retiree health coverage, down from 66% in 1988, according to the Kaiser Family Foundation. Only 5% of small firms with fewer than 200 workers offer coverage. Among large companies, 29% offer early retirees (those younger than 65) health coverage, according to the Mercer/Foster Higgins survey of health plans. Of large public-sector organizations, 77% offer early retirees coverage. Benefits are declining. Under plan provisions already in effect, retirees will shoulder 90% of their total medical costs by 2031, according to a Watson Wyatt survey. "I don't know of anyone who has medical coverage as a retiree," says Ron Tipton, who worked in investment services before retiring. He now lives in Downingtown, Pa.

He was lucky, Tipton says, to have served in the military during the 1960s, qualifying him for care through the Veterans Administration. "That was the reason I was able to retire early," Tipton says. Without VA coverage, Tipton says he would have to go back to work — just for the health benefits.

Employers are facing rising health care costs for both current employees and retirees. Coverage for retirees must be listed in accounting records as a current liability — driving down shareholder value in many companies.

"We have a double whammy: health care inflation coupled with a recession," says Gregg Lehmann, president and chief executive officer of the national Business Coalition on Health. "The first line of defense is to cut back on these rich benefits, not just with retirees, but with active employees."

Currently, it costs employers an average $6,642 a year to give early retirees health coverage and $2,717 for those who qualify for Medicare, according to a survey by Mercer Human Resource Consulting.

At Con Edison in New York, retiree health costs alone run up a $70 million annual tab, says Hector Reyes, director of employee benefits.

But making changes to those benefits is very sensitive, he says.

"Basically, it's, 'What kind of commitment are we making to retirees?' " he says. So far, the company has chosen to increase the amount retirees pay for care, rather than drop coverage.

Nationally, however, Reyes says employers will be under increasing pressure.

"If we keep seeing the current cost trend, we'll see more and more employers terminate the programs," he says.

Benefit consultants say several changes need to occur.

"We've got to get our arms around health care costs, change public policy to encourage employers to stay in the retiree medical game and encourage everyone to think and plan more carefully about what they'll need in retirement," says Joe Martingale, national leader for health care strategy at Watson Wyatt.

Medicare also needs to change, Martingale says, so that prescription drugs are covered. The program also needs incentives for patients to use the most efficient forms of care.

Planning for retirement is tough already for many Americans. Financial planners say not enough are considering their health care costs in calculating how much money they'll need.

Nieman and his wife paid the $600 each month for medical insurance until they hit 65 and qualified for Medicare.

Now the Pittsburgh couple's monthly payments have dropped to about $400, which covers Medicare and a supplemental policy, which pays some Medicare deductibles and charges, although it does not cover prescription drugs.

"When you think about it, that's about $5,000 a year," Nieman says. "If you're on Social Security and a small pension, that's a big bite."

He recommends that workers factor in health care costs when planning their retirement.

"When you say, 'I only need so many dollars when I retire,' you forget about all these expenses you never incurred before," Nieman says, "especially if you had all these health benefits when you were employed."

Sears Shifts a Cost to 2nd Quarter

By Sandra Guy - Business Reporter - Chicago Sun-Times - October 3, 2002

Sears, Roebuck and Co. on Wednesday played down its shift of $191 million in costs related to an accounting change to the second quarter from the first after discussions with regulators.

But an analyst who tracks Sears' cash flow is warning that the Hoffman Estates-based retailer is still maintaining too low a reserve for uncollectable credit- card accounts even as the company has posted two straight quarters of negative cash flow.

Sears' accounting change increases reported first- quarter results by 59 cents a share to 34 cents, and lowers second-quarter net income to 71 cents, according to amended filings with the U.S. Securities and Exchange Commission.

The move won't affect the earnings estimate for the year, spokeswoman Peggy Palter said.

Sears first announced the cost in July, when the company said it changed the way it accounts for the allowance of uncollectible credit-card accounts, to be more conservative.

The decision to record the expense in the second quarter instead of the first came as a result of a "regular review" with the SEC, Palter said.

Sears has boosted its earnings expectations twice this year, and now expects 2002 profit to rise to $5.15 a share from $4.22 last year.

But Michael Markowski, director of research for StockDiagnostics.com, said Wednesday that Sears is risking uncollectible credit-card debt as the economy sours.

He noted that Sears reported $1.3 billion in revenue in the most recent quarter from financial products and services, consisting mostly of its Sears and Sears Gold MasterCard credit cards. But the same product line burned up $1.16 billion in operating cash in order to cover the credit-card receivables--the money shoppers owe when they use Sears credit cards, Markowski said.

Sears spokeswoman Palter countered that the quality of Sears' credit-card portfolio is excellent, in particular its $8.5 billion in Gold Mastercard receivables.

"We don't think there is any credibility to (Markowski's) assessment," she said.

Also Wednesday, Sears said Cendant Corp.'s Avis Rent A Car System will run Sears' licensed rental-car business, pushing out Budget Rent a Car.

Sears Car Rental locations will be converted to Avis operations, and customers will be able to use their Sears credit card to rent from Avis, Sears said.

As many as 45 Avis locations are expected to open at Sears facilities by the end of January, with at least 100 more to follow over the next three to five years, Sears said.

Sears shares fell $1.16, or 2.89 percent, to $39.01 in New York Stock Exchange composite trading. They have declined 18 percent this year.

Contributing: Bloomberg News

Sears Restates its 1st-half Results

By Susan Chandler, Tribune Staff Reporter - Chicago Tribune - October 3, 2002

SEC discovers accounting error; profit unchanged

The Securities and Exchange Commission has directed Sears, Roebuck and Co. to restate its first-half financial results to more accurately reflect an increase in bad debt in its giant credit card portfolio, the retailer said Wednesday.

The restatement affects the timing and manner in which Sears reported a $300 million pretax increase in potentially uncollectible money owed by its credit card customers.

Sears said it took action after "further interpretive guidance" from the SEC staff. The issue came up during a normal SEC review of Sears' filings, said company spokeswoman Peggy Palter.

Although the restatement did not affect Sears' net income for the first half, it reduced its earnings per share from operations, a number that Wall Street investors watch closely, and one that is weighed heavily in determining executives' incentive bonuses.

Despite a year of steadily declining sales, Sears has promised investors a 22 percent increase in annual operating earnings per share, an aggressive target that some retail experts doubt the company can hit.

As shoppers continue to shun its apparel offerings, the nation's third-largest general merchant has been ramping up its lucrative credit card business, adding more than $2 billion in new debt in the past year.

The credit card business is critical to Sears' success because it generates more than 60 percent of the company's profit. But it also can become a big drag on earnings, as it did in the late 1990s when delinquent accounts and bankruptcy filings soared.

Sears said Wednesday's announcement does not affect its earnings target because the charge was recorded as a non- comparable item, which is not included when calculating an operating earnings increase or decrease.

"We don't think it's a big deal. It's not going to change our estimates for the year. It does not change our guidance," Palter said.

Sears' investors weren't pleased, but they didn't panic either. The company's stock closed down $1.16 per share, or almost 3 percent, at $39.01, during a down day in the market.

According to its SEC filings, Sears decided this year that its method of figuring bad credit card debt wasn't as aggressive as that of some of its bank card competitors.

Sears opted to restate its first-quarter results to reflect an addition to its provision for bad debt. Although the Hoffman Estates-based retailer never issued a separate press release, the company mentioned the restatement in its second-quarter earnings release in mid-July.

Instead of adding the $300 million to the bad-debt provision, which is subtracted from income, Sears classified it as a change in accounting principle, a one- time item.

"Sears was trying to take something that was a change in estimate, which has adverse effects on income, and treat it as a change in accounting principle, which does not," said Roman Weil, accounting professor at the University of Chicago Graduate School of Business.

Companies may call something a change in accounting principle only when it alters the rules under which their financial statements are put together, such as switching inventory accounting methods, Weil said.

Upping the estimate for a bad-debt provision wouldn't qualify under normal circumstances, Weil said.

In addition to changing where Sears accounted for the charge, regulators also directed Sears to move the charge from the first quarter to the second. That's a blow because Sears reported record net income of $420 million in the second quarter.

The company had to lop off $191 million of that, leaving it with about $229 million in second-quarter net income. Still, Sears was able to add the same amount to its first-quarter net income, leaving the total for the first half unchanged.

Copyright © 2002, Chicago Tribune

Sears Gives Budget the Boot

Lands' End Account Lands in North Carolina

By Jim Kirk - CHICAGO TRIBUNE - October 3, 2002

Lands' End, the Dodgeville, Wis.-based direct merchant that was acquired by Sears, Roebuck and Co. this year, is reaching all the way to Raleigh, N.C., to hire a new advertising agency.

The apparel and home-furnishing retailer named McKinney & Silver, owned by French advertising holding company Havas, as the new agency on its $20 million advertising account. The account had been with DDB Chicago and, briefly, at Element 79 Partners.

Though Lands' End initially had looked at Sears' agencies, the retailer quickly moved to a finalist list of non-Sears shops that included Minneapolis-based Carmichael Lynch and Dallas-based the Richards Group as well as McKinney & Silver.

The review was being watched closely because of Lands' End's new ties to Sears, which acquired the retailer for $2 billion in an effort to beef up its apparel business.

Lands' End, which built its business on traditional clothing styles sprinkled with a homespun image that seeped out through the pages of its catalogs, has not
hidden the fact that it wants to remain separate from Sears' image as much as possible.

As such, Lands' End went for a smaller shop where its advertising needs would command more attention than at a large agency.

"Lands' End has a legacy of connecting with our customers, and it is imperative that our agency partners understand and help further that relationship," said Lee Eisenberg, executive vice president and creative director at Lands' End. "We believe that McKinney & Silver, with its strong brand integration capabilities and cutting-edge creative, will take our business to a new level and will be an excellent fit with our company."

The win is a boost for new McKinney President and Chief Executive Brad Brinegar, who joined the agency this year after being bounced out of the top job at Leo Burnett USA following a clash with other top executives.

Lands' End put its account up for review shortly after it was moved from Omnicom shop DDB, which handles Sears competitor JC Penney, to Element 79 Partners.

A spokeswoman for Lands' End said that new creative should roll out in early 2003.

McKinney will handle all national print and broadcast advertising, including the retailer's core women's and men's businesses as well as licensed products, children's apparel and the Internet.

Sears Reclassification:
1Q Op Net Was $300M, or 93c/Shr

Dow Jones Newswires - October 2, 2002

HOFFMAN ESTATES, Ill. -- Sears, Roebuck & Co. (S) amended its first- and second-quarter results for the current fiscal year to reflect the reclassification of an accounting charge.

In a press release Wednesday, the retailer said it filed amended quarterly reports to show the refinement as a change in estimate rather than as a change in accounting principle. Originally, Sears recorded the $191 million charge as a cumulative effect of a change in accounting principle at the beginning of the year to include current balances and accrued credit-card fees.

With the amended results, the company increased its reported first-quarter income by $191 million, or 59 cents a share, and reduced its second-quarter results by the same amount.

Sears originally reported earnings of $300 million, or 93 cents a share, before items and $110 million, or 34 cents a share, including items for the first quarter ended March 30. In the second quarter ended June 29, the company earned $420 million, or $1.31 a share.

New York Stock Exchange-listed shares of Sears closed Tuesday at $40.17, up $1.17, or 3%. Before market open Wednesday, an Instinet spokeswoman said the stock hasn't traded yet but has been offered lower.

Teen Retailers Fall After Aeropostale Cuts Forecast
Oct. 1, 2002 Bloomberg

New York: Abercrombie & Fitch Co., Wet Seal Inc. and Hot Topic Inc. shares fell after rival mall-based retailer Aeropostale Inc. cut its profit forecasts, raising concern that teenagers are paring spending on apparel.

Shares of Aeropostale, whose casual fashions include flare jeans and hooded sweatshirts, tumbled 58 percent. Surfwear seller Pacific Sunwear of California Inc. declined 5.5 percent and Too Inc., a girls' clothing chain slipped 7.4 percent.
The number of customers visiting stores dropped in mid- September and is likely to stay that way, prompting steeper price cuts to push sales and to reduce inventory, Aeropostale said late yesterday. Slow mall traffic suggests retailers may resort to profit-eroding discounts to get sales during the critical holiday season, investors said.
"If one wasn't questioning the holiday sales season, one ought to now,'' said Marty Bukoll, an analyst at Northern Trust Corp., which manages about $330 billion in assets and owns shares of retailers including Aeropostale.

Wal-Mart to Open as Many as 465 Stores Next Year

Wal-Mart Stores Inc. will open as many as 465 stores next year in its biggest expansion ever, as the world's No. 1 retailer tries to increase grocery sales to weather pullbacks in consumer spending.

The plan includes as many as 210 supercenters, which offer fresh food as well as general merchandise, Wal-Mart said. For the current year, which ends Jan. 31, the discount retailer expects to have opened about 192 supercenters, more than its goal of 185, Treasurer Jay Fitzsimmons said on a conference call with analysts.
Shoppers, who are paring some non-necessities from their budgets, will come to Wal-Mart more frequently if they can buy groceries there at lower prices than at supermarkets, investors said. Wal-Mart's sales in July and August fell short of its projections, and the company reduced its forecast yesterday for September totals as shoppers purchase less clothing. "If the consumer wants to tighten the belt, there will be a lot more people who make the extra effort to go to Wal-Mart," said Elizabeth Shamir, an analyst with PNC Advisors, whose $56 billion in assets includes about 4.2 million Wal-Mart shares.

Saks to Cut Up to 295 Jobs, Merge Some Operations|

Birmingham, Alabama: Saks Inc. will cut as many as 295 jobs as the retailer combines its Younkers stores' headquarters with the Carson Pirie Scott division offices as part of its cost-reduction measures.

Saks, which owns Saks Fifth Avenue, will eliminate about 270 positions at the Younkers office in Des Moines, Iowa, and 25 jobs at a division furniture warehouse and distribution center in Green Bay, Wisconsin. The company has about 56,000 employees, spokeswoman Julia Bentley said.

Saks has ordered less and has combined support operations for its catalog, Internet and store divisions to pare costs. The Younkers move will reduce annual expenses by about $12 million before taxes starting next year, the company said. Saks will complete the consolidation by Feb. 1, the end of its fiscal year.

The company, based in Birmingham, Alabama, will have about $10 million in costs, mainly for severance and property write- offs, related to the consolidation. Saks will transfer some of Younkers's support functions as well as its merchandising and advertising departments to Carson Pirie Scott in Milwaukee.

Online Retailers Face Grim Holiday
October 1, 2002 - CRAIN'S Chicago Business
 

Holiday online sales won't be stuffing Santa's sack at quite the furious pace of holidays past, according to a forecast of the holiday shopping season from Jupiter Research.

According to Jupiter's findings, consumers will spend less on a per capita basis this holiday season, and overall online sales will increase at almost half the pace of last year despite a growth in the online population. As the Internet becomes more mainstream, so does the income level of Web shoppers, said Jupiter senior analyst Ken Cassar.

Mr. Cassar said overall online retail sales will grow by 17% this holiday season, down from the 30% increase from 2000 to 2001. At the same time, consumers are projected to spend an average of $306 online this season, down from the $313 average of previous years.

The analyst is also advising retailers to "push demand" to get consumers to shop before Nov. 15. "Consumers seem disposed to buy early," he said.

Fewer shopping days Online retailers have a lot at stake in persuading consumers to buy early. With six less shopping days this year, online retailers need a bigger window to get orders shipped to prevent a logjam come delivery time and a customer-service meltdown when orders are late and irate consumers are phoning and e-mailing to find out what has happened to their holiday gifts.

The analysts found one of the most effective ways of getting consumers to shop early is through e-mails.

"This is going to be the year of e-mail marketing," said Jared Blank, senior analyst, noting the price of e-mailing messages continues to drop. In addition, he said the use of HTML in messages gets one to 1.5 times as much response as text messages.

As for online holiday advertising, Juliana Deeks, associate analyst, said 85% of online advertisers have indicated they intend to maintain or increase their online advertising budget, with an average increase of 3% anticipated for holidays.

Convenient shopping

Other Jupiter Research analysts said they expect free and discounted shipping-and-handling charges to be big draws for the holiday, while at the same time consumers may be looking to the Web less for rock-bottom prices but a little more for the convenience of shopping.

The number of retailers leveraging their multi-channel approach is growing, the researchers said. Nineteen percent of retailers will allow online shoppers to pick up products at brick-and-mortar stores, the analysts said, up from 12% last year.

This story originally appeared on AdAge.com, the Web site for Crain's sister publication Advertising Age.

Will Martinez Succeed Martha Stewart?

By Susan Chandler - Chicago Tribune - October 1, 2002

AT RANDOM CORPORATE LEADERSHIP

The next Martha Stewart? Maybe, but can he bake?

Maybe he can't decorate a three-tiered wedding cake or slipcover a couch, but Chicago's Arthur Martinez may have the right stuff to stand in for Martha Stewart in the corporate arena.

Retail and corporate observers are buzzing that the retired chief executive of Sears, Roebuck and Co. would be the logical -- and obvious -- choice to step in as interim CEO of Martha Stewart Living Omnimedia if Stewart decides to take a leave of absence to deal with her legal problems.

Martinez is one of only six directors who serve on the board of Martha Stewart, and is the only one with extensive corporate and retail experience. The two met years ago when Sears struck a deal to carry Stewart's paint line. Shortly after Martinez retired in late 2000, he was named to the board.

"If you were to write the spec for the person to fill that job, the only person on the board who would even come close is Arthur," said James Drury, whose Chicago firm, James Drury Partners, specializes in high-level searches for executives and directors.

"He understands retailing, marketing and advertising. He understands products and services. He has really practiced on a much bigger stage the elements that are necessary for the success of Martha Stewart."

Martinez, who is traveling abroad, took time out of his vacation to decline comment on the speculation.

Infamous ImClone sale

As nearly everyone knows by now, Stewart is under investigation for her sale of nearly 4,000 shares of ImClone Systems on Dec. 27, one day before the company got bad news from government regulators about its experimental cancer drug.

The House Energy and Commerce Committee, which was looking into alleged insider trading at ImClone and other companies, has referred its files on Stewart to the Justice Department, urging federal prosecutors to take up the case.

The heat on Stewart was turned up this week when a Merrill Lynch & Co. brokerage assistant agreed to plead guilty to a misdeameanor and provide testimony to federal prosecutors against Stewart, who has previously denied any wrongdoing.

If Stewart's legal problems become more distracting she may choose -- or be asked by the board -- to take a leave of absence, management experts say. Such a move would provide the company's directors with some welcome flexibility.

If Stewart is never charged or ends up being vindicated, she could return to reclaim the CEO title. If she ends up pleading guilty or being found guilty, the board could smoothly move forward with a search for a permanent replacement.

Some believe it already has taken the latter step. A recent story in the New York Times, citing unnamed sources, said the board has begun interviewing search firms to find a replacement for Stewart.

The company took the unusual step of issuing a press release categorically denying the report. Sources close to Martha Stewart Living say a leave of absence has not been discussed.

Another stand-in

Besides Martinez, the only other name being bandied about as a possible Stewart stand-in is Sharon Patrick, the president and chief operating officer of Martha Stewart Living Omnimedia.

Patrick has taken on a higher profile role during the company's turmoil this summer, and she likely would do an adequate job as interim CEO if Stewart needed to step aside. But it would be harder for her to go back to her old position if Stewart reclaimed the CEO job, management sources say.

"It's just a little cleaner if you have a non-executive in the interim CEO role," said one source.

Calling on a director to step in as a CEO during a crisis has become a more frequent occurrence in recent years.

Last October, UAL Corp. tapped director Jack Creighton as interim CEO after the abrupt departure of James Goodwin. Waste Management Inc. director Robert Miller stepped up to the plate when the trash hauler found itself in the throes of an accounting scandal in 1997, and Kmart Corp. director Donald Perkins did the same in 1995 after the board grew weary of unfulfilled promises from Joseph Antonini.

Only his critics are suggesting that Martinez wouldn't mind getting back in the CEO's chair again. In fact, the opposite probably is true, according to veteran retail consultant Sid Doolittle.

"He is pretty happy with his lifestyle, being a director of five or six companies," said Doolittle, partner with Chicago's McMillan/Doolittle. "He is enjoying being a senior guru of the industry."

Not much of a challenge

Besides, he adds, running a company with less than $300 million in annual sales wouldn't be much of a challenge for a man who stepped down from a $41 billion company. "If someone called him and asked him to run the Gap, he might be interested," Doolittle said.

But headhunter Drury disagrees.

A responsible director like Martinez would feel obligated to rise to the challenge if his fellow board members asked him to become interim CEO, he says.

"If you're going to be on the board, you have to be ready to step up and represent the shareholders' best interest in a crisis," Drury says.

Shoppers Hit Spending Brakes,
Sending Retailers' Sales Down

By Ann Zimmerman, Amy Merrick and Sarah Ellison
Staff Reporters of The Wall Street Journal
October 1, 2002

Shoppers cut back spending at some of the nation's big retail chains in September, heightening retailers' worries about the all-important Christmas shopping season.

Fearing that months of economic bad news and uncertainty about Iraq may finally be sinking into consumers' psyches, many big retailers have been bracing for a chilly holiday. Now, with what may be a big holiday iceberg heading their way, retail companies are doing their best to manage inventories -- and manage investors' expectations.

Wal-Mart Stores Inc., the world's largest retailer, Monday said September sales would miss expectations for the second consecutive month. Sales at stores open at least a year are expected to move forward just 3% to 4%, not 4% to 6% as previously projected. J.C. Penney Co. estimated September same-store sales would be down 1% to 3%, revising its earlier estimate of flat sales or even a slight increase. Target Corp. said September sales have been "well below" its plan of a 3% to 5% increase at its discount Target stores and slightly less than that for the total corporation. The Minneapolis retailer slashed its estimate for the month; it now expects same-store sales to be slightly below last year's levels.

Through months of stock-market declines, corporate scandals and job cuts, consumer spending has held fairly steady. No amount of bad news seemed to stop some buyers from splurging on cars, houses and other big-ticket trophies. Still, consumers show signs of growing stingy in areas such as clothing and gifts.

Wal-Mart says without last year's windfall from federal tax rebates, shoppers may be a little short on mad money this year. But it says it still expects to meet third- quarter and full-year earnings targets and believes sales will firm up in October. It doesn't plan to alter holiday merchandise plans.

At Sears, Roebuck & Co., September same-store sales were in line with its expectations for a decline "in the high single digits," resulting in part from disruptions from store remodeling, says spokeswoman Peggy Palter. Home appliances and hardware were leading sales categories in September.

"We didn't go into this year expecting to have a terribly strong economy for the holiday season, so that's already to some extent been factored into our fourth-quarter expectations," Ms. Palter says. The Hoffman Estates, Ill., retailer says it does expect sales to improve, predicting a same-store sales decline in the low single digits for the year.

Federated Department Stores Inc., the Cincinnati parent of department stores including Macy's and Bloomingdale's, says it has taken those signals to heart and kept inventories under control. Even so, the retailer Monday said the last week in September was "disappointing" and cut its monthly same-store sales estimates for the second time, projecting growth of 0% to 2%. Just a week ago, Federated said September same- store sales would be "at best" at the low end of an earlier forecast for a 3% to 5% increase.

"There was tremendous uneasiness amongst consumers that went beyond the economy," says Terry Lundgren, president and chief operating officer at Federated. He says young men's and children's clothing, jewelry, shoes and home-related merchandise would be bright spots for the company in the fourth quarter, the retail calendar's make-or-break season, for which Federated is projecting 1% to 3% sales growth. "Santa should be fired up and ready to roll," Mr. Lundgren says.

Retailers have kept inventories tight, but they can't help being nervous. "With the most uncertain holiday season in about 30 years, many retailers I know are holding their breath," says Chris Ohlinger, chief executive of Service Industry Research Systems, a market- research firm. It is too late, he says, for merchants to drastically adjust their inventories further for the Christmas season. His advice to consumers: "Shop early. There will be many more out-of-stock signs on the shelves this year."

Many retailers' inventories are already so lean that they may not have much room to cut. During the second quarter, retailers' ratio of inventories to sales fell for the seventh straight quarter, according to an index compiled by A.G. Edwards.

Retailers have been delaying orders as long as possible this year, in order to get a better picture of how much to wager. Sportswear-maker Kellwood Co., of St. Louis, has said that retailers have been placing orders 45 to 60 days later than usual for the fall and holiday seasons.

This year, Retail Forward Inc. forecasts that fourth- quarter sales will increase just 3% to 3.5%, down from 4.5% to 5% growth last year. Senior economist Frank Badillo says another wave of mortgage refinancing should benefit retailers selling home furnishings and consumer electronics.

Some of the frivolity of the holiday season is still kicking. Neiman Marcus Group Inc., in its Christmas gift catalog, this year is featuring personalized his-and-her action figures, created by Gentle Giant Studios in California. Priced at $7,500 each, they are a veritable bargain compared with previous years' offerings of his- and-her diamonds and dirigibles.

Karen Katz, chief executive of Neiman Marcus Direct, says inventory is aligned with sales. But with less than four full weeks between Thanksgiving and Christmas, "part of the challenge is that this is the shortest number of shopping days." She adds, "We're clearly uncertain about the holidays."

-- Shelly Branch contributed to this article.

Lands' End Recruits NHL Licensed
By Kelly Quigley - CRAIN'S Chicago Business - September 30, 2002

Sears, Roebuck and Co.'s Lands’ End Inc. unit on Monday said it has signed a three-year agreement with the National Hockey League to produce an exclusive line of apparel featuring NHL logos. Financial terms of the deal were not disclosed.

The clothing retailer, acquired by Hoffman Estates-based Sears this summer, said the National Hockey League collection is available through its catalog and Web site, but will not be carried in Sears department stores.

Customers can have logos from any of the 30 NHL teams embroidered on a variety of men's, women's and children’s products, a Lands’ End spokesman said. All-Star Game, Stanley Cup and Zamboni logos also are available.

John Maher, Lands’ End director of licensing, said the NHL agreement will help further raise the profile of Lands’ End in the licensed apparel marketplace. The company in June signed a deal with Major League Baseball to make custom-embroidered apparel, and a year ago launched the Alumni Collection that features logos of more than 100 universities.

The spokesman would not say how well the lines are selling or disclose Lands' End revenue expectations for them. He said the retailer might seek agreements with other sports groups in the future.

Sears acquired Lands' End in June for about $1.9 billion, in a move to gain a more affluent customer base and boost its lagging apparel business. By the end of the year, Lands' End apparel will be available at some 170 Sears stores, and by 2003 at least 870 stores will have significant retail space devoted to the brand.

Shares of Sears declined $1.77, or 4.3%, to $38.85 in Monday afternoon trading.

Retailers' Sept. Sales Look Bleak

Reuters - September 30, 2002

"An already sluggish climate took a turn for the worse Monday when major retailers scaled back sales forecasts as increasingly hesitant consumers fretting about job losses and a disastrous stock market stayed away from stores.

Wal-Mart Stores Inc. Monday ratcheted back its September sales forecast, the third month in a row that the world's biggest retailer has been hurt by the shaky economy and consumer insecurity. "This is in line with our view that the consumer continues to be cautious, the West Coast dock workers situation adds additional risk to the fall and Christmas season unless it's resolved quickly," said Todd Slater, an analyst with Lazard LLC.

The Bentonville, Ark., discounter's dim outlook was echoed by other major retailers, including department store heavyweight Federated Stores Inc., which said its sales could be flat compared with earlier expectations of 3 percent to 5 percent growth.

J.C. Penney Co. Inc. also said same-store sales at its department stores in September were tracking below expectations with a decline in the low single digits on a percentage basis, compared to its previous forecast for same-store sales that were flat to up slightly.

DOUBLE-DIP RECESSION

In afternoon trading on the New York Stock Exchange, Wal-Mart shares fell 3.7 percent, at $49.35. J.C. Penney shares slid more than 9 percent to $16.01 and Federated was down 4.5 percent at $29.77.

"The economic downturn's impact on consumers has been lagging and we're finally seeing them hit home," said Frank Badillo, a senior economist with Retail Forward. A falloff in gas prices late last year, mortgage refinancing, tax rebates and tax cuts are among the factors that helped blunt the initial impact of the downturn, he said.

"You'll hear a lot more about a double-dip recession and the risk of that has increased for the fourth quarter," Badillo said. A double-dip recession is when the economy has a renewed contraction after several months of recovery from a downturn.

The weak September sales weighed on Standard & Poor's Retailing Index, which was down nearly 5 percent, compared to the broader Standard & Poor's 500 Index, which was down 1.8 percent. Shares of discount giant Target Corp. slipped nearly 8 percent, to $29.38.

The association representing employers at 29 U.S. West Coast ports ordered a lockout Sunday night, saying their union was engaging in illegal work slowdowns and work stoppages. The unionized dock workers handle more than half of U.S. trade.

In another grim economic note, the National Association of Purchasing Management-Chicago released data on Monday that showed manufacturing activity in the Midwest contracted for the first time in eight months in September.

CHEERLESS HOLIDAY

Next up for retailers is the holiday shopping season, which is the single busiest shopping period. Back-to-school, known as the second-most important period, was a disappointment, so another dismal season could bring more pain.

"For the holidays, it may be too early to tell yet," said Kurt Barnard, publisher of Barnard's Retail Trend Report. "But unless there are major changes for the better, the holiday could be a washout."

Wal-Mart said its earlier sales forecast was based on "too optimistic" assumptions about the amount of business lost in the post Sept. 11 period last year. It was also affected by tax rebate comparisons, which should diminish in October, the company said.

September was supposed to be a profitable month for retailers because last year's attacks kept shoppers away, making for easy year-ago comparisons. Wal-Mart was one of a few retailers with strong year-ago figures to match, because consumers stocked up on necessities like groceries and eschewed discretionary spending.

"This was not unexpected, the numbers continue to soften across the board, across many categories and across a wide group of retailers," Lazard's Slater said.

Still, Wal-Mart said its quarterly earnings would match Wall Street expectations for a jump of more than 20 percent.

Earnings should range from 40 to 41 cents per share for the third quarter, it said, compared with 33 cents per share the year before. Full-year earnings are still seen at $1.76 to $1.78 per share, up from $1.49 per share in 2001.

Analysts, on average, had been expecting Wal-Mart to earn 40 cents per share for the third quarter, and $1.79 for the year, according to research firm Thomson First Call.

The areas of strongest performance included electronics, video games, home furnishings and paint, Wal-Mart said. Apparel was weak.

"It's a day-to-day fight for retailers," said Marcia Aaron, an analyst with Pacific Growth Equities. "But when it starts impacting the Wal-Marts of the world that's when the economy and consumer are tired of shopping."

Uninsured Americans on the Rise

14.6% lacking health coverage, U.S. report finds

By Bruce Japsen - Chicago Tribune staff reporter  - September 30, 2002

The number of Americans without health insurance rose in 2001 for the first time in four years as more workers lost their jobs and more employers cut benefits, a new report from the U.S. Census Bureau says.

The ranks of the uninsured rose to 41.2 million, an increase of 1.4 million, or 3.5 percent, from 2000, according to the report, scheduled to be released Monday. That meant 14.6 percent of the U.S. population had no health insurance.

Illinois remained slightly below the national level but also saw its number of uninsured residents rise, to 13.7 percent of the state's population from 13.6 percent in 2000. Nearly 1.7 million Illinoisans had no health insurance last year.

The national trend reverses a period of expanding health coverage that began in the late 1990s during the longest economic boom in modern times, when unemployment was low, corporate profits were high and stock prices soared in an unprecedented bull market.

With deep job cuts affecting most sectors of the economy in 2001, however, many economists and health industry officials fully expected that the number of uninsured would rise as more Americans lost their paychecks and their health-care coverage.

Yet it turns out that even those with jobs lost health insurance. The percentage of people with employer-based health-care coverage fell to 62.6 percent in 2001 from 63.6 percent in 2000, the census report said.

"It's a fact of life that most coverage in the U.S. is driven by jobs, but we saw a drop in employer-provided coverage, which is significant," said Chuck Nelson, assistant division chief for income, poverty and health statistics for the U.S. Census Bureau.

Adults age 18 to 24 were the least likely of any age group to have health insurance in 2001. About 28 percent of this group didn't have coverage.

Among racial groups, American Indians and Alaska natives were the least likely to have health insurance, according to three-year Census Bureau averages ending last year.

Analysts blame the drop in coverage on a combination of the soaring cost of health care and sagging corporate profits.

The trend could only worsen as health benefits run out for unemployed workers covered by the federal COBRA law, which requires large employers to offer insurance policies to workers they cut.

"As more and more people lose their jobs, they are going to lose their benefits, and this is going to get worse," said Katie Barnickel, spokeswoman for Access to Care, a Westchester group that tries to link uninsured residents in suburban Cook County to free and low-cost medical services.

Medical providers fear that the increasing number of uninsured will further stress a health-care system already reeling because of rising medical costs and cutbacks in state and federal spending.

Access to Care has had to put those without insurance on a 10-month waiting list for its services--a safety net of sorts that lets patients pay $5 for certain doctor's office visits and $10 to $30 for certain prescription drugs.

The organization served almost 17,000 people in suburban Cook County last year and has 4,000 more waiting for the group's services this year.

"How do you tell someone who calls up and wants to join our program [because] they have high blood pressure that they have to wait 10 months to get their medications?" Barnickel said. "Our waiting list comes down to a funding issue."

Despite the state and federal cutbacks in health spending, the number of uninsured children remained stable at 8.5 million, or 11.7 percent of the nation's youth population, in 2001, the census report said.

An increasing number of uninsured children are eligible for coverage through federal-state Medicaid health insurance programs for the poor. These Medicaid services, such as Illinois' KidCare program, have expanded in recent years, contributing to an increase in the number of people covered by government health insurance programs, the Census Bureau said.

Looks Cool, Sounds Cool: Thank Sears

By ELAINE LOUIE - NEW YORK TIMES - September 29, 2002

DUNCAN SHEIK, composer and recording artist, lives in a TriBeCa loft furnished mostly with instruments. A Yamaha baby grand piano has center stage; a small Hammond organ and a Wurlitzer keyboard stand in the background. There are drums in the glassed-in, soundproof studio. A Calrec console, eight feet across, once used by the British Broadcasting Corporation to record live classical music, dominates the control room, which is equipped for digital recording. He also has a Nord Electro keyboard, the newest acquisition, which simulates both the Hammond and the Wurlitzer.

"I reward myself with a new piece of gear every time I start a project," he said, grinning.

Mr. Sheik has a Tintin haircut, pointy at the center. His voice is soft and intimate as he sings "Genius," about a man behaving stupidly toward a woman, and he accompanies himself on his favorite instrument.

It is a Silvertone electric guitar, made for Sears, Roebuck by a company called Danelectro in Red Bank, N.J. Silvertone was the Sears brand name for its guitars, which in the 50's and 60's sold for $39 to $69 in the Sears catalog. Mr. Sheik's guitar is edged in white vinyl, and its red-brown surface glitters.

"They made it look devilish to appeal to the rebellious nature of teenage boys," said Mr. Sheik, who is 32. "Look at the little horns, the deep red. It's kind of low-down and trashy."

But looks, of course, deceive. The guitar has "lipstick" pickups — the metal strips that encase the magnet and coil that transmit the sound of the strings to an amplifier. It is these pickups that give a Silvertone its special sound.

"It's a clean, warm sound," Mr. Sheik said. "If you hit it softly, it sounds soft and beautiful." He strummed it gently, as if it were a classical guitar. The sound was delicate and crystal-clear. "If you hit it hard," which he promptly did, "you can make it sound very angry but not in a heavy metal way." The loud, bright twang made you sit up and take notice, but it didn't make you cringe.

"It's nuanced and great and lovely," he said. "It's almost like an acoustic guitar."

And therein lies an insider tidbit.

"The sign of a good electric guitar is that it still sounds good if it's not plugged in," he said.

Mr. Sheik bought the guitar for its looks, not its sound. In 1996, he found himself in Cincinnati, about to do the music video of "She Runs Away" for his first album, and he went to Mike's Music there in search of a "cool-looking guitar."

"I messed around with it a little, paid about $350 and used it almost as a prop," he said. (In Manhattan, vintage Silvertones are available for $300 or more at 30th Street Guitars and Sam Ash in Midtown and Mojo in the East
Village.)

"But once in a blue moon, I'd pull it out," he recalled. He would play, record a new song, play it back, and gradually he discovered that the guitar's cool quotient was not restricted to its looks. On his "Daylight" album, which was released in August, he wound up playing half the songs on the Silvertone.

This fall, as he tours the United States, Europe and Asia, Mr. Sheik will have his flashy Silvertone with him. Not that the guitar is perfect; it has to be tuned — constantly.

Sears Sticks to Upbeat Outlook

By Susan Chandler - Staff Reporter - Chicago Tribune
September 29, 2002

Business could be better at Sears, Roebuck and Co.

Sales have declined every single month this year. During August, when parents rush to outfit their children for school, Sears' same-store sales plunged 11 percent, a double-digit decline that shocked even retail veterans.

But Sears Chief Executive Alan Lacy is still vowing to deliver a spectacular 22 percent increase in 2002 earnings per share, excluding one-time items. Sears reaffirmed that guidance Sept. 5, counting on cost- cutting and its lucrative credit-card business to save the day.

Now, some Sears watchers are raising doubts the company can deliver on its financial promises.

"They're dreaming," says George Whalin, president of Retail Management Consultants in San Marcos, Calif. "They're going to start reporting some really bad numbers."

On Thursday, Fitch Ratings lowered its outlook on Sears to negative from stable, citing weak sales trends, a difficult retail environment and growing competition from discounters and home-improvement chains. Although it applauded Sears' credit-card growth, Fitch also cited concerns about the quality of its portfolio if economic weakness continues.

Indeed, there is cause for concern, retail experts say.

While Sears' apparel sales have been weak for several years, the Hoffman Estates-based chain has been depending on its credit-card business and sales of big- ticket items like home appliances and consumer electronics.

But appliance sales, where Sears has a commanding 37 percent market share, weakened this summer despite aggressive promotions, including zero-percent financing offers.

Not only is that dragging down the company's top line, it eventually will crimp Sears' high-margin credit card business as well. Fewer big-ticket transactions translates into a smaller portfolio of credit card debt, retail experts point out.

The stakes are high as Lacy approaches his second anniversary at the helm of the nation's third-largest retailer, and his regime's credibility is on the line.

Paul Liska, Sears' new chief financial officer and a Lacy recruit, says he has a firm grip on reality and that Sears will come through with the upbeat numbers it has promised.

Despite sagging sales, Sears has been able to boost its efficiency by downsizing its headquarters staff in Hoffman Estates and de-layering its sprawling field organization, Liska says. Because the layoffs in Hoffman Estates--about 1,300 positions out of 7,000--mostly were over by the end of the first quarter, the company has been able to reap cost savings for almost the entire year.

"We're unique because our profitability is coming from productivity improvements," Liska said. "That's the beauty of productivity. It's totally within your control."

Declining Sales Expected

All along, Sears has said its 2002 sales would likely decrease. The steeper-than-expected August decline has to be averaged with smaller-than-expected sales declines in the first half, Liska says. "All of this was anticipated."

Overall, Sears is sticking with its prediction that annual sales will be down by about 5 percent, he says.

Sears isn't counting on a fourth-quarter miracle for that to happen. "If it is the same type of selling season as last year, and last year did not feel great, we're fine. We didn't expect the economy to get a lot better."

Anyone who suspects Sears might be too aggressive is off base, Liska adds. "We're a very conservative company on an accounting basis. We do everything according to Hoyle."

Wall Street doesn't seem overly concerned. Of the seven analysts reporting recommendations to Thomson Financial/First Call, none has changed their outlook on Sears' stock this month.

One analyst has Sears rated a "strong buy," and three analysts are recommending Sears as a "buy," according to Tom O'Keefe, equity research analyst with Thomson Financial. Three others have a "hold" rating on the retailer.

Only Merrill Lynch analyst Daniel Barry reacted after the September sales report, slightly trimming his third- quarter and full-year estimates for Sears' stock. And Barry is still expecting Sears to earn $5.31 per share, even more than the 22 percent increase Sears has promised.

But investors, chastened by accounting problems at other companies, don't appear quite as convinced.

Sears' stock price has drifted down from a high of almost $60 a share this summer to about $41, losing almost a third of its value and outpacing the overall market's decline of about 20 percent. Even so, Sears' stock remains well above its 52-week low of $31 per share.

Cash Flow Questioned

Although mainstream analysts appear comfortable with Sears' earnings story, a small investment firm in Sarasota, Fla., is sounding an alarm.

StockDiagnostics.com Inc. has a proprietary software system that looks for contradictory indicators in a company's financial reports. And Michael Markowski, the firm's director of research, believes it has found some at Sears.

In the second quarter, when Sears was posting record net income, it also was recording negative cash flow on an operating basis, which means it was paying out more money than it was collecting.

That's a financial anomaly that should be raising red flags for investors, Markowski says.

"They're telling you they're making a lot of money, but they're not generating any cash," he said. "The problem is that, generally, companies generating negative operating cash flow are trying to do whatever they can to maintain Wall Street's projections. They're stretching."

Sears' cash flow has been negative for the past two quarters because of a big increase in receivables, which is money that Sears is owed by shoppers on its credit cards, Securities and Exchange Commission filings show.

Stricter credit controls

While more credit card debt means more interest and fees for Sears, it also sets the stage for trouble if customers can't make their payments. That's exactly what happened to Sears in the mid-1990s when a big push to get more credit cards in the hands of consumers created a flood of bad debt that dragged down earnings several years later.

Since then, Sears has cleaned up its portfolio and tightened collection policies. But there's no doubt that Sears is hitting the accelerator on its credit business again. Since Sears introduced a Sears Gold MasterCard in June 2000, shoppers have racked up an impressive $8.50 billion in balances, a good portion of that outside Sears' stores.

At the end of June, Sears had $29.81 billion in credit card debt outstanding, up 8 percent from a year earlier, most of it on the traditional Sears in-store card.

Liska denies that Sears is stretching. He says the negative operating cash flows are simply a sign that Sears is growing its credit business, which is a "good thing" because "that's how we make a lot of money."

StockDiagnostics.com's analysis is flawed, Liska says, because the software program doesn't work with financial companies, and Sears, which earns more than 60 percent of its profit from credit cards, is a finance company.

"If these models really worked, this guy would operate a hedge fund. He wouldn't be running a Web site," Liska said.

Markowski says it's news to him that Sears is a finance company rather than a retailer. And he says he will really be concerned if Sears posts a third consecutive quarter of negative cash flow.

Sears' third-quarter earnings are due in mid-October.

KB Toys is Exclusive Supplier for Sears' Wish Book, Site

By Sandra Guy - Business Reporter - Chicago Sun Times
September 27, 2002

Beware the Christmas tree this holiday season--your children might try to cut it down with "My First Craftsman Toy Chainsaw" set.

The chainsaw set, a play workbench, tool set and big rig are among the new Craftsman-branded toys that Sears, Roebuck and Co. and KB Toys will sell for the holidays, the Hoffman Estates-based retailer announced Thursday.

Sears also announced that KB Toys, the nation's fifth- largest toy retailer, has become the first sole supplier of toys in Sears Wish Book catalogs and at Sears.com.

In addition, KB Toys will set up its own 1,000-square- foot stores inside 77 Sears stores in nine markets this holiday season. The store-within-a-store expansion follows a successful test of the concept at 29 Sears stores in four markets last year.

Sears' agreements with KB Toys, whose financial terms were not revealed Thursday, ramp up Sears' efforts to be the exclusive destination for everything from Craftsman tools to Carrier air conditioners to Lands' End apparel.

Analysts debate whether the strategy will work, though no one doubts that Sears will benefit from an expanded toy selection and a popular name-brand during the crucial holiday sales period.

Among the new toy brands Sears will feature at its Web site are LeapFrog, Radio Flyer and Neurosmith.

Sears faces stiff competition in toy retailing, said Roz Bryant, stock analyst at Chicago-based Morningstar.

Bryant said she doubts shoppers will pick Craftsman- branded toys over cheaper toys at Wal-Mart, the nation's No. 1 toy retailer.

The KB Toys announcements occurred the same day Fitch Ratings downgraded its outlook on Sears' $17 billion in unsecured debt to "negative" from "stable."

Fitch cited Sears' weak sales trends, the unknown impact of store remodelings, increased competition for appliance sales with home-improvement chains, and the weak retail environment. Though it applauded Sears' credit-card growth, Fitch cited concerns about the quality of Sears' credit-card portfolio if economic weakness continues.

Sears spokeswoman Peggy Palter said Fitch's action "doesn't necessarily mean there is an imminent change in the ratings" on Sears' debt.

"It will not materially affect our cost of funding, nor will it affect our access to capital markets," she said. "We remain confident our restructuring remains on track."

On a more positive note, Sean McGowan, a longtime Wall Street observer of the toy industry, said Sears' deal with KB Toys plays off each retailer's strengths.

KB Toys is aggressive in designing its own toys, including KB Learning Toys and the Dance Diva Home- Recording Studio, and has the expertise to handle order fulfillment from the Sears Wish Book and Sears.com at its Blairs, Va., fulfillment center.

Sears is expected to benefit by attracting more families into its stores and aligning itself as a player in the toy market for the first time in 15 years.

The KB Toys stores will operate inside the Sears stores from mid-October through early January.

The toy stores will be located at Sears stores locally at 2 S. State St. and 4730 W. Irving Park Road (Six Corners) in Chicago; River Oaks Shopping Center in Calumet City; Chicago Ridge Mall in Chicago Ridge; Oakbrook Center in Oak Brook; Orland Square Mall in Orland Park; Woodfield Mall in Schaumburg, and Southlake Mall in Merrillville, Ind.

The Craftsman toys, manufactured in China, will be sold via Sears Wish Book, online at Sears.com and KBtoys.com, and at KB Toys stores and 460 of Sears' 870 department stores.

The most expensive Craftsman toy is a $29.99 workbench that comes with work goggles and 56 accessories, including plastic hammer, hacksaw, bolts and nails.

Wal-Mart Moves up

By Lorrie Grant, USA TODAY - Sep. 26, 2002

Wal-Mart became the world's largest retailer by selling a broad selection of general merchandise at low prices. Now it is becoming the No. 1 retailer in an increasing number of specialty product categories — some seemingly unlikely for a discount chain.

"Wal-Mart will seek to test the outer boundaries of what consumers are willing to allow Wal-Mart to be," says Ira Kalish, chief economist for market research firm Retail Forward.

Where Wal-Mart has already tested the boundaries and emerged No. 1:

Jewelry. Jewelry and watch sales topped $2.3 billion last year, pulling ahead of former industry leader Zale, which posted $2.1 billion, according to National Jeweler magazine. In May, Wal-Mart added brand-name Keepsake diamond jewelry, which expanded its offerings in quality and price, with bridal sets, necklaces and rings from $199 to $899.

Groceries. Wal-Mart's grocery sales last year were $65 billion, easily topping supermarket leader Kroger's $50 billion, according to Supermarket News. Grocery sales have climbed as it has converted stores into so-called Supercenters — a complete supermarket and general merchandise store under one roof — that account for 1,179 of the company's 2,782 U.S. retail stores. The company also sells groceries at its 517 Sam's Club warehouse stores and has started a chain of freestanding Neighborhood Market supermarkets, now at 36 stores. Together, they hold 10% of the $682.3 billion U.S. grocery market.

Toys. An everyday selection of toy basics at low prices and full shelves of the hot toys, especially at the holidays, have made Wal-Mart the leader in the $34 billion toy industry. It had 19% of sales in 2000 (the latest full year available), passing Toys R Us, which held onto 17%, according to researcher NPDFunworld. This does not mean that Wal-Mart is forsaking the general merchandise discount strategy that made it a $217 billion business — selling everything from tissues to trolling motors. It needs that breadth because "the entire population shops at Wal-Mart," says Celia Clancy, general merchandising manager for women's and children's apparel.

But growth is coming, in part, because of deeper selection in some categories. Where Wal-Mart could hit No. 1 next:

Fashion apparel. Wal-Mart has started selling George, a more upscale proprietary brand with goods to rival the likes of Gap, American Eagle Outfitters, Ross and other specialty chains. Choices range from suits and dresses to trendier low-rise jeans and skirts. The line is designed to suit Wal-Mart's core apparel buyer but also draw in a higher-income customer who might be in the store for groceries or other goods. "Time and convenience outweigh everything," Clancy adds. George was first rolled out at Wal-Mart in Europe. It has succeeded in the 256 U.K. Wal-Marts against brands including Gap and Marks & Spencer and at the 95 German stores. It has been tested this year in the USA, and this fall the women's items will be in all Wal-Marts, while George menswear will be in 2,000 stores.

Drugs. By the end of 2001, Wal-Mart operated 2,977 pharmacies — making it the third-largest drug chain behind Walgreen and CVS — and had half of all
discount- pharmacy prescription sales, according to PharmTrends tracking provided by Ipsos-NPD.

Though it is huge, there is more than sheer size behind Wal-Mart's takeover of some specialty categories. It's about more than price, too, especially as it adds some pricier offerings to its mix.

Its emergence as top seller also reflects how millions of Americans have changed shopping preferences toward both value, which means they're more likely to try a discounter, and convenience, doing a lot in one stop.

"It's about a consumer who is not only looking for the best deal but ... a unique selection of merchandise," explains consultant Wendy Liebmann, president of WSL Strategic Retail.

To different shoppers, that could mean a lot of different categories, a Wal-Mart tradition. Or it could mean depth within a category, which the retailer is trying to provide in apparel, for example, by adding exclusive fashionlines such as George and Mary-Kate and Ashley Olsen clothes for girls.

Both Wal-Mart's aggressive expansion and shoppers' fading loyalty have frustrated other retailers.

Some are fighting back with more customer services and conveniences. Many supermarket chains are trying to make a strength out of quicker checkout, using methods ranging from lanes that let consumers scan their own goods to payment machines that use the touch of a fingerprint.

Wal-Mart may have the financial and technological clout to outmaneuver such moves. But some experts warn that if it gets too involved in trying to dominate too many fringe categories, it could lose the intense focus on general merchandise and price that made it Wal-Mart.

"At some point, it becomes difficult to manage and maintain control over so many categories," Kalish says.

Sears Signs Exclusive Deal With Carrier

Dow Jones Newswires - September 24, 2002

HOFFMAN ESTATES, Ill. -- Sears Roebuck & Co. (S) signed a three year agreement to begin selling Carrier Corp.'s heating, ventilation and air conditioning systems and products next year.

In a press release Tuesday, the retailer said Carrier, a United Technologies Inc. (UTX) unit, will benefit from an increase in exposure achieved through Sears' newspaper inserts, credit card inserts, direct mail, in- store displays, Internet exposure and television and Yellow Pages advertising.

Financial terms of the agreement, which will take effect on Jan. 1, weren't disclosed.

Sears' NYSE-listed shares traded at $40.97 shortly after the market opened Tuesday, down $1.15, or 2.7%, on volume of 275,200 shares. Average daily volume is 2.73 million shares.

Allstate CEO: Progress In Homeowner Turnaround

By Chad Bray - Dow Jones Newswires -  September 18, 2002

NEW YORK -- Allstate Corp. is ahead of schedule in terms of turning around its homeowners business, the insurer's chief executive said Wednesday.

At a press luncheon on Wednesday, Edward M. Liddy, Allstate's chairman, president and chief executive, said the Northbrook, Ill., insurer has made significant progress in improving underwriting and increasing rates to more adequate levels in its homeowners insurance operation.

However, more progress is needed before executives can declare victory, Liddy said. Allstate has previously said it could take as many as eight quarters to turn around the homeowners business.

It takes longer for rate hikes and policy changes to have an impact on the homeowners business than it does for personal auto policies, in part because most home policies are renewed annually, instead of on a six-month basis.

Liddy said Allstate, which began addressing profitability concerns in its homeowners lines early last year, moved quicker than a number of competitors, who have just begun seeking rate hikes this year.

Meanwhile, Liddy said Texas - particularly mold claims there - remains problematic, but the insurer has taken several steps to limit its losses there and should have the problem behind it as revisions in policy terms are phased in as policies are renewed over the next year.

He noted the insurer posted underwriting losses of $250 million in Texas last year and has recorded about $150 million in underwriting losses so far this year.

Retailers Brace for Dismal Holiday
CRAINS' Chicago Business - September 17, 2002

(Reuters) "U.S. retailers are expected to post their lowest holiday sales increases in five years as the shaky economic recovery, weak stock market and a possible war with Iraq keep consumers cautious, a retail trade group forecast Tuesday.

The National Retail Federation forecast that sales in November and December "the most important sales period of the year for retailers "would increase by 4.0 percent from a year ago in stores that sell everything from furniture to clothes, sporting goods and home electronics. That compares with a 5.6 percent increase last year, and would be the smallest gain since 1997, when sales also rose 4.0 percent.

"What is happening is consumers, even though they are not terribly optimistic about the economy, are seeing some positive things," Rosalind Wells, chief economist at the federation, the largest U.S. retail trade group, said in a telephone interview. She cited low inflation and low interest rates as positives.

Consumer spending accounts for two-thirds of U.S. gross domestic product, and holiday sales can account for up to 30 percent of total annual retail sales.

Mortgage refinancing is "probably at a peak now during the third quarter," and that money will show up in consumers' wallets in time for the holidays, Wells said.

But one major factor hanging over retailers is whether holiday cheer will be wiped out by a war with Iraq. At the same time, threats of further attacks on the United States persist, Wells said.

"That's the big question mark," Wells said of a possible war. "Not only war with Iraq but another major terrorist incident or something that (hurts) consumer confidence."

Holiday sales in 1990, amid the Gulf conflict, were about flat from 1989, the federation said. But the economy was in a recession then and is in a recovery now, said Scott Krugman, a spokesman for the federation.

Many retailers saw weaker-than-expected sales in August as the sluggish economy and unusually warm weather cut into key back-to-school sales.

In addition, household wealth fell 3.4 percent in the second quarter from the first quarter, according to the Federal Reserve, another sign of the sluggish economy and stock market.

But sales have been within expectations in September as the weather has cooled. ``I'm hearing reports that September sales are stronger. There's a better response to back-to-school now,'' she said.

Instinet's Redbook Retail Sales Average, which tracks sales data, rose 0.5 percent in the two weeks to Sept. 14 compared with the same period in the previous month.

The federation has forecast a 3.5 percent rise in real gross domestic product in the second half of the year.

Other reports have forecast a gain in consumer spending during the holiday season. On Sept. 5, Deloitte Research forecast a rise of 5.5 percent to 6 percent in consumer spending by year-end, up from 2.5 percent in the first half of the year.

Merchandise related to the home should sell well, boosted by strong housing sales, Wells said. Apparel sales will tend to be weak compared with other retail sectors, she said.

Retirees' Medical Benefits in Danger
Companies move to slash expenses

Chicago Tribune - September 17, 2002

The latest casualty of escalating health costs is retirement health benefits, as U.S. employers say they're set to slash those benefits in coming years, a survey found.

Your company's contribution to your medical costs after retirement will shrivel to 10 percent of your health- care costs by 2031, a drop from the 50 percent employers contribute at present, according to a survey by an employee benefits firm released Monday.

"The burden on future retirees to pay for their own medical costs is increasing dramatically, and far too few employees are prepared for these looming changes," said Sylvester J. Schieber, Watson Wyatt vice president and an author of the study.

"The net result of skyrocketing medical costs and public policy has been to render retiree health benefits economically irrational."

The cost of health care has been rising in the double digits for the past few years, led by costs for prescription drugs and hospital stays. That has put pressure on payers to skim benefits wherever possible, he said.

The poll of 56 big firms with about 5,000 employees found that companies plan to scale back their share in health benefits by setting minimum length-of-service requirements and cutting their direct investment to retirement health plans.

Employers will also set the bar higher for the amount of time an employee must work for a company before qualifying for retiree health benefits, the poll found.

The trend is already beginning. About 20 percent of employers studied have eliminated retiree medical plans for new hires and 17 percent will require new hires to pay the full premium for coverage, the report said.

It found 45 percent of employers cap contributions for new hires while 39 percent do so for current employees. Only one in four employers cap contributions for current retirees. The median employer contribution cap of $2,000 for current retirees 65 and older--that is, those who have Medicare coverage--drops to $1,740 for future retires. The median of $4,450 for current retirees younger than 65 drops to $3,900 for future retirees.

In 1984, 9 of 10 large employers that offered retiree medical benefits to supplement Medicare for workers over 65 required service of five years or less. Last year, only about a quarter offered that benefit, according to Watson Wyatt. For future retirees, only about 14 percent allow workers to qualify so quickly.

Increasingly, consumers are paying more out of their pockets for health care. A study released earlier this month by the Kaiser Family Foundation found that 78 percent of employers plan to jack up premiums next year. This year saw the largest increase in premiums in 12 years, to nearly 13 percent. Health plan premiums are typically negotiated between employers and insurers before being passed on to workers.

Many are looking at contribution-type plans that would require employees to manage a sum of money on their own to encourage them to spend wisely.

Allstate Moves Could Point to Next Chief Executive

By Chad Bray - Dow Jones News Wires - September 12, 2002

Allstate Corp. may be grooming its next chief executive with a series of operational and management changes announced Thursday.

The Northbrook, Ill., insurer named Thomas J. Wilson, chairman and president of its Allstate Financial unit, as president of its new Allstate Protection unit effective Oct. 1. He replaces Richard I. Cohen, who is retiring at the end of the year.

Allstate Protection combines the operations of its Allstate Property and Casualty in-house business and its Ivantage Group independent distribution business under one roof.

"It's interesting they're moving a guy from Allstate Financial to the property-casualty side," said Michael A. Smith, a Bear Stearns analyst. "It should give him a better background, where he could eventually step up and run the whole company."

Bear Stearns doesn't have a banking relationship with Allstate and Smith doesn't own Allstate stock.

Wilson, 44 years old, joined Allstate as chief financial officer in 1995, coming from Sears Roebuck & Co. (S). He was named president of Allstate Financial in 1999.

Edward M. Liddy, Allstate's chairman, president and CEO, is 56 years old and has previously said he has no plans to retire from Allstate anytime soon. Liddy took the top job at Allstate in 1999 after serving nearly four years as president and chief operating officer.

Michael Lewis, a UBS Warburg analyst, said in a research note Thursday that the changes don't reflect a significant shift in direction for the company.

"Despite the significant management moves, we believe there will be no material shift in Allstate's strategic direction and we expect no operational disruptions," Lewis said. "We believe the promotion of Tom Wilson to run the property-casualty business reflects his strong performance as head of the life division and makes him a prime candidate to eventually lead Allstate Corp."

According to the research note, UBS or its affiliates have acted as a manager/co-manager in the underwriting or placement of securities for Allstate or an affiliate in the past three years. Lewis, a member of his team or a household member holds a long common stock position in the company.

Interim Chief Financial Officer Casey J. Sylla, 59 years old, will replace Wilson as chairman and president of Allstate Financial on Oct. 1. Samuel H. Pilch, 55 years will be acting CFO effective Oct. 1. He is group vice president and controller.

"The CFO position seems to be a stepping stone to running Allstate Financial," said Smith, the Bear Stearns analyst.

He noted it was unusual that Allstate didn't name a permanent CFO. Sylla has been acting CFO since John Carl's retirement at the end of the second quarter due to health-related concerns.

Catherine S. Brune, 49 years old, has been appointed senior vice president and chief technology officer. She is currently a vice president in Allstate's Technology Shared Services. She succeeds Frank W. Pollard, who is retiring Dec. 31.

Meanwhile, Liddy said in a press release Thursday that the organizational changes are designed to ensure the company's structure is consistent with its business strategy.

"These changes are designed to accelerate our growth, while complementing and enhancing the progress we have made in implementing our core business strategies," Liddy said in a statement.

Mike Trevino, an Allstate spokesman, said Thursday that the moves aren't a cost-saving initiative and no jobs will be affected by the changes. The moves are the result of a review of its organization.

The new structure essentially creates three unique businesses within the company - protection, asset management and consumer banking.

Allstate's strategy in the past few years has been to broaden its financial services offerings in hopes of keeping more of its client dollars in house.

The protection segment will offer traditional property- casualty products - namely personal auto and home policies. The Ivantage brands will continue to be sold under the Encompass and Deerbrook names through independent agencies in the new organization.

"The intent is to be more customer focused and having all of those entities involved in the selling of protection products and servicing of protection products organized under one organization," Trevino said.

The asset management business will focus on retirement and education savings products, including life insurance, annuities and trust services. Allstate Bank will continue to offer savings, mortgages and checking products. The bank and asset management businesses remain under the Allstate Financial banner in the organization.

Trevino said the changes don't point to a potential spinoff of the property-casualty business. A number of companies have announced plans to spin off units in hopes of capitalizing on higher rates and tighter fundamentals in the market.

Citigroup Inc. (C) spun off its Travelers property- casualty business as Travelers Property-Casualty Corp. (TAPA) in March, but retained Travelers life and retirement planning operations.

Meanwhile, St. Paul Cos. (SPC) hopes to spin off its reinsurance unit as Platinum Underwriters Holdings Ltd. sometime later this year.

Allstate's announcement didn't have a profound effect on its shares on Thursday. The insurer's stock recently traded up 7 cents, or 0.19%, at $37.40 on 788,700 shares traded. On a typical day, about 2.75 million shares of Allstate change hands.

Lands' End Can Boost Sears
by Sandra Guy - Business Reporter - Chicago Sun-Times
September 12, 2002

The critical importance of Lands' End clothing to a turnaround in Sears, Roebuck and Co.'s apparel business is being closely watched by Wall Street.

Indeed, a turnaround in the apparel business could help Sears weather a slowdown in appliance sales later this year, and move the company's apparel business from break- even to profitability, said retail analyst Linda Christensen of UBS Warburg in New York.

"The profitability of Lands' End will help balance the Sears' business," Christensen said. "Now, Sears earnings are very skewed to the appliance business."

Sears gained the exclusive right to sell Lands' End clothing in its stores with its $1.9 billion acquisition of the Dodgeville, Wis.-based catalog and Internet retailer. The deal closed in June.

Lands' End merchandise debuts in November in 184 stores, including 20 of Sears' 22 Chicago area stores. Lands' End will roll out to all 870 Sears stores nationwide by fall 2003.

In one indication of Lands' End's importance to Sears' success, Christensen believes Lands' End merchandise could add 20 cents to Sears' earnings per share next year.

Sears is forecasting 2002 earnings per share of $5.15, a 22 percent increase from last year's $4.22.

Though apparel accounts for 17 percent of Sears' retail and related service revenue, it operates at break-even.

By contrast, appliances are expected to contribute 27 percent of Sears' full-line stores' operating income this year.

Next year, Lands' End merchandise could contribute nearly 60 percent of apparel's operating income, thus playing a big part in generating $234 million in estimated operating income from Sears' $6 billion apparel business, Christensen estimated.

"A turnaround of Sears' apparel business, which we define as reaching an 8 percent operating margin, would add an estimated 80 cents to earnings-per-share, including 20 cents per share of direct benefit from the sale of Lands' End merchandise," Christensen said in a research report.

Wayne Hood, retail analyst at Prudential Securities in Atlanta, has noted that Sears apparel sales average $145 per square foot of store space, or 36 percent below the industry mean of $225 per square foot.

If Sears can boost the sales figure to $200 per square foot with Lands' End's introduction, the total sales would reach $1.5 billion in 2004, Hood estimated.

"The greatest risk is at Lands' End and how its core customer will view merchandise being sold at Sears," Hood wrote in a research note. "Sears will have to protect the brand."

Sears Changes Look
by Sandra Guy - Business Reporter - Chicago Sun-Times
September 9, 2002

Shoppers at Sears Roebuck and Co.'s 22 Chicago area stores get their first look today at the full line of the retailer's new clothing label, Covington.

Covington's success is critical to Sears' effort to reinvent itself as it grapples with old rivals JCPenney and Marshall Field's as well as savvy discount competitors like Kohl's and Target.

The debut of the moderately priced women's, men's and children's clothing is being boosted by a 25-percent-off fall sale. Covington apparel, handbags and shoes, along with the November introduction of higher-priced, higher- tier Lands' End apparel, target the 75 percent of Sears shoppers who buy a refrigerator, a Craftsman drill or a gardening spade and never look at Sears clothes.

Roughly 30 million of the 40 million households that shop at Sears buy so-called hardlines, the industry's lingo for appliances, electronics, hardware and lawn-and- garden equipment.

"Lots of women shop in hardlines," said Kathryn Bufano, Sears executive vice president and general manager responsible for apparel, footwear, jewelry and home fashions. "Women are the household managers, the purchasing agents for the family," so the need to win them over is obvious.

Sears is backing the Covington line with its largest-ever integrated marketing campaign for a single apparel brand.

Officials won't say how much the company will spend, but they confirm the Covington marketing campaign is unprecedented in terms of spending and breadth. It extends to TV, newspaper and magazine ads and includes advertising directed to Latinos and African Americans, important customer bases for Sears.

Sears expects Covington apparel, which replaces eight discarded private-label brands, to garner $200 million in sales its first year and to surpass its trendy Apostrophe brand in volume.

The need to persuade the vast majority of Sears customers to shop the whole store is crucial to Sears CEO Alan Lacy's strategy of developing stand-alone stores, away from malls, which is key to achieving desperately needed top-line growth.

Sears' sales and revenue growth have been stagnant for the last few years. Sears' same-store sales plunged 11.1 percent in August from the prior year, and revenues dropped 8.7 percent, to $2 billion, in the same period.

The smaller and younger Kohl's has seen its yearly revenue jump 25 percent to 30 percent in each of the last 10 years, largely because of Kohl's new store openings.

Lands' End apparel is a vital part of Sears' whole-store strategy because Lands' End customers' incomes are in the same range as those of Sears' hardline customers.

Sears' electronics and appliance shoppers have average yearly incomes of $60,000 to $70,000; the average Sears shopper earns only up to $54,000.

Lands' End customers are overwhelmingly married women with college degrees and an average household income of $76,000.

Sears acquired exclusive rights to sell Lands' End clothing at Sears stores with its $1.9 billion acquisition of the Dodgeville, Wis.-based catalog and Internet retailer. The deal closed in June.

Lands' End apparel will be introduced in November at 184 stores, including 20 in Chicago. It will roll out to all 870 Sears stores nationwide by fall 2003. (The Sears stores in Chicago Ridge and Merrillville, Ind., will get Lands' End clothing in 2003.)

The strategy of getting hardlines customers to shop for Sears' products such as clothes and home decor items also makes sense because Sears holds a leading 40 percent share of the appliance market nationwide, though it is fighting increasingly aggressive competitors such as Lowe's and Home Depot.

In electronics, Sears is stepping up its efforts to attract high-income customers to compete with market leader Best Buy and No. 2-ranked rival Circuit City with a prominently placed "Plasma TV Shop."

The shops will offer 11 models of thin-screen TVs--four kinds of plasma large-screen TVs and seven of liquid crystal display (LCD) large-screen TVs, all high-definition capable. The plasma models range in price from $5,499 to $8,000, while the LCD TVs range from $1,199.99 to $2,999.99.

Thin TV screens are 3-1/2 to 4 inches deep and can be viewed from several angles. A big-screen TV, even one that is small-chassied, is 24 inches deep.

"Customers are investing in televisions are part of their home decor," said Ray Brown, Sears vice president of consumer electronics. "We expect more women to be buying plasma and thin-screen technology because it provides more flexibility."

Sears has made room for the "Plasma TV Shops" by paring its selection of analog products such as phones, boom boxes and VCRs.

Another Sears strength--work tools--will be featured in "Tool Territory" sections, where experts offer advice on 73 brands of tools, including Craftsman, Stanley, DeWalt and Makita. More than 400 full-line stores will have the departments by the end of this year. Eventually, all full-line stores will have them.  

The 10,000-square-foot Tool Territory departments include special sections devoted to carpentry, woodworking, mechanics and power tools for lawn and garden.

Lacy's intense efforts to cover all the bases, from working mothers to tool freaks to electronic-gadget geeks, are quickly taking shape as the important holiday season nears.

Shoppers will see Covington women's apparel in Missy sizes just inside the entrance to Sears from inside the mall, replacing the discontinued Circle of Beauty cosmetics area.

Special Covington sizes, including women's and petite, will be included among other women's and petites apparel. Men's clothing in regular sizes will be displayed by classification--shirts with shirts and pants with pants, for example, rather than by brands.

Covington apparel also will be available in "Plus" sizes and in new Men's Big and Tall shops--a fast-growth area for Sears. The Big and Tall shops will be included in 17 of the 22 Chicago area Sears stores.

Shoppers can push shopping carts through the aisles, where they will notice clearly designated sections of the store marked by new signs and fixtures.

They will pass by new closet shops and expanded home-accent departments.

They will check out at central-aisle check-out counters adjacent to key departments rather than at individual department check-outs.

Though the changes appear cosmetic, they are at the root of the 116-year-old retailer's future.

Sears has dropped unprofitable business lines, overhauled its store management structure and supply-chain processes, and cut 4,900 salaried jobs--22 percent
of its salaried work force.

The revamp is aimed at boosting operating income by 50 percent to more than $3 billion, doubling profits from retail and related services operations by 2004, and
achieving annual savings of $600 million by the same year.

Retooling Sears

Key elements of Sears' store redesigns, aimed largely at attracting higher-income women who now buy appliances and garden tools at Sears. The moves also are meant to strengthen competition against rivals like JCPenney, Kohl's and Target:

* Lands' End clothing (starts appearing in stores in November)
* Covington, a new moderately priced apparel line for men, women and children
* Closet Shops
* Expanded Home Decor sections
* Plasma TV Shops
* Men's Big and Tall Shops
* Tool Territory
* Central-aisle checkouts
* Shopping carts

Men's Big and Tall stores will be included in these stores:

* Fox Valley Center, Aurora
* Stratford Square Mall, Bloomingdale
* River Oaks Shopping Center, Calumet City
* Chicago (four locations): 1601 N. Harlem Ave.; 4730 W. Irving Park Road (Six Corners); 2 N. State St., and 6153 S. Western Ave.
* Lincoln Mall, Matteson
* Southlake Mall, Merrillville, Ind.
* Golf Mill shopping center, Niles
* North Riverside Mall, North Riverside
* Oakbrook Center, Oak Brook
* Orland Square mall, Orland Park
* Woodfield Mall, Schaumburg
* Westfield Shoppingtown Hawthorn, Vernon Hills
* Spring Hill, West Dundee

Plasma TV Shops will be installed at these local Sears stores:
* 1900 W. Lawrence in Chicago
* 4730 W. Irving Park Road (Six Corners)
* 2 N. State St., downtown Chicago
* Golf Mill shopping center, Niles
* Oakbrook Center, Oak Brook
* Woodfield Mall, Schaumburg
* Westfield Shoppingtown Hawthorn, Vernon Hills
* Charlestown Mall, St. Charles
* 105 Northwest Highway, Crystal Lake
* Sears Appliance and Electronics store, 1008 E. Rand Road, Mount Prospect

Chicago stores that will get exterior improvements in 2003:
* 1334 E. 79th
* 4730 W. Irving Park Road
* 7601 S. Cicero (Ford City)

Chicago area stores to be completely renovated this year:
* Spring Hill Mall, West Dundee
* Stratford Square Mall, Bloomingdale

Will Shoppers Covet Covington?
By Lisa Lenoir - Fashion Editor - Chicago Sun Times
September 9, 2002

My earliest memories of Sears come from buying school clothes in the 1970s.

My mother took me to the children's department to select from what she called "colorful, fun clothes for kids that wore well."

Winnie the Pooh was the children's line of the day, along with Toughskins.

I remember being decked out in all things Pooh, and even had a matching bedspread, with the famous character holding a balloon, and a comforter with a similar image
dotting it. My mother made the curtains to match the decor.

After all, she wanted to watch her pennies and Sears helped her to do it.

"Finances were limited," she says today. "You're trying to make mortgage payments. It was perfect for being on a budget."

I'm sure Sears executives would love to hear those words now, more than 30 years later, as they roll out their new Covington private- label line for men, women and
children.

While the name doesn't have the "cute" cache like Winnie the Pooh, for the children's line, this collection promises to resonate with Sears shoppers who want to look good without the high price tag.

The '70s were much different from today. Now, adults and children alike are name-brand conscious. Sean John, Tommy Hilfiger, Old Navy, Ralph Lauren and Gap compete with what many perceived as a less-than-hip Sears.

To say you shopped at such a place would alert folks you're the ultimate square, unless you were shopping for automotive, tool and appliance products.

Moving into the 1980s, designer anything, from Izod to Ralph Lauren polo shirts to Calvin Klein jeans, topped any shopping list. Anything Sears was considered passe.

It's only recently that fashion-conscious and budget-conscious shoppers, like me, are rethinking our perceptions about non-name brand clothes. Stores such as Carson Pirie Scott, Nordstrom and JCPenney are infusing doses of style into their private-label collections.

Bloomingdale's enlisted Heather Mills, Sir Paul McCartney's new bride, to promote its trendy spring I.N.C. collection. And Saks Department Stores Group, which includes Carson Pirie Scott, unveils clothing by Laura Ashley this fall. It's a new partnership to
produce streamlined sportswear, drastically unlike Lara Ashley's traditional dowdy English country style.

Contemporary shoppers dramatize their endorsement of JCPenney and Target with faintly self-mocking nicknames such as "Jacques Pennay" and "Tar-jay." Sears has yet to receive such a sexy name twist.

But backed by Sears' fashion and design director, Fran Yoshioka, and a vast design team, the company plans to build name recognition with Covington.

At first glance of the press information, the collection didn't immediately thrill. The striped turtlenecks, a classic white shirt, stretch twill pants, and for men corduroy shirts and pants are comparable to what many of Sears' competitors have.

But it's only when viewed up close that real appreciation dawns. The qualities that appealed to my value-conscious mother intrigue me as well.

Yoshioka says, "We want to be trend-right, the best quality, the best fit, and represent the best quality in the mall."

Does it measure up? If you're looking for knockout looks to be head-turners, don't look to Covington for the answer.

However, if you're looking for a foundation to complement trendier, designer looks, Covington is the place to start.

It's a strategy that Marshall Field & Co. has used successfully. Field's execs revel in the fact they can reach the woman wanting everything from its high-end Yves Saint Laurent Rive Gauche collection to its less- expensive private- label brands, 111 State and Field Gear.

Luis Padilla, Field's executive vice president of merchandising, says women don't buy Chanel from head to toe. They mix labels. They might combine a pair of Seven jeans with their 111 State T-shirt. Field's tries to enhance a wardrobe, stylishly, of course.

"We are trying to provide fashion and trend at a value," he says.

Ditto for Sears. For instance, the denim shirt ($26), seen in many stores, appears to be nothing more than basic. The top stitching helps to give the shirt its fashion. But pair it with a funky printed T-shirt, or better yet, a wrap dress, and it takes on new dimension.

The men, who now crave for more fashion in their wardrobes as evidenced by the success of such stores as Banana Republic and Kenneth Cole, can grab less
expensive versions of polos, trousers and mock ribbed sweaters from Sears. The $40 polos come in an array of colors such as ebony, coal heather, teal heather and hunter heather and rust heather.

And the children's selection of boys' rugby shirts ($14) and hoodies ($16) and girls' yarn-dyed striped sweater ($16) and corduroy jeans ($18) offers the same durability that wooed my mother 30 years ago.

Yoshioka's astuteness about the fashion industry and its major players comes through in the clothing. She's well aware Covington must elbow for space among the Ralph
Laurens and Calvin Kleins of the world.  

The attention to seaming detail, quality fabrics and trend-right color palettes positions the brand to catch the attention of this fashion editor--way before going to buy an appliance or paint.

A Look at Covington
By Lisa Lenoir - Fashion Editor - Chicago Sun Times
September 9, 2002

Sears' new Covington line includes so many pieces. We focus on a few, putting them to the fashion-value test.

GIRLS
Items: Striped mockneck top and corduroy shirt and jeans

Materials: 97 percent cotton/3 percent Lycra in the turtleneck; 100 percent cotton in the corduroy shirt and jeans

Prices: $12 for turtleneck; $16 for corduroy shirt; $18 for pants

Comment: This winning combination scores for its durability and color palette. The corduroy jeans are good to the touch and feel sturdy.

BOYS
Items: Hooded fleece sweatshirt and twill cargo pants

Materials: 80 percent cotton/20 percent polyester for the hoodie; 100 percent cotton for the pants

Prices: $16 for the hoodie; $18 for the pants

Comments: Boys, who watch sports and music videos and see logo-rich clothes, might not go for the Covington "C" on the sweatshirt--unless they know how to be creative and say it stands for "cool." The pants are a good foundation for any growing boy's wardrobe.

WOMEN
Items: Fine-gauge striped sweater and gray flannel jeans

Materials: 100 percent cotton for the top; 98 percent cotton and 2 percent Lycra for the bottoms

Prices: $28 for the top; $32 for the pants

Comment: The color vibrancy of this top signals it could work under a black suit or for casual days. The pants are perfect for those needing a little room in their trousers.

MEN
Item: Italian-made merino polo sweater

Material: 50 percent merino; 50 percent acrylic

Price: $40

Comment: The man wanting to invest more in his power tools versus his clothes can keep in step fashionwise with this polo, much like the high-end versions seen in the Banana Republic, Kenneth Cole and Gap. The sleek styling gives it an of-the-moment look.

Sears Loses Credit Card Ranking
PR Newswire - September 9, 2002

According to data in the newly released 2003 Card Industry Directory, GE Card Services has unseated longtime number one retail card issuer Sears, Roebuck and Co. GE experienced a 4.8% growth in outstandings from year-end 2000 to year-end 2001. During the same period, Sears experienced a 12.9% decrease in outstandings while focusing on converting a portion of its retail cardholder base to MasterCard gold accounts.

The 2003 edition of The Card Industry Directory, generally acknowledged as the most comprehensive and detailed guide to the credit and debit card industry, also reveals that US credit card charge volume is up 6.4% from year-end 2000 to 2001. Global credit card charge volume is up 15.2% for the same period.

"The September 11 terrorist attacks and the weak economy cast a pall over the credit card industry last year," Sandra L. Budde, Editor of The Card Industry Directory reports. "Businesses cut back on travel, consumers postponed major purchases and canceled expensive vacations, bad debt soared and consumer confidence plummeted."

According to the research contained in the 2003 Card Industry Directory, however, 2001 proved to be a good year on other fronts. The real action came on the debit front. Debit volume rose handsomely as American consumers continued to whip out their offline or signature-based Visa check and MasterCard debit cards, with charge volume increasing 26.7%.

Visa U.S.A. remained the top American card company in 2001 due to its foresight a decade ago regarding consumer demand for debit cards and its recent moves into new payment areas. Visa was first out of the box with its Verified by Visa system designed to cut online card fraud and it has proven to be a leader in smart cards. MasterCard forged on and was rewarded with double -- and in one case, triple-digit growth.

"When it comes to opening burgeoning markets, technology that makes card acceptance more convenient continues to play a major role," Peter Lucas reports in a section of the new report titled Beating the Odds in Hard Economic Times. "One market that has benefited significantly from better point-of-sale technology is quick-service restaurants, a $110 billion industry in which less than 10% of the 125,000 locations accept plastic. Armed with better payments systems, acquirers can now process transactions at QSRs in about 90 seconds, compared to 100 seconds or more for cash. QSR operators can increase sales 1% for every 10 seconds they shave off between the time an order is placed and the food is picked up, a key selling point."

The Card Industry Directory, published by Thomson Media, the force behind Credit Card Management and Card Forum, has set the industry standard for nearly 15 years. The 2003 edition delivers exclusive rankings and in-depth data for issuers, processors, networks and acquirers; details on leading vendors, service providers and technology developers; up-to-date contact information for thousands of key executives and managers; and a wealth of industry data, market statistics and authoritative analysis -- including valuable insight on Internet issuing and acquiring; a comprehensive roundup of major portfolio sales and a sweeping statistical survey of competitive market trends.

Sears Class Action
Insurance Claim Notification
September 7, 2002

NARSE continues to pursue clarifications not only the Insurance Settlement, but health care issues as well. In a follow-up letter of a meeting between NARSE Chairman Ken Johnson and Alan Lacy, Sears Chairman and CEO, Johnson had asked that Sears send a certificate of life insurance to each retiree detailing his/her status through 2007 and at the end.

According to a comment from a letter NARSE received on July 10, 2002 from Alan Lacy, Lacy indicated that, "Retirees affected by the insurance life settlement will be receiving new information in September from the insurance provider."

Same Store Sales Slid 11%
Wall Street Journal - Sept. 5, 2002

Sears, Roebuck & Co., said same-store sales slid 11% for the four weeks ended Aug. 31, dragged down by apparel sales, which posted double-digit declines in most merchandise categories. Sears also saw lower sales in home appliances and in the home office and lawn and garden categories.

Sears reiterated its July forecast for fiscal 2002 per- share earnings of $5.15, up 22% from the $4.22 it earned a year earlier.

J. C. Penney Co.,  reported a 2.9% increase in same-store department-store sales for the period ended Aug. 24. The company said that although the retail environment continues to be challenging, its department- store sales were above plan in August. Penney said it is comfortable with fiscal third-quarter earnings of 15 cents to 21 cents a share. Analysts expect the company to earn 19 cents a share, according to Thomson First Call.

Federated's Sales Slide 5.8%
Federated, the Cincinnati-based operator of Macy's and Bloomingdale's, Thursday posted a 5.8% decline in same- store sales for the period ended Aug. 31.

"We obviously were disappointed with our August sales performance," James Zimmerman, Federated's chairman and chief executive, said in a prepared statement.

Mr. Zimmerman noted that the company saw some improvement in sales trends during the last two weeks of August, including the Labor Day weekend. This improvement "gives us encouragement for achieving our plan of a 1%-to-3% same-store sales increase for the fall season."

Bleak August Retail Sector News
September 5, 2002

1. Wal-Mart Says August Sales Were Less Than Forecast
Bentonville, Arkansas: Wal-Mart Stores Inc., the world's largest retailer, said August sales at stores open at least a year rose 3.8 percent, less than forecast, as shoppers reduced spending on back-to-school clothing. The discount retailer had forecast an increase of 4 percent to 6 percent for the four weeks ended Aug. 30. September sales are expected to climb within the range of the previous forecast, Wal-Mart said in a recorded message. Shoppers are delaying purchases as they try to stretch their dollars amid recent declines in consumer confidence, which fell to a nine-month low in August. Some students are waiting longer to see which styles are popular with classmates before planning their back-to-school wardrobes, analysts have said. Sales at the company's Wal-Mart stores division rose 4.3 percent last month, while its Sam's Club warehouse chain had a gain of 1.1 percent. Same-store sales are an important retail indicator because they exclude results from new and closed locations.

2. Procter & Gamble Raises Profit Forecast on Sales Gain
Cincinnati: Procter & Gamble Co., the largest U.S. household-goods maker, raised its profit forecast as it reduces costs and sells more new products such as a Crest toothpaste marketed to woman. Earnings per share in the first quarter ending Sept. 30 will rise by 14 percent to 16 percent, spokeswoman Linda Ulrey said. Last month, it estimated earnings would increase by 11 percent to 15 percent. Sales will rise about 7 percent to 9 percent, led by health-care products and emerging markets such as China. Procter & Gamble is the biggest gainer in the Dow Jones Industrial Average today and this year as investors seek companies with steady profits. Since becoming chief executive two years ago, A.G. Lafley has cut 9,600 jobs, sold declining brands such as Comet cleaner and introduced lines including a vanilla-and- cinnamon Crest that goes on sale this month. ``The beat goes on,'' said Daniel Popowics, an analyst at Fifth Third Bank, which manages more than $30 billion in assets and owns 9.8 million Procter & Gamble shares. ``It underlines the consistency in the company. There is a higher-margin mix of products starting to kick in.''

4. Target Aug. Sales Miss Forecast; Profit May Miss Also
Minneapolis: Target Corp., the second- largest U.S. discount retailer, said August sales at stores open more than a year were less than expected, and this quarter's profit may miss forecasts if sales remain sluggish. Same-store sales for the entire company, which includes Mervyn's and Marshall Field's, fell 0.1 percent, the first decrease in 20 months. They climbed 0.5 percent at Target stores, less than expectations of an increase of 2 percent to 4 percent, the company said on a pre-recorded call. Sales of men's apparel were slow in all three chains while shoppers bought fewer sporting goods and jewelry at the Target discount chain, the company said. Results from other retailers, including No. 1 discounter Wal-Mart Stores Inc., also missed forecasts as shoppers held back on purchases. ``The consumer has a certain amount of dollars, and that number isn't increasing right now,'' said Scott Rodes, director of research at Bahl & Gaynor Investment Counsel, which has shares of Target and Wal-Mart among $2 billion in assets under management.

5. Gap Has Smallest Monthly Sales Decline in 16 Months
San Francisco: Gap Inc., owner of Gap, Old Navy and Banana Republic stores, said August sales at stores open more than a year fell 2 percent, the smallest monthly drop since April 2001. Sales picked up in the second half of the month as the retailer had more promotions and introduced a fall marketing campaign, San Francisco-based Gap said in a statement. The company said it was able to improve margins even with the promotions. Sales of men's merchandise were better than women's at Gap chains, and stores for babies and kids did better those for adults, Chief Financial Officer Heidi Kunz said on a recorded message. Gap, which has had profit declines or losses in the past nine quarters, is selling more basic items such as jeans after fashion mistakes turned away shoppers. The month's sales rose 6.4 percent to $1.16 billion from $1.09 billion a year earlier.

10. Best Buy Revises First-Quarter Results to a Loss
Eden Prairie, Minnesota: Best Buy Co., the largest U.S. electronics retailer, restated its fiscal first- quarter results to a loss from a profit because of a change in how it accounts for costs related to acquisitions. Best Buy wrote off $348 million in the quarter ended June 1 because of a decline in value of its Musicland and Magnolia Hi-Fi businesses, the company said in a statement. Eden Prairie, Minnesota-based Best Buy had a loss of 85 cents a share. It had reported net income of $70 million, or 22 cents. Sales in the second quarter ended Saturday rose 20 percent to $5 billion from $4.17 billion a year earlier, spokeswoman Shannon Burns said. The addition of 76 Best Buy stores and sales from Future Shop stores, which Best Buy acquired in November, helped boost sales, the company said. Best Buy shares rose 7.8 percent after the company said second-quarter same-store sales rose 2 percent, more than some analysts had forecast.

Ads Will Push Sears' Soft Side

Crain's Chicago Business - September 03, 2002

Hoffman Estates-based retailer Sears, Roebuck and Co., pushing softer lines for the first time in two years, breaks a TV campaign Sept. 12 for its Covington line of men's, women's and children's clothing.

Spending was not disclosed. Chicago-based WPP's Y&R Advertising is handling the new campaign, which will carry the tagline "Because all your clothes should be your favorites."

On the merchandising side, Sears has focused on exiting and editing product lines, getting out of the cosmetics business last year, for instance. Sears plans a major revamp of its stores
centered on the Covington and Lands' End clothing lines.

In May, CEO Alan Lacy said Sears has high hopes for its new Covington apparel brand, which it plans to roll out in September, replacing eight other store brands (ChicagoBusiness.com, May 3).

Perhaps the biggest challenge Sears faces is executing Mr. Lacy's plan to remodel about 600 of its full-line stores to make them less cluttered and more shopper-friendly. The new stores
feature centralized checkout stations, improved layouts and simplified signage.

Sears shares were down slightly to $44.83 in midday trading Tuesday.

Employers Slow to Adopt New Health Plans

By Johanna Bennett - Dow Jones Newswires - September 3, 2002

Despite the talk about consumer-driven health plans as the next step to alleviate runaway healthcare spending, employers have not embraced the trend as quickly as some industry analysts had hoped.

Many are intrigued by the new "do-it-yourself" style of health plans being pitched by Aetna Inc. (AET), Humana Inc. (HUM), UnitedHealth Group Inc. (UNH) and startups such as Lumenos, of Alexandria, Va., Definity Health, of Minneapolis, and Destiny Health, of Bethesda, Md. But according to some estimates, fewer than 100,000 U.S. workers are covered by such plans this year.

First launched in 2001, consumer-driven health plans are a marked change from the traditional health insurance and managed care plans in which employers choose and pay for a large portion of their workers' medical benefits.

Some plans give workers an annual allowance to buy their own health insurance. Some couple a high deductible health plan with an employer-funded account that reimburses workers for out-of-pocket medical costs. Others let members custom build a benefit plan or include a tiered hospital benefit that charges patients higher co-payments for treatments at more expensive hospitals.

Only a handful of major employers offer consumer-driven health plans to employees, including medical-device maker Medtronic Inc. (MDT), Xerox Corp. (XRX), drug
maker Novartis AG (NVS) and insurers Aetna and Humana. Next year that list will grow to a few dozen companies, Toys "R" Us Inc. (TOY) and Levi Strauss & Co. (X.LVI).

Many Employers Stay On The Sidelines

Still, many employers have adopted a wait-and-see attitude toward these plans until various concerns are addressed, according to industry analysts. So consumer- driven health plans won't become a standard offering by employers until 2005, said Blaine Bos, a consultant with William M. Mercer, a New York employee benefits consulting firm.

"Everyone is interested in it. I don't know of any employer who hasn't been approached and sat through a presentation about this," Bos said. "But most are sitting back and waiting to see some independent analysis that shows that these plans actually have an effect on the bottom line."

Larry Boress, vice president of the Midwest Business Group on Health, which represents employers like Sears, Roebuck & Co. (S) and Ford Motor Co. (F) in talks with health plans, said he thinks "that everyone is examining the potential. They are listening and waiting to see what the experience is like for other companies."

Indeed, investment bank Merrill Lynch & Co. Inc. (MER) won't add a consumer-driven health plan to its benefit offerings next year and has no specific plans for 2004. But the company is "familiarizing itself with the concept and various providers," said spokeswoman Selena Morris. Meanwhile, Friedman Billings Ramsey Group Inc., a small investment bank in Arlington, Va., also isn't expected to make any drastic changes to its benefit plans next year.

"Our eyes are open. But the earliest anything would happen is 2004 or 2005," said Bank Of America Corp. (BAC) spokesman Brad Russell.

Until now, employees have had little incentive to keep an eye on the cost of their health care, said Norbert Chung, area president for California-based Gallagher Benefit Services Inc., a unit of insurance brokerage giant Arthur J. Gallagher & Co. (AJG). In traditional
health plans, once members meet their deductible, their medical bills are covered by insurance. So consumers give little thought to the cost of a prescription or the disparity between fees doctors charge for an office visit, Chung added.

Consumer-driven health plans, however, are designed to make members more cost conscious, encouraging them to treat health care decisions like other major purchases.
That means comparing cost and quality and comparison shopping for some services.

"It about being a smarter consumer of health care," Chung said. "It creates an opportunity for price to enter into the decision-making process."

To companies facing premium hikes of 15% to 20% next year, this is music to their ears. Aetna and Humana executives say they have been busy fielding inquiries
and making formal presentations to potential customers.

"We have had employers beating down our doors to find out about consumer-driven health plans," said Jeff Bringardner, vice president of sales for Humana.

That interest should escalate, according to some industry experts. The Internal Revenue Service eliminated a major concern among employers and workers last month when it decided that personal spending accounts workers use to pay medical bills are not
taxable and unspent funds can be carried over to the next year

So far, Humana has made between 75 and 100 formal presentations that resulted in agreements with nine employers for next year. Meanwhile, Aetna's plan, known
as HealthFund, will be part of the employee benefit menus at 15 companies next year, said Ron Williams, president and head of Aetna's health care business. One
of those companies has replaced all of its health plans with HealthFund, he added.

Though initially designed for large, self-insured employers, HealthFund will be expanded next year to include any employer with more than 50 employees.

"The selling season is very young and we have significant quoting activity underway," Williams said.

Concerns About Employee Reaction

Still, not all employers are convinced of the benefits of consumer-driven health plans.

Some are skeptical about whether they will save money, fearing that members with costly medical problems won't choose the new plans. Others worry that they will
diminish the value of their health benefits in the eyes of employees, making it harder to recruit and retain valued workers.

"We think it is exciting...However the jury is still out," said Al Maag, spokesman for Avnet Inc. (AVT), a Fortune 500 distributor of semiconductors and electrical components.

The Phoenix company is worried about the cost impact on both itself and employees, Maag said.

Others are constrained by labor unions.

At telecommunications giant AT&T Corp. (T), for instance, about half of the employees are union members, so any change to their health insurance would have to be discussed during contract negotiations next year, said Alan Sefcik, vice president for benefit planning.

"It's not that we strictly want to be a follower," Sefcik said. "But it is difficult to jump out in front."

Those worries, however, should be appeased as more and more major insurance carriers begin offering consumer-driven health plans, according to some analysts.

Cigna Corp. (CI), Pacificare Health Systems Inc. (PHSY) and Wellpoint Health Networks Inc. (WLP) are marketing consumer driven benefit plans. Health Net Inc. (HNT) is launching a pilot program.

Medtronic, one of the nation's largest makers of heart devices, chose to gamble by being one of the earliest to add a consumer-driven health plan to its menu of
employee benefits.

Under its plan, employees are given an annual allowance of between $1,000 and $2,000 to pay medical bills. Once the cash is spent, they have to cover a deductible of
between $500 and $2,500 out of pocket before the company's self-insured health plan begins covering costs.

To date, about 13% to 14% of Medtronic's employees have enrolled in the plan.

"People are embracing what consumer healthcare can do," said David Ness, vice president of compensation and benefits.

Aetna began offering its HealthFund plan to its employees on Jan. 1. Humana began offering its custom health plan, known as SmartSelect, to 4,800 employees
in its Louisville headquarters July 1.

A Confident Sears Set to Sell Big TVs
CRAIN'S Chicago Business - August 27, 2002

Sears, Roebuck and Co., the 4th largest U.S. retailer, Tuesday announced its first foray into selling top-end, big-screen TVs, saying the lure of the newest sets would outweigh concerns that economic woes and a jittery stock market could stall big-ticket purchases.

Even though a number of electronics retailers — including market leader Best Buy Co. Inc. — have seen a slackening in the recent boom in home entertainment gear, Sears said it is confident its expanded TV offering would give it the edge come the holiday shopping season.

Best Buy and No. 2-ranked rival Circuit City Group are among several U.S. retailers that have moved swiftly to market flat-panel plasma or liquid crystal display (LCD) TVs as Americans seek more entertainment at home after the Sept. 11 attacks.

But Sears, based in Hoffman Estates, Illinois, said it had opted to study market trends first and now feels ``the time is right'' to push the new TVs

as prices are fast coming down. The TVs, some of which cost up to $12,999, are billed as offering the sharpest pictures and high-quality sound.

Although the sets — sold mainly at specialty boutiques such as Tweeter Home Entertainment Group Inc. — have been around now for about four years, analysts said 2002 marked the start of their mass consumer adoption.

The burgeoning appeal has retailers scrambling to be seen as the best venue to buy them, analysts said.

PRICE FACTOR

Ray Brown, Sears' vice president of consumer electronics, said the company would introduce the new TVs at more 650 of its largest stores across the country. Sears ranks among the top 10 leading sellers of consumer electronics products in the U.S.

"These products are now reaching price points that most consumers view as affordable,'' he told Reuters in an interview.

"The (falling) prices mean these products are no longer exclusively for the super wealthy,'' Brown added. He said, for example, prices of plasma, flat-panel TVs have fallen by about 50 percent from a year ago.

Shoppers can now buy plasma sets for from $5,499 to about $8,000, compared to prices a year-ago that were as high as $15,000, Brown said.

Even so, Todd Kuhrt, an analyst at Midwest Research, said the current economic climate and concerns about the resiliency of Wall Street may lead consumers to defer purchases.

"This is the worst time to debut this product. I think it's probably not going to have the legs that some thought it would have," Kuhrt said. Consumers could wait for prices to fall as low as $2,000, a decline seen taking place over the next three years, Kuhrt said.

In contrast to Sears, Wal-Mart Stores Inc., the world's largest retailer, said Tuesday it is still probing the viability of carrying the new TVs.

"We are looking at this. We are still in process of examining the emerging technologies, but of course who determines what we sell are our customers,'' Wal-Mart spokesman Tom Williams told Reuters.

Brown said Sears would carry a larger assortment of the newest TVs, compared with other chains. Analysts estimate that Best Buy and Circuit City each currently sell fewer models as they introduce customers to the sets.

Industry-wide TV sales were expected to reach 25 million this year, with only 30,000 coming from the flat-panel plasma or LCD models, Brown added.

"These products are at the beginning of their introductory phase. We think they have a good future," Bill Cimino, a spokesman for Richmond, Virginia-based Circuit City said, adding the company was also planning a major company-wide roll-out of the newest TVs.

Lands' End Pares Agency Review
Crain's Chicago Business Newsroom
August 26, 2002

Lands' End has trimmed the contenders in its $20-million advertising review to four shops, according to executives close to the decision.

Interpublic Group of Cos.' Carmichael Lynch and Campbell Mithun, both Minneapolis; Havas' McKinney & Silver, Raleigh, N.C; and independent Richards Group, Dallas, will continue in the final round from an original pool of 12 agencies.

Agency representatives declined to comment, as did Lands' End and its search consultant, Rojek Cutcher Group, Cleveland.

No Sears Connections

None of the finalists are associated with Lands' End parent Sears, Roebuck & Co. A critical driver in that decision, according to insiders, was that executives at Lands' End wanted to be sure the brand's advertising identity would remain separate from that of its new owner.

Last month, the catalog retailer put its account in play after Omnicom Group's DDB Worldwide, Chicago, moved the assignment to sibling Element 79, Chicago, to avoid a conflict with rival retailer J.C. Penney.

Sears Betting Upheaval Will Pay Off

'Massive change' cheers shoppers, tests investors

By Susan Chandler - Chicago Tribune staff reporter - August 22, 2002

The orange signs scattered around the Sears, Roebuck and Co. store in Vernon Hills all say the same thing: Pardon our dust.

But it's not the dust that Nancy Fisco is noticing. The McHenry resident is looking at the scented candles, picture frames and small appliances in Sears' new home accents shop.

The sale-priced candles were "cheaper than I would have paid for them at Target," said Fisco, who hasn't shopped at Sears in at least a year. And the store felt more open. "I was impressed with the way the towels and rugs were displayed. They weren't cluttered," she said.

That good report card is welcome news for Sears' top brass, who are putting Sears' chain of 870 department stores through its biggest upheaval in recent memory.

On the downside, the disorder is showing up in Sears' monthly sales numbers: Sales declined 4.9 percent in July and 3.8 percent in June. The numbers for the first half of August, the kickoff to the important fall back- to-school season, were even worse. Sales are tracking below Sears' plan for a nearly 10 percent decline.

So far, investors are showing remarkable patience with the giant remodeling job, which kicked into high gear this spring. Sears stock is trading around $47, well above its 52-week low of $29.90. But that forbearance is likely to end soon when the work draws to a close.

"Once it's done, they've won't have an excuse," said George Whalin, president of Retail Management Consultants in San Marcos, Calif. "They'll have to start putting some numbers on the board."

Right now, Sears would settle for having all its merchandise on the floor.

Its new private-label line of classic apparel, Covington, is just now arriving. Last week, at Sears' store in Woodfield mall, piles of Covington women's sweaters and racks of Covington women's shirts greeted shoppers entering from the mall, a high-profile spot that until recently was filled with Sears' discontinued Circle of Beauty cosmetic line.

But many racks are still bare, waiting for more Covington merchandise to arrive from the overseas factories where it is produced.

"We're in the throes of really massive change," said Mary Conway, Sears' executive vice president of stores, as she inspected the Covington setup in Woodfield last Friday. "A week ago this was a giant hole."

The Covington launch is just the beginning. Closet shops featuring wooden hangers and clothes racks are being added in more than 500 stores, along with home accent departments featuring a new private-label Sears' brand, Whole Home. Big-and-tall men's shops are cropping up in 350 stores, and new "plasma" departments are being created to showcase flat-screen TVs.

Boxes of athletic and children's shoes are being moved onto the sales floor, so customers can help themselves. And trendy fragrances such as Calvin Klein and Gucci have been freed from glass cases where they were once kept under lock and key.

On top of that, new departments are being created to showcase Lands' End clothing, which will be sold in 184 Sears stores beginning this fall.

If that weren't enough, 50 Sears stores, including the ones in Stratford Square mall in west suburban Bloomingdale and the Spring Hill Mall in northwest suburban West Dundee, are receiving full remodeling jobs.

The changes aren't cheap. Sears is spending about $800 million this year upgrading its full-line stores and will do the same for the next two years. That's more than half of its annual $1.3 billion capital spending budget.

Pressure on workers
In the short term, all that change has put tremendous pressure on Sears' store employees who have to work twice as hard keeping the stores looking good. And there are fewer managers to help out. As part of a major reorganization of Sears' field operation, the number of direct reports to managers of average-size Sears stores has been cut from 11 to five. Total salaried positions have been trimmed by about 20 percent.

"People are really trying to get this out of the way," said Conway, who is happy with the progress the stores have made.

It's definitely been a year of change.

Earlier this year, the stores went through another evolution as Sears created centralized checkouts in the aisles, following in Kohl's Corp.'s footsteps. Last year, the stores rolled out strollers that double as shopping carts.

Already, some of the changes are being rethought.

In about 35 stores, Sears will be trading its shopping cart strollers for traditional grocery-style shopping carts this fall because people without kids indicated they felt funny using the strollers, Conway said. If the test is successful, the larger carts will expand throughout the chain.

Freedom to experiment
For years, Sears resisted the idea of shopping carts because they clashed with its goal to look more like a department store. But under Chief Executive Alan Lacy, Sears has redefined itself as a "broad-line merchant," giving it freedom to experiment with techniques used by discounters.

Meanwhile, Sears' self-service trial already has hit a few bumps.

Putting $35 bottles of perfume out on shelves has resulted in an increased rate of shoplifting. So Sears has encased the small packages in larger plastic boxes known as "clam shells." The clam shells make it harder for someone to conceal the perfume under their clothes.

"You want to make it convenient for customers to shop, but you do have to deal with shrink," said Conway.

Customers optimistic
Most customers appear to appreciate the efforts Sears is making. Shopping at the Sears in Vernon Hills on Tuesday, Richie Moore noticed that Sears is working on its consumer electronics area.

"It looked like they were expanding. It's a good thing to keep updating it," said the Beach Park resident and mortgage banker.

Although he said he frequently shops at Sears, he has been going elsewhere for electronics because of better prices at Best Buy and Computer Discount Warehouse.

If Sears does bolster its gadget offerings, it has a chance to win Moore's business back, but it won't happen automatically.

"They need to have a bigger selection and better prices. I've got a wait-and-see attitude right now," he said.

Sears Emphasizes Heritage in Campaign
By Stuart Elliott - New York Times -  August 23, 2002

A year after Sears departed from tradition by introducing a tongue-in-cheek advertising campaign, the struggling retailer is making a midcourse correction with heart-warming commercials that evoke the company's heritage.

Beginning Sunday night, Sears, Roebuck & Company will augment its current campaign, which carries the theme "Sears. Where else?," with now-and-then spots that painstakingly recreate scenes of everyday life from the 20th century. By reminding consumers that Sears sold their ancestors everything from farm equipment to saddle shoes, the commercials are meant to remind them that Sears now offers everything from computers to denim jackets. And Sears hopes the ads — which will continue through the important back-to-school, fall and holiday shopping seasons — will help recapture the consumers who have increasingly been wooed away by discount retailers like Target, Kohl's and Wal-Mart.

Sears is joining a lengthy list of blue-chip brands like Ford Motor and Gatorade that are adding a heritage pitch to their current campaigns. Because nostalgia is popular on Madison Avenue during uncertain times, the worried national mood since Sept. 11 has generated a skein of ads with traditional touches that seek to move forward by looking back.

"We felt the time was right for us to celebrate the role we have played and continue to play in the lives of our customers," said David Selby, senior vice president for marketing at Sears in Hoffman Estates, Ill.

"The essence of who we are, what we do, is that no one has what Sears has to help you live your life," he added. "America today is looking for institutions it can trust."

But retail analysts and corporate-identity consultants are skeptical whether retroactivity is appropriate for Sears. Consumers, they say, want retailers to provide the hottest, newest merchandise rather than paeans to bygone days of cracker barrels, Wells Fargo wagons and Sears Silvertone radios.

"It's intellectually clever, but I'm not sure it's the right emotional approach to bring shoppers into the store today," said Candace Corlett, a principal at WSL Strategic Retail in New York, a consulting company.

"It's always been a tough sell to build retail loyalty based on historical loyalty," she added. "If that tactic worked, we'd still have Gimbels and Montgomery Ward."

Adding to the difficulties for Sears is its competitive situation, said Burt Flickinger III, managing director at the Strategic Resource Group in Westport, Conn., another retail consultant. The chain is "stuck in a no- man's land, caught in a cross-fire" between "value department stores like Kohl's, with excellent price, promotion and image marketing, and on the other side discounters like Target, which are bringing class to mass."

"History's interesting, but it doesn't often translate into the best price," he added, "and the best price is what's driving consumer behavior."

The American shopper's relentless focus on low prices is evident from recent sales data from retailers. In July, sales at Sears stores fell 2.7 percent from July 2001. For stores open more than a year, a critical barometer of health in retailing, the decline was worse, 4.9 percent. By comparison, last month Wal-Mart Stores sales rose 11 percent over all and 4.5 percent in same-stores; Target Stores sales were up 8.7 percent over all and 1 percent in same-stores; and the Kohl's Corporation sales rose 23.8 percent over all and 7.5 percent in same- stores.

Back-to-school sales at retailers like Wal-Mart, however, are weaker than they had anticipated, primarily because of weather, to paraphrase the singer Nelly, so hot that consumers seem more interested in stripping than shopping.

At Sears, back-to-school sales are soft for children's apparel, said Lee Antonio, a spokeswoman, but are strong in clothing categories like denim and uniforms.

The introduction last year of "Sears. Where else?" was intended to play up the variety of name-brand merchandise sold by Sears in apparel and other important categories like appliances and tools, rather than trying to compete on price against Target, Wal-Mart and the other growing discounters. The campaign, by the Chicago office of Young & Rubicam Advertising, part of the Young & Rubicam division of the WPP Group, has departed significantly from the typical Sears style of peddling with jingles and hyperactive invitations to one-day sales.

The "Where else?" ads have been funny, playful, sometimes even, gasp, sexy, presenting tales of consumers whose lives would be improved immeasurably if they bought at Sears all the items on hypothetical shopping lists. For instance, an overweight man in a bathroom is offered this shopping list: "Fieldcrest bath towels. Whole Home accent rugs. NordicTrack treadmill."

"We're not changing our voice as much as adding a new tone of voice," said Mark Figliulo, managing partner and chief creative officer at Young & Rubicam Chicago, which shares the Sears general advertising account with a sibling WPP agency, the Chicago office of Ogilvy & Mather Worldwide. "There's still humor in it, but it's a little more emotional."

"We're not telling people to shop there because Sears has been around for a long time," he added. "We're reminding them Sears is a trusted brand they can count on, that we had it then and we still have it now."

For instance, in a commercial that will start running Sunday, actors dressed in period costumes from different decades of the 20th century demonstrate the variety of Sears offerings with a set of inquiries. A farmer asks "Where can I get a plow for the spring planting?"; two men ask, "Where can I get a radio to listen to the game?"; a woman asks, "Where can I get new shoes and a new electric washing machine?"; and a man asks, "Where can I get my wife a wig?"

Those black-and-white vignettes, filmed by the director Tony Kaye using vintage equipment from each period, are interspersed with color film of contemporary consumers asking for merchandise like the Xbox video game system and steel-belted radial tires. At the end, an actor playing a salesman in a Sears TV-radio department of the 1950's says, "It was true then," and an actor playing a salesman in a Sears electronics department of 2002 chimes in, "And it's true now," that for "great brands, credit, service and satisfaction guaranteed," the place to "get it all in one store" is "Sears. Where else?"

Mr. Figliulo of Y.& R. Advertising and Mr. Selby of Sears said that the then-and-now ads would alternate with new versions of the shopping-list ads. They will also incorporate corporate developments like the introduction of a midprice line of apparel under the Covington brand name, scheduled for September; the redesign of Sears stores to add features found at rivals like Target, which include clustered checkout counters at exits rather than dispersed throughout various departments; and the introduction of merchandise bearing the brand name of Lands' End, which Sears agreed to acquire in May for $1.9 billion.

Because the heritage commercials will be mixed in with the shopping-list ads, it is difficult to estimate how much Sears plans to spend on each type of pitch. The company typically spends $600 million to $1 billion annually on all forms of advertising.

Consumers Curb Spending
Reuters Newsroom - August 20, 2002

Sales at U.S. chain stores slowed last week as consumers, fearing the rewards of economic recovery could be slow in coming, curbed extraneous spending and stuck to basic purchases.

Analysts keep a close eye on the retail sector for signs that consumers, whose spending accounts for two thirds of U.S. economic activity, will keep the wheels of the economy turning.

Business at U.S. retailers fell 0.8 percent in the week ended Aug. 17 after a 0.5 percent drop in the preceding week as early back-to-school promotions failed to lure shoppers.

Sales at U.S. chain stores according to Instinet Research's Redbook report fell a steep 1.5 percent during the first two weeks of August compared with the same period last month.

"Consumers are increasingly buying closer to need,'' Instinet said in the report. ``Back-to-school sales generally have lagged'' retailers' expectations, the report said.

Children are taking a more ``value-oriented'' approach in their back-to-school shopping, Instinet said, even as discount stores like Wal-Mart and Target flood billboards and television screens with snazzy seasonal advertising.

A shaky economy is driving parents to hunt for bargains too: "Given the current economic conditions, parents are more cautious about spending,'' Redbook said.

BACK-TO-SCHOOL BLUES
For a season rivaled only by Christmas in terms of sales volume, a sputtering start to August is unlikely to have retailers cheering, analysts said.

"It's not looking very optimistic for the month or for the back-to-school season,'' said Michael Niemira, senior economist at Bank of Tokyo-Mitsubishi. ``Last week's performance just accentuated a weak trend that has be in place since July.''

Discount stores are likely to stay afloat as consumers scour store shelves for cheap stuff. Discounter Target Corp. said on Monday it expected sales at stores open at least a year — same-store sales — to rise between 2 percent and 4 percent in August.

Department stores, by contrast, continue to suffer. A weak economy reduces retailers' pricing power, denting specialty retailers who can only slash prices so far before crimping profits.

Sears, Roebuck & Co. said on Monday same-store sales for the first two retail weeks of August were below its already deflated expectations of a high-single digit sales decline for the period.

The Bank-of-Tokyo Mitsubishi and UBS Warburg's Weekly Chain Store Sales Snapshot is compiled from seven major discount, department and chain stores across the country that report their weekly results. They include J.C. Penney Co. Inc., Sears Roebuck & Co., Target Corp., Kmart Corp., Wal-Mart Stores Inc., Federated Department Stores Inc. and May Department Stores Co.

The Redbook Retail Sales Average, released weekly by Instinet Research, is a sales-weighted average of annual growth in same-store sales at discount, department and chain stores.

Sears' Aug. Sales Miss Mark
Reuters - August 19, 2002

Retailer Sears, Roebuck and Co. Monday said comparable store sales for the Aug. 4-17 period were below its expectations.

The company said it had been expecting a high-single digit sales decline for the period. A spokeswoman offered no further comment on the results.

The company said it remains on track for meeting its fiscal year forecast for a comparable store sales decline in the low to mid-single digit range.

Best-performing areas included hardware and junior apparel in its full-line stores, versus specialty stores such as automotive, the company said in a recording for investors.

Sears, Others Alter 9/11 Ad Plans
Crain's Chicago Business - August 15, 2002

Joining the ranks of several other major retail advertisers, Hoffman Estates-based Sears, Roebuck and Co. will not air regularly scheduled TV commercials on the anniversary of the Sept. 11 terrorist attacks, a spokeswoman said, but will reschedule its ads for other times.

Target Corp.'s Target Stores also is putting off advertising plans, a company spokesman said. Target will place an ad in a memorial section planned for The New York Times, he said.

"We are somewhat quietly honoring those in New York City," he said.

A number of chains, particularly those in New York, were planning memorial window displays.

The ad blackouts by retailers are expected to have a minimal impact on sales, as the anniversary falls on a Wednesday, usually a quiet shopping day even though it comes at the peak of the important back-to-school season.

Sears plan to go ahead with sales events planned for the following weekend, the spokeswoman said.

This story originally appeared on AdAge.com, the Web site of Crain's sister publication Advertising Age.

Sears Sues Emerson Electric
By Kelly Quigley - CRAIN'S Chicago Business - August 14, 2002

Sears suit claims machine scam

Sears, Roebuck and Co. has filed a civil lawsuit against St. Louis-based Emerson Electric Co., claiming the tool manufacturer used machines owned by Sears to make a line of bench power tools for a Sears competitor.

Emerson carried out an elaborate operation in which it retained a number of Sears machines at a plant in Paris, Tenn., which had been used to make Craftsman tools for the Hoffman Estates-based department store chain, according to the 12-count lawsuit.

After Sears ended its contract with Emerson in 1998, Emerson kept manufacturing machines and valuable drawings of Craftsman tools to make similar products for a Sears rival, the lawsuit alleges. The machines and drawings were supposed to have been destroyed or returned to Sears when the contract was terminated.

Sears says it suffered millions of dollars in damages as a result, and is seeking monetary compensation from Emerson, the largest maker of power supplies for the telecommunications industry.

By using the Sears-owned machines and intellectual property, “Emerson enabled a competitor of Sears’ to enter the bench power tool market” much earlier than otherwise would have been possible, the lawsuit says. The Sears spokeswoman declined to identify the competitor, which was not named in the lawsuit filed late Tuesday in U.S. District Court for the Northern District of Illinois.

Emerson says the numerous allegations are “completely false” and that it never defrauded or misled Sears.

"We are astounded and incensed that such a lawsuit was filed, and we intend to fight it aggressively," Emerson said in a statement. "We will take every step necessary to protect our reputation and our shareholders against these false claims."

Emerson is still under contract with Sears to make certain Craftsman hand and power tools, and there is no plan at this time to terminate those contracts, the Sears spokeswoman said.

The company began an investigation of Emerson’s Paris plant in 1998, as part of an audit after the bench tool contract ended, she said. Recently, new information surfaced that led the company to re-launch an investigation, which resulted in the findings that are the basis of the lawsuit, the spokeswoman said.

As part of the plan to keep Sears from discovering the machines, the lawsuit claims Emerson hid them at an abandoned shirt factory and lied about the number of machines it originally used.

After some of the machines were to be demolished after the contract ended, Emerson reclaimed the machines without Sears’ knowledge, the lawsuit says.

Shares of Sears closed up $2.57, at $44.62 on Wednesday.

Sears Sues, Alleging Emerson Made Tools for Competitor

Dow Jones Newswires - August 14, 2002

A company contracted to produce certain Craftsman tools scammed Sears Roebuck and Co. (S) out of millions of dollars by making counterfeits, Sears alleged in a lawsuit.

The civil lawsuit, filed late Tuesday in federal court, alleges that Emerson Electric Co. (EMR) concocted an elaborate scheme to use Sears' manufacturing machines to make bench power tools for one of Sears' competitors.

Sears claims Emerson lied about the number of Sears' tool-making machines it was using, and then hid some of them in an abandoned shirt factory. The lawsuit alleges that Emerson bought back many Sears-owned machines from a company hired to demolish them and duplicated other Sears machines. Emerson then used the machines to build tools for a Sears competitor, the lawsuit claims.

"We're reading (the lawsuit). It hasn't been reviewed here yet," Emerson spokesman Matt Wisla said Wednesday. "We just have no comment on pending litigation, and we just have not had a chance to review the suit yet."

Sears, of Hoffman Estates, Ill., Sears says the competitor, which was not named in the lawsuit, would not have been able to enter the market so quickly without the help of the Sears-owned equipment.

Sears spokeswoman Jan Drummond said the company is not releasing the name of the competitor it believes was involved with Emerson.

Until September 1998, Emerson built Sears' signature Craftsman-brand bench and stationary power tools in its plant in Paris, Tenn., the lawsuit says. When the company's contract with Sears expired, it was supposed to return all tool-making machines and drawings to the retailer, Sears says.

Instead, the lawsuit alleges that Emerson claimed to have one-fifth the number of Sears-owned machines it possessed.

When Sears officials inspected the plant, Emerson employees limited who could conduct the audit and only let them work during "non-production" hours, the lawsuit says.

Emerson officials intimidated auditors, saying they could not guarantee the Sears team's safety at the plant, the lawsuit alleges.

The lawsuit contends Emerson officials told the auditors many machines had been moved because they were obsolete and of scrap value.

Emerson officials were actually hiding new, usable machines at the shirt factory, the lawsuit alleges.

Emerson bought back some machinery from a company Sears hired to destroy the equipment. The lawsuit claims Emerson spray-painted marks on machines it wanted then paid an outside company $265,000 to buy those machines back from the scrap dealer Sears hired to disable the equipment.

Drummond said Sears had started investigating Emerson in 1998. But those efforts stalled, she said. New information was recently discovered that caused Sears to resurrect its investigation, Drummond said.

Emerson officials announced in April that the Paris, Tenn., plant would be closing by July 2003.

Sears is seeking unspecified compensatory damages in the lawsuit.

Emerson Electric later issued a statement saying in part, "The allegations in this lawsuit are completely false, and we flatly deny that we defrauded or misled Sears at any point or in any manner."

Emerson said it intends to fight the suit aggressively and protect its reputation.

Sears Says Results In Line With Co. Expectations

DOW JONES NEWSWIRES  - August 8, 2002

Sears Roebuck & Co. July same-store sales fell 4.9%, slightly ahead of consensus analyst expectations of a decline of 5%.

The department store retailer said results were in line with company expectations, as the current quarter is the period of "greatest sales disruption at the store level" as store remodelings proceed.

Total domestic store revenue fell 2.7% to $1.97 billion for the four weeks ended Aug. 3, from $2.03 billion a year ago.

Sears said dealer and hardware store formats saw upper- and low-single digit increases, respectively, in July. At full-line stores, lawn and garden sales and appliance sales increased, offset by decreases in other categories.

Sears, which is overhauling merchandise displays so that sales floors become less cluttered, said sales for the 26 weeks ended Aug. 3 fell 1.5% to $13.67 billion from $13.87 billion. Same-store sales fell 4%.

Allstate AFL-CIO, Allstate Suit Might Bring Huge Ramifications

By Mike Comerford  - Daily Herald Business Writer - August 8, 2002

In what union officials on Wednesday were calling a potential "landmark case," an AFL-CIO affiliated union officially applied to represent the more than 10,000 U.S. agents selling The Allstate Corp. products.

Should the union be able to convince national labor relations officials that Allstate is treating the agents more as employees than independent contractors, union officials say it could have a wider impact on contract jobs in other sectors.

More than half of 5,000 agents signed petitions calling for a union election, according to officials at the Office and Professional Employees International Union.

Union officials predicted Wednesday that a final decision, even with an appeal, could come before year's end.

"This is an issue that has never been fully litigated before in the U.S.," said Michael Goodwin, international president of the union, in Chicago Wednesday for an AFL- CIO executive council meeting. "If we win, it will effect thousands of jobs of people around the U.S."

Allstate officials on Wednesday disagreed, citing several court and Internal Revenue Service rulings. From its official statements, it appears Allstate will challenge whether the National Labor Relations Act applies to what Allstate calls independent contractor agents.

In 1999, the Northbrook insurer changed its business model, announcing its intention to make its employee agents into independent contractors and, at the same time, beefing up Internet services.

There have long been reports of problems with Allstate agent morale but since the changes, which took effect in 2000, legal actions have become more common.

"They used to say we were just a 'few' disgruntled agents," said Robert Guilmette, a spokesman for the unofficial agents association named the National Association of Professional Allstate Agents, based in Michigan. "Now, we have the majority signing this petition."

Agents opposing current Allstate policies complain they must still sell mostly Allstate products yet without receiving a pension or other benefits.

Allstate contends it is within the law and if agents don't like arrangement they can sell their book of business to another Allstate-dedicated agent.

Goodwin's union has had limited success in organizing non-traditional work sectors. When podiatrists in 1996 formed a guild, they failed to gain legislation giving podiatrists collective bargaining rights. The guild has since become affiliated with the Office and Professional Employees union.

Still, prominent Chicago-based labor attorney Thomas Geoghegan said Wednesday the case has some government precedence and, if successful, could help other job sectors, from taxi drivers to high-tech workers.

"You have high-tech workers working as contractors and they don't have health insurance," said Geoghegan, who has written several labor law books and is often portrayed as a pro-labor attorney.

"Making people independent contractors is a bad deal for the government because it creates a work force with less Social Security later in life," he said, "because companies don't kick in for independent contractors."

 

Dow Jones Newswires - August 6, 2002

Dell Computer Corp. has received a contract from Sears, Roebuck & Co. to provide hardware and deployment services to update the technology infrastructure of Sears' 870 full-line stores. The value of the contract wasn't disclosed.

In a news release, Dell said the rollout is scheduled for completion this fall. Under the Sears CRT Replacement Project, Dell will provide about 1,800 PowerEdge 2500 servers, seven PowerVault 220S storage systems, 3,700 OptiPlex GX50 desktops, and 14,600 Dell E551 and E771p monitors to replace CRT, or cathode-ray tube, terminals.

Sears has also purchased Dell Premier Enterprise Service and Support for servers, which provides for a four-hour response time to technical problems around the clock, it noted.

Craftsman Ads Connect with Building History

By Jim Kirk - Chicago Tribune - August 2, 2002

Any brand that reaches 75 years old needs some kind of freshening up.

Sears, Roebuck and Co.'s Craftsman is no exception, especially with a brand offering a lifetime guarantee. But with the brand in its 75th year this month, Sears marketing executives thought it was time to spend some money reinvigorating it.

So, Sears this month is launching a new image campaign for Craftsman--its first in several years--via agency Ogilvy & Mather Chicago. The new campaign sets out to connect Craftsman tools with some of the country's most famous landmarks, as well as some not-so-famous suburbs.

Avoiding schmaltzy nostalgia, the campaign has a dual purpose: reintroduce the brand to new customers and keep them coming to Sears instead of the so-called big box competitors such as Lowe's and Home Depot.

In one ad, a picture of the building of the Gateway Arch in St. Louis, sits opposite copy that states: "Construction on the arch didn't start until 1963, but when it did, the workmen were armed with two things: [architect Eero] Saarinen's majestic vision and our tools."

Another that features an old photo of a suburban subdivision states: "Craftsman helped build the suburbs. So we know a thing or two about uniformity."

It is also the most recent step by Sears to reinvest behind its proprietary brands, which continue to be big traffic draws through its stores.

"Craftsman is a very strategically powerful part of our value proposition," said David Selby, senior vice president of marketing for Sears. "The fact that it is a 75-year-old brand is worth noting. So we're creating a special effort."

Even as it launched a new store-branding campaign last year, the Hoffman Estates-based retailer says that its dual strategy of also promoting its house brands continues to be key. Campaigns for appliances such as Kenmore get special heft.

"We very much want to keep it in front of people," said Andy Ginger, vice president/brand management for Sears. "It's the flagship brand in the store."

While most of the print campaign will be featured in home repair and remodeling magazines, a TV campaign is in the works that will touch on similar themes.

Lands' End Shops Ad Account

July 22, 2002 - CRAIN'S Chicago Business

Citing an account conflict, Sears, Roebuck and Co.-owned Lands' End placed its nearly $20 million ad account into review. Omnicom Group's Element 79, in Chicago, is the incumbent agency.

Lands' End said the presence of J.C. Penney Co. as a client at sibling Omnicom agency DDB Worldwide, Chicago, was a conflict. DDB had both the Lands' End and J.C. Penney accounts prior to this spring's acquisition of the specialty catalog retailer by Sears. Despite the shift, DDB Worldwide and Element 79 share some back-office functions.

Rojek Cucher Group, Cleveland, is handling the review. A decision is expected in October.

Lands' End spent $19 million on advertising last year, according to Taylor Nelson Sofres' CMR. The bulk of the spending, $13.2 million, was put toward on magazine advertising with a small amount spent on syndicated TV ads.

Hoffman Estates-based Sears bought Lands' End for nearly $1.9 billion.

This story originally appeared on AdAge.com, the Web site of Crain's sister publication Advertising Age.

Sears Weekly Sales Report
by Susan Chandler, Chicago Tribune - July 20, 2002

No news is good news: For several years now, Sears, Roebuck and Co. has been providing a weekly sales report that anyone can dial up. So have other major retailers such as Wal-Mart Stores Inc. and Target Corp.

Of course, the weekly reports from those two companies have been pretty upbeat for a long time, while the news from Sears hasn't been so rosy.

Monthly sales at the nation's third-largest general retailer have declined for 10 months in a row. So Sears has decided to pull the plug on the weekly updates at the end of the third quarter.

Paul Liska, Sears' chief financial officer, told analysts this week that the sales recordings are being discontinued because they are "not helpful" to Wall Street analysts.

What they really don't help is Sears' stock price. Chief Executive Alan Lacy acknowledged Thursday that one of the reasons investors have been bailing out of Sears' stock for the past several weeks is they've been worried that continuing sales declines would weigh on earnings-- and understandably so.

But Sears continued its cost-cutting magic in the second quarter, posting strong earnings numbers even as sales continued to shrink.

The company will continue providing monthly sales reports, of course. It can't really get out of that because analysts would raise a ruckus.

And we can't help thinking that if Sears' sales ever start to trend upward again, the weekly update may make a comeback.

Former Sears Exec Named President of
Wal-Mart Financial Services

Chicago Observer - July 20, 2002

Jane J. Thompson, the Sears, Roebuck and Co. executive whose areas of responsibility had a habit of running into trouble or out of existence, is getting another shot, this time at Wal-Mart Stores Inc., where she's been named president of Wal-Mart Financial Services.

The Bentonville, Ark.-based retailer didn't announce her appointment, and she didn't return calls. But a spokesman who confirmed the hiring said she would oversee Wal-Mart's expansion on the consumer banking and credit fronts: "Jane was just brought in at a more senior level to bring all we're doing under one umbrella."

At Hoffman Estates-based Sears, Ms. Thompson, now 51, presided over a rapid expansion of its credit-card portfolio that led to soaring delinquencies by 1997. Sears also took a $475-million charge to cover legal settlements related to efforts to get customers who filed for bankruptcy protection to still pay their Sears bills.

She left Sears in 1999 to "pursue other interests" after heading direct-marking efforts that were disbanded as part of a broader restructuring. Most recently, she was global director, consumer strategy practice, at Deloitte Consulting in Chicago.

Like Sears and other retailers, Wal-Mart has envied higher margins associated with retail banking and consumer credit. It has a pending bid to buy a California bank β€” but only to lower costs of processing debit-card transactions, it claims, not, as small banks fear, to become a new, giant competitor.

 

Sears Raises 2002 Outlook
Reuters Newsroom - July 18, 2002

Retailer Sears, Roebuck and Co. Thursday said its credit business helped it report a second-quarter profit well above estimates despite a dip in revenues, and it raised its full-year earnings estimate.

Sears, the No. 4 U.S. retailer, said net income rose to $420 million, or $1.31 a share, compared with a loss of $197 million, or 60 cents a share, a year earlier.

Analysts had been expecting it to earn between $1.09 and $1.17 per share, with a consensus expectation of $1.14 per share, according to research firm Thomson First Call.

Revenues slipped to $10.14 billion from $10.18 billion a year earlier. The company said it expects 2002 full year comparable earnings per share to be about $5.15, a 22 percent increase over the prior-year amount of $4.22. The estimate takes into account the negative impact on sales from repositioning and restructuring initiatives. Analysts had been expecting $5.07 per share for the year.

The previous expectation was for full year comparable earnings per share to increase approximately 17 percent. Shares of Sears rose 8 percent in the second quarter, outperforming the Standard & Poor's Retailing Index, which fell about 7 percent.

Sears last month closed its $1.9 billion acquisition of catalog and Internet retailer Lands' End Inc. and is facing the challenge of reviving its laggard apparel business to attract a loyal and more affluent customer.

The retailer has struggled to revive its clothing business in recent years as it has lost customers to discounters like Wal-Mart Stores Inc., Target Corp. and Kohl's Corp.

Sears Swings to Profit, Raises Full-Year Views
Dow Jones Newswires -  July 18, 2002

Sears Roebuck & Co. swung to a profit in the second quarter, helped in part by ongoing improvements at the company's credit business. The company also raised its full-year guidance for the second time this year.

The department-store retailer Thursday reported net income of $420 million, or $1.31 a share, for the period ended June 29, compared with a year-earlier net loss of $197 million, or 60 cents a share.

Analysts had expected Sears to post earnings of $1.14 a share for the latest quarter, according to a survey by Thomson First Call.

Year-earlier results included a pretax charge of $809 million, or $1.56 a share. Excluding that item, the company said it earned $316 million, or 96 cents a share, for the year-earlier period.

"Profits for the quarter showed solid increases across all segments," said Chairman and Chief Executive Alan J. Lacy, in a prepared statement. "Margin rate improvements continue to benefit the retail businesses, while Credit and Financial Products results were driven by the growth of the Sears Gold MasterCard product and a favorable interest rate environment."

Overall revenue dipped slightly to $10.14 billion from $10.18 billion a year earlier.

Revenue for retail and related services slipped to $7.7 billion from $7.76 billion. Domestic credit and financial-products revenue rose 3.5% to $1.3 billion, driven primarily by higher average receivable balances.

Credit receivables at the end of the second quarter grew 8.8% to $28.2 billion, the company said. The domestic provision for uncollectible accounts, on a comparable basis, increased by $43 million, or 12%.

Meanwhile, Sears announced a change in its accounting for the allowance for uncollectible accounts in the credit business. Sears has changed its allowance methodology to include current balances and accrued credit-card fees. Previously, Sears' allowance methodology had provided for uncollectible principal and accrued finance charges on past-due accounts.

The company believes the change moves it toward a more conservative position in regard to its allowance for uncollectible accounts. As a result of the accounting change, Sears said it recorded a cumulative noncash charge of $191 million as of the beginning of 2002. It said the change didn't impact second-quarter results.

For the full year, Sears raised its earnings to $5.15 a share, a 22% increase from year-earlier earnings of $4.22 a share. In April, the company said it expected full-year earnings to increase 17% from last year, up from an initial forecast in January for earnings growth of between 13% and 15%.

Analysts currently expect earnings of $5.07 a share in 2002, according to First Call.

Separately, Sears said it will offer Lands' End products in more than 180 Sears stores this fall in 10 markets. Last month, Sears completed its acquisition of mail- order and Internet merchant Lands' End Inc. for about $1.86 billion.

The department-store retailer said about 15% to 20% of the stores' apparel selling space will carry Lands' End products.

The current 10 markets include Chicago; Los Angeles; San Francisco; Boston; New York; Philadelphia; Hartford, Conn.; Madison, Wis.; Atlanta and Raleigh-Durham, N.C. Sears expects the full rollout to remaining stores to continue through 2003.

Sears to Charge Up Credit Card Features
By Kelly Quigley - Crain's Chicago Business Newsroom - July 17, 2002

Sears, Roebuck and Co. on Wednesday said it is partnering with a host of entertainment, dining and retail businesses that will accept the department store’s credit card by mid 2003. Sears Cards are now accepted only at the chain’s own retail outlets.

Hoffman Estates-based Sears said customers will be able to use their cards at a variety of partner merchants that don’t compete directly with Sears. A spokesman declined to say how many establishments would accept the Sears Card next year or name specific businesses with which Sears hopes to partner.

Sears hopes the new program will jump-start its credit card business, which has fallen well below its $28.95 billion peak at the end of 1997 (Crain's, May 21, 2001). But even with the drop in credit card revenues, it is still a crucial part of Sears’ vitality. Last year the company’s credit card business yielded $26.32 billion, which accounted for 47% of sales.

In addition to the Sears Card, the basic store card with 40 million active accounts, the department store also offers Sears Gold MasterCard, which has about 20 million accounts.

Sears hiked interest rates this year on its store credit card to 21.9% from 21%, boosting the minimum monthly finance charge to $1 from 50 cents. Interest rates on Sears Gold MasterCard range from 13.9% to 21.9%, depending on the customer’s credit standing.

“Sears relies heavily on its credit card business,” said Roz Bryant, a Sears analyst with Morningstar Inc., Chicago. Financially, it makes sense for Sears to expand the reach of its store card, which has a higher interest rate than most bank credit cards, she said.

“By growing the usage of a card with a high interest rate, it can benefit Sears’ earnings over time,” she said.

However, the high interest rate might deter people from using the card, Ms. Bryant added.

“As a trend, people are straying away from store cards because they are so limiting and expensive,” Ms. Bryant said. “There are so many options that consumers have these days,” including competitive bank credit card offers with low interest rates.

A Sears spokesman said the store card is targeted at customers who want to use the card for everyday purchases, but who are not “interest rate sensitive,” because they either keep low balances or pay their entire bill each month.

As a model, Sears can look to its own Canadian affiliate. Sears Canada Inc.’s store card has been accepted at third-party merchants since 1996. The 55%-owned Sears subsidiary now has 10 such partners, including drug stores, gas stations and hotels.

Kmart's Woes May Bode Ill for Workers Comp
WALL STREET JOURNAL - July 17, 2002

ACHES AND PAINS: Kmart's injured-worker claims could bite others.

Worker's compensation officials in many states are nervously watching the big Troy, Mich., retailer struggle to emerge from bankruptcy-court protection. If it doesn't, other companies that, like Kmart, self- insure worker's-comp claims could be on the hook for Kmart's 19,000 claims. That also could hobble the ability of some workers, at Kmart and elsewhere, to get claims fulfilled.

Like many other big companies, Kmart self-insures its worker's comp claims in many states. Self-insurers try to rein in costs by administering and paying claims themselves rather than paying premiums to an insurer to do it. The idea has drawn more interest as a tough insurance environment has led to higher worker's comp premiums, state officials say.

But as Kmart shows, the move isn't risk-free. Even if the bonds totaling $174 million that the company uses to back its claims survive bankruptcy, they likely wouldn't be enough to pay off claims if Kmart falters. While states differ in how they make up the difference, they generally require other self-insurers in those states to help pay claims. "There's not enough bond money to go around. Something has got to give," says Milton Black, a worker's comp lawyer representing a former Kmart worker.

It's unclear how much potential liabilities could exceed the $174 million collateral. North Carolina, for example, says Kmart backs $6.2 million in worker's comp liability with $4 million in bonds. In Illinois, Kmart backs about $8 million in claims with $2.7 million in collateral. North Carolina has asked Kmart to contribute 100% collateral, while Illinois is considering an increase request.

Claims also tend to grow. California's self-insurers' security fund notes that past claims tend to exceed by 50% the collateral put up to back them.

Some state systems already have felt pinched by the weakened economy. California expects a much larger deficit in its fund than the $12.7 million it posted in 2000, and expects to levy the maximum amount it can from companies for several years. In that environment, a Kmart default "is a scary proposition," says Theresa Muir, the fund's chairwoman.

Already, New York and New Mexico have pulled Kmart's self-insurance privileges, requiring the company to buy worker's comp insurance to continue business in those states. Kmart, which says claims are being met one way or another, has said it plans to survive. In worker's comp circles, many are pulling for them. "We're hoping for the best and preparing for the worst," says Gregory Krohm of the International Association of Industrial Accident Boards and Commissions.

Sears to Expand Credit Card

By Kelly Quigley - CRAIN'S Chicago Business  - July 17, 2002

Sears, Roebuck and Co. on Wednesday said it is partnering with a host of entertainment, dining and retail businesses that will accept the department store’s credit card by mid 2003. Sears Cards are now accepted only at the chain’s own retail outlets.

Hoffman Estates-based Sears said customers will be able to use their cards at a variety of partner merchants that don’t compete directly with Sears. A spokesman declined to say how many establishments would accept the Sears Card next year or name specific businesses with which Sears hopes to partner.

Sears hopes the new program will jump-start its credit card business, which has fallen well below its $28.95 billion peak at the end of 1997 (Crain's, May 21, 2001). But even with the drop in credit card revenues, it is still a crucial part of

Sears’ vitality. Last year the company’s credit card business yielded $26.32 billion, which accounted for 47% of sales.

In addition to the Sears Card, the basic store card with 40 million active accounts, the department store also offers Sears Gold MasterCard, which has about 20 million accounts.

Sears hiked interest rates this year on its store credit card to 21.9% from 21%, boosting the minimum monthly finance charge to $1 from 50 cents. Interest rates on Sears Gold MasterCard range from 13.9% to 21.9%, depending on the customer’s credit standing.

“Sears relies heavily on its credit card business,”

said Roz Bryant, a Sears analyst with Morningstar Inc., Chicago. Financially, it makes sense for Sears to expand the reach of its store card, which has a higher interest rate than most bank credit cards, she said.

“By growing the usage of a card with a high interest rate, it can benefit Sears’ earnings over time,” she said.

However, the high interest rate might deter people from using the card, Ms. Bryant added.

“As a trend, people are straying away from store cards because they are so limiting and expensive,” Ms. Bryant said. “There are so many options that consumers have these days,” including competitive bank credit card offers with low interest rates.

A Sears spokesman said the store card is targeted at customers who want to use the card for everyday purchases, but who are not “interest rate sensitive,” because they either keep low balances or pay their entire bill each month.

As a model, Sears can look to its own Canadian affiliate. Sears Canada Inc.’s store card has been accepted at third-party merchants since 1996. The 55%-owned Sears subsidiary now has 10 such partners, including drug stores, gas stations and hotels.

Allstate Corp Appoints New Chief Investment Officer
Stephen Lee - Dow Jones Newswires  - July 15, 2002

Allstate Corp. (ALL) named Eric A. Simonson senior vice president and chief investment officer, effective July 29. Simonson will also assume the president post of Allstate Investments LLC.

In a press release Monday, the insurance company said Simonson replaces Casey J. Sylla, who is currently serving as acting chief financial officer following the recent retirement of John Carl. In March, Carl announced plans to retire from the top finance spot by the end of the second quarter as a result of health-related concerns.

Information on Simonson's previous position wasn't immediately available. Simonson held positions at John Hancock Mutual Life Insurance Co. and Prudential Insurance Co. of America.

Sears: "The Brighter Side"
By Robin Goldwyn Blumenthal - Barron's - July 15, 2002

A retail makeover and strong finance operations could bolster profits and shares at Sears

For most of its 116 years, Sears, Roebuck and Co. dominated the middle ground of American retailing, balancing moderately priced hard goods with soft, lawn mowers with lingerie, in its bid to appeal to the nation's vast middle class. But middle turned to middling in the late 1990s, and the company suddenly found itself a dinosaur beside the stylish fashion chains at the mall and the hard-goods discounters strung out along the highway. Annual sales stagnated at about $41 billion, profit skidded, and Sears shares fell more than 50% from their 1998 high, to 29.90 apiece in the aftermath of Sept. 11.

A funny thing happened on the way to extinction, however. In Alan Lacy, 48 years old, a former Sears Roebuck chief financial officer whom the board named chairman and chief executive in September 2000, Sears found a man with a plan to revitalize the company's flagging stores, bolster its burgeoning credit-card business and raise Sears's fashion profile on Wall Street. What's more, it's working.

Alan Lacy, CEO and remodeler-in-chief: "There is no question we should make more money in retailing than we have."

Sears shares nearly doubled in the past nine months, reaching a high of 59.90 in June, although they since have backtracked to about 48. But some savvy investors think the stock is undervalued at a mere 9.5 times this year's expected earnings of about $1.6 billion, or $5.06 a share, compared with the price-earnings multiples of 15 to 30 accorded other national retail chains, as well as well-run consumer lenders.

Sears' fans contend the stock could set new highs north of $80 as the success of Lacy's makeover, aimed at converting the company's 867 full-line stores to self- help format with centralized checkout, becomes evident among customers and investors. "We're on a path to have Sears much better defined in the marketplace," Lacy says.

Last year Sears, of Hoffman Estates, Ill., posted earnings of $1.4 billion, or $4.22 a share, before special items, compared with $1.5 billion, or $4.21 a share, in 2000. (Net income, nicked by restructuring and accounting-related charges, were $735 million, or $2.24 a share.)

This year began on a much stronger note; Sears reported first-quarter earnings of $318 million, or 98 cents a share, before the effects of an accounting change, up 85% from a year ago. For the full year, as noted, analysts anticipate about a 20% increase, according to Thomson Financial/First Call, followed by a gain of 13%, to $5.73 a share, in 2003. The projected increases in part reflect expected cost cuts, productivity enhancements and a modest pickup in revenue.

Sears's apparel operations are thought to be losing money, although the company hopes its $1.86 billion purchase of catalog retailer Lands' End in May will put to rest lingering doubts about the viability of Sears's so-called softer side. All told, retail operations contributed 76% of last year's sales of $41 billion, but just $900 million of operating income.

Ironically, Sears's recent strength has been based largely on the company's credit-card operations, which chipped in 12.6% of sales, but an outsized 60.8% of operating earnings, after corporate costs, in 2001. The imbalance has led some investors to dub Sears a finance company with a retail unit, and goes a long way toward explaining why Lacy & Co. believe they can expand profit at a mid-teens rate, at least in the near term, on subdued growth in sales.

Table: Give Them Credit

Larry Robbins, CEO of Glenview Capital Management, a New York hedge fund, praises Sears's "conservative credit culture", citing its superior statistical performance relative to other publicly traded consumer finance companies. Indeed, the delinquency rate on Sears loans packaged into securities declined by more than eight- tenths of a percentage point, and the loss rate by 1.16 percentage points, from March 2001 through April 2002. In both categories the trend compared favorably with those of other consumer lenders. As of the end of 2001, Sears managed $28 billion in domestic credit-card receivables.

Sears's credit operations took a giant step forward in 2000 with the introduction of a Sears Gold MasterCard, initially mailed to seven million largely inactive holders of the company's in-house card. Since then, Sears has been steadily converting proprietary cards, on which users incurred little or no finance charges, to Sears Gold MasterCard accounts, and has offered the MasterCard to new customers as well. Additionally, the MasterCard generates fee income for Sears from outside vendors. The new MasterCard now accounts for 20 million of the company's approximately 60 million card accounts, and last year helped the credit business achieve operating margins of 29%, ten times those of Sears's retail operations.

Robbins hired his own finance experts to examine Sears's credit-card business, and began buying stock in this year's first quarter. As of March 31 Glenview Capital owned 975,000 of Sears' 322 million shares, representing the firm's No. 3 position.

Susan Byrne, founder of Dallas-based Westwood Management, likewise lauds the strength and contribution of the company's credit-card operations. "Sears has the ability to control its losses very well," she says, adding that the gap between the company's P/E and the multiples of 15 to 20 accorded other credit-card concerns is "too large a spread." Westwood owns 1.54 million Sears shares.

Byrne thinks Sears' shares eventually could reach 80, as analysts and investors develop a better understanding of the forces driving the company's growth. "The stock still reacts to whether or not weekly sales are good," she says. In fact, Sears tanked 1.53 points to 48.40 Thursday, after the company announced that sales fell 3.8% in June, slightly more than expected, at stores open at least a year.

Sears's monthly same-store sales last rose in Aug. 2001, by a measly 0.2% at that, and are unlikely to show any growth this year. Getting back to flat sales would be a material turnaround for the company, says Robbins, who looks for steady progress this year and a resumption of positive comparisons in 2003. But 2004 could be "a breakout year" for sales, he says, as store remodelings are completed.

"Relative to other large-cap retailers, Sears represents the best value," Robbins says. "The company is at a long- term inflection point. It is being priced to be a perennial market-share donor to others. We think it will be able to demonstrate better earnings growth and come out stronger" after Lacy's restructuring efforts. As investors start to discount 2004 earnings of $7 a share, and if the stock trades at 13 times earnings, "you'll see a $91 stock in '04," he adds.

Lacy has told Wall Street that Sears needs only 2% to 3% growth in same-store sales in the next two to three years to achieve its goal of 50% growth in operating profits by 2004. (Last year the company reported $2.2 billion in operating earnings.) About $600 million will come from reduced staffing and improved productivity, leading to higher sales per square foot. "There is no question we should make more money in retailing than we have," he says.

By the fourth quarter Sears will have remodeled 50 stores and introduced Lands' End merchandise into 175. The company also is replacing eight in-house brands with its own Covington apparel label. Some Wall Street critics question whether Sears overpaid for Lands' End, but Lacy calls it a "key part of our strategy", akin to converting Sears-card holders into MasterCard holders. Although approximately 35 million households shop Sears actively in a year, 25 million shop hardlines only. "We were looking for an idea big enough to cause our existing shoppers to come to the stores for clothes," he says.

Nor will Lacy rule out the acquisition of more brands after Lands' End is fully integrated. "One thing we like about Lacy's approach is that he focuses on what works and gets rid of what doesn't," says retail consultant Sid Doolittle, of Chicago's McMillan Doolittle. "That's the kind of thinking that built Target -- focusing on a strategy and sticking with it."

Though Sears is firmly rooted in some of the best mall locations in the country, retail giants such as Target, Home Depot and Best Buy pose stiff competition. After all, Lacy notes, shoppers have to drive by these big-box category killers in order to get to the mall. "We need to find a way to get closer to customers," he says.

Despite Sears's remodeling of its stores and its image, Lacy acknowledges that investors may remain unconvinced until the company puts up better revenue numbers. Once that happens, Sears can begin to reinvest profits and build new stores to spur growth. In the meantime, the company pays an annual dividend of 92 cents a share, for a yield of 1.9%. Sears also has bought back about 6% of its shares since August 2000, and in December authorized a new $1.5 billion stock-repurchase program.

To be sure, Sears still faces challenges from without and within. But a more convenient shopping format, together with more appealing goods, ought to lure customers back to the mall, while a solid, high-margin finance business offers some downside profit protection.

In Thursday's sales report, Lacy said Sears continues to be "pleased" with the progress of its repositioning initiatives. In particular, he noted that the company's focus on gross margins and productivity improvements continues to boost profit. Before long, he contends, Wall Street and Main Street both will give Sears its due.

Sears Can't Beat Sales Slump

By Kay Riley  - Crain's Chicago Business - July 11, 2002

Sears, Roebuck and Co. on Thursday said June same-store sales fell 3.8%.

The Hoffman Estates-based retailer reported that full-line stores open more than a year saw strong sales in appliances and lawn and garden merchandise. However, those gains were offset by decreased sales in softline categories.

Total domestic store revenues for the five weeks ended July 6 were $2.7 billion, a 1.6% decrease compared with revenues of $2.8 billion a year earlier.

In mid-June, Sears said sales for the month were in line with its forecast of a low single-digit sales decrease (Chicagobusiness.com, June 11).

The June numbers are a slight improvement over May, when unseasonably cool weather put a damper on same-store sales, which fell 4.4 %.

Meanwhile, other U.S. retailers, particularly discounters like Wal-Mart Stores Inc. and Target Corp., showed improving results for June, as consumers sought relief from the hot summer weather and stores refrained from their usual price slashing.

As expected, June same-store sales, or sales at stores open at least a year, exceeded those of the previous month, when unusually cold weather sidelined sales of seasonal goods like air conditioners and grills. Retailers finally were rewarded with above-normal temperatures across most of the United States in June.

Another big help was the absence of fire sales. Retailers typically hold clearance sales in June to make room for the crucial back-to-school season, which starts in the latter half of July. But markdowns were restrained this year as inventories, planned conservatively after the Sept. 11 attacks, were exceptionally low.

An aggregate of 78 retailers tracked by Bank of Tokyo-Mitsubishi chalked up a same-store sales increase of 5.1 percent, essentially in line with the bank's expectation of 5 percent.

``It's the strongest since March, and I think it does contain a lot of solid performance. The ones doing well did exceedingly well,'' Mike Niemira, an economist for the bank, told Reuters.

U.S. Retailers' Sales Rose in June, Led by Wal-Mart
Bloomberg.com - July 11, 2002

U.S. retailers' sales rose in June, led by demand for household goods and warm-weather products such as barbecue grills and summer dresses at discounters including Wal-Mart Stores Inc. and Target Corp. Sales at stores open a least a year jumped 7.9 percent at Wal-Mart, prompting the world's largest retailer to increase profit estimates. Costco Wholesale Corp., the biggest U.S. warehouse-club operator, had a 6 percent gain, while Target had a 4.9 percent rise.

Sales at clothing retailer Limited Brands Inc. climbed 5 percent. The increases at low-price merchants such as Wal-Mart and Costco suggest that consumers are still price conscious as the economy recovers from recession. Warm weather after an unseasonably cool May, and the long July Fourth holiday weekend, helped to drive shoppers into stores, analysts said. "What I'm seeing is a recovery,'' said Barbara Johnson, chief operating officer of ShopperTrak RCT, which tracks retailers' sales and customer-traffic patterns. "People are not wasting money, but they haven't stopped spending.''

Wal-Mart Raises 2nd-Quarter Forecast on Higher Sales
Bloomberg.com
July 11, 2002

Wal-Mart Stores Inc. raised profit forecasts after same-store sales at the world's largest retailer increased a more-than-expected 7.9 percent in June, helped by purchases of air conditioners and summer clothing. Profit in the quarter ending July 31 will be as much as 45 cents a share, or 1 cent more than estimated, Wal-Mart said in a recorded call. The company increased its full-year forecast by 2 cents, to $1.76 to $1.78 a share.

This is the first time in five months that Wal-Mart has boosted its full-year estimate. Same-store sales at the company's Wal-Mart stores rose 8.7 percent as shoppers snapped up summer clothing and fans ahead of the Fourth of July holiday. Wal-Mart continues to benefit as consumers limit spending because of concerns about jobs and the economy, investors said. "The consumer's willing to buy, but not always at full price,'' said Pieter Mulier, an analyst at Safeco Corp., whose Safeco Equity Fund has $843 million under management, including about 380,000 Wal-Mart shares.

Sears Will Defend Lands' End Suit
By Kay Riley - CRAIN'S Chicago Business  - July 9, 2002

Sears, Roebuck and Co. on Tuesday said it would fight a copyright infringement lawsuit against mail-order retailer Lands’ End Inc., which it acquired in June for $1.9 billion.

Hoffman Estates-based Sears, which was not named in the federal lawsuit, intends to "vigorously defend" Lands’ End against allegations made by motivational speaker and author Sherry Maysonave, said a Sears spokeswoman.

Ms. Maysonave, a Texas-based consultant whose book "Casual Power" examined the business casual trend, claims that Lands’ End used her original copyrighted material on the company's Web site and in its catalogs without her permission.

The Dodgeville, Wis.-based catalog and Internet clothing retailer "tried in good faith" to work with Ms. Maysonave, the Sears spokeswoman said. She declined to comment further, saying the company's lawyers were reviewing the suit.

The lawsuit, originally filed last September and amended on Monday, seeks unspecified damages. It claims Lands’ End first contacted Ms. Maysonave after her book was released in late 1999, to solicit content for its Web site and to offer her a paid position on its advisory board.

In March 2000, Lands’ End notified Ms. Maysonave that it would be producing its own content. The lawsuit charges that Lands End then used passages from her book on its Web site and in other promotional materials.

"They have unlawfully used my copyrighted content and exploited my ideas for more than two years. Still they admit no wrong and now have sold their more successful, profitable company to Sears for almost $2 billion" Ms. Maysonave said in a statement.

Lands' End, now a subsidiary of Sears, continues to offer its product line direct to customers through its catalogs and online at landsend.com.

Sears Says It Will Fight Copyright Suit vs. Lands' End
By James Covert - Dow Jones Newswires - July 8, 2002

Sears, Roebuck & Co. (S) said Monday it will fight a lawsuit that accuses its Lands' End unit of copyright infringement and stealing intellectual
property.

"Our point of view is that the claim is without merit, and we'll vigorously defend against the allegations," Sears spokeswoman Jan Drummond said.

In an amended lawsuit Monday, Empowerment Enterprises LLC charged that in 2000, Lands' End contacted its founder and president "for the expressed purpose" of making her a paid member of the Lands' End advisory board and to develop business casual content for its Web site.

"Under the guise of finalizing the business arrangement," the Dodgeville, Wis., catalog retailer asked the plaintiff for detailed advice on the "development, marketing and sale of Lands' End business casual clothing," the suit alleges.

Subsequently, the suit claims that in March 2000, Lands' End e-mailed the plaintiff that it was "proceeding with (its) own internally developed content." Then Lands' End
made "free and unauthorized use" of the plaintiff's recommendations, according to the suit.

Sears, which completed its acquisition of Lands' End on June 18, said it was aware of the brewing litigation before it decided to buy Lands' End, and that it believes the new suit's underlying claims are the same as the initial suit.

The plaintiff's original lawsuit was filed Sept. 4, seeking unspecified actual and punitive damages. After the suit was filed, the plaintiff claims that Lands' End vowed to remove unauthorized material from its Web site. In the amended lawsuit filed Monday, the plaintiff claims that the unauthorized content in question remains on the Lands' End Web site and still is being used in marketing programs.

Discussions between Lands' End and the plaintiffs date back to September, Drummond confirmed. Lands' End has tried to negotiate a settlement in the matter, but the
company found that the plaintiff's demands were "unreasonable," Drummond said.

Sears was not named in the lawsuit.

Jury Awards $29M in Tire Lawsuit
Associated Press - July 4, 2002

An Orange County jury awarded a Bryan family $29 million Wednesday night in a lawsuit over a fatal rollover involving a sport utility vehicle with a Bridgestone/Firestone tire.

The jury assessed 35 percent of the damages against Sears Roebuck & Co. and 65 percent against Bridgestone/Firestone. The family previously reached a settlement with Bridgestone/Firestone.

The lawsuit was filed against Sears Roebuck & Co., which sold the Dueler APT tire and later patched it after a nail caused a hole, and the tire maker.

Family attorney Richard W. Mithoff said the amount to be awarded will ultimately be determined by the judge. He said the amount to be recovered from Sears would be reduced because of the prior settlement with Bridgestone/Firestone.

Jan Drummond, director of media relations for Sears, said that the company strongly disagreed with the verdict.

"We have believed and continue to believe that Sears' handling of this tire and the repair that was made to it was proper and appropriate," she said.

She said the company is considering its options, including an appeal.

The lawsuit, filed in Orange County because Bridgestone/ Firestone has a plant there, involved the Sept. 25, 2000, death of Terry Tripp, 35.

Tripp died when a tire blew out on the SUV in which he was riding. Joe Greenwood, the owner of the vehicle, testified that the blowout caused the vehicle to pull to the left, and the truck rolled when he veered to the right to avoid oncoming traffic.

Rating the Retailers Uncovers Surprises

By Kim Mikus - Daily Herald - Suburban Chicago - June 30, 2002

Would you rather shop at Sears or Wal-Mart?

On paper, Wal-Mart seems it would be the retailer of choice. The discounter continues to report phenomenal growth and with $220 billion in annual sales, it's the world's largest company.

But the pages of the most recent Consumer Reports rated Sears above Wal-Mart as the desired place to shop. In fact, Sears comes out on top among the six chains examined in the publications first-ever reader retail survey.

In order of best to worst, the rankings were: Sears, Costco, Target, Sam's Club, Wal-Mart and Kmart. Readers were asked to look at everything from product quality to checkout speed. Some of the article's results seem to go against stereotypes.

Sears results may have surprised some. "With somewhat lower prices than the typical department store and better service than most discounters, Sears is a retailing hybrid," the story said.

However, analysts point out that just because shoppers like a store, it doesn't mean they actually shop there on a regular basis.

"It's an attitude survey. Attitudes don't always coincide with behavior," said Sid Doolittle, founding partner of the Chicago retail consulting firm McMillan and Doolittle.

The story showed that shoppers are willing to put up with a lot in order to save a buck.

People choose Wal-Mart for price, despite having to put up with some inconveniences. Readers complained of overcrowding in the store as well as cluttered displays. Wal-Mart was also criticized for being difficult to navigate.

Wal-Mart says they will use the survey as a way to improve.

"We're always looking at customer service and customer satisfaction," said Wal-Mart spokesman Tom Williams.

Doolittle, of Chicago, believes the survey results, while unscientific, are "reasonably valid" and accurately describe the positioning of the companies in relation to each other. He said one aspect that was not addressed was the location of the stores in relation to the shopper's home.

Some results were of no surprise. For example, bankruptcy-ridden Kmart was rated as worst in every category.

Other points of interest were that Costco and Sam's Club were praised for their home-entertainment products and Sears and Costco for hardware.

Sears stood out for service, checkout speed, product selection and store layout.

A spokeswoman for the Hoffman Estates-based retailer said officials were "very pleased" with the outcome of the survey.

Sears is aware of the areas that need work, spokeswoman Peggy Palter said. For example, the article criticized Sears for its apparel. To address this issue, Sears recently purchased Lands' End as a way to spruce up its selection.

Industry analysts credit Target with bringing more affluent customers to the world of discount retailing with its "cheap chic" merchandise.

Although Target touts its affiliation with stylish designers, fewer than 20 percent of readers said the store's clothing was excellent. Costco also was praised for its name brand clothing.

WHICH IS BEST?
Consumer Reports readers ranked the retailers. The stores are listed in order of reader score, with highlights of the magazine's report:

SEARS -- SCORE 77 PERCENT
Quality of products ranks high Superior sales staff, checkout speed, selection and layout Highest prices

COSTCO -- SCORE 76 PERCENT
Winner for value Good place to buy electonics, hardware, small appliances and entertainment products Gold Star membership costs $45 per year

TARGET -- SCORE 76 PERCENT
Shopper friendly environment Product quality unexceptional Sale items out of stock fairly often

SAM'S CLUB -- SCORE 74 PERCENT
Less sophisticated than Costco Considered the biggest warehouse club Advantage membership costs $35 a year

WAL-MART -- SCORE 71 PERCENT
Strength is price Overcrowding is a big complaint Displays and clutter criticized

KMART -- SCORE 66 PERCENT
Complaints of missing price tags Cluttered aisles Filed for bankruptcy protection this year

This is How Sears' Used to Be!
What is Lands' End Future?

"Lands' End Hiring, Promotional Policies Get the Job Done Right "
Author: SARAH Z. SLEEPER
Section: Managing A Successful Company - Investor's Business Daily
June 28, 2002

Kelly Ritchie is a good example of corporate promotions done right. Ritchie is senior vice president of employee services for direct merchant Lands' End Inc.

She's been with the company since 1985, right out of college. She worked her way up from front-line sales to executive management, and now reports directly to the chief executive of the 10,000-person firm.

Ritchie says her long, happy tenure is the result of company policy that gave her opportunities to advance and gain diverse experience. She managed a call center, served as a recruiter and had several other roles at Lands' End before landing her VP job three years ago.

While hopping from company to company is a standard practice for many executives trying to climb the corporate ladder, Ritchie says it's not the norm for Lands' End. The company has a turnover rate well below the industry average. Analysts cite its hiring and promotion policies as among the best in corporate America.

Lands' End, said John Challenger, CEO of outplacement firm Challenger, Gray & Christmas Inc., "cares for its people, invests in their futures, emphasizes education and training and provides opportunities for growth and promotion." From a list of top-performing firms, he selects Lands' End as one of the best in hiring.

And it's gotten better over the last few years. Three years ago, its turnover rate was 12%, about the norm in retail. That was during the tenure of former Chief Executive Michael Smith, when the company had flat sales and earnings.

"We were in a time where we needed to bring in talent," said Ritchie.

Smith and a number of other executives were ousted, and the company has returned to rising sales and a low 6% turnover rate.

On June 17, Sears completed a $2 billion acquisition of Lands' End. The two will work together to mesh what Ritchie says are complementary hiring practices.

"If it wasn't a great place to work, you'd have more turnover," said Tierney Remick, managing director of the consumer practice for executive recruiter Korn/Ferry International.

Lands' End does the single most important thing that ensures long-term hiring success, says Challenger. It places personal qualities at the top of the list of a candidate's credentials. It looks for folks who fit its corporate culture, not just for people who look good on paper.

"Chemistry and rapport are the intangibles that are critical to most successful management teams," said Challenger.

Many people will have plenty of experience and resumes that seem perfect, but that's not enough. In a face-to-face meeting it's usually clear within 10 minutes if a given candidate has the right stuff, he says.

At Lands' End, that means new hires must have positive attitudes and they must be team players, says Ritchie. Over a series of interviews at the company's Dodgeville, Wis., headquarters, a candidate's behavior is scrutinized as part of an overall screening.

"How did they greet the receptionist when they came in? How did they do under stress when their flight was delayed?" said Ritchie. "We are constantly looking to see that they have respect for the individual."

Curt candidates are passed over for folks who show collaborative, diplomatic personalities, she says. "We spend a lot of time asking questions to try to get an idea of how this person will work under pressure," said Ritchie.

That's smart, says Challenger. "Mistakes happen all the time because employers are dazzled by a resume."

That was especially true during the heyday of the Internet, says Remick, when hiring was at a frenzy. It's crucial that companies take the time for conversations that reveal a person's motivation and leadership skills, she says.

Even before holding in-person interviews, Lands' End tries to find people who will get along well with current staff. Some 50% of all new hires come from employee referrals of family and friends. To keep employees informed about open jobs, Lands' End puts out a bimonthly internal newsletter.

The firm offers financial incentives of between $1,000 and $2,500 for referrals who get hired for salaried positions. For nonsalaried spots, referrals garner $35 plus a chance in an annual drawing for a Saturn sport utility vehicle.

Hiring costs have dropped because of the incentive program. In 2000, the average cost to fill a Lands' End position was $15,681. In 2001, it was just $10,629.

Remick says the referral program works well. But she notes it's not as efficient for high-level staff as it is for mid- and low-level staff.

Lands' End also uses job fairs, recruiting services, media advertisements, Web postings and internships to find some of the 20,000 resumes it receives each year. About 6% of its hires are actually rehires who left for greener pastures, but then returned when they didn't find them, Ritchie says.

Promoting from within is often the best method, says Challenger. With an employee, the company knows the good and bad of that person. When someone comes from another company, it's hard to know exactly what you're getting, he says.

For promotions to succeed, it's vital that individuals have enough tact and political savvy to stay on good terms with bypassed co-workers. As long as hard feelings are kept in check, a competitive atmosphere can be a boon. "It's good for the organization for people to have ambition," said Challenger.

Ritchie says it's more efficient to promote from within. In 2000, Lands' End took an average of 72 days to fill positions with external candidates, while it took just 44 days when the candidate was promoted. In 2001, it took an average of 80 days for external candidates and 41 days for promotions.

EEOC May Allow Companies to Reduce Retirees' Benefits
A FIGHT BREWS over company-sponsored retiree benefits.

Wall Street Journal - June 26, 20002

In a rare step, federal officials plan to exempt retiree health benefits from age-discrimination laws in some cases. In a regulatory agenda published last month in the Federal Register, the Equal Employment Opportunity Commission said it plans to propose a rule that would let companies reduce benefits to older retirees without fear of lawsuits when they qualify for Medicare or state programs.

Cost-conscious employers typically cut back on benefits when retirees reach 65 and qualify for Medicare, but they fear a two-year-old court decision that squelched the practice could boost expenses and force them to eliminate benefits entirely. The EEOC's notice last month was a message to employers. "We're saying 'don't drop your retirement plan. Help is on the way,' " says David Frank, EEOC legal counsel.

Opposition is forming. The AARP, the group formerly known as the American Association of Retired Persons, says the decision weakens discrimination laws. "Can you simply deny people a particular benefit because of their age?" asks Michelle Pollak, an AARP lobbyist.

Scrutiny of retiree benefits comes as they become harder to find. A General Accounting Office study found that about a third of the 23.4 million retired Americans 65 or older supplemented Medicare with some form of employer coverage in 1999. But fewer employers these days provide these benefits. "There's very little new formation of retiree health benefits for people entering the workplace today," says Paul Dennett of the American Benefits Council, a business group.

Companies, which have made it tougher for workers to qualify for retiree plans over the years, say additional costs simply will hasten that pullback. So they protested when, two years ago, a federal appeals court ruled that workplace age-discrimination laws forbid offering retirees different amounts of coverage based on age. The EEOC adopted the same interpretation but backed off under employer pressure.

The EEOC expects the new rule to be proposed later this year, when it will be open for official comment. Mr. Frank, of the EEOC, says the rule is narrow, related only to Medicare and not as broad as legislation proposed last year with a similar aim.

Still, Christopher Mackaronis, a Washington, D.C., employment attorney, contends the EEOC is exceeding its authority and may hurt retirees. "Everybody agrees you couldn't do this in a million years to a current employee," he says.

Goodbye to Proud Morgan Stanley

Commentary: America's leadership fails us, again
By Paul B. Farrell, CBS.MarketWatch.com
June 25, 2002

Someone tell Phil Purcell he just made a big mistake: He should have kept "Dean Witter" and retired "Morgan Stanley."

That would have been more in keeping with his recent congressional lobbying efforts that seem more in the spirit of Gordon Gekko than the historic way of doing business at the once proud House of Morgan.

We lived by simple principles. When I was at Morgan Stanley, I kept a plaque on my desk with these bold words from J.P. "Jack" Morgan Jr.: "Do your work, be
honest, keep your word, help when you can, be fair." It's still on my wall 25 years later.

Unfortunately, Purcell's lobbying efforts fall far short of the kind of leadership character that Morgan Stanley ... that Wall Street ... that Americans everywhere need at this crucial juncture in our history.

God stopped calling Morgan Stanley last week

The name Dean Witter was officially removed from the Morgan Stanley Dean Witter moniker -- under which the company had done business since the 1997 merger of the
two firms -- last week. But everyone knew that eventually it would be shortened to just Morgan Stanley (But in reality Morgan Stanley disappeared, not Dean Witter -- at least the Morgan Stanley I knew, which was a firm so proud of its heritage that when I was there back in the 1970s we ran an ad with this caption: "If God Wanted to Do a Financing, He Would Call Morgan Stanley."

We lived as if that were true. Morgan Stanley had a worldwide reputation as the "Rolls Royce of investment bankers." And with that reputation came responsible leadership.

I remember one firm meeting attended by Henry Morgan, J.P.'s son.

After everyone had a chance to speak on a certain prospective client, Morgan spoke of principles, then added, "My father would turn over in his grave if we did this." He stood and walked out. The deal was dead.

Dean Witter stole more than just a name

The merger came as a surprise in 1997, an "odd couple" match between the white-shoe Morgan Stanley, the world's leading investment banker, and Dean Witter, a blue-collar retail brokerage house once owned by Sears Roebuck.

Yet each saw advantages in joining forces: Morgan Stanley wanted a wider retail distribution network. Dean Witter wanted more product and more clout with
institutions. Before long, Phil Purcell, a Dean Witter broker, had forced out his Morgan Stanley co-CEO and took control of the merged firm.

Last week it became painfully obvious that Morgan Stanley isn't on God's call list anymore. Shortly after "Dean Witter" was officially deleted and the name again became Morgan Stanley, I saw how much the Morgan tradition had disappeared. Morgan Stanley was now a wolf in sheep's clothing, while Dean Witter is very much alive, hiding under the Morgan Stanley brand yet refusing to live up to Morgan Stanley's legacy of leadership.

Lobbying for more pork from politicians

What happened?

Shortly after the name change, news reports began circulating that Purcell was lobbying Congress to avoid responsibility, water down reform efforts and prevent state attorneys general from enforcing state securities regulations.

That's hardly a leader in the historic Morgan tradition.

Purcell is obviously afraid that New York Attorney General Elliott Spitzer might hold Morgan Stanley (along with overhyped Internet analyst Mary Meeker) as accountable as he did with Merrill Lynch and its Net analyst, the discredited Henry Blodget.

So out of fear, Purcell put on his broker's hat and went whining to Washington, doing everything possible to undercut the power of the state attorneys general -- anything to prevent the states from enforcing the laws designed to protect Main Street investors.

He'd rather leave enforcement to a weaker SEC headed by a chairman clearly biased in favor of Wall Street.

America's gross failure of leadership

Today, Main Street America is crying for leaders to stand up for something -- leaders on Wall Street as well as in Corporate America, the White House, SEC, Congress
and the Church.

America needs leaders, and too few are answering the call. The vast majority of America's so-called leaders are ducking responsibility and running for cover.

Today, Wall Street's credibility is at an all-time low, slipping lower every day. And yet here we see the head of the world's top investment bank, the once proud Morgan Stanley, flagrantly attempting to avoid responsibility and undercut the enforcement of securities regulations clearly designed to protect individual investors.

Once more it becomes painfully obvious that Wall Street's primary interest is enriching Wall Street at the expense of Main Street investors. Unfortunately, they just don't get how they're failing as leaders.

Stand-up guy?

Can Phil Purcell become a true American leader? Maybe.

Purcell has two choices: First, he can continue his absurd lobbying efforts, which are as bad for America as all the pork-barrel lobbying that's jacking up federal
deficits and lowering our confidence in America's weak leadership. But if he continues, he should at least be honest enough to keep the Dean Witter name and stop demeaning Morgan Stanley's proud heritage.

Alternatively: Purcell could transform himself into a true American leader. He could take full responsibility. He could take charge of reforming Wall Street, not just Morgan Stanley. He could make a real difference by leading the way to restoring America's confidence in the financial markets. Main Street needs that kind of leadership.

But if Purcell doesn't take charge, will someone please tell him to retire the Morgan Stanley name? Because right now the old Dean Witter hustler image fits a lot
better.

You bet J.P. Morgan is rolling over in the grave, and you know God quit calling.

Sears Same Store Sales are Below June Forecast

From Bloomberg, June 24, 2002

Sears, Roebuck & Co., the largest U.S. department-store chain, said sales at stores open at least a year are "slightly'' less than the company's June forecast.

Sears has exited businesses such as window treatments and reduced its number of apparel lines to free up space for more- profitable items such as fitness equipment.

The company will introduce its Covington clothing in September and start selling apparel from Lands' End, the Internet and catalog retailer it bought last week, in some of its stores by the end of the year.

Coverage Causes Pain
by Sandra Guy - Chicago Sun-Times - June 20, 2002

Richard Bruce sits at the kitchen table of his Elmhurst home, pointing to the numbers written neatly on lined paper.

The numbers tell his story: When Bruce, 65, took early retirement from Sears, Roebuck and Co. almost nine years ago, he contributed $95 a month for health care coverage for himself and his wife, Betty. At that time, Sears provided a 75 percent subsidy for Bruce's medical insurance premium.

Three years after Bruce retired, Sears froze the dollar amount it contributed to retirees' medical plans, and today, Bruce pays $148 for considerably less coverage. The benefits, provided by an insurance company that contracts with Sears, are limited to prescription drug costs and catastrophic medical expenses.

The coverage kicks in when a retiree's out-of-pocket expenses exceed $2,000 in a calendar year, after a $250 deductible is met for eligibility. The lifetime cap for the plan's total reimbursements was raised this year to $250,000 from $150,000.

Bruce estimates Sears now subsidizes less than 50 percent of his medical insurance premium as a result of the company's decision to cap the dollar amount of its health care contribution to retirees enrolled in medical plans.

For Bruce to maintain health coverage at the level he had when he retired, he now pays another $305.68 for a Medicare program and a supplemental insurance plan, bringing his total monthly premiums to $453.68--a 378 percent increase since he retired.

"When you are an employee, and the company is doing take- aways, you can go somewhere else. When you are a retiree, you have no options," said Bruce, who rose through the ranks for 33 years, starting as a catalog order-buyer and ending as an executive compensation manager in Sears Tower and later at corporate offices in Hoffman Estates.

Sears officials counter that rising drug costs and retirees' longer life-spans make it difficult for Sears to keep costs in check.

"Health care costs are the single fastest-rising cost facing our company, and it is essential that we keep these costs in line if we are to remain competitive in a very price-sensitive retail environment," said Liz Rossman, Sears vice president of human resources, compensation and benefits.

Sears declined to provide its retiree health care costs. However, an annual benefits report shows Sears' contributions in 2000 for catastrophic and
prescription- drug coverage for the company's Medicare-eligible retirees totaled $64.4 million, or about 5 percent of its net income that year.

Nationwide, large companies' retiree health care costs last year skyrocketed 18 percent to 20 percent, and double-digit increases are expected to continue, according to the U.S. Chamber of Commerce.

But Bruce's fellow Sears retirees Lewis Orlow and David N. Silger have their own stories about rising costs of health care.

Silger is angry that Sears reneged on its promise to retirees that their medical insurance costs would not exceed 25 percent of the total cost of coverage.

"What (Sears) is doing is morally wrong," he said. "If you make a contract with someone, you should keep it."

Sears first cut back its health care coverage for retirees 12 years ago. At the time, many companies were changing their coverage plans because of the growing number of two-income households and a new accounting rule that forced companies to list as a liability the cost of future retirement benefits.

Before the rule change, companies treated retirement benefits as liabilities in the year in which they were paid. As a result, companies took a big one-time charge against their earnings--Sears took a $1.9 billion non- cash charge in 1993--and must now carry their future retiree expenses on their books every year.

"The accounting rule changed retiree health benefits as we knew them," said Paul Fronstin, director of the health research program for the Employee Benefit Research Institute, a non-profit research organization in Washington, D.C. "Once employers saw what the numbers did to their balance sheets, there was a mass exodus away from offering the benefits."

Among companies that continued offering retiree health care coverage, many put caps on their plans, Fronstin said. When the cap is reached, any additional costs are borne by retirees.

Sears' next move came in 1996, when it froze the dollar amount it contributed to retirees' medical plans for pre- 1996 retirees. Sears also froze the dollar amount for post-1995 retirees at the amount it contributed in the year of their retirement.

For those who retired after 1995, Sears also cut its contribution to retirees' spouses from 100 percent to 50 percent of the amount it contributes toward a retiree's medical coverage.

Finally, Sears stopped subsidizing health care coverage after age 65 for employees who retired after Dec. 31, 1999.

Sears' retirees feel betrayed. They worked at Sears with the understanding that though their salaries weren't as high as those at other big businesses, their retirement benefits would let them live out their lives with a sense of security. They feel they have been deceived about their promised benefits.

At Boeing Co., the high use of prescription drug benefits is a major driver of rising retiree health care costs, said Boeing spokesman Ken Mercer.

While prescription drugs account for 25 percent of the total health care costs of Boeing retirees younger than 65, that percentage jumps to 59 percent for retirees 65 and older.

Boeing and Sears also face a problem increasingly common to old-line companies that have downsized their work forces.

Boeing's active work force of 170,000 is not much bigger than its pool of retirees, which numbers 140,000.

Sears has about an equal number of active workers and retirees--137,000 active workers and 140,000 retirees.

At Navistar International Corp., retirees outnumber active workers 3 to 1.

Navistar, the Warrenville-based truck and bus maker formerly known as International Harvester, paid $125 million in retiree health benefits last year.

"Post-retirement benefits remain a major financial issue for our company," said spokesman David Wrobel.

Companies like Sears that contracted with Medicare HMOs suffered yet another blow in 1999, when a change in federal reimbursements slashed Medicare spending, prompting many insurers to flee the field, raise rates or cut benefits.

Since 1998, the HMO exodus has forced 2.2 million elderly and disabled people to lose their plans, and for many, the prescription drug coverage they got with those plans also disappeared.

Adding to the misery is the steady rise in the cost of prescription drugs and health insurance.

Spending on prescription drugs is expected to rise 16 percent this year because of higher prices and increased use, according to a survey by Express Scripts, one of the nation's largest pharmacy benefits managers.

Sears retirees, organized as the National Association of Retired Sears Employees, want Sears to keep its promise to them, but their court battle over Sears' cutbacks in their life-insurance coverage brought little relief. In the insurance battle, a judge ruled in March that Sears' benefit plan enabled it to make cuts at any time. U.S. District Court Judge James B. Moran described the retirees' lawsuit as "good facts and bad law," noting that laws regarding companies' obligations to their retirees have not been favorable to workers.

The place for long-term relief is Congress, Moran said. "I, of course, have to follow the law."

How did we come to this?

Key milestones in corporations' decisions to reduce health care coverage for
retirees:

* 1974: Congress passes the Employee Retirement Income Security Act (ERISA). It gives employers the right to change the retiree benefits of active workers at any time. The law also allows companies to change the benefits granted to retirees, as long as the companies reserve the right to do so in specific language and on a widely known basis when the benefits are first provided.

* 1993: The Financial Accounting Standards Board adopts a new accounting rule requiring companies to list future retirement benefits as liabilities on their balance sheets over the period in which the benefits were earned. The rule forces companies to take one-time charges and reduces reported earnings because of the large liabilities they now must carry on their balance sheets.

* 1997: Congress changes the Medicare managed-care funding formula, substantially reducing profitability for insurance companies. The change prompts insurers to cut benefits and either raise rates significantly or flee the Medicare HMO program.

* 2001-2002: Health insurance premiums for employment- based health insurance in the United States rise an average of 14 percent, and are forecast to jump more than 20 percent next year.

* Current: Prescription drug costs are rising an estimated 16 percent a year. Medicare doesn't cover outpatient prescription drug costs for people 65 and older.

Sources: Sun-Times research, Employee Benefit Research Institute

Many big firms don't cover retirees

Fragile corporate balance sheets and skyrocketing costs for health care and prescription drugs are forcing old- line businesses such as Sears, Roebuck and Co., Boeing Co. and Navistar International Corp. to rethink their policies of providing health care coverage to current and future retirees.

Indeed, Chicago-based Boeing Co. has informed non-union salaried employees hired within the last four years that the company will provide no health care benefits when they retire.

That's not unusual. Mercer Human Resource Consulting says 77 percent of U.S. companies employing more than 500 workers offer no health benefits in retirement to employees who retire at age 65 and older.

Of the 23 percent who do offer benefits to over-65 retirees:

* 22 percent of employers will pay all costs.

* 47 percent offer plans where the worker shares the costs.

* 31 percent offer plans in which the retiree pays all the costs.

And 71 percent of large employers will offer no benefits in retirement to active workers who will retire before age 65.

Of the 29 percent who will offer benefits to early retirees:

* 20 percent of employers will pay all costs.

* 45 percent offer plans where the worker shares the costs.

* 35 percent offer plans in which the retiree pays all the costs.

Sears Wraps Up Lands' End Buy
By Kelly Quigley - Crain's Chicago Business  - June 17, 2002

Sears, Roebuck and Co. on Monday completed its $1.9-billion purchase of Wisconsin-based catalog and Internet clothing retailer Lands' End Inc.

Hoffman Estates-based Sears closed on its cash tender offer, at $62 per share, for Lands' End stock—a hefty 20% premium over its stock price at the time the deal was announced. Sears CEO Alan Lacy spoke enthusiastically about the deal at Credit Suisse First Boston's Third Annual Retail and Apparel Conference in New York.

"We think Lands' End provides a very good value that will stand up very well on our retail shelves," he told investors.

Lands' End will provide Sears with a more affluent customer base and an undeveloped credit business, which currently accounts for more than half of Sears' profits. Mr. Lacy said the acquisition also will boost Sears' lagging apparel business, which contributes only $6 billion of the retailer's $41 billion in annual sales.

Sears said the acquisition may dilute its earnings this year and next but will add to earnings in 2004.

Sears has long been a force in the home appliance and hardware business, in large part due to the popularity of its Kenmore and Craftsman brands, Mr. Lacy said. The retailer is hoping the Lands' End brand will lure Sears' hardline shoppers into the clothing aisles, he said.

The Lands' End purchase is part of Mr. Lacy's master plan to transform Sears from an amorphous, old department store chain into a vital, growing business that can actively compete against Target, Kohl's, Wal-Mart and Home Depot. But even though Lands' End offers tremendous growth opportunity, local retail experts warn that Sears must avoid pitfalls such as reduced customer service, corner-cutting in manufacturing and pared benefits for Lands' End's 8,300 employees (Crain's, May 20).

By the end of the year, Lands' End apparel will be available at some 170 Sears stores, and by 2003 at least 870 stores will have significant retail space devoted to the brand, Mr. Lacy said.

Lands' End, now a subsidiary of Sears, will continue to offer its product line direct to customers through its catalogs and online at landsend.com.

Flashing Yellow on Asset-Backed Debt
By Janet Kidd Stewart - Chicago Tribune staff reporter - June 16, 2002

Seeking shelter from balance sheet "perfect storms," skittish investors have been flocking to companies with lots of visible assets and regular revenue streams. Just don't get too comfortable under the umbrella.

Like so many cash-strapped consumers who take payday loans or hock the Rolex for cash, companies are loading up on debt backed by future sales and hard assets. Now at record levels, these asset-backed securities ratchet up risk levels for investors, some observers are warning.

U.S. companies in the first quarter had a record $1.3 trillion in outstanding debt backed by specific assets like receivables, loans owed to them and inventory, according to the Bond Market Association. The total has more than quadrupled since 1995.

In some respects, asset-backed borrowing has been a good thing.

Unlike the egregious fees of consumer payday loans, the debt is cheaper for companies because it is guaranteed with huge, specific assets. The guarantee also means a generally higher credit rating than unsecured bonds, a big plus for institutional investors like pension and mutual funds that buy them. With several companies imploding swiftly into bankruptcy in the last year, investments that are at the front of the payout line and insulated from the bankruptcy process have obvious attractions.

But it also means that as investors seek safety in the brick and mortar of the old economy, those companies are surrendering ownership of what would seem to be their bedrock assets.

Just two local examples: Sears, Roebuck and Co. put up nearly a third of its customers' credit card debt as collateral for asset-backed securities. UAL Corp., parent of United Airlines, has more than half of its 243 company-owned airplanes obligated--with a book value of $5.5 billion.

As more companies securitize a greater portion of their assets, overall credit quality declines, say some market observers and bond buyers. That decline affects bond investors of all types, and stock buyers to some degree, as share prices in recent months have been shaken by credit-quality concerns. And it moves everybody down the priority line in the event of bankruptcy.

"It's taking away collateral from traditional bondholders, and when companies book gains from securitization on the balance sheet, it takes away from the quality of earnings," said John Vail, chief strategist for Mizuho Securities' Chicago office.

The Enron effect

And as corporate profits remain squeezed, and regulators wrestle with Enron Corp.-inspired reporting changes intended to make the obscure financial instruments more transparent, some fear even their cost advantages will shrink.

Already, credit downgrades in the sector--usually rare events compared with unsecured bonds--are on the rise, a serious issue for the sector, said Ray Kennedy, a bond expert with Pacific Investment Management Co., known as Pimco.

Last month, for example, Fitch Ratings downgraded some of Downers Grove-based Spiegel Inc.'s asset- backed notes, citing rising charge-offs.

Asset-backed securities are different from traditional bonds in that they are backed by a specific set of assets, such as inventory, home mortgages, auto loans, credit card receivables and even future revenue streams from tobacco litigation settlements and feature films. In the event of default, those pledged assets are off-limits to traditional creditors such as bondholders and shareholders.

The instruments have come under scrutiny in Enron's aftermath because the energy trading company was a heavy user of special-purpose entities, which are financial vehicles set up to hold instruments like asset-backed securities. Enron utilized the special-purpose entities to mask massive credit risk in off-balance-sheet deals.

In response, the Financial Accounting Standards Board is hammering out new guidelines for reporting accounting gains from the transactions, and a new industry group-- the American Securitization Forum--sprang up in March, in part to lobby for keeping the securitization vehicles free of onerous regulations in Enron's wake.

Amid the noise, some market experts worry that even legitimate uses of the securities pose a serious risk for investors.

As credit card delinquencies rise, for example, companies must boost reserves for them, a difficult feat in a downturn.

Issuing oom

The complex financial products aren't new, but their use exploded in the latter 1990s as a relatively cheap source of capital for growing companies--cheap, because investors were willing to take lower interest rates in exchange for the guarantee of the assets.

In 1991, total volume of outstanding asset-backed debt amounted to $50.6 billion. A decade later, it had soared to $1.3 trillion.

Their rise is but one burgeoning risk among many for investors in the post-Enron, recessionary environment, according to a report by J.P. Morgan Securities Ltd.

"Market sentiment on weaker credits has deteriorated quickly following the Enron bankruptcy and suspected fraud issues," Morgan analyst Emmanuel Weyd wrote. "Poor disclosure often prevents us from quantifying these risks properly and leads market participants to assume the worst for any suspect credit."

Shining light on transactions

Disclosure is supposed to be improving. Last year the FASB started requiring companies to disclose more information about special-purpose entities and asset-backed securities, especially when those results are kept separate from financial results.

Standards board officials say companies, in general, are doing a better job explaining their transactions, but many have a long way to go.

Still, said Weyd, increased securitization itself poses a danger, even while it adds liquidity to run companies.

"For companies that use this excessively, they are taking assets out of the balance sheet to get cash. For existing creditors, it weakens their protections," he said.

Area firms among big U.S. issuers

Banks and other financial institutions are the biggest issuers of the complex asset-backed instruments, but many other types of companies now use them as a relatively cheap source of credit.

U.S. companies have sold 313 of the financial instruments this year for a total of nearly $160 billion, according to Thomson Financial.

Local companies Navistar International Corp. and Sears, Roebuck and Co. were two of the first non- financial concerns to create securities out of their balance-sheet assets.

Sears, the first U.S. mass-market retailer to become active in this market back in 1988, was the nation's 20th-largest issuer in the first five months of this year, selling more than $2.1 billion worth, according to Thomson Financial.

Sears' $1.9 billion purchase of cataloger Land's End was partly financed with debt drawn from Sears' credit card receivables, or future customer payments.

In recent years, Sears has loaded up on $9.5 billion in outstanding securities that are backed by its $28 billion in credit card receivables, and that doesn't count traditional corporate bonds and other debt.

Asset-backed borrowing is cheaper than traditional loans, said Sears' treasurer, Larry Raymond. He said that 62 percent of Sears' private-label credit card accounts are more than 5 years old, indicating a fairly stable portfolio, and its asset-backed securities account for a third of total receivables, compared with much higher percentages for other issuers.

Navistar had nearly $3 billion in asset-backed receivables as of Oct. 31, according to the company's most recent filings with the Securities and Exchange Commission. The company pledged portions of its future truck sales as collateral.

Another Chicago-based firm, Bank One Corp., is the 12th-largest manager of asset-backed debt, with $3.5 billion in proceeds issued in the year's first quarter alone.

And Household International Inc. has nearly $22 billion in asset-backed securities, or roughly 21 percent of its receivables stream, according to regulatory filings.

Detroit automakers GM and Ford are big players, too, issuing a combined $21.2 billion in asset-backed securities this year alone through June 6, according to Thomson Financial.

Sears, Costco Score High in Consumer Reports
Survey (Update1)
By Chitra Somayaji and Anna Dubrovsky - Bloomberg - June 12, 2002

Sears, Roebuck & Co., Costco Wholesale Corp. and Target Corp. scored high with shoppers for merchandise quality and convenience, according to a survey by Consumer Reports magazine.

Wal-Mart Stores Inc., the world's largest retailer, and Kmart Corp., the largest U.S. retailer to file for bankruptcy, fared the worst in the survey. The magazine used 56,000 responses from 31,000 subscribers to compile its results. Wal-Mart's Sam's Club warehouse chain unit was ranked in the middle.

Sears, the largest U.S. department store chain, received high marks for its service, checkout speed, product selection and store layout, the magazine said. Readers cited the retailer's appliances, hardware and lawn and garden equipment.

``Sears does quite a bit of customer research,'' Peggy Palter, a spokeswoman for Sears, said in a telephone interview. ``We would expect to fare well in the survey.''

Costco was noted for its low prices and high product quality, the survey found. Target has a shopper-friendly environment and customers liked the company's checkout speed, selection and layout, the magazine said.

This was the first such survey by the magazine, which is published by the nonprofit testing and information company Consumers Union. The results were based on overall shopping experience, quality and selection of products, prices, sales staff, checkout speed and problems.

Wide Variety

Consumer Reports chose the six chains because they are all big-name stores that sell a wide variety of merchandise, spokeswoman Jennifer Shecter said in a telephone interview.

"These places are increasingly very popular places to shop,'' she said. "They are all doing very big ad campaigns right now. And with the recession, people are looking for value and good deals in general, and that's what these places offer.''

Shoppers complained that Wal-Mart stores were too crowded and hard to navigate, the magazine said.

Wal-Mart spokesman Tom Williams said in a statement e-mailed to Bloomberg News the company plans to use the feedback from the survey and that it is always focused on improvement.

Respondents also said they preferred certain stores for specific types of products. The warehouse clubs operated by Costco and Sam's Club were popular with people who wanted to buy home- entertainment products, while hardware buyers liked Sears and Costco.

The survey results are published in the July issue of the magazine.

Sears Expects June Decline
By James Evans - Crain's Chicago Business  - June 11, 2002

Sears, Roebuck and Co. on Monday said sales from the first week of June are on target with the company's June forecast of a low single-digit sales decline for the month.

In its weekly sales update, the Hoffman Estates-based retailer said same-store sales; sales at stores open more than one year; were stronger in hardlines products than in softlines categories. Sears noted that strong sales categories included home appliances, lawn and garden and women's apparel.

A spokeswoman would not comment further.

Just last week, Sears reported that unseasonably cool weather put a damper on May sales. Sears reported same-store sales fell 4.4% in May. Overall store revenues for May dropped 1.5% to $2.25 billion, down from $2.29 billion in May 2001 (ChicagoBusiness.com, June 6).

Shares of Sears traded up 50 cents, or nearly 1%, to close Monday at $58, near the 52-week high of $59.90 hit on June 3. Shares hit a 52-week low of $29.90 on Sept. 21.

Sears Must Pay $10.2 Million in Firestone Tire Death
June 9, 2002 Bloomberg.com

Sears, Roebuck & Co. must pay $10.2 million to relatives of a man who died when a Firestone tire bought from the retailer failed and a sport-utility vehicle flipped, a Texas state court jury decided.

The jury last week awarded $29 million in damages to the family of Terry Tripp, who was riding in a Chevrolet Blazer that rolled over in September 2000 after a Firestone Dueler APT-model tire failed. Jurors held Sears 35 percent responsible for the wreck and Bridgestone Corp.'s Firestone unit 65 percent responsible. Firestone had already settled with the family.

Firestone, which has recalled 10 million AT, ATX II and Wilderness tires since August 2000 made for the Ford Explorer SUV, faces hundreds of lawsuits stemming from tire failures, which U.S. highway-safety safety officials have tied to 271 deaths. Lawyers for the Tripps said the Dueler tire, sold only by Sears, is just as dangerous as the recalled models. "I think the jury verdict sends a clear signal that if you're selling defective tires you need to do something about It," said Houston attorney Joe Alexander, who represented the Tripps at trial.

Class Action Against VISA/MasterCard
Wall Street Journal Online News - June 10, 2002

High Court Allows Class Action
Against Visa and MasterCard

WASHINGTON -- The Supreme Court on Monday rejected a bid by Visa USA Inc. and MasterCard International Inc. to quash a class-action lawsuit accusing them of forcing merchants to accept their debit cards.

The lawsuit was filed in 1996 on behalf of about four million retailers across the U.S.

Visa and MasterCard, the world's biggest payment companies, argue that the case, with so many plaintiffs, would be unmanageable.

Dozens of banking groups and trade associations argued that case sets standards that "too easily permit the cobbling together of industrywide classes, with potentially devastating economic effects for individual companies or whole industries." Visa and MasterCard also questioned whether the plaintiffs had enough in common to merit class-action status.

By turning away the appeal, the justices passed up a chance to rewrite rules for class-action lawsuits. The decision cleared the way for the case to proceed before a federal judge in Brooklyn, N.Y.

The plaintiffs named in the suit include some of the nation's largest retailers -- such as Wal-Mart Stores Inc., Sears, Roebuck & Co. and Safeway Inc. The plaintiffs asserted that processing Visa and MasterCard debit cards as if they were credit cards forced them to pay billions of dollars a year in extra processing charges -- costs that are passed on to their customers. The retailers were given class-action status in 2000.

An estimate from the plaintiff's economists puts damages, including interest, at between $13.1 billion and $15.8 billion. The claims could triple to between $39.3 billion and $47.6 billion under U.S. antitrust law.

Visa and MasterCard say the claims are closer to $100 billion. They argue that such high stakes can coerce defendants into a settlement regardless of the merits of the case. "Coercion is, if anything, an understatement for a class such as the one proposed in this case of four million members seeking damages of approximately $100 billion," their attorneys told the justices.

A divided Second U.S. Circuit Court of Appeals in New York had concluded that the district judge had "carefully" applied federal rules of civil procedure, and upheld the class certification in October. The Supreme Court's action Monday leaves that ruling intact.

The two payment associations have policies that require shopkeepers to accept any card with a Visa or MasterCard logo. That means merchants must accept Visa Check or MasterCard debit cards with higher transaction fees than those charged by other debit-card networks, the plaintiffs claim.

Visa and MasterCard, which account for three-quarters of the $1.3 trillion U.S. credit-card market, say the allegations aren't true.

It is unlikely that the suit will ultimately result in Visa and MasterCard paying $39 billion. If the merchants prevail in court, the two credit-card companies could declare bankruptcy, or, more likely, seek a settlement that might include court-ordered changes in the rules they impose on retailers, and probably a settlement of several billion dollars. (Visa vs. Wal-Mart)

Allstate Targets Commissions
By Steve Daniels  - CRAIN'S Chicago Business
June 6, 2002

Stung by property losses last year, Allstate Corp. is proposing cutting commissions paid to its agents for sales of homeowners insurance policies by 50% as part of a wide-ranging new compensation plan now being drafted.

The Northbrook-based insurer floated a new proposal to agents June 4 that would reduce commissions on sales of new homeowners policies from 20% of premiums to just 10%. Compensation on sales of car-insurance policies wouldn't change.

An Allstate spokesman says money saved from the cut in compensation for homeowners policy sales will go toward new agent bonuses for reaching growth and profitability goals.

"It is not in any way intended to say that the company is de-emphasizing homeowners (insurance)," he says.

Allstate also is proposing to scrap its current agent bonus system, which rewards agents with company stock if certain earnings-per-share goals are met. Instead, a new system would provide its 12,000 agents with bonuses based on hitting growth and profitability targets for their agencies.

U.S. Retail Sales Rose in May
June 6, 2002 - Bloomberg

Led by Costco, Kohl's New York: U.S. retailers' same-store sales rose in May, helped by higher-than-expected increases at Costco Wholesale Corp., Kohl's Corp. and other chains that emphasize low prices.

Sales at stores open at least a year climbed 3.4 percent, according to the Bank of Tokyo-Mitsubishi Ltd.'s index of more than 80 chains. They increased 6 percent at Costco, the largest operator of warehouse clubs, and 8.7 percent at Kohl's, which sells clothing priced lower than at many other department stores.

"The strong got stronger," said Elizabeth Shamir an analyst at PNC Advisors, which holds shares of Costco among the $60 billion in assets it manages. Sales are rising at chains "when you're offering the consumer what they want."

Discount retailers such as Wal-Mart Stores Inc. and Costco had the biggest sales gains as consumers remained careful about where they spent money. The pace of sales slowed from the average 4.8 percent gain between January and April. Unusually cool weather reduced demand for items such as summer apparel and lawn and garden equipment, analysts said.

Life Cycles of the Rich and Famous

Death often inevitable for corporate giants

By Janet Kidd Stewart - Chicago Tribune staff reporter  - May 26, 2002

With the implosion of such American icons as Xerox, Kmart and Polaroid after a relatively mild recession, investors are facing a grim reality: Companies, even giant ones, have organic life cycles that are shrinking with alarming speed.

The corporate scrap heap is piled high with once-stalwart brands that fell victim to bad decisions, better rivals or just plain fate, forcing investors to rethink the buy-and-hold mantra that financial strategists have preached for years.

Other giants aren't dead, just ailing shadows of their former selves. And others are simply not the go-go growth machines they once were, plodding along in old age and showing signs of senility.

If this sounds familiar, perhaps it is because it's reminiscent of the Nifty Fifty large-cap growth companies held up in the late 1960s and early 1970s as "one-decision" stocks.

Polaroid was one of them. The company introduced instant color film in 1963, split its stock 4-for-1 the following year, added thousands of workers and saw shares soar. But by 1972, the stock had reached its peak, and began a slow slide. Last year, it became one of more than 250 public companies to file for Chapter 11 bankruptcy protection, a record.

Most of the other Nifty Fifty stocks never regained former glory and underperformed the benchmark Standard & Poor's 500 over the long haul.

And it's not just the Nifty Fifty--remember American Cotton Oil, Distilling & Cattle Feeding and Tennessee Coal & Iron? All were once part of the elite Dow industrials.

Blue-chip companies dominate their industries, and their products seep so deeply into the consumer psyche during their high-growth phases that they can appear invincible. But that success can be what makes them most vulnerable. As demonstrated by dramatic changes in the list of leading companies by market capitalization over the years, it's clear even the biggest can fall hard.

"What you find is a lot of roiling. It's very hard to get to the top and even harder to stay there," said Al Ehrbar, a partner with Stern Stewart & Co., a New York consulting firm that helps companies measure shareholder wealth.

A new study by Chicago consultant A.T. Kearney has found a pattern in that
roiling: Measuring consolidation patterns of 25,000 global companies, the firm found that industries go through predictable phases, and that the pace of that movement is accelerating rapidly.

Of course, there are companies that defy the odds and survive: General Electric and Coca-Cola are two, as are Chicago heavyweights Kraft Foods and Walgreen--all companies with at least 100-year histories that are still growth machines.

Yet even these powerhouses are vulnerable to extinction at some point, experts say, or at least enough retrenchment to be extremely painful to investors.

Motorola a case study

Consider Schaumburg-based Motorola. It dominated the cellular telephone industry in the early 1990s; expecting its growth rate to continue, investors bid up shares just over two years ago to nearly $185 before a 3-for-1 split--and the bursting of the technology bubble.

This week, Motorola will be a case study in failure at Northwestern University's Kellogg School of Management, where an associate dean will argue that the company didn't react more quickly to the introduction of digital cell phones precisely because of its success with older analog technology. Last year, the company turned in its first operating loss since 1930--more than $1 billion. Shares have plunged 72 percent since their 2000 high.

"A record of success leaves you vulnerable to competitors not on your radar screen. That organic process is very difficult to overcome," said David Besanko, Kellogg's associate dean and management strategy professor.

The upshot, for investors, challenges the fundamental buy-and-hold mantra and the nation's love affair with stock picking: Investing in any single company takes on more inherent risk as the economy matures and consolidates.

Some lay the demise of these giants squarely at the feet of management.

"Ultimately, management takes responsibility for success or failure," said retail consultant Sid Doolittle, a former executive of now-defunct Montgomery Ward. "Companies with strong cultures are resistant to change and get trapped in their own strategies."

Others call these implosions a healthy, natural selection process as global business consolidates. Still others point to a host of other factors, from the business cycle to an unforgiving capital market structure.

"Once you are no longer a growth story and are part of everyone's lives, now your fortunes are tied; it's more difficult to get away from the economic cycle," notes Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York.

Federal Reserve Chairman Alan Greenspan recently blamed corporations' increasing reliance on intangible assets, which indeed represent a fast-growing proportion of market capitalization. "Trust and reputation can vanish overnight," Greenspan said recently while discussing the Enron collapse. "A factory cannot."

Intangibles now account for about 70 percent of corporate market value, down from 80 percent in 1999 but still well above the 59 percent as recently as 1992, according to Compustat data analyzed by PricewaterhouseCoopers.

Analyzing the "implied value" of companies in different sectors (market capitalization minus book value), PricewaterhouseCoopers found that even after the stock bubble burst, industry market worth still ranged between two and four times corporate book value.

Goodwill and intangible assets

It's not just investors bidding up a company's prospects. Some of America's biggest corporate giants have few tangible assets on their balance sheets: AOL Time Warner, Viacom and Kraft all have goodwill and intangible assets making up more than 60 percent of total assets.

And yet Corporate America couldn't disagree more with the idea that intellectual property is killing off companies. To the contrary, they contend, it has helped companies stave off death by allowing them to enter new markets quickly.

Consider Coke, which derives the lion's share of its market wealth from its powerful brand, not plants and equipment. Corporate growth comes not just from physically expanding into new markets (which has largely been done) but in marketing new extensions of the brand.

On Monday, for example, the company is heavily promoting its new 12-pack refrigerator cases with dozens of area children in Lincoln park painting refrigerators that will be donated to charity. It also is launching Vanilla Coke in Chicago and five other markets.

"It's constant reinvention of what we are," said Steve Hutcherson, vice president in charge of the Coca-Cola Classic lines for the Atlanta-based soda giant. "You have to constantly get the public to reconsider your proposition, and if you don't, you become stagnant."

If it weren't for the innovation and flexibility that reliance on "intellectual assets" brings, many more firms would already be in the grave, experts said.

"This does create faster product life cycles because companies can more quickly update to stay ahead of the competition," said Aron Levko, a PricewaterhouseCoopers consultant who analyzed the Compustat data.

Whatever their cause, the swift demise of so many should be a siren song for investors, alerting them to the risks that even giant consumer names can stumble and fall, observers say.

"The value trap is buying into a business and assuming it goes on forever," said Edward Studzinski, a portfolio manager with Harris Associates. "If there's a mistake we investors have made over the years, it was forgetting that in reality there are very few really good businesses and that a lot of [company] managers are not as brilliant as they or we thought they were."

Commonly, managers fall into the all-too-easy trap of clinging to what has worked--not daring to tinker with success--or even to old problem behavior.

"Kmart was the son of Kresge, and it kept all of its predecessor's problems in logistics and efficiency," Doolittle said.

For investors, it's important to note that advocates strongly caution against active trading in and out of individual positions--which can be costly both in transaction fees and in missing market upturns--and that buy and hold, as a philosophy, has its place. But, experts stress, just don't hold forever.

"Companies have to reinvent themselves," says Julie Van Cleave, managing director of Mason Street Advisors, a new investment unit of Northwestern Mutual Insurance.

Or die trying. And maybe they should: Artificially propping up companies with government intervention, as in Japan, creates a drag on growth, argues Edward Snyder, an economist and dean of University of Chicago's Graduate School of Business.

"The thing that's truly special about our economy is that it tolerates failure," Snyder said.

And even when the government does step in--as in Chrysler and Continental Bank--it doesn't guarantee companies long-term survival in that form.

Not all companies fail, of course. Some shrink, many merge into other companies, and some actually survive and grow. Nowadays, though, the life cycle moves much faster.

Predictable patterns

In a new study of 25,000 global corporations, A.T. Kearney has found industry consolidation isn't a series of random events: Players in virtually every industry follow a predictable consolidation pattern from fragmentation to domination until something--like deregulation or technical innovation--wakes the industry's slumbering giants and interjects a flood of upstart competitors.

That four-stage industry life cycle--opening, scale, focus and alliance, to use Kearney's terms--has shrunk due to technological innovation from several decades in the early part of the 20th Century to roughly 25 years today.

Further, Kearney studied Chicago's business landscape and found a critical mass poised in the latter stages of the growth curve, suggesting a potentially rapid rate of more corporate deaths to come.

"It's a call to arms because ultimately survival boils down to management," said Larry Hitchcock, vice president in A.T. Kearney's strategy and organization practice. "It's been widely talked about that Chicago's business community needs to cultivate innovation, but from my perspective the leadership here needs to define its end game rather than let it be done for them by an East Coast investment bank. Not having a [strong] merger integration process is crazy."

Companies can move through life cycle stages with breathtaking speed. AT&T, one of the 10 biggest U.S. companies at the close of the 20th Century, is now preparing for a 1-for-5 reverse stock split to keep its share price in double digits after it sells its cable TV operation.

"In our view there is no such thing as a one-decision, buy-and-hold-forever stock anymore," said Steve Galbraith, a senior equity researcher with Morgan Stanley who has written about share-price inflation. "This is explicitly not to say to trade like a maniac, but Cisco at $60 a share was a sell, as was AIG at $100 and GE at $50. I'm still inclined to hunt for the winning 800-pound gorilla, but history is not on your side when valuations get nutty."

Headliner: Alan Lacy
A Change of Clothes at Sears

by Robert Berner - May 27 2002 Business Week - May 21, 2002

Sears Roebuck CEO Alan Lacy is turning to the top line of shoring up profits through cost-cutting. On May 13, Sears said it would buy cataloger Lands' End for $1.9 billion, cementing talks that Lacy's predecessor, Arthur Martinez, began back in 1998. Sears, which will continue to run Lands' End catalogs and Internet site, also plans to carry the brand's merchandise in its stores to bolster Sears' eroding apparel sales.

Lacy figures that buying a well-known brand will help in its bid to develop an in-house label. And beginning the only retail shop to carry the Lands' End line should help distinguish Sears' from rival chains. "It allows you to compete on something other than price," Martinez says.

But there are risks as well. Lands' End is aimed at higher-income shoppers, who may be alienated as Sears lowers prices. Store sales might end up cannibalizing Lands' End catalog sales. Those sales are about where they were three years ago, suggesting the brand might not have much growth potential. Lacy could find more in this package than he bargained for.

Sears Plan to Sell $1 Billion in Bonds

Sears Boosts Sale of 30-Yr Bonds 33 Percent to $1
Bloomberg -  (Update1) - By Terence Flanagan
May 21, 2002

New York:  May 21 (Bloomberg) -- Sears, Roebuck & Co., the largest U.S. department store chain, plans to sell $1 billion of 30-year bonds, up from $750 million originally planned, said people familiar with the sale.

Morgan Stanley Dean Witter & Co. is managing the sale, with help from Bear Stearns Cos. and Lehman Brothers Holdings Inc., the people said. The sale is expected as soon as today.

Hoffman Estates, Illinois-based Sears has about $10.8 billion of bonds outstanding, according to Bloomberg data. The company's debt carries investment-grade ratings of ``Baa1'' at Moody's Investors Service and "A-" at Standard & Poor's.

Sears Roebuck Sells $1 Billion of 30-Year Bonds Yielding 7.238%
By Terrence Flanagan - Bloomberg
May 21, 2002

The following issue went on sale today:

New Accounting Rules Turn Lands' End
Into a Bargain for Sears
By Allan Sloan - Washington Post.Com - May 21, 2002

If you're shopping for upscale merchandise, it's hard to turn down a nifty property that will cost you 40 percent less now than when you coveted it two years ago. Especially when it's become more valuable in the interim. That, in a nutshell, is how a change in accounting rules has marked down Sears's effective cost of buying Lands' End, the big catalogue retailer, for $1.9 billion in cash.

While there's more to this acquisition than just numbers -- for reasons we'll get into later, I think Sears will mess up Lands' End -- an accounting change that took effect last July helps make this transaction feasible for Sears, which can pay a steep $62 per share for Lands' End stock without eviscerating its own per- share profit.

Under the old accounting rules, buying Lands' Ends for $1.9 billion in cash would have triggered large accounting charges for Sears that would have wiped out most of Lands' End's reported profits. Under the new rules, however, these charges no longer exist.

Had Sears bought Lands' End at the current price when it sniffed around the company before -- in July 2000, according to the companies' Securities and Exchange Commission filings -- the deal would have diluted Sears per-share earnings. Now, it won't. It has to do with what accountants call "goodwill," which is the difference between the price Sears is paying and Lands' End's stated net worth. At today's price, that's a $1.5 billion difference.

According to Lehman Brothers accounting guru Robert Willens, under the old rules Sears would have had to charge about $50 million of goodwill a year against its profits for 30 years. Since Lands' End's profits for its most recent 12-month period are only $87 million, a $50 million hit would leave only $37 million of reported profits for a property that cost Sears $1.9 billion. That's more than 50 times profits, a prohibitively steep price. "If they had to amortize goodwill, the acquisition would have diluted Sears's profits substantially," Willens said.

Let's look at it another way. Buying Lands' End under the old rules would have cost Sears the equivalent of $3.4 billion -- the $1.9 billion purchase price plus the $1.5 billion in accounting charges. Having to pay just $1.9 billion means a cost for accounting purposes more than 40 percent below the cost under the old accounting rules. (I'm not saying the old rules were better than today's regulations; I'm just showing what a big difference the rule change makes.)

Current rules will require Sears to show goodwill on its books after the Lands' End acquisition is completed, but it won't have to subtract goodwill from its reported profits unless it decides that the value of Lands' End has been permanently reduced. It will probably take a couple of years for Sears to mess up Lands' End that badly.

Under the old accounting rules, the only way Sears could have bought Lands' End without running into a goodwill problem would have been to swap Sears shares for Lands' End shares. But that would have diluted Sears's earnings per share because it would be paying much more for each dollar of Lands' End earnings than the stock market accords to each dollar of Sears's earnings.

By paying cash under today's rules, Sears will break even on the deal almost immediately -- provided Lands' End's profit projections turn out to the accurate. Here's why: Let's assume that Sears pays 7 percent a year for long-term money. That makes an interest tab of $133 million a year on the $1.9 billion purchase price. So if Lands' End produces at least $133 million of pretax profit, Sears breaks even.

Guess what. In SEC filings Friday, Lands' End said it expects to make $133 million before taxes in its current fiscal year, which will end in February. The year after that, Lands' End expects to earn $152 million, which would put Sears solidly ahead.

Given these numbers -- and given that Sears badly needs help in its apparel business and its online operation, two areas in which Lands' End is terrific
-- you can see why Sears is hot for the deal. Why not? It gets really good people to run its Web site, which is now strictly blahsville. And without much embarrassment, it gets back into the catalogue business, which it foolishly (in hindsight) abandoned under a previous regime.

So why am I downbeat on this transaction, which looks so brilliant on paper? Because there's more to life than numbers. I'm a customer of Lands' End because its service is excellent, and I'm an ex-customer of Sears because the Sears service I've gotten is just horrible. Customer service is expensive. So the first time that Lands' End misses its profit projections -- and it's missed at least twice since 1999 -- I can see Sears reacting by cutting customer service because it thinks customers won't notice.

But they will. And the downhill slide will start. And Lands' End will become like Sears.

Some people tell me that Sears's recent ventures into upscale merchandising have been done very well. Maybe that will happen at Lands' End, but I doubt it. Even a bargain price is too much to pay if you degrade the thing you've bought.

Sloan is Newsweek's Wall Street editor. His e-mail is sloan@panix.com.

Turnarounds
 By Pablo Galarza - Money Magazine - June 2002  - May 20, 2002

Lucent, Conceco an Sears (oh my) What are we, nuts? Read on Investing in troubled companies that are struggling to turn around their failing operations is about as perilous as it gets. But along with he risks that a turn around won't ever happen comes out-sized returns for those lucky enough to be right. Indeed, there are few better ways in the stock market to score the elusive "10 bagger" - or tenfold return - than to correctly bet that a company is on the verge of a comeback. Turnarounds can take time to pay off, however, making patience not just a virtue but a must. Here are three turnaround gambles that we believe have a decent likelihood of success - and belong only in the most speculative portion of a diversified portfolio. (Lucent, Conesco details are omitted.)

SEARS.
Here's a less risky but still potentially lucrative turnaround. Shares of the retailer - once the country's largest - have been on the softer side for too long, under performing the S&P by 31% since 1997. But signs now point to changing fortunes, and value managers have been climbing aboard.

The key lure is not retail apparel. Rather, it's CEO Alan Lacy's focus on the more profitable and faster-growing home improvement market - and on credit cards. In fact, the credit-card business makes up an astounding 69% of Sears operating profit of $2.6 billion. With more than 40 million accounts, Sears is actually the nation's seventh largest credit-card company.

"People misunderstand where Sears makes its money," says Susan Byrne, manager of Gabelli Westwood Equity, who's recently been buying the shares. "It's like a huge bank." A growing bank at that. Operating income from financial products were up 25.3% in the fourth quarter, as low interest rates cut Sears' cost of borrowing. CEO Lacy's stated goal is to grow operating income from credit cards by 5% a year. To that end, Sears has invested heavily in high-tech screening programs to identify better quality credit card customers.

The company executives recently told Wall Street that earnings should be up 17% in 2002 - somewhat higher than the mid-teens gains that many analyst had been expecting. Byrne thinks the good news will keep coming. Sears currently fetches $54 a share; her target price is $80 within 12 months and $110 within three years.

Sears Gets Credit for Lands' End Deal
Big Store Set to Cash in on Plastic

By Eddie Baeb - Crain's Chicago Business - May 20, 2002
 

Squall jackets and Oxford shirts from Lands' End promise to spruce up Sears, Roebuck and Co.'s apparel offerings. But the acquisition of Lands' End also means a potential bonanza for Sears' most robust business: credit.

The catalog and Internet retailer delivers to Sears a more affluent customer base and an undeveloped credit card business, giving Sears an opportunity to further expand its already lucrative credit business, which currently accounts for more than half of profits.

The $1.9-billion acquisition of Dodgeville, Wis.-based Lands' End Inc. also could hold the key to expanding Sears' lagging apparel business, which contributes only $6 billion of the retailer's $41 billion in annual sales.

But Hoffman Estates-based Sears will also have to overcome pitfalls, including resisting the temptation to meddle with Lands' End's successful formula. One particular danger is that, in a down cycle, Sears would slash customer service or product quality to improve margins, thereby putting the franchise at risk.

Indeed, Sears hasn't distinguished itself with past acquisitions — its foray into auto parts with the 1988 purchase of Western Auto Supply Co. blew up under Sears' tinkering, turning a once-profitable chain into a money loser.

Toting up the benefits
But allowing that the retailer has learned from past missteps, observers say the Lands' End acquisition has the potential to generate both revenue and profit growth.

Credit could offer a key.
"No question, credit is a great opportunity," says Kevin Silverman, retail analyst at ABN AMRO Asset Management in Chicago. "It's one of the reasons Sears was such a fabulous buyer for Lands' End. Very few potential buyers would be in a position to bring Lands' End apparel into so many stores. And very few buyers would be in a position to offer credit like Sears can."

Mr. Silverman, who has followed both companies, says that over time, he estimates 40% of Lands' End catalog sales could be made on Lands' End plastic. Based on its $1.5 billion in sales last year,

that would mean about $600 million of additional sales going through Sears' credit business, which tallied net credit card receivables of $28 billion at yearend. Sears currently offers a proprietary Sears card and last year launched a Sears MasterCard.

CEO Alan Lacy says Sears is likely to issue a Lands' End proprietary credit card and a co-branded Lands' End MasterCard — the catalog company doesn't now offer its own credit card — and customers also will be able to use their Sears card for purchases from Lands' End catalogs and Web site.

Expanding credit will improve Sears' bottom line. While retail and related services generated $31.43 billion in sales last year, they produced only $901 million in operating income. Meanwhile, Sears' credit business generated $1.53 billion of operating income on $5.22 billion of revenues.

Sears posted 2001 net income of $735 million, or $2.24 a share, on revenues of $41.08 billion. Lands' End, whose fiscal year ended Feb. 1, reported net income of $66.9 million, or $2.23 a share, on revenues of $1.57 billion.

With a proprietary card that could be used only at Lands' End, Sears will gain an opportunity to finance purchases at interest rates typically higher than on bank-issued credit cards.

With a co-branded Lands' End MasterCard, Sears can provide a consumer's primary credit card — covering consumer purchases such as restaurant, hotel and airline charges.

Lands' End rival L. L. Bean Inc. of Maine offers a Visa card, issued by MBNA America Bank, that carries free shipping, monogramming and spending rewards.

In addition, Sears can market credit and other products to Lands' End's customer list, which includes more than 33 million names. Last year, Lands' End took orders from 7 million individual customers.

The danger, of course, is that Sears could alienate Lands' End's more-affluent customer base by trying to sell them products such as credit card insurance or dental plans.

"What (Sears) really shouldn't do is go in and mess Lands' End up," says Claire Gruppo, president of New York-based investment banking firm Gruppo Levey & Co., which specializes in direct marketing and retail. "If Sears starts using the catalog as a marketing tool for its stores, or if they start asking Lands' End management to work on Sears catalogs, that would be a big problem."

Getting the right mix
One particular danger: If it found itself under profit pressures, Sears could look to cut costs at Lands' End as a way to boost corporate margins. Sears' retail operations have a gross margin of 26.6%, according to a recent financial statement, while Lands' End enjoys a 43.9% margin.

But Lands' End success is predicated on strong service — customers can quickly reach telephone representatives who are familiar with the product — and high quality at reasonable prices.

And retail experts say that Sears must integrate and display the new merchandise in a way that's consistent with Lands' End's reputation for quality, also making sure its sales people are knowledgeable about the goods.

One analyst estimated that Sears' plan to devote 15% to 20% of its apparel floor space to Lands' End at its 870 department stores could result in sales of up to $2 billion of Lands' End merchandise.

But Sears must get the product mix right, carrying enough inventory to meet demand while avoiding overstocks that lead to heavy markdowns.

Mr. Lacy doesn't foresee problems. "I don't think the execution risk is that significant," he said in an interview. "We're essentially just adding another apparel brand."

Trying to Dodge a Merger Bullet
Lands' End Town Knows Sears Link Means Change

By Susan Chandler - Chicago Tribune Staff Reporter  - May 19, 2002

DODGEVILLE, Wis. -- Ruth Murphy is skeptical, and she's not afraid to say it. The grandmotherly soda fountain clerk just doesn't see a good fit between Lands' End Inc., her town's economic engine, and Sears, Roebuck and Co.

"I can't see Lands' End clothing sold in Sears. Can you?" she asks while mixing an 85-cent ice cream float for a young customer perched on an old-fashioned stool at the Corner Drug Store in downtown Dodgeville. "Lands' End clothes are very good quality."

The implied criticism of Sears is clear, even in a town where people are mostly too polite to say anything negative about Lands' End Chairman Gary Comer's decision last week to sell the preppy apparel catalog company to a big-city retail giant for almost $2 billion.

But the sense that an era is ending is inescapable.

"I have a lot of people who sneak down here on their lunch break or come after work," says Vern Ott, owner of the Village Barbershop. "I hope everyone working here now can stay.

Since 1978, when Lands' End moved its headquarters from Chicago to southwest Wisconsin on the whim of Comer, Dodgeville has flourished. The tiny town surrounded by dairy farms has seen an influx of new residents and wealth as Lands' End added jobs and developed a national reputation as a good place to work.

But while such growth often brings negatives, Dodgeville has retained its small-town character. Serious crime is virtually non-existent, leaving court dockets filled with cases of disorderly conduct and driving under the influence.

The schools are good, the streets are quiet. Senior citizens gather at the Courthouse Inn on weekday mornings to play a few hands of cards or feast on the Foreman's Breakfast, two eggs smothered in cheddar cheese sauce served on a bed of hash browns for $5.50.

"It's pretty obvious when they have 4,000 employed in the Dodgeville facility, and we're only a community of 4,200 that it's a real positive for the whole area," says Dodgeville Mayor Jim McCaulley. "Not only the weekly paycheck, but the benefits have really helped stabilize the farm economy."

Gary Schill, co-owner of the 109-year-old drugstore, agrees. "You can travel in the Midwest and see a lot of communities our size that have really struggled. But here, it's been steady upward growth.

`It's been a blessing'

"Many townspeople and farm wives have been able to endure hard times because of a second wage earner. It's been a blessing."

Some of those blessings are quite tangible, such as the town swimming pool, made possible by a $500,000 donation from Comer, and a new surgical and outpatient wing at the local hospital, which got under way with a $250,000 contribution from Lands' End.

But now Dodgeville's favorite billionaire is taking his money and going home to Chicago. If the deal is approved as expected, there won't be any more Lands' End annual meetings for him to preside over. No more board meetings for him to attend. That prospect was enough to cause 74-year-old Comer to break into tears several times Monday while explaining to employees why it was time for Lands' End to move on without him.

By the end of June, Lands' End will simply be a unit of Sears.

Frankly, that concerns Brindi Melton, the manager of Thistle Hill Table Top Co., an upscale home accessories shop on Dodgeville's main street that is a favorite with many Lands' End designers and graphic artists.

"A lot of our business comes from Lands' End," says Melton, the daughter of shop owners Carla and John Lind. "How is this going to affect business? Are people going to be worried about their jobs? We're worried."

Outside of Lands' End workers, there aren't many townspeople who would pony up their cash for Thistle Hill's orange-linden blossom herbal bath beads, rusty wrought-iron garden tables or Fiestaware pitchers in the latest colors.

And it takes a rather urban design sense to pay 75 cents per dried quince pod or $1.50 for an octopus-like spider cone to create a tony table display.

Trying to ease fears

Of course, Sears is saying all the right things to allay the potential fears of Lands' End employees and Dodgeville residents. Sears Chief Executive Alan Lacy, who traveled to Dodgeville to meet with Lands' End employees Monday, has promised to leave Lands' End alone, maintaining its Dodgeville headquarters under CEO David Dyer. "We want them to continue to be the happy family they are," Lacy said last week after the deal was announced.

But such fairy tale endings are unusual in mergers between big companies and small entrepreneurial ones, notes Thomas Lys, professor of mergers and acquisitions at Northwestern's Kellogg School of Management.

"Here's what happens. The culture of the buyer gets imposed on the seller," Lys said. "If Sears doesn't want to turn Lands' End into Sears, they have to be very vigilant."

If Sears decides to integrate Lands' End into its accounting system or reporting structure, it's the beginning of the end, Lys warns. "The moment they start integrating them, the entrepreneurial people will leave. If they wanted to work for Sears, they would have."

That's certainly the case for Devan Thompson, a California native who had his pick of job offers but decided to join Lands' End as soon as he graduated from Brigham Young University in Utah four years ago.

Thompson, 28, believes that change is inevitable once the merger goes through, but he also believes that what Lands' End has created is worth fighting for.

"I'm loyal to the Lands' End brand and I'll defend it and make sure it stays the way it should be," says the senior inventory manager for outerwear. If Sears were to ask him to make a product cheaper, "I'd say, `We're either going to do it the Lands' End way or not at all,'" Thompson vows.

The Lands' End way

So what exactly is the Lands' End way? To those caught up in the urban rat race, it almost sounds too good to be true.

Customers and good service are revered here. All products are guaranteed, and Lands' End will accept returns years later on items that clearly have been well used. Phone operators, many of them farm wives, are not allowed to prompt a customer to place an order. If the person on the other end of the line wants to talk about the weather for 15 minutes, that's fine.

Employees are treated with the same respect. Part-timers who work more than 25 hours a week receive the same benefits package as full-time workers, including annual bonuses, medical and dental insurance, profit-sharing and a company match on their 401(k) contributions.

All employees have free use of a fitness center, including pool, and there's a backup child-care center available to anyone who has a sick baby-sitter or other glitch. There's also paid caregiver leave for those with a severely ill spouse or child, and anyone can buy an extra week of vacation annually.

Lands' End also knows how to have fun. Phyllis Toay, who spends her days at a sewing machine hemming pants, is part of the 10,000 Steps Club. She and other workers have meters that count each step they take daily. Club members encourage each other and keep track of their weekly progress.

One morning last week, Toay went on a company-sponsored Poker Walk among Lands' End's buildings, picking up a playing card at each one, trying to put together a winning hand. With her three 10s, a king and five, Toay has a decent chance to win but doesn't know what the prize might be.

It doesn't really matter.

"I like the atmosphere. Coming to work is a pleasure," says Toay, 62, who joined Lands' End after injuring her back 20 years ago on the family farm.

With so much to lose, it only makes sense that Lands' End workers would be nervous at the prospect of change. Surprisingly, perhaps, few say they feel that way.

"I look at this as a good opportunity for growth," said Cindy Doney, a specialty shopper at Lands' End who answers product-related questions for customers. "They're presenting it in such a nice light."

Doney, who has 20 years invested in Lands' End, was surprised to hear the company was sold, but the name Sears didn't scare her. "I thought it was great. I buy at Sears in Madison. I get good customer service."

Still, she wouldn't want her job to change. As the mother of three, Doney's second income is critical to her family. "This is not an extra for me," she says.

Cash bonuses awarded

Helping to ease the shock to employees is a lot of cash.

On the day the sale was announced, Comer and Dyer said they would give Lands' End employees a bonus equal to two weeks pay. Then Lacy tacked on an additional one-week bonus payable at Christmastime.

Then Comer decided to go further. He is kicking in an additional $1 million to be split among current employees who were there when he stepped down as president in 1990. There's talk he might even double that amount.

Chris Aide, who has worked for six years packing customer orders, already knows how she is going to spend her extra dough. She will attend a nearby music festival and her son is going to Australia in July.

No one appears to be begrudging the big paydays that are going to the guys at the top. Comer's 52 percent stake is worth close to $1 billion. Former CEO Richard Anderson's holdings will bring him $71.4 million.

And Dyer is sitting on $28.7 million in Lands' End shares, including exercisable options. That makes Dyer, who lives on an estate near Governor Dodge State Park, Dodgeville's richest resident by far.

Other top executives are being paid retention bonuses to make sure they stick around.

Will Sears get its payoff?

But whether Sears will receive the big payoff it is expecting from acquiring Lands' End probably won't be known for at least two years, business experts say.

By then it should be clear whether Lands' End's reputation for quality has given Sears new credibility in the apparel area or whether being in Sears has hurt Lands' End's image with upscale consumers.

Robert Blattberg, director of the Center for Retail Management at the Kellogg School, isn't optimistic.

"In the long run, it's a question of whether they bastardize the brand. Does having Lands' End products at Sears degrade the image of Lands' End?" Blattberg said. "My gut feeling is yes."

Dodgeville's residents are hoping he's wrong.

Allstate Said to Coerce Its Agents

By Joseph  B. Treaster - New York Times - May 18, 2002

A federal agency has concluded that the Allstate Insurance Company was illegally discriminating against about 650 life insurance agents even as it was negotiating to settle similar charges involving thousands of agents who sell auto and home insurance, several agents and the company disclosed yesterday.

In a letter to both sides in the dispute dated May 10, Lynn Bruner, a district director of the Equal Employment Opportunity Commission, said Allstate had engaged in "unlawful interference, coercion and intimidation" against the life insurance agents in 2000 and 2001.

According to the E.E.O.C., the company required agents to convert from being employees with health and pension benefits into independent contractors. Ms. Bruner said Allstate had acknowledged telling the agents they would not be permitted to work for the company unless they agreed in writing not to sue for any kind of employment discrimination. Such an action is a form of illegal pre- emptive retaliation, she said in the letter, which urged the company and the agents to begin settlement talks.

For nearly two years, Allstate has been fighting similar claims that it forced thousands of auto and home insurance agents to become independent contractors. Those agents sued Allstate in Federal District Court in Philadelphia in August. In December, the E.E.O.C. also sued Allstate.

Allstate has in turn sued the agents for fraud, saying they got severance or other benefits after agreeing not to sue the company, but never intended to honor their agreements. Susan Rosborough, an Allstate lawyer, said the company, the country's second-largest seller of auto and home insurance after State Farm, treated its agents properly and legally. The company says it wants to make its sales force more efficient and is increasing commissions to compensate for the elimination of benefits. But Michael Wilson, the lead lawyer in the agents' private suit, said their earnings as independent contractors were not making up for the losses in benefits.

The initial complaints from the home and auto insurance agents were based on age discrimination. More than 90 percent of them were more than 40 years old. More than 80 percent of the life insurance agents are that old. Both of the commission's cases cover a wide range of employment discrimination offenses.

Lawyers who specialize in suing corporations on behalf of workers portrayed Allstate as arrogant in its persistence. "If an employer gets a finding based on a certain type of practice, normally, you would expect the employer to be very cautious about doing it again," said L. Steven Platt, a Chicago lawyer who is president of Workplace Fairness, a group that provides information to workers.

But Ms. Rosborough said Allstate continued converting employees into contractors under the belief that the commission was wrong. "We don't understand their theory of retaliation," she said.

Felix Miller, the lead E.E.O.C. lawyer in the case involving the larger group of agents, said the retaliation concept was simple: agents were required to sign a release giving up their right to sue under antidiscrimination employment laws. "If an agent refused to sign," he said, "Allstate said: `Goodbye. We're not even going to consider keeping you as a sales agent.' We found that to be unlawful retaliation."

But Ms. Rosborough said, "The way we look at it, their jobs were going to go away whether they signed the release or not."

There were two types of jobs, she said — one with full benefits, the other with opportunities to make more money. "We essentially said, Job A is going away," she said. "You have a number of options. If you wanted to apply for Job B, in this case the independent contractor job, you had to sign the release."

With Allstate maintaining its position, there seems to be little hope for a negotiated settlement with the 650 life insurance agents. Whether the E.E.O.C. will eventually sue Allstate over the second group is unclear.

The commission's action against Allstate comes as its leadership and attitudes are shifting in a direction potentially more favorable to corporations. Dominated by Clinton appointees until recently, the agency has filed more than 400 discrimination lawsuits annually in three of the last four years.

But Republicans are on their way to gaining a majority on the agency's five-member board. Cari M. Dominguez, the current chairwoman, appointed by President Bush, has begun to emphasize mediation over litigation. Legal experts say the number of lawsuits is likely to decline.

At Allstate's annual shareholders meeting in Chicago on Thursday, Edward M. Liddy, the chief executive, called lawsuits "a plague on corporate America."

"We conduct ourselves in a most ethical way," he said.

Barry L. Hutton, an Allstate vice president, said it was common for companies to require departing employees to promise in writing not to file lawsuits.

But Mr. Miller, the lawyer for the E.E.O.C., said the big distinction in Allstate's case was that most of the agents were not leaving the company. "This was a situation where you were signing a release in order to stay," he said.

Sears Starts Lands' End Tender Offer
From the Reuters Newsroom - May 17, 2002

Sears, Roebuck and Co., the No. 4 U.S. retailer, Friday said it had begun a tender offer for all shares of catalog and Internet specialty clothing retailer Lands' End Inc. Sears is offering $62 cash for each Land's End share, or a total of $1.9 billion. Sears said the tender offer will expire June 14. Morgan Stanley is the dealer-manager for the offer, and Mellon Investor Services LLC is serving as the depositary for the offer.

Sears, which recorded revenue of more than $41 billion last year, aims to revive its apparel business through the Lands' End acquisition. Its shares closed Thursday at $56.75 on the New York Stock Exchange, where they have a 52-week trading range of $29.90 to $56.90. Lands' End shares ended at $61.84.

Proposed Deal Could Help Both Retailers' Web Sites

By Bob Tedeschi - New York Times
May 14, 2002

If Sears, Roebuck's planned acquisition of the catalog and Internet retailer Lands' End goes as planned, analysts say, the e-commerce operations of both companies, already among the leaders in their respective online categories, may benefit.

"While Sears has been focused on how to tie e-commerce to their stores," said James Crawford, a retail analyst with Forrester Research, "Lands' End is very focused on improving the customer experience online. They'll be very complementary, in that there's not a lot of overlap in what they're trying to do with e-commerce."

The Sears Web site ranks third among department store retailers' sites, behind Target's and Wal-Mart's. Sears says its site helped produce $500 million worth of store sales last year, mostly in "hard lines," like appliances and power tools, which require a good deal of research before a customer buys.

Sears largely abandoned its conventional catalog business in the 1990's and has made its Sears.com Web site more of a marketing medium than a mail-order business. A full 40 percent of the products that Sears sells online are picked up by customers at the stores.

Lands' End has a reputation for e-commerce innovation, rolling out such offerings as a custom clothing feature that lets customers essentially tailor garments to suit their bodies. Its Web site was responsible for $327 million, or 21 percent, of the company's sales last year, making it one of the few success stories in an online category that has been nearly bereft of good news.

Neither Sears nor Lands' End would comment yesterday on how they would merge their Web operations. But because the two companies have such divergent approaches to e- commerce, analysts said there would be little opportunity to save money by integrating the two.

According to Michael Petsky, principal of Petsky Prunier, an investment firm in New York that specializes in mergers and acquisitions in the direct marketing industry, Sears essentially shut its internal catalog division in the mid-90's. It has instead chosen to work with "catalog syndication" companies, which actually operate warehouses and fill customer orders, he added.

So Sears owns little of its own warehouse and distribution capabilities for direct sales through Sears .com and its catalogs, Mr. Petsky said, and it has little in the way of assets to merge with the publishing, warehousing and customer service divisions of Lands' End.

Sears could conceivably make more money on catalog and Internet sales by handling them internally through the Lands' End distribution system. But Mr. Petsky said such an approach would be difficult, given that the Lands' End system was set up to sell and distribute shirts and trousers, not stoves and tires.

In the early going, the bigger online beneficiary of the merger will probably be Lands' End, which will be able to market its Web site to Sears.com visitors, to the 130 million customers in the Sears database and to recipients of the 90 million newspaper inserts that Sears distributes each week.

While many analysts were enthusiastic about the proposed acquisition, some cautioned that the move might be too similar to Federated Department Stores' $1.7 billion purchase of the direct marketer Fingerhut in 1999. That merger quickly ran into trouble, but Fingerhut had problems that Lands' End does not. Fingerhut foundered on a mountain of bad credit card debt, and its low- budget products proved a poor match for Federated, the parent of Macy's and Bloomingdale's.

Despite such cautionary tales, there will probably be more deals between direct marketers and department stores in the near future, said Mr. Petsky, the analyst. "We're seeing a big uptick in mergers and acquisitions activity, focused on direct marketers," he said.

Many traditional retailers realized that they could not successfully build Internet and catalog operations of their own, Mr. Petsky said, but they have come to appreciate the wisdom of selling to customers through different channels. And while there have been few Internet retailers worth picking up from the dot-com trash heap, he said, some traditional catalog companies with Web sites, like J. Jill and Spiegel, have generally retained their value.

"Many major marketers," Mr. Petsky said, have the money "to do substantial direct marketing deals."

Martha Stewart Wares to be Sold in Canada
Reuters Company News - Monday, May 13, 2002

Martha Stewart Living Omnimedia Inc. (NYSE:MSO - News), the media and merchandising company headed by style guru Martha Stewart, on Monday said Sears Canada Inc. (Toronto:SCC.TO - News) will become the exclusive Canadian retailer for the Martha Stewart Everyday brand.

New York-based Martha Stewart entered a multiyear merchandising agreement with retailer Sears Canada to distribute the brand label in 2003 upon expiration of its current arrangement with Zellers Inc., which launched the brand in Canada.

Martha Stewart Everyday brand label collections in the bed and bath, housewares, gardening, textiles, and seasonal products will be available at Sears Canada stores and through Sears Canada's catalog and Internet site in summer 2003.

Sears Canada's merchandising approach and multiple channels of distribution, including the catalog and online services, are among the reasons the retailer was chosen to replace Zellers, Martha Stewart said.

In the United States, Martha Stewart Everyday is distributed through bankrupt discounter Kmart Corp. (NYSE:KM - News) Martha Stewart has stated its intention to stand by Kmart, but it is allowed by contract to talk to other retailers in the event of a bankruptcy. In the first quarter, closures of Kmart stores hurt Martha Stewart's earnings.
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Sears Buys Lands End for $1.9 Billion
Reuters - May 13, 2002

Sears, Roebuck and Co., the No. 4 U.S. retailer, said Monday it agreed to buy Lands' End Inc., the largest specialty catalog and Internet retailer, for about $1.9 billion, in a bid to revive its laggard apparel business.

Under terms of the deal, which has been approved by both retailers' boards, Sears will pay $62 a share for Lands' End, representing a 21 percent premium over Friday's closing price. Sears will assume an unspecified amount of debt.

The agreement ends years of speculation that the two retailers were in talks to merge. Lands' End had been contemplating opening its own stores, and Sears is in the process of overhauling its clothing unit, which has underperformed its appliance and tool business.

Shares of Dodgeville, Wisconsin-based Lands' End rose more than 22 percent to $62.52 in preopen trading on Instinet, compared with Friday's close at $51.02. Sears shares fell to $49.80 in preopen trading from $51.81 at Friday's close.

``I think this is one of the smartest moves that could have been made,'' Kurt Barnard, president of Barnard's Retail Consulting Group, said. ``It will give Lands' End enormous distribution and it will greatly enhance Sears' apparel business. Lands' End is a household name.''

Sears has struggled to revive its apparel business in recent years. The retailer has lost customers to discount chains like Wal-Mart Stores Inc. and off-the-mall chains like Kohl's Corp.

Sears will put some Lands' End products into many of its 870 department stores by autumn and is expected to complete product roll-out to stores by fall 2003.

Lands' End, known for its conservatively styled casual clothes, shoes and home goods, will continue to offer all its products through its catalogs and Web site.

"We were drawn to Lands' End's brand strength across all apparel categories, including men's, women's and children's,'' Alan Lacy, Sears chief executive officer, said in a statement.

David Dyer, Lands' End CEO, will continue to head up the Lands' End business, reporting to Lacy after the deal closes.

Dyer also will assume responsibility for Sears' existing customer-direct business, which includes sears.com, catalogs and specialty merchandise.

Lands' End founder and Chairman Gary Comer and certain other Lands' End shareholders have agreed to tender their shares, representing about 55 percent of the outstanding common stock.

The tender offer requires that at least two-thirds of the fully diluted shares be tendered as well as other approvals. The deal is expected to be completed in June. Lands' End will become a wholly owned subsidiary of Sears and will keep its headquarters in Dodgeville.

Lacy said the deal does not change Sears' outlook for 2002, and the company stuck by its forecast for earnings per share growth of 17 percent above the $4.22 it earned in 2001.

The transaction is expected to be slightly dilutive to break-even in 2002 and 2003.

Sears' Lacy on Purchase of Lands' End and Sales (Transcript)

Bloomberg - Hoffman Estates, Illinois, May 13, 2002

Alan Lacy, chairman and chief executive of Sears, Roebuck & Co., talks with Bloomberg's Rachel Katz via telephone about the department-store company's agreement to buy Lands' End Inc. for about $1.9 billion in cash, the likely impact of the purchase on clothing sales and the company's earnings outlook.

(This is not a legal transcript.
Bloomberg LP cannot guarantee its accuracy.)

KATZ: Hello, and welcome to the Bloomberg Forum. This is Rachel Katz.

I'm speaking with Alan Lacy, chief executive of Sears, Roebuck and Company, which, today, announced it agreed to buy catalogue and Internet retailer, Lands' End for about $1.9 billion. Hi, Alan. How are you?

LACY: Doing well, thank you, Rachel.

KATZ: Thanks for joining us. Why is this a good fit for Sears?

LACY: Well, it's a good fit really on two dimensions. We're buying a great company. Lands' End is a wonderful company, that is growing very rapidly, and that we can help them grow faster, giving them access to our extensive customer relationships. And then, secondly, we're buying a great brand. The Lands' End brand is very well renowned for its quality and value. And we think having that brand in our stores will provide a very good point of differentiation and draw to our soft line assortments, particularly for our more affluent hard line shoppers, and also in attracting new customers for our store.

KATZ: What Lands' End products are you going to be offering into your stores and online?

LACY: Well, we're going to be basically focusing on their best selling items, and we're going to be introducing them into our men's, women's and kid's departments, as well as our home fashions department as we go forward. We do anticipate having, you know, 15 to 20 percent of the floor space in those departments devoted to Lands' End product, which will be a very compelling assortment; the customer will notice. And we think that we're going to be able to draw, once again, lots of new customers to our store, and then have a product that connects better with our existing customers on both the hard line and the soft line side.

KATZ: Sears has acknowledged in the past that it has had difficulty inducing apparel sales. How do you think this is going to help?

LACY: Well, I think that, you know, one of the issues that we've had is that our proprietary brands and soft lines just haven't had that customer recognition and draw power that ideally one would like to have. And while we have some important and national brands in our assortment, and those continue to be important to us, I must add as well, that what we really have lacked is the powerhouse brand in soft line that really stands up to the same kind of brand that we have on the hard line side with, for example, Kenmore, Craftsman and Die Hard. In hard lines, we have national brands of best value and better prices available exclusively at Sears, and Lands' End is very much of the same ilk in that it's a best product at better prices that will now be available exclusively at Sears.

KATZ: What portion of Sears' sales comes through apparel at this point?

LACY: Well, of our $41 billion corporate sales in total domestically, about $6 billion of our revenue is apparel.

KATZ: Do you have any targets that you're looking to grow that to?

LACY: Not specifically, other than we'd like it to grow as rapidly as we can. We'd also like the rest of our business to grow as rapidly as it can. So we're really not solving for some mix. We really want all of our store and our operations to do well.

KATZ: How are you planning to finance this purchase?

LACY: Well, we will issue, basically, debt. We have several hundred millions of excess cash available right now, but we'll be placing about $1.5 billion worth of debt to fund the transaction. A third of it will be through the asset-backed market and two-thirds of it will be through the unsecured, longer-term market.

KATZ: Do you expect this to have much impact on your credit rating currently?

LACY: Well, the rating agencies will review this transaction, and I'm sure they will announce their point of view once the transaction closes.

KATZ: Now, Sears over the past decade or so has cut back on its large catalogues and began focusing on specialty catalogues. How does the Lands' End purchase further that strategy?

LACY: Well, I think, that, as we've talked about the last year or so, we really have three principal growth strategies in our company. The Sears Gold MasterCard in our credit business, the Great Indoors is our freestanding retail format, and our direct to customer business. We have a substantial one already. Most notably, in terms of our online activity, both in terms of how it influences in-store sales, as well as how much we sell online, and we think adding Lands' End just gives us more critical mass in direct to customer. And given our very extensive customer relationships and information, that we're going to really be able to satisfy our customers on a very direct basis, very satisfactorily as we go forward.

KATZ: And what effect do you expect the acquisition to have on earnings over the next three years?

LACY: Well, for 2002, it will be modestly dilutive, but we reaffirmed our guidance for the full year this year with 17 percent earnings growth. So we're very comfortable that our current business momentum is quite strong and that the dilution is fairly minor for this year; 2003 is relatively neutral; and 2004 we expect it to be significantly accretive.

KATZ: Any particular Lands' End items that you personally like most, or are you a regular customer there?

LACY: Well, I've got a very substantial and increasingly substantial wardrobe of Lands' End product. And I think that particularly their men's dress shirts are extraordinarily a good quality, a good value; and for the weekend wear, their khaki slacks are a great value, as well.

KATZ: Now, just in a separate announcement, Sears Canada today said it will be - it will start selling Martha Stewart Everyday house wares starting next summer after discount chain sellers decided to drop the line. What do you expect this to bring to Sears' Canada stores?

LACY: Well, I think the Martha Stewart brand is a very important brand in the home fashions arena. And we think that Sears Canada is a very good partner in relationship for Martha Stewart. We can express her brand across a wide variety of product categories up there and very much against the better shopper.

KATZ: Now, apparently Zellers thought it wasn't selling quite as well as some of their other products. What are your hopes for pushing sales of this at Sears?

LACY: Well, I think, Sears Canada thinks it will be a very important part of their business from a revenue standpoint. I don't know that we've disclosed exact revenues at this stage, but it's going to be a very important product line for us.

KATZ: Can we expect to see more Martha Stewart items in Sears' U.S. stores in the future?

LACY: Well, in the U.S. we have her paint, but that's all we've got, as you may be aware. She has a relationship with Kmart that is exclusive and that excludes a number of retailers, including ourselves, so until that changes, the paint business is all that we've got.

KATZ: Well, thank you very, Alan. We certainly appreciate your taking some time to speak with us.

This has been Rachel Katz with the Bloomberg Forum, speaking with Sears, Roebuck and Company Chief Executive Alan Lacy.

***END OF TRANSCRIPT***

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Sears Agrees to Buy Lands' End for About $1.9 Billion
Bloomberg News - May 13, 2002

Sears, Roebuck & Co. agreed to buy Lands' End Inc. for $1.9 billion, gaining a catalog and Internet retailer known for polo shirts, khakis and deck shoes as the largest U.S. department-store chain tries to boost clothing sales.

The $62-a-share offer is a 22 percent premium to Lands' End's closing price Friday. Sears will issue about $1.5 billion in debt to fund the acquisition, Chief Executive Alan Lacy said in an interview. The transaction may reduce profit this year and next, and raise it in 2004, Sears said.

Sears will start selling Lands' End apparel in some of its 870 department stores this fall to capture more upscale shoppers. The retailer is trying to persuade customers who shop at its stores for appliances and electronics to give clothing a try, too. Lacy has been remodeling stores and developing private brands as clothing sales dropped in the past five quarters, analysts said.

"Sears has shown no expertise in apparel,'' said David Abella of Rochdale Investment Management Inc., which holds 92,377 Sears shares in about $1 billion in assets. Rochdale sold Lands' End this year. "My concern for Sears is that they're paying a lot for it, but you have to pay for a top brand."

Allstate Rate Increases

Daily Herald - Arlington Heights, IL - May 12, 2002

Allstate CEO explains 'storm' behind rate hikes
By Dave Carpenter Associated Press

Tougher times in the insurance industry are prompting Allstate Corp. to do something Wall Street likes and consumers won't: raise rates aggressively.

At the forefront of an industrywide trend, the nation's second-biggest personal-lines insurer had homeowners' rate hikes averaging 20 percent approved in 23 states in the first quarter - and is seeking more - with expensive mold claims being a significant factor.

Automobile premiums also are being increased, albeit more moderately, as Allstate moves to emerge from a lengthy period of sluggish earnings and revenue.

Edward Liddy, the chief executive officer, acknowledges the homeowners' rate hikes in particular are dramatic, but says the industry is adjusting out of necessity after years of offering relatively low-priced policies.

Higher rates are only part of the changes under Liddy, who reorganized the agent-based network and added Internet sales capability and round-the-clock call centers soon after taking charge in 1999.

Liddy is steering the company increasingly into financial services - efforts complicated by the skittish economy and lower investment returns. He also has overseen a change in underwriting strategy that includes the use of credit scoring - a controversial evaluation of financial stability - where allowed by state regulators.

Here are excerpts from an interview last week with the 56-year-old Liddy:

Q. Why have you raised rates sharply now, not a year ago or a year from now?

A. It really is a function of what's happening to the industry.

We had last year kind of a perfect storm, if you will - the escalation of material costs that it takes to repair a home, the escalation of labor costs because of the large number of remodels, reconstructions, home- building, etc., and a lot of very bad, inclement weather. And then finally, there are, particularly in the state of Texas, some emerging issues related to mold, and the trial bar has in fact gotten hold of mold as an issue.

All those things came together in the last year and a half, and it's caused us to have to dramatically increase the cost of homeowners' insurance.

Q. When and how will Allstate start showing sales growth that meets Wall Street's expectations?

A. Our goal is to grow the top line of our property- casualty business in the high single-digit range. That's really all you can do in this business. If you try to grow faster, then it's very much a take-market-share gain and you wind up hurting the bottom line in order to grow the top line. So if we can get from (the current) 51/2 percent into the 6 to 7 to 8 percent range, we'll be in quite good shape. And I think you'll see those levels later in the year, again particularly as rate increases begin to roll forward.

Q. How long will it take to turn around the homeowners business?

A: We'll have it done by the middle of next year. ... A homeowner's policy is a 12-month policy, so when it comes to rate increases and changes to offset the impact of mold, for some folks you won't get to them until 12 months, and then the effect of that will take another full 12 months to be seen.

Q. How is the company responding to the mold issue?

A: We've done a couple things, and I think we've done them fairly quickly. We've revised our policy forms to put a limitation on mold. The regulators (in Texas) have now reinserted the words 'sudden' and 'accidental.' We also have fairly dramatically increased our rates down there.

Q. Do you have the critical mass to be a big player in financial services?

A: We do, because of what we're trying to do in financial services. Our goal really is not to be all things to all people. It's to have real strength in the protection area of financial services, and in the retirement planning and asset management area of financial services. And then a small piece of the banking business. We have no interest in the brokerage business or the credit businesses.

We're targeted at middle America, where a lot of firms don't have the infrastructure to be able to go. We have that because we really have 12,000 agents out there.

We've been in the life insurance business, or financial services, since 1954. That business generated about $500 million of operating income after tax last year. So some people get the impression that we're just coming to this party late, but we've been a major player in this area for awhile.

Q. When do you think you might overtake State Farm to become the largest personal-lines insurer?

A: It's not our goal to get bigger than State Farm. We want to be better than them and we'd like to be more profitable and we'd like to provide better customer service. If we're able to do all those things, I think we will in time be larger than we are right now, and that could mean that we're bigger than State Farm.

Home Depot Plans to Expand Its Showroom for Appliances

By Chad Terhune - Staff Reporter of The Wall Street Journal
May 13, 2002

Home Depot Inc. is rolling out a larger appliance showroom in as many as 350 stores this year, par