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July 2000 - September 2000

Health Plans for Early Retirees at Issue

The message below was sent today by Sears retiree Bob Kunath who resides in the State of Illinois. It further expands on the brief from AARP Bulletin that was sent to you earlier today. Bob's letter to the legislators may give you thought on how to approach them. Many thanks, Bob! _____________________________________________________________________

U.S. Appellate Court Says Retirement Plans Must Spend the Same on Benefits - No Matter the Age
By Kathy M. Kristof - Los Angeles Times Syndicate - September 26, 2000 

A surprise decision by a Pennsylvania appellate court could imperil retiree health benefits, particularly costly "bridge" benefits that provide health insurance to early retirees who are too young to qualify for Medicare.

The ruling, by the U.S. 3rd Circuit Court of Appeals, says that plans cannot provide more costly benefits to early retirees than to retirees who are over age 65, and thus eligible for Medicare, without running afoul of the federal Age Discrimination in Employment Act.

"If not legislatively or judicially reversed, this decision will affect many large employers," said Henry Saveth, a New York-based attorney with William M. Mercer Inc., a national benefit-consulting firm. "The distinct danger is that employers would choose to drop retiree health benefits rather than pay the additional cost that this ruling would require."

About 70 percent of the nation's largest employers offer so-called bridge benefits to early retirees. These benefits generally provide full health insurance coverage between early retirement and when retirees hit age 65 and can qualify for Medicare. At that point, most plans either drop coverage completely or become secondary insurers, only picking up health costs that Medicare doesn't pay.

As a result, the cost of providing health coverage to retirees who are too young to qualify for Medicare is vastly greater than providing coverage to those over 65, according to the Employee Benefit Research Institute in Washington. It costs roughly $5,200 annually to provide health insurance to an early retiree, compared with $1,874 each year once the retiree turns 65, institute figures show.

Under this ruling, affected companies can do one of two things: They can spend more on every retiree older than 65 or they can cut coverage to younger retirees.

"These plans are very expensive now and employers have been looking for ways to reduce the cost," said John D. Piro, chairman of the health-care practice at Hewitt Associates in Norwalk, Conn. "This type of ruling is a big disincentive to keep these plans going."

It's unclear how widespread the ruling's effect will be. The decision, made in August, is technically binding only in the three states covered by the 3rd circuit: Pennsylvania, New Jersey and Delaware. But experts are unsure whether it affects companies headquartered in those states or all companies that have operations or retirees in those states. Moreover, because the ruling involves a federal law, it can serve as legal precedent, sparking lawsuits and change all over the country, industry experts said.

The Age Discrimination in Employment Act is a federal law. "It should apply equally across the country," said Rich Ostuw, global health-care practice director at the national benefit-consulting firm of Watson Wyatt Worldwide in Stamford, Conn. "This will either expand to other states or be reversed."

At the moment, benefit consultants are betting that the case will be overturned either by federal legislation or legal appeals.

Congress modified the age discrimination act in 1990 to make it clear that age discrimination laws affected benefit plans as well as work rules. But congressional leaders at the time made a point of going through the law's legislative history to clarify that the act should not hamper companies from coordinating their benefit plans with government-sponsored plans, such as Medicare.

As a result, a district court had rejected a claim by a group of retirees of Erie County, Pa., when they said the county had discriminated against them by providing better benefits to younger retirees than to those older than 65. However, the appeals court put the legislative history aside, saying that the letter of the law was clear. Legislative history is considered by the courts only when laws are ambiguous, the court said.

Consultants expect most companies will take a "wait-and-see" posture, figuring that either Congress or the courts will act quickly to reverse the decision once they realize what a negative impact the ruling might have on early retirees.

"What the court has done is put into stark relief the question of whether or not pre-65 retiree medical plans can survive," Piro said. "As a matter of public policy, I would hope the answer will be yes. But that will have to wait until this issue is taken further." ______________________________________________________________________

Kunath sent the following letters to his Senators and Congressmen:

"Dear Senator,

I cut the following article from today's Chicago Tribune.

I am an early retiree, age 58. I depend on the early retiree health care benefit, provided by my former employer, for health insurance for myself and my wife. If we were to lose that benefit, similar coverage would cost me $7200 per year, which we cannot afford.

I urge your immediate support to amend the "Age Discrimination in Employment Act" to allow companies to provide early retiree health care benefits. With the trend in recent years for early retirement, there are many thousands

like me that need this benefit at the time in our lives when we are most vulnerable.

Please advise me of your position and hopefully, your immediate and aggressive support." ____________________________________________________________________ 

Bob retired from The Associates, but worked for Sears for over 30 years, in retail and at Discover Card and SPS Payment Systems before his company (SPS) was sold by Morgan Stanley Dean Witter to the Associates.

The issue is the same with all of those companies. They are likely to take advantage of this ruling unless we make a lot of noise.

Rivals Aiming to Pull Plug on Sears' Appliance Push 
Big Store Sets Sights on Circuit City's Old Business
By Eddie Baeb CRAIN'S Chicago Business September 25, 2000

SEARS, Roebuck and Co. will be squaring off against retail powerhouses Home Depot - and, ultimately, Wal-Mart - as it seeks to expand its already commanding marketshare in home appliances.

The Hoffman Estates-based retailer is gunning for a portion of the $1.5 billion in sales that will be up for grabs as a result of the exit of Virginia-based Circuit City Stores Inc. from the appliance business.

While the short-term gain may boost SEARS' marketshare to more than 40%, experts say, the retailer faces a long-term challenge from rivals catering to a new generation of shoppers willing to place low price above service and selection.

SEARS rival Home Depot Inc., based in Atlanta, began selling home appliances early this year and now displays about 50 different models at nearly all of its stores. Home improvement chain Lowe's Cos. of North Carolina is rapidly expanding, and it says that its home appliance sales, now a distant second to SEARS, were up 30% in the second quarter of this year.

But perhaps the most serious threat comes from Arkansas-based Wal-Mart Stores Inc., which this month began a 12-store test selling appliances in a venture with Connecticut-based General Electric Co.

"I think there's more downside than upside for SEARS," says Bob Lawrence, executive director of Associated Volume Buyers Inc., a Long Beach, Calif.-based buying cooperative for 1,700 independent retailers of appliances, electronics and furniture. "You've got some real savvy merchants jumping into this business, and they've got nowhere to go but up."

Appliance sales are critical for SEARS and its newly tapped CEO, Alan J. Lacy, who has suggested that SEARS will focus on its historic strengths in big-ticket items and try to further leverage the company's credit and services businesses with retail operations.

Indeed, SEARS needs a boost at a time when it is struggling with flat revenues at its 858 department stores amid concerns that a slowing economy will dampen consumer demand.

SEARS figures it has the potential to wrest about $450 million of Circuit City's $1.5 billion in appliance sales, and is already courting those customers.

Tina Settecase, vice-president of home appliances, says SEARS has set out to ensure that its sales floors are well-staffed, and has added about 650 new sales people over the past year, bringing its salesforce to 1,200.

SEARS recently began airing a television commercial that touts its appliance business, noting that the company is the only retailer carrying the top six brands, including its exclusive Kenmore line. SEARS also has added models that were best sellers at Circuit City.

Industry observers agree that SEARS is well-positioned to land much of the Circuit City business because the two retailers had a similar sales approach. They add that the strategy of Home Depot and Wal-Mart - appealing to the price-conscious and people who want to install the items themselves - leaves SEARS with the customer who wants sales help.

Both Home Depot and Wal-Mart are entering the business with an assist from GE, which will warehouse, deliver and install the appliances for the retailers. Both chains feature a limited selection for display in their stores, with an electronic kiosk available that offers GE's complete line. Home Depot also is selling Maytag brands, which GE also will deliver and install.

Squeezing margins
Some industry experts say Home Depot and Wal-Mart will see higher profits in appliance sales because of GE's infrastructure and delivery system. They also expect the chains will lower prices, squeezing industry retail margins..

Experts also have suggested that GE's deal with Wal-Mart and Home Depot could change how consumers think about buying appliances - moving from the traditional, full-service model to a more self-help model.

But Ms. Settecase doesn't think that GE's program will be a great advantage for SEARS' competitors.

"This system has worked well for GE in contract sales (to homebuilders), but we'll have to wait and see how it works with home deliveries," says Ms.. Settecase.

"We need to take them seriously, and we will," she adds. "But at the same time, if you look at SEARS' assortment and what we offer vs. the new competitors, I think we'll beat them hands-down."

Retailer's head start
Meanwhile, GE has a lot at stake in its success. "We have made no larger investment in the past year than in appliances," says a GE spokesman.

Home Depot, in hopes of garnering the Circuit City business, is trying to raise its profile as a new competitor in the field. But for now, at least, SEARS has a significant head start at customers who would have turned to Circuit City.

"This is the corporate gift of a lifetime," says New York-based retail analyst Michael Exstein of Credit Suisse First Boston Corp. "This gives SEARS incredible breathing room it didn't have before. Now, (SEARS executives) have to do something very imaginative to capture Circuit City customers."

Correction: An article in the Sept. 25 issue of Crain's incorrectly stated the number of SEARS, Roebuck and Co. major appliance salespeople. SEARS' major appliance salesforce is about 12,000. _____________________________________________________________________ Gordon's Comments: Having shopped all major Sears competition for appliances, I have come to the conclusions that Sears very professional and well trained sales staff will upheld Sears portion of the market. In addition, Sears assortment and presentation is head and shoulders above anyone else in the market place. Home Depot has a long way to go as far as the floor space, assortment and professionalism that Sears exhibits, while Lowe's presentation is good and improving. However it is this writers opinion, Home Depot and Lowe's have much to learn and a long way to go to beat Sears in appliance sales, particularly if Sears gets aggressive in its merchandising and advertising. Wal-Mart may not be able to devote the space, assortment, nor have the professional sales staff. In conclusion, (as it has always been), dedicated, knowledgeable, and hard working Sears people will make the difference. Hopefully, Lacy will recognize that fact, and review current and retiree benefit packages to enable Sears to retain its best people.

New Sears CEO Consolidates Power
Sept. 22, 2000

HOFFMAN ESTATES, Ill. (AP) - Consolidating his power, Sears, Roebuck and Co.'s new leader said Friday he is eliminating the company's year-old leadership structure in which two senior officials shared decision-making with the chief executive.

The move takes effect Oct. 1, when Alan Lacy officially takes over as president and chief executive officer from the retiring Arthur Martinez.

Julian Day, executive vice president and chief operating officer, is leaving the company to pursue other interests as a result of the plan, Sears said in a statement released after markets closed.

Day was part of the three-person office of the chief executive along with Lacy and Martinez - an arrangement Martinez announced a year ago so he could personally devote more attention to Sears' struggling retail business.

Day, 47, joined Sears in March 1999 as executive vice president and chief financial officer. He was not believed to be a finalist for the top job, which Sears' board awarded to longtime company official Lacy on Sept. 11.

Lacy also succeeds Martinez as chairman on Dec. 1.

Sears' New Chief Says, "CHARGE IT"
By Eddie Baeb, Crain's Chicago Business - September 18, 2000 

Returning to its roots: Sears' new CEO Alan Lacy plans to play to the retailer's historic strength in hard lines while expanding credit card operations to boost profits. 

With the appointment of Alan J. Lacy as CEO, Sears, Roebuck and Co. moves
from a grand strategist to an operating pragmatist in an effort to get the Big Store moving again without over-promising.

At the heart of Mr. Lacy's emerging game plan for Sears: Expand credit card 
operations to improve profitability while playing to the retailer's historic strength in big-ticket items from refrigerators to power tools.

Mr. Lacy, who takes over as president and CEO Oct. 1, won't lavish the same amount of energy touting Sears' apparel as did his high-profile predecessor, Arthur C. Martinez. But he still must figure out how to sell more high-New Sears chief eyes credit margin fashion goods, or put the floor space to a better use.

Early indications are that the 46-year-old Mr. Lacy, who is credited with fixing Sears' $4.1-billion credit card business, also may pull back on some of Mr. Martinez's ambitious initiatives.

"I do have as a principal management philosophy: Do fewer things better," Mr. Lacy told analysts last week.

Yet Mr. Lacy will also be under pressure from Wall Street to grow revenues. Current initiatives, such as the Hoffman Estates-based chain's four-unit Great Indoors home decorating superstore chain, will take years to drive the retailer's $41 billion in annual sales. And while Sears' e-commerce Web site is expanding rapidly, its revenues are nominal. Analysts say Sears may need to hit the acquisition trail again.

Mr. Lacy is less likely than Mr. Martinez to promise the moon.

"I think we may see a more streamlined focus from Alan than we have seem under Martinez," says retail analyst Brian James of Boston-based Loomis  Sayles & Co. "(Mr. Lacy) is a zero-hype kind of guy. I think he understands that you can't turn an elephant into a gazelle."

But fewer initiatives and more realistic expectations may not be well-received by Wall Street, where Sears' stock is in dire need of a boost. The stock price has ranged from $25.25 to $42.50 this year, and last week traded in the $35 range. Just two years ago, the stock eclipsed $60.

Although Sears posted record earnings last year, the gains were made from a stock buyback program and profits from the credit business that came by decreasing the amount of money set aside to cover uncollectible accounts. Sears' retail revenues fell 2% last year.

Strategy's linchpin
Credit operations, which provide Sears with half of its profits, will be a
linchpin of Mr. Lacy's strategy. He says the business is poised for growth,
with new credit card accounts up 10% this year. Outstanding balances are on
track for a low-single-digit percentage increase, after two years of
decline.

Rather than growing the credit business by offering the standard Sears cards to less creditworthy borrowers, as Sears did in the mid-'90s, Mr. Lacy has developed two new cards, including the Premier Card, which was launched last fall to offer bonuses for frequent shoppers. Sears also mailed nearly seven million Sears MasterCards recently to customers who shop regularly at Sears but don't use a Sears card.

Persuading people to buy big-ticket items on a Sears-backed card is key to
getting interest payments paid on large balances. If those same purchases are charged to competing bank cards, Sears gets only the profit on the low-margin goods.

Mr. Lacy took over the credit business in December 1997 while it was beset with losses the retailer absorbed after issuing credit cards to thousands of less creditworthy borrowers who defaulted and left their bills unpaid. That also led to legal trouble when Sears aggressively pursued customers in bankruptcy.

"There's a consensus that Mr. Lacy is a financial man appointed because of the credit business and because he knows the overall operation," says Walter Loeb, a New York-based retail consultant. "Sears continues to de-emphasize fashion. It's not a key item for them."

Competition is fierce
While analysts predict that Sears will play to its core $19-billion hard lines business, including major appliances, home electronics and tools, the competitive landscape is fierce. Retail titans Wal-Mart Stores Inc. in Arkansas and Atlanta-based Home Depot Inc. are both pushing into one of Sears' best businesses, home appliances. However, Sears may be able to capitalize on Virginia-based Circuit City Stores Inc.'s decision drop out of the appliance business.

In addition to emphasizing big-ticket items, Mr. Lacy must tackle Sears' most glaring weakness — women's apparel sales. Mr. Lacy says fixing apparel is "job No. 1."

Apparel is important because profit margins approach 40%. Sears devotes more
than 60% of its floor space to its $9-billion soft lines business, which includes apparel and home accessories — expensive real estate at its 858 full-line department stores. But apparel sales have been lackluster for two years now, as the company has been unable to lure back shoppers who found trendier clothes and better brands at competitors such as San Francisco-based Gap Inc.'s Old Navy chain and Wisconsin-based Kohl's Corp. 

If Sears' fashion goods don't sell or have to be marked down, Sears must find a better use for the expensive selling space, experts say.

But incrementally boosting apparel sales is unlikely to spur the growth Wall Street demands. Mr. Martinez's strategy for "off-the-mall" growth included about a half-dozen major initiatives, nearly all of which ultimately failed.

Mr. Lacy has championed Sears.com, which he has headed since September. In two years, the site has grown to one of the most-frequented sites run by a brick-and-mortar retailer, according to two different Internet tracking firms. But it's far from clear that the Web will be Sears' salvation.

"What you do within the department stores is interesting, but ultimately, it's not the answer," says retail consultant Neil Stern of Chicago-based McMillan/Doolittle LLP. "(Sears) has got to grow through new formats, acquisition or international expansion. Wal-Mart has done all those things. That's why they're the world's largest retailer." 

Martinez's Exit Package Lacking Millions of Things
Chicago Tribune, Sept. 17, 2000

Companies have engaged in an odd race to the bottom in recent years. The more damage CEOs do, the more money boards pay them to get out of sight.

Mattel Co. CEO Jill Barad had such a tempestuous and terrible reign, the company paid $50 million to get rid of her. A $17.7 million package helped Coca-Cola CEO Doug Ivester admit he was in over his head.

Here at home, Bank One Chief Executive John McCoy messed up the company's
credit card operation, couldn't handle the merger he engineered, and got thanked with a $10 million kiss goodbye. 

Big-time parting gifts raise the ire of anybody who has ever worked an honest day for an honest buck. We're used to seeing CEOs get paid millions, and we might even accept that as the price of attracting and retaining star performers.

But the new twist is twisted logic: Companies argue that they've got to pay huge severance packages to send a signal. They say the big bucks gifts are a way of telling CEO wannabes that they won't get stiffed if they can't get the job done.

This is the out-of-kilter environment in which Sears, Roebuck and Co.'s board dealt with the question of how to compensate Arthur Martinez when it came time for Martinez to go.

And a look at Martinez's retirement agreement, which has not previously been
disclosed, shows that the Sears board of directors did a responsible job. They paid Martinez what they owed him, but not much more. Sears wouldn't help me with the numbers. A spokesman said Sears won't know the final tally at least until the end of the year. But I couldn't wait that long, and neither should you. So I recruited Paul Oyer, a professor of economics at Stanford University's business school who specializes in compensation packages, to help me do some math.

Based on our calculations, Martinez's package adds up to as much as $14.6 million.

The total is small enough that Martinez won't have to worry about seeing his picture in the Excessive Paycheck Hall of Fame. But then, we won't see him selling StreetWise, either.

Sears' board of directors played Martinez's package mostly by the book.

The company owed Martinez three years of salary and bonus. The salary portion adds up to $3.6 million. Average out his up-and-down bonuses and you get somewhere around $4.5 million. The board gave him some extra long-term compensation pay, too, but only a measly half mil.

The one apparent piece of generosity was the way directors gilded his pension plan--to the tune of perhaps $6 million.

We shorted out our calculators computing the pension number. But you may want to know we assumed the 60-year-old Martinez will live to age 80 and that Sears' board expects inflation to grow at only about 4 percent a year.

That 6 million bucks sounds like a lot of money. But remember, the figure represents the present value of what Martinez would have been paid in pension for the next two decades.

The board also was obligated to continue Martinez's benefits and vest his stock options, which it did.

The options package isn't as big a deal as it could have been. Sears' stock price is so low that nearly half of his 1.8 million stock options have no market value now.

The board gave Martinez an office, a financial planner--everything but a bodyguard. But in CEO land this is standard stuff.

We'll never know for certain if Sears' troubles sent Martinez packing or if he simply decided to retire, as he claims.

The retirement package doesn't offer many clues, either. It doesn't include one of those huge lump-sum payments that these days indicates the board dumped the CEO.

Oyer thinks Sears' board focused less on Martinez than it did on what the outside world would think. "They can justify it on the basis of signaling to people who might take a tough job at a troubled company that they're not going to take every dime from you if it doesn't work out."

Sears announced two weeks ago that one of Martinez's proteges, Alan Lacy, is
succeeding Martinez as Sears' CEO.

Sleep well, Alan. If you can't do better than Martinez, then you won't go hungry either.

Sears Opting for Hipper, Trendier Look
By Dana Knight - Sept. 11, 2000

INDIANAPOLIS--Can't find the perfect wrench? Take a break, grab a cappuccino, then sit down and e-mail a friend.

Sears, Roebuck and Co. is ready to shed its hardware-and-tools image for a trendier, hipper and more customer-convenient store.

To start, the Chicago-based retailer has plopped a cybercafe in the middle of its Greenwood Park Mall store, which opened here Friday as a pilot for the 850 Sears stores nationwide.

Customers can shop, eat, drink and even complete leftover business deals.The new computer center features 20 workstations, along with scanners, copiers, fax machines and color laser printers.

In an age in which Internet sales are waging a strong battle against brick-and-mortar retailers, the Sears, Roebucks of America are searching for a way to stand out, according to Frank Acito, chairman of the marketing department at Indiana University.

Sears may be one of the first retailers to go to such extremes, but it won't be the last, he said.

"How do you make the in-store experience win out over Internet shopping? You improve the things you do best, which is the more relaxing in-store experience of touching, feeling the merchandise. Let customers walk around with a cup of coffee while they shop to relax, and you further differentiate yourself from the Web."

The retailer, which still dominates the appliance and tool industry, is losing ground in stiff competition with retailers such as Home Depot and Lowe's..

A year ago, Sears announced sales and profits were sagging, and company executives began searching for a market boost. The answer: make their store different from their hardware counterparts.

"Hardware is really a small part of our whole business," said Bill Kearns, Sears' district general manager. "A lot of people think of Craftsman, Kenmore and Diehard Battery as just men stuff and the only Sears stuff."

But the majority of Sears inventory is now devoted to home fashions and apparel, he said, adding, "this is a complete change of philosophy and strategy in the company."

And the cafe and computer centers are just one part of that change.

Sears has expanded to offer mattresses, candles and art deco furnishings. And it's splashed the stores with a new color scheme--bold oranges, reds, greens and purples. The store has added shopping carts so customers don't have to lug merchandise around.

Special kiosks and centers are set up so patrons can actually try out what's for sale--video cameras can be tested and watched on a TV screen. Drills and power saws are sitting out assembled, so patrons can pick them up and try them out.

For Bonnie Smith, manager of the Greenwood store, it's not the Sears of her childhood. "It's like nothing you've ever seen before," she said.

New CEO To Put Own Imprint on Sears
Lacy Says Retailer's Board Wants Him to "Go for It"
By Jennifer Walters, CBS MarketWatch - Sept. 10, 2000

HOFFMAN ESTATES, Ill. (CBS.MW) -- Alan J. Lacy, Sears Roebuck & Co.'s chief-executive-in-waiting, said Monday that he will be a change agent at the giant retailer.

While lauding retiring CEO Arthur Martinez for his "great legacy and great successes," Lacy said in a conference call that he will stamp his own imprint on Sears  before the year is out.

"I am my own person," said Lacy, 46, promoted Sunday to the top spot from president of services. During his tenure, Sears has revamped its troubled credit unit -- which generates half of all profits -- and has spearheaded Sears.com, among other duties. "I firmly believe in continuous improvement," he said.

Today on CBS Lacy was hired in 1994 as senior vice president of finance. He moved up the ladder to chief financial officer before being named to president of services last September. Lacy held senior management positions at Kraft Inc., not far from Sears' corporate headquarters here, before joining the retailer.

"There's a stereotypical point of view that an internal person is perhaps not going to be a change master like someone from the outside," he added. "But I have made substantial changes (in credit and services). And there's no question that in my discussions with the board that they want me to go for it."

Shares of Sears jumped as much as 4 percent in early trading, but settled down by midday. The shares, in a choppy market, closed up 50 cents to $35.25.

Something of a surprise successor
The board chose Lacy over a bevy of internal candidates, including Sears Canada president Paul Walters, considered an odds-on favorite because of his own turnaround successes.

Lacy will step into Martinez's job on Oct. 1. Martinez, 60, prompted the CEO search when he said he wanted to retire this year.

In remarks during the conference call, Martinez praised Lacy's "extraordinary integrity and grace under pressure. There've been a lot of pressure points over the years."

"He knows our company. He knows our business. He knows our issues," Martinez added. "He has a track record of delivering the bacon, as they say."

Crash course in retail
Lacy, however, does not have a track record in retail sales, and acknowledged as much during the call. He said he would spend the next few weeks absorbing as much as he can from Martinez.

"I want to take a deep dive into retail and make sure that I'm as up to speed as I need to be," he said.

Lacy also will use his experience in services to boost retail sales by "bundling" them for consumers, he said. For example, when a consumer buys a refrigerator, he or she generally also purchases services such as installation and service contracts. Lacy wants to flip the buys too, linking service purchases with retail goods.

"While retail runs and drives service revenues and profits, services also can drive retail sales," he said. "I want to bundle our offerings with a complete shopping opportunity for the customers."

Lacy said he will focus most, at least initially, on building momentum for Sears' newest concept, the stand-alone Great Indoors, what Lacy called a store for home "fashionings."

He's also big on growing the company's electronic commerce division, Sears.com, which he said is redefining how consumers shop and purchase from Sears.

And, he thinks that appliance sales - a mainstay among the Sears' product lineups - are well-positioned to vault to new levels.

"For home appliances, there are tremendous opportunities with the exit (from the category) of Circuit City," he said.

Sears Board Names New President
Sept. 10, 2000

HOFFMAN ESTATES, Ill. (AP) -- Sears, Roebuck & Co.'s board has elected one of its top executives as the company's president and chief executive officer, officials announced Sunday.

Alan J. Lacy, the company's president of services, will succeed chairman and CEO Arthur Martinez, who announced in March he planned to retire by the end of the year.

Lacy, 46, will assume his new positions Oct. 1. In December, he will become the company's chairman, when Martinez retires.

"The board undertook a comprehensive review of internal and external candidates, and we are very pleased that an internal selection was the right choice,'" Michael A. Miles, chairman of the board nominating committee said in a statement.

Lacy joined the Hoffman Estates, Ill.-based company in 1994 as a senior vice president of finance. He was named executive vice president and chief financial officer the next year. He was named president of Sears Credit in 1997, and assumed his current position in September 1999.

Martinez complimented Lacy in a statement, saying: ``He led the drive to strengthen Sears important credit business, and he is now leading a significant improvement in our home services business.''

Martinez also pointed to Lacy's "vision and talent as a strategist in the e-commerce business." 

When Martinez, who rescued the company from near-ruin in the mid-1990s, made his announcement to retire, industry analysts said it would create an opportunity for Sears to anoint a younger, more Internet-attuned leader to help the old-economy giant thrive in a fast-changing retail world.

Court Okays Awards Against Sears in Woman's Crushing
 By Jon Yates - Staff Writer - Sept. 6, 2000

The Illinois Appellate Court has upheld a multimillion-dollar ruling against Sears, Roebuck and Co., agreeing with a jury that found the company liable for an accident that left an elderly Batavia woman disfigured and blind. Rosa Kresin, now 77, was crushed June 1, 1996, when a St. Charles Sears employee ran her over while backing a van out of the store's automotive center. Last year, a jury ruled Sears should pay Kresin almost $15.7 million after finding Sears did not properly train its employees to avoid such accidents.

Sears appealed the decision, asking for a new trial or a reduction in the judgment.
 Instead, Appellate Court justices recently upheld the ruling, writing that the jury award "does not exceed a fair and reasonable amount" and should not be overturned.

Meanwhile, the amount Sears owes Kresin continues to grow. Under state law, the company must pay 9 percent annual interest on the original jury ruling, handed down March 15, 1999. The interest equates to about $3,800 per day, or an additional $2 million so far.

Kresin's attorney, Charles F. Thompson Jr., said the significance of the ruling is not lost on his client, a longtime Sears charge card owner.

"She's told me a couple of times. She said, `Look, I paid my interest to Sears. Now they should pay the interest they owe me,'" Thompson said.

Sears can appeal the latest ruling by either asking the Appellate Court to take another look at the case or by seeking a ruling from the Illinois Supreme Court. "Our options are under consideration," said Jan Drummond, a spokeswoman for the company. "That's probably as much as I can tell you. We haven't made a decision yet on what our next action will be."

James C. Schroeder, an attorney representing Sears, declined comment, saying the company had not authorized him to talk about the case.

Thompson said Kresin lived by herself and was in good health at the time of  the accident but suffered life-altering injuries when the van ran her over.

Court records show Kresin had just bought a new battery for her car and was walking in the pedestrian area behind the service center when the van backed up and struck her, fracturing her skull and breaking a leg, shattering her ribs and her collarbone.

Kresin was blinded in the accident and now has problems straightening out her
left elbow. According to court documents, her left hand is fixed in a permanent claw-like position.

Thompson said Kresin now lives with her son in DeKalb. Although her health has improved and her mind remains sharp, her son must care for her daily, giving her sponge baths and helping with almost every facet of life.

"Her world is a world of total darkness. Basically, [the accident] took away all independent living for her," Thompson said. "She is a very alert, animated person. She had a great sense of humor. But her world is very, very limited." Thompson said the money from the lawsuit would be used, in part, to buy Kresin a new house that will have modifications such as specially designed showers and bathroom facilities. The money will also be used for improved medical and daily care, he said.

Gordon's Comments:
It is quite inconceivable that the "New" Sears is challenging this award in a accident that has left a customer blind and with severe physical limitations. In the "Old" Sears, we would have settled immediately and deeply expressed our regret and deepest apologies. Like with the actions taken against Sears retirees, there appears to be little heart at Sears today.

Most top retailers reported August sales declines, or lackluster sales results at best, as consumers continued to cut back on their spending amid rising interest rates.

Bucking the trend, Sears, Roebuck and Co. said same-store domestic revenue rose 5.6% in August, while total domestic store revenue was up 6.9% to $2.22 billion from $2.08 billion. The Hoffman Estates-based retailer reported strong sales in appliances, lawn-and-garden products and electronics. The company also saw growth in footwear, home fashions and intimate apparel.

Downers Grove-based Spiegel Inc. also reported a rise, albeit slight: Sales totaled $208 million for the four weeks ended Aug. 26, a 1% increase from sales of $206 million for the four weeks ended Aug. 28, 1999. But comparable-store sales results for the apparel retailer's Eddie Bauer subsidiary fell 20% for the four-week period-compared with a 12% increase for the year-earlier period.

Federated Department Stores Inc. reported a 1.1% increase in same-store sales, with total sales rising 1.4% to $1.27 billion from $1.25 billion. Direct-to-customer sales, which include the operations of Fingerhut, Bloomingdale's by Mail, Bloomingdales.com, Macy's by Mail and Macys.com, fell 1.9% to $128 million, the Cincinnati-based retailer said.

Plano, Texas-based J. C. Penney Co. said same-store sales, or sales in stores open at least a year, fell 4.5%. Department store sales sank 5.4% to $1.13 billion from $1.19 billion in the year-earlier period, and total company sales dropped 0.5% to $2.46 billion from $2.47 billion. But Penney's drugstore sales increased 5.3% to $965 million, as same-store sales rose 10.1%. The growth was led by a 15.5% increase in pharmacy sales, although margins remained depressed, the company said.

Wal-Mart Stores Inc., the nation's leading retailer, said same-store sales rose 5.7%. Wal-Mart, based in Bentonville, Ark., said total company sales rose 11.6% to $14.53 billion from $13.03 billion a year earlier. Same-store sales at the company's Sam's Club warehouse outlets rose 5.1%.

Kmart Corp. said same-store sales were flat in August, excluding the impact of store closings and inventory sales. In fact, "sales were below plan" for the month," Chairman and CEO Chuck Conaway said. Troy, Mich.-based Kmart said same-store sales rose only 2.8%, while total sales increased 4.6% to $2.64 billion from $2.53 billion.

St. Louis-based May Department Stores Co. reported a 3.6% decline in August same-store sales, although total sales rose a slight 1.7% to $1.02 billion from $1 billion.

Reporting a steeper decline was Dillards Inc. of Little Rock, Ark., which said same-store sales fell 6%. Total sales also dropped 6%, to $631.7 million from $669.5 million. The department store chain noted that sales for the year-earlier period were restated to exclude the sales of leased departments.

Columbus, Ohio-based apparel retailer Limited Inc. said same-store sales rose 6% in the month, but net sales fell 1.9% to $717.5 million from $731.6 million a year earlier. Excluding 1999 sales from Galyan's Trading Co., which was sold, and Too Inc., which was spun off last August, sales increased 8%.

Sears Strays From Mall For Growth, 
But Has Trouble Minding The Store
Marilyn Much - Investor's Business Daily - August 30, 2000

Months before he's set to retire as chairman and chief executive of Sears, Roebuck & Co., Arthur Martinez still is hunting down growth engines for the ailing retailer. Sears is struggling with fierce competition and a weak apparel climate. After growing at a healthy clip from 1995 to 1997, sales rose 1% in 1998 and fell 1.2% in 1999. Martinez is hoping the Great Indoors concept, a home-improvement superstore outside Sears' traditional mall settings, will help do the trick. Now in tests with three outlets, 35 Great Indoors should be added by year-end and a total 100 will be operating by the end of 2002. But that's not what Wall Street had in mind.

Image: Company In The News "Sears has had an overly broad agenda for the last several years in an attempt to chase growth, but most have been severe disappointments," said Michael Eckstein of Credit Suisse First Boston Corp. "I'm afraid the rollout of Great Indoors will mirror those other attempts."

Other off-the-mall outlets include Sears Hardware, Orchard Supply Hardware and the failed HomeLife Furniture stores, of which Sears has sold most of its interest. Performance at many stores has been uneven and execution has been faulty, analysts say. With mall traffic falling, Sears may need to add free-standing venues for growth. How Sears reverses its decline depends on its new chief, not yet named. Sears executives weren't available for comment. More pressing is the need to lure traffic to its department stores, analysts say. "Ultimately, Sears will have to work to defend its core mall anchor franchise and come up with a viable apparel strategy," Eckstein said. "In the end, an organization can only do a few things well . . . and Sears has a strong franchise in hard goods. I would rather it narrow its agenda to defend that business." 

With $39.6 billion in 1999 sales, Sears is the nation's No. 2 retailer. It has 860 department stores and 2,100 specialty outlets. It has one of the biggest credit-card portfolios in the U.S., with $27 billion in receivables and 39 million cardholders. Sears has strung together three quarters of 29% or more earnings growth, driven mostly by strong sales in lines such as appliances and a solid credit business. But apparel sales have been flat to down. Last month, Martinez cautioned analysts about Sears' second-half performance. He said there is continued softness in apparel. Apparel sales have started to fall at most department stores, analysts say. As Sears has raised its share in hard goods such as Kenmore appliances and Craftsman tools, it's fallen behind in building brand recognition in clothes. Its women's apparel had a good run until two years ago, when its fashions got too edgy, Eckstein says. Now its thrust is unclear. Still, Sears has come a long way under Martinez, who led it from near demise to a solid player after taking the helm in 1995. He's revamped stores and closed its ailing catalog division. After bad debt cut into earnings in 1997, he overhauled credit operations. Growth in the past two years has been driven by Sears' stronger credit business, says analyst Joseph Grillo of Deutsche Banc Alex. Brown. Future gains need to be fueled by revitalized retail sales, if it wants to continue improving, he says.

And it must find a way to differentiate its offerings, says analyst Kevin Calabrese of Argus Research. Still, Sears has plenty going for it. It has little competition in goods such as appliances. With Circuit City Stores Inc. exiting the appliance business, Sears has a huge opportunity to grab share, analysts say. "While it's had problems, Sears is a solid company," Calabrese said. "Their earnings are solid and good. It's not a company that will disappear, but one with work in progress."

NEW YORK -- As a new set of stores starts selling appliances and consumer electronics and retailer Circuit City Stores Inc. (CC) stops, a wholesale change may be occurring in the way appliances are sold.

Thursday, retail industry giant Wal-Mart Stores Inc. (WMT) said it will begin a 12-store test selling General Electric Co. (GE) appliances.

While it is only a test, Wal-Mart's entry into appliances so soon after Circuit City said it would exit the area, sparks questions about the future of home appliance selling. The Wal-Mart/GE deal puts most of the installation, distribution and inventory management responsibility on GE. That arrangement relieves much of the cost that kept appliances from being as profitable a category as Circuit City desired. Now Circuit City will remodel its stores and dedicate the space once allocated to appliances to higher margin electronic goods.

"In our opinion, the traditional model for selling appliances is at a point where there is going to be fundamental change," said George K. Baum analyst Dean Ramos, who follows consumer electronics retailers such as Circuit City and Best Buy Co. (BBY).

Wal-Mart will have about 40 major appliances on display in the front of its stores located near an area where it leases space for optical shops, beauty salons and other services, according to spokesman Rob Phillips. Some of those appliances will be available for customers to purchase and take home that day, others will have to be ordered and GE would handle delivery and installation. Another 150 items would be able to be ordered for delivery and installation by GE through kiosks located in the store, he said. Wal-Mart's Sam's Club warehouse club recently announced a deal to carry Maytag Corp. (MYG) products.

"I think we see it as an area where we can grow our business," Phillips said. "We're moving into a new market where sales are strong."

Replacing Circuit City Business
The deal helps GE regain ground. Now that Circuit City has exited the business, manufacturers are looking to expand their reach into other retail stores more than ever. Some industry watchers believe Best Buy will be the next consumer electronics retailer to exit the appliance business, but the company recently said it is committed to the area and has added Whirlpool's Kitchen Aid brand appliances. Also, whereas the Circuit City didn't have the space in its stores to display both appliances and the amount of high-tech gadgets it wants to show off, Best Buy's bigger stores have ample room, analysts said.

While the company will reveal little about its plans, Wal-Mart may be considering that sales of home-related merchandise have been robust as new and existing home sales have flourished. For years, Sears Roebuck & Co. (S) has led the home appliance selling market and currently commands 38% marketshare in the U.S. Much of Sears' recent sales growth has come in its hard goods area which includes home. In the last year, Sears has added 3 percentage points to its market share because of strong sales of appliances with advanced features such as its Kenmore Elite line which includes a washer that has no central agitator. Sears may still have a competitive advantage because of its strength in the industry and its wide selection of major brands including GE, Whirlpool, Maytag, Amana Appliances and Electrolux AB's (ELUX) Frigidaire products.

However, there is a lot of new competition. Home Depot Inc. (HD) and Lowe's Cos. (LOW) have gotten into the home appliance game more recently. Lowe's currently has about 6% of the market while Best Buy has 5% and Home Depot has about 1%, according to PaineWebber Inc. analyst Aram Rubinson. Before announcing that it would exit the business, Circuit City had about 9% to 10% of the market.

Competitors Keep Close Watch
With Wal-Mart testing the waters, things may get more complicated. Whenever Wal-Mart becomes a factor in an industry, the competition has to take notice. The company's scale and advanced distribution processes have allowed it to undercut competitors at the cash register. Best Buy may not have to worry as much because it tends to attract a much more affluent shopper than Wal-Mart and the home improvement stores may not need to sweat as much because they target the do-it-yourself crowd and contractors. Sears, however, which draws a value-conscious shopper, may need to be concerned.

"If I were a retailer, I wouldn't want to compete with Wal-Mart on price," said Janet Pinkerton, editor-in-chief of Dealerscope, a Philadelphia-based trade publication that follows the consumer electronics industry. "With Wal-Mart, their whole thing is low prices."

Still, Wal-Mart's entry into the business, despite GE's handling of the distribution and installation, may not be simple. Once Wal-Mart makes the sale, the customer experience is in GE's hands. A number of retailers and manufacturers, including Sears and Best Buy use a mix of their own and third-party contractors for delivery, installation or service.

"It's difficult to manage third-parties," Pinkerton said. "Sears has the machine down, but there is still huge potential for customer dissatisfaction."

But Wal-Mart shouldn't have that problem, said some observers. GE has made a successful business from delivering its own appliances as well as those of its competitors. The company is able to guarantee delivery within a shorter time frame than much of the competition. In addition to its work with Home Depot, GE is also handling appliance order fulfillment for a number of e-commerce companies, including Xoom.com.

"People don't want to waste the whole day waiting for a washer to be delivered, they want certain times that you can come and deliver," said an analyst who requested anonymity. The analyst added that Whirlpool has had trouble with deliveries. "Right now GE can do it plus or minus 15 minutes of a (specific) time. GE's fulfillment capabilities are the best in North America," the analysts said.

Other factors remain, including Wal-Mart's bet that appliances will be a robust business late in the home buying boom. Now that interest rates have risen, the home-buying frenzy is beginning to cool.

"I'm not sure where we are in the home-buying boom, but we're certainly not at the beginning," Ramos said.

A federal court ordered Ameritech Corp. to pay $175.7 million to about 17,000 workers who retired since 1994 because the company miscalculated the benefits due the retirees.

The payout is one of the largest class-action pension settlements in history and stems from Ameritech's underestimating how long the workers would live after retirement. The U.S. Court for the Southern District of Illinois in Belleville ordered Ameritech in February to recalculate the retirees' benefits, and the court entered a final order based on the new calculation Monday.

The payments to retirees, which will start this fall, range from a few hundred dollars to as much as $30,000, with the average being $10,000. The payments include interest earned at the rate of 5 percent on the individual awards.

Some Ameritech employees may be eligible to roll over their back payments into tax-deferred IRA accounts.

Steven A. Katz, a Belleville trial lawyer with a national reputation in consumer and pension rights, and his colleagues who represented the retirees were awarded almost $51 million by the federal court.

The payments will be taken out of Ameritech's pension plan, which is overfunded, so no current workers' benefits will be affected.

Many of the Ameritech employees worked more than 30 years for the company, and during that time they accrued pension benefits.

But Katz said Ameritech miscalculated the lump-sum pension payouts that most of the retirees opted for, instead of taking a monthly pension check.

Katz filed a class action suit on behalf of the retirees after being approached by several former workers who expressed concern about the size of their payout.

Katz said that while pension miscalculations "are not uncommon, they are very difficult for an individual retiree to catch. The law and government regulations governing pension distributions are extremely complex. In addition, the distributions require complex mathematical computations."

Ameritech spokesman David Pacholczyk denied liability for the miscalculation, and added, "We value every one of our employees and former employees, and we settled this so we could move on and focus our attention on serving customers."

Many of the affected retirees who worked for the company have scattered around the country. They were notified in June that they will participate in the settlement and will receive additional information about filing forms to collect the payments in the months ahead.

Katz also is the lead attorney for 40 million people in a class-action suit against Publishers Clearing House, charging that individuals were unfairly lured into purchasing magazine subscriptions in the belief that such purchases would increase their chances of winning prizes in the contest.

The days of sketching and erasing floor plans are over. There's no need for tiny replicas of appliances, cabinets or furniture either. At BobVila.com, designers, contractors and do-it- yourselfers can create, customize and accessorize entire rooms with the click of a mouse. "At BobVila.com, we're focused on putting everything at the fingertips of the consumer," said Bob Vila, America's preeminent authority on home improvement and host of "Bob Vila's Home Again."

"Our latest technology enables people to lay out and adjust the dimensions of their floor plan, and insert windows, doors, electrical outlets and plumbing fixtures. Once they're satisfied with the basic shape of the room, they can position cabinetry, lighting, appliances and more. Best of all, they can use our new 3-D technology to visualize the room from most every angle imaginable."

The 3-D design-and-visualization tool offers assistance to professionals and do-it-yourselfers alike. Easy to use, it can prevent costly mistakes. For example, it won't allow windows to be placed too close to the point where walls meet, nor will it allow cabinets to be hung over an island in the kitchen. Likewise, it positions plumbing fixtures and electrical outlets in the most appropriate locations. Additionally, the appliance icons are dimensionally correct, so they give an accurate look at how a specific refrigerator or stove will fit in a kitchen.

"Just as Bob Vila strives to offer the best advice on building and remodeling projects, BobVila.com is dedicated to helping consumers successfully accomplish their goals," said Andy Wetmore, chief executive officer of BobVila.com. "Throughout our Web site, we've used the theme `Inspire. Design. Achieve.' We want to be the resource people use for advice, information and tips from Bob, as well as the products and services they need to complete their projects."

The 3-D tool is one of many innovations that will be offered by BobVila.com, which is in the process of remodeling its Web site. A more comprehensive rollout of the site is planned for this fall. "We're inviting visitors to watch our Web site grow and evolve in much the same way as viewers see projects take shape during each season of `Bob Vila's Home Again,'" Wetmore added.

When the fall rollout of the Web site takes place, consumers will be able to do more than plan and visualize their rooms. They also will be able to utilize BobVila.com to select and purchase the appliances, tools and other items they need to complete their projects. Additionally, BobVila.com will offer building-technology updates; project-management techniques; online chats; information about choosing a contractor, "greenbuilding," accessible design and historic preservation; video clips from "Bob Vila's Home Again;" and more.

Based in Boston, BobVila.com is a joint online venture between the Bob Vila organization and Sears. BobVila.com plans to become America's leading site for home-improvement solutions - offering consumers inspiration, online help, products and services. The company intends to build on the strengths and expertise of Bob Vila and Sears, and to join with other authoritative partners, to create the definitive online resource designed to assist people at every stage of the building-and-remodeling process.

SOURCE Sears, Roebuck and Company

Arthur Martinez wasn't all that enthusiastic when a headhunter called in 1992 to ask whether he would be interested in the top retail job at Sears, Roebuck and Co.

It wasn't that Martinez, then vice chairman of Saks Fifth Avenue, didn't itch to run his own show.

Martinez simply figured Sears and its ponderous, slow-moving bureaucracy would never move fast enough to make him an offer before he signed on as chief executive of P.A. Bergner, parent of Carson, Pirie Scott.

He was wrong. Two weeks later after a whirlwind courtship, Martinez accepted the job at Sears.

Martinez, a finance whiz with a Harvard MBA, was well aware he had a big job ahead of him. Sears once had been a one-stop shop for America, selling everything from tractors to underwear. But by the late 1980s, its potpourri of appliances, mattresses and men's suits had fallen out of favor with consumers who were shopping in trendier specialty stores.

Retail experts had labeled Sears a dinosaur.

Martinez's new boss, Sears Chairman Edward Brennan, hadn't ignored the problems. Brennan had tried to reorganize the company, revamp the merchandise and brighten the stores. But results had been disappointing, and Sears' board eventually went looking for a new fix-it man.

Now, while Brennan was concentrating on unwinding the financial services conglomerate that Sears had built, it was Martinez's task to pump new life into Sears' retail empire.

Soon after taking the job, Martinez said, "Well, this is going to be a clear win or lose. Either I'm going to be a hero, or I'm going to be a bum. There is no middle ground ... no shades of gray on this one."

Martinez was wrong again.
As he prepares to step down as chief executive of Sears after an eight-year tenure, Martinez is neither a clear winner nor a clear loser. Sears remains firmly stuck in the middle, neither as competitive on price as its discount store rivals nor as fashionable as a host of new specialty store players.

If there is a color that describes Sears' future today, gray is it.

The retailer's board of directors again is searching for a new turnaround artist, the same kind of rising star that Martinez was when he joined the Sears team. A successor could be named any day now.

Whether it turns out to be Alan Lacy, a finance whiz who shares the CEO office with Martinez, or someone from the outside, they will face the same challenge Martinez defined during his tenure: making Sears a compelling place for Middle America to shop.

Eight years ago, however, what needed to be done at Sears was crystal clear..

'Tattered old lady'
First on Martinez's "to do" list was stopping the losses from Sears' struggling retail business. "When I got here, the retail business was not making a dime. Sears was a tattered old lady," Martinez reflected during a recent interview in Hoffman Estates, where Sears is based.

Within five months of his arrival, Martinez announced he was closing more than 100 money-losing stores, laying off 50,000 employees and shuttering the venerable Sears catalog, which was losing $150 million a year. Wall Street analysts, frustrated by Sears' hidebound ways, applauded the radical actions.

Then Martinez went on the offensive, launching a $4 billion remodeling campaign to brighten the remaining Sears stores and increase the square footage for apparel by recapturing back-office space.

Back at Sears headquarters, Martinez was winning converts with his low-key management style and his ability to quickly grasp complicated topics. He asked lots of questions, sought input from subordinates and rarely got angry.

"Arthur was a great boss," said John Costello, former head of marketing at Sears. "He empowered you to do your job and was decisive when you needed him to be."

Martinez would have loved to bring popular brand names such as Liz Claiborne and Nike to Sears right away, but he recognized that many brands wouldn't sell to Sears because they didn't want to hurt their image or alienate more upscale department stores. So he made a major push into creating so-called private label brands that would be designed by Sears and produced by factories overseas.

Of course, such efforts pay off slowly. It takes several years to develop a new line from concept drawings on a sheet of paper to merchandise on the floor. But consumer research showed that what Sears already had on the racks was better than women shoppers were giving it credit for.

So in the fall of 1993, Martinez decided it was time for a bold marketing move: invite women shoppers back to Sears before all the stores were cleaned up and the new merchandise was on the shelves.

The "Softer Side" of Sears was born. With catchy puns playing on Sears' hardline strengths, the image advertising campaign won plaudits and awards. Martinez made sure that all the clothing and accessories featured in the ads were actually for sale in all Sears stores.

Sales exploded. From the back of the retail pack, Sears moved to the front, posting monthly sales increases in 1993 and 1994 that averaged more than 8 percent.

But revving up sales at Sears mall-based department stores wouldn't be enough to make the company's stock a favorite on Wall Street again. Martinez needed an "off the mall" growth story to lay out before investors..

As he surveyed the Sears' empire, most of the pieces already were there.

Sears Credit, the retailer's credit card operation, was a sleeping giant. Martinez bought in Jane Thompson, a former McKinsey Co. consultant and a Martinez protege, to wake it up.

Although Sears already was one of the largest credit issuers in the country, Sears Credit threw its net wider, opening 17 million new accounts between 1994 and 1996. It also raised its interest rates and late fees.

With fresh credit cards in their hands, shoppers gave a two-fold boost to Sears. They loaded up on merchandise, boosting sales at Sears' stores, and then they paid 21 percent interest on their credit card balances, boosting revenue for Sears Credit.

But pumping up Sears credit portfolio wasn't enough by itself. Sears still needed new retail concepts.

Martinez chose to push ahead with the rollout of HomeLife, a freestanding furniture chain that moved furniture and mattresses out of Sears' mall-bound stores.

Hoping to capitalize on shoppers' frustration with giant home improvement chains such as Home Depot, he created Sears Hardware to be a friendly, neighborhood alternative for busy do-it-yourselfers.

Martinez didn't stop there. He transformed Western Auto, an auto repair chain acquired by Sears in the late 1980s, into Parts America, an auto parts store that would no longer perform repair service. Later, he added National Tire Battery, or NTB, yet another freestanding chain that was intended to cater to more upscale clientele, the drivers of sport-utility vehicles and sports cars.

Martinez's efforts were firing on all cylinders in the spring of 1997. He confidently predicted Sears would turn in another year of double-digit earnings growth.

Unexpected obstacles
Then the Sears engine hit an unexpected obstacle. In April, his chief legal counsel warned Martinez that Sears was in trouble with the U.S. Bankruptcy Court in Boston for wrongly collecting payments from an unemployed Boston man.

Although most credit card debt is unsecured and wiped out during bankruptcy, Sears representatives had been cornering debtors in courtroom halls and threatening them with the prospect of having their Sears purchases repossessed if they didn't continue to pay. Many debtors had agreed to pay Sears a reduced amount of their debt over time.

But Sears' "reaffirmation" plans were illegal because they had not been approved by bankruptcy judges, who have oversight of such plans and who protect individual debtors without counsel.

The problem ran much deeper than one man in Boston. Martinez learned that Sears had been illegally collecting money from an unknown number of bankrupt debtors for more than a decade.

"We were going through our most successful year in retail. It was a disturbing event," Martinez adds. "It was certainly a personal low point."

Disturbing and costly. Sears ended up taking a $475 million pretax charge in 1997 to cover the costs of investigating the matter and paying restitution to almost 200,000 debtors.

Almost two years passed before the scandal was laid to rest. In early 1999, Sears agreed to plead guilty to one count of criminal bankruptcy fraud and pay a $60 million fine to settle the federal investigation into the matter.

FBI Special Agent in Charge Barry Mawn described the outcome as an example of "Corporate America blindly [pursuing] profitability over its obligation to treat the consuming public with fairness and honesty."

He couldn't have chosen words that hurt more. Martinez had preached a simple dictum at Sears that any spiritual leader could agree with: Do the right thing. Not long after his arrival, Martinez reissued the company's code of conduct and required that all salaried employees verify that they had read it.. He also instituted a toll-free number for employees to report unethical behavior at Sears or to receive guidance with ethical issues. 

One of the things that disappointed Martinez the most about the credit scandal was that no Sears employee had called the ethics line to report the arm-twisting. "It's a puzzlement to me," Martinez said. "The notion of passive acceptance was something I was trying to break down." The credit scandal was a watershed event in Sears' attempted turnaround, according to former executives. The winners' attitude that characterized Sears in the mid-1990s vanished.

"The whole organization was floored," remembers Anthony Rucci, the former head of human resources at Sears. "We took our eye off the very simple formula that caused our success for the first five years."

Sears' management team had been focused on improving external measures such as customer satisfaction, Rucci explained. Now it became inwardly focused.

While Sears was still trying to sort out the credit mess, the company suffered another public relations setback of a much different kind.

Under the gun to cut costs, Martinez moved to reduce company-paid life insurance for 80,000 retirees.

Now 114 years old, Sears had 120,000 retirees. By comparison, giant Wal-Mart, only 31 years old, has a small fraction of that number. By reducing the value of life insurance to a maximum of $5,000, Sears expected to save $600 million over the next 10 years.

With that single decision in the fall of 1997, Martinez would galvanize the bad feelings against him among tens of thousands of former Sears employees. Many in the Sears family thought Martinez had taken single-handed credit for Sears' early turnaround when many of the plans he implemented had been formulated before his arrival.

The resentment was stoked by Martinez blaming the "old Sears" culture for the company's problems in the early 1990s. And the fact that Martinez was taking home millions of dollars in compensation as he was cutting retiree benefits didn't help either.

With the life insurance issue as their banner, some former high-ranking executives of Sears organized the National Association of Retired Sears Employees to oppose Martinez. They wrote letters to directors and cut up their Sears credit cards. They protested inside and outside Sears' annual meetings. They hired airplanes to fly banners over the Taste of Chicago that read "Sears Unfair to Retirees." Their derisive nickname for Martinez became "King Arthur."

"Welcome to the American version of the bullfighting," Martinez said. "They stick sharp things into you and then try to kill you."

A lawsuit filed by retirees over the life insurance reduction has been languishing in federal court since October 1997.

A downhill run
After that rough year, nothing much seemed to go right for Sears. Sales growth at its core department store chain stalled in 1998. Apparel sales slumped again, prompting Martinez to significantly pare down the number of suppliers while he searched for more profound solutions.

And both the furniture and auto parts businesses turned out to be major losers for Sears. HomeLife, which was bleeding red ink, was scaled back with store closings and then finally sold in 1998 at a loss to Citicorp Venture Capital. Western Auto also was sold the same year to an auto parts chain from Roanoke, Va. The charges from those two retrenchments cost Sears $245 million in losses on an after-tax basis.

Last year, mostly because of fewer merchandise markdowns on holiday goods and reduced levels of bad debt at its credit card unit, Sears posted a 39 percent increase in net income to $1.45 billion, even though its overall revenue declined 1.2 percent to $41.07 billion.

Still, Sears earnings have not reached the $2.37 billion level they achieved in 1993. Revenue growth has been virtually flat for the last three years.

What happened to Martinez's grand plans to reinvent Sears?  To be sure, Martinez moved quickly and accomplished much that was good. The company's balance sheet and cash flow are stronger, its 860 department stores look better, and apparel offerings have greatly improved.

The culture has changed too. Martinez has pushed down decision-making in the organization, forcing managers to take risks and act like entrepreneurs. More of their compensation is tied to quantifiable measures such as improvements in customer service scores and increases in Sears' earnings per share.

"Is this a better company than when I joined eight years ago? The answer is yes," Martinez said. But Sears' competitors, such as Wal-Mart Stores Inc., Target Corp. and Kohl's Corp., have improved faster, arguably leaving Sears in a worse competitive position than when Martinez arrived. Even Martinez, who was quickly celebrated as the savior of Sears in the mid-1990s, has acknowledged his transformation ran out of steam after only a few years.

Turnaround questioned
Now, some analysts are questioning whether Sears' first turnaround under Martinez was ever real. "I don't think it was ever fixed originally," said Jeffrey Edelman, retail analyst with PaineWebber. "It was one thing to take dead store space, put some new product in there and generate more sales. Beyond that, there was very little follow-through."

Indeed, the boost to Sears' image in Martinez's early years has largely evaporated. Many middle-class women still think of Sears as a place where elderly women shop, not a place they will find fashionable clothes for themselves. Many teenage girls, who have more choices than ever about where to shop, would be embarrassed to say their prom dress came from Sears..

That's no surprise to Chris Ohlinger, chief executive of Service Industry Research Systems, a retail market research firm in Highland Heights, Ky. Ohlinger has made a career out of tracking shoppers' perceptions of retailers.

In 1993, when Martinez's turnaround efforts began to take shape, shoppers surveyed by Ohlinger's firm gave Sears failing grades on both value for the money spent and as a fun place to shop. On a scale of zero to 100, Sears received a rating in the low 30s as a "fun and exciting" place to shop.

Of course, Sears has lots of company, Ohlinger points out. Only a few retailers are perceived as fun by shoppers, such as Crate Barrel, which scores in the 60s.

During the years the Softer Side campaign rolled on, the scores improved slightly. But they have since fallen again, back to the low 30s where they started. Even Wal-Mart's downscale, crowded stores now score higher than Sears as a fun place to shop.

"According to customers, the changes at Sears really haven't gone far enough," Ohlinger said.

Sears acknowledged the perception gap when it scrapped the "Softer Side" ads in favor of more price-oriented spots last year.

The Softer Side was a very powerful and appealing advertising campaign, marketing experts agree. But it may have tried to move Sears' image too far too fast, according to Christie Nordhielm, an assistant professor of marketing at Northwestern University's Kellogg Graduate School of Management.

"It was too ambitious of a movement," she said. "When you try to make a big leap, it can almost push you backwards. People will tend to get even more solidified in their original opinion."

Another major change also was working against the Softer Side, she said. In the mid-1990s, shoppers stopped associating themselves with brands and began associating themselves with retail outlets.

"Instead of shopping for Levi's, you were shopping at the Gap," Nordhielm said. "It became a question of where you bought it. People didn't want to say they got their clothes at Sears. They wanted to say they got them at Banana Republic."

By playing up its Softer Side, Sears was working against a very formidable competitor: its own reputation as a trusted, reliable supplier of commodity goods, not fashion items, Nordhielm said.

'Softer Side' defended Martinez isn't ready to write off the Softer Side so fast.

"The Softer Side succeeded on both levels and went far beyond," Martinez said. "It's very hard to have straight-line improvement in perception. Do I give myself an A+? No, a B+. On balance, we've done a pretty good job."

Oddly enough, many of Martinez's most intractable problems fell in areas of his greatest expertise-strategy and finance. HomeLife and Parts America were failures because Sears didn't understand the capital investment involved for them to succeed nationally.

The push in credit resulted in a surge of delinquencies and bad-debt writeoffs that dragged down Sears earnings in the late 1990s.

To be sure, some of Martinez's growth strategies were winners. A fledgling chain of upscale, home-remodeling stores known as the Great Indoors "has been a huge home run for Sears," Martinez said. Another success: Sears' freestanding chain of hardware stores.

One thing is certain: Martinez already has addressed, although not always successfully, Sears' most obvious problems. The "low hanging fruit" is gone, leaving his successor with even tougher challenges than he faced in 1992.

As Martinez prepares to depart, he is philosophical about the ability of any one to pull off the kind of radical makeover that he was once credited with..

"This is a tremendously complex company. I'm reminded of this every day. No one person could grasp and manage all the elements."

He adds: "We're getting away from the notion of leader-centric company.. Sears has a great tendency to delegate too many decisions upward. I spend a lot of time telling people, 'That's your decision to make.'"

Sears, Roebuck and Co. donated $352,551 to the National Alliance of Breast Cancer Organizations (NABCO) last night in a special half-time presentation during Game Two of the WNBA Western Conference Finals at the Great Western Forum in Los Angeles. As part of Sears $1 million commitment to NABCO, last night's donation represents the funds raised during the first season of Sears three-year presenting sponsorship of the Sears WNBA Breast Health Awareness program.

"Sears donation and marketing efforts this year to support the Sears WNBA Breast Health Awareness program are just the start of our commitment to the program," said John A. Lebbad, Sears director of event marketing and sales promotion. "Sears has embraced breast health as our major initiative with the WNBA to educate millions of customers and WNBA fans about this crucial health issue that touches so many lives.''

Throughout the entire 2000 season, Sears and the WNBA have supported the Sears WNBA Breast Health Awareness program through integrated efforts, nationally and locally in the 16 WNBA communities. On a local level, Sears, the WNBA and NABCO selected a local "Breast Health Hero'' in each WNBA city for his or her dedication to the cause and honored each Hero with a $10,000 donation to NABCO on his or her behalf.

Each WNBA team hosted Sears WNBA Breast Health Awareness nights during the WNBA season where Sears donated $0.50 to NABCO for each fan attending the game. During each Breast Health Awareness game, the team provided fans with additional information about breast health and local breast cancer resources and, in select markets sold the specially designed, pink breast health awareness T-shirts, worn by the players in that night's warm-up, to raise additional funds for NABCO. Sears also raised funds through a special promotion with Nike and on-court contests at WNBA games.

On a national level, Sears distributed breast health awareness brochures in the lingerie departments at all 860 Sears full-line stores nationwide. The WNBA also produced a public service announcement (PSA), which features Lisa Leslie, the program's national spokesperson, and her mother, Christine Leslie-Espinoza, which airs during nationally televised games and in each WNBA arena. In addition, the WNBA All-Star 2000 Auction, the first-ever online auction on WNBA.com, produced more than $56,000 in bids to benefit the Sears WNBA Breast Health Awareness program.

Sears reached its donation goal for year one of the program by donating $1,000 for every assist made during Game 2 of the WNBA Western Conference Finals last night. The Houston Comets and the Los Angeles Sparks combined for 29 assists, adding $29,000 to Sears total donation. The defending-champion Comets defeated the top-seeded Sparks 74-69 to secure their return to the WNBA Championship Series where they will play either the New York Liberty or the Cleveland Rockers in Game 1 this Thursday.

``The outstanding support provided by Sears has enabled us to take our Breast Health Awareness efforts to a new level,'' said Val Ackerman, WNBA President. ``With the program's broader reach, many more women will now benefit from the early detection message.''

The Sears WNBA Breast Health Awareness program is designed to further increase public awareness about the importance of early detection of breast cancer and to raise funds needed to inform, educate and screen women all over the country. The Sears WNBA Breast Health Awareness initiative has several goals, which include: promoting the importance of early detection, encouraging women to follow good breast health guidelines, reaching out to medically underserved women and supporting the work of NABCO, the leading non-profit education and information resource on the disease, and local cancer education/support groups.

"The addition of Sears to the ongoing WNBA breast health awareness initiative this year has provided the resources we need to send a nationwide message and deliver important services to women across the country,'' said Amy Langer, NABCO's Executive Director and a 15-year breast cancer survivor. ``Sears and the WNBA are not only spreading awareness for the importance of good breast health to women of all ages and races -- they are also providing the funds needed to support early detection programs.''

Sears, Roebuck and Co. is a leading U.S. retailer of apparel, home and automotive products and services, with annual revenue of nearly $40 billion. The company serves families throughout the country through approximately 860 department stores, more than 2,100 specialized retail locations, and a variety of online offerings accessible through the company's Web site, www.sears.com <http://www.sears.com> .

The WNBA began its fourth season on May 29, 2000, becoming the longest running women's professional basketball league ever in the United States. During the 2000 WNBA regular season the league broke its own record for attendance for women's professional sports by attracting over 2.3 million fans heading into the playoffs. The WNBA Championship will begin on August 24.

The National Alliance of Breast Cancer Organizations (NABCO) is the leading non-profit information and education resource on breast cancer and a network of over 400 breast cancer organizations. NABCO provides information, assistance and referral to anyone with questions about breast cancer, and acts as a voice for the interests and concerns of breast cancer survivors and women at risk. More information on NABCO can be found on its Web site www.nabco.org <http://www.nabco.org> or by calling toll-free, 1-888-80-NABCO.

Sears, Roebuck and Co. on Thursday said it expects second quarter profits will exceed Wall Street consensus estimates after reporting its domestic same-store sales rose 2.3 percent in June.

A survey of analysts by First Call/Thomson Financial pegged Sears' second quarter earnings at 99 cents a share. In the year-ago second quarter, Sears earned 86 cents a share.

Based on revenue and other business trends seen this quarter, Arthur Martinez, Sears' chief executive, expressed confidence that the company's second quarter performance will exceed current consensus expectations with earnings per share over the same period last year of at least 20 to 25 percent.

Total domestic store revenues for the five weeks ending July 1, 2000 increased 3.6 percent from a year-ago to $2.80 billion.

"Appliance and electronics sales remained strong. We also saw improvements this month in hardware and lawn and garden," Martinez said in a statement. "In apparel, while overall sales were slightly lower than a year ago, footwear performed well."

Sears to Buy Back as Much as $1 Billion of Stock
By Heather Landy - Bloomberg - August 9, 2000

Sears, Roebuck & Co. said it would buy back as much as $1 billion of stock as the biggest U.S. department-store chain tries to boost its share price.

Based on today's closing price of 30 11/16 on the New York Stock Exchange, Sears could buy back as many as 32.6 million shares, or 9.5 percent of its shares outstanding. Sears had 343 million shares outstanding as of July 1.

Sears, which has almost completed a $1.5 billion repurchase program authorized in March 1999, is trying to reverse a 25 percent drop in its stock over the past year. Increased credit-card revenue and demand for appliances and electronics have led profit higher in recent quarters. Still, investors are concerned about sluggish clothing sales and the naming of a successor to Chairman and Chief Executive Arthur Martinez.

``This is a step in the right direction,'' said analyst Bill Dreher of Robertson Stephens, who has a ``long-term attractive'' rating on Sears stock. ``But there remains other issues, such as the transition of the chief executive and sales of apparel.''

The company has not yet named a new chairman. Martinez, who announced in March that he would retire by year's end, said last month that he planned to ask the board to approve a new buyback plan. Under the program, which expires in December 2002, shares would be bought on the open market or in privately negotiated transactions, the company said.

``We are pleased with the health of the company and its strong cash flow capabilities,'' Martinez said today in a statement.

Sears has matched or exceeded monthly sales forecasts since late 1999, following more than a year of stagnant sales. To compete with discount and specialty chains, Sears cut costs on T- shirts and other basic items, reduced the number of its suppliers and focused on Kenmore appliances and other private-label goods.

Even so, Martinez said last month that clothing sales have been disappointing and aren't expected to pick up in the second half.

Insurance Services, Inc. is now offering consumers the HomeSafe Protection Plan, a new in-home mechanical breakdown insurance policy that protects a variety of appliances and systems which are not covered by most homeowners insurance. Countrywide has teamed with Sears HomeCentral(R) to provide the repair and replacement services for the home systems and major appliances covered by the HomeSafe Plan. Sears HomeCentral is the nation's largest home repair and improvement provider, serving more than 15 million homes each year. Sears certified technicians service one of every five appliances in America -- no matter where the customer purchased it or who made it.

"Homeowners are often faced with the inconvenience of costly appliance or system failures," said Steve Phillips, President and CEO of Countrywide Insurance Services. "The HomeSafe Protection Plan not only relieves this burden by providing coverage when unexpected costs arise, consumers can count on Sears HomeCentral to get the job done. It's a tremendous benefit for homeowners to know that a trusted service professional will show up every time and will completely repair or replace covered malfunctioning items."

HomeSafe is a unique in-home mechanical breakdown insurance policy that differs in several ways from a traditional home warranty product. First, with HomeSafe, no property inspection is required to obtain coverage. Unlike most home warranties, consumers can purchase their HomeSafe policy without the hassle of obtaining and showing proof of a home inspection. Second, HomeSafe coverage is provided regardless of the age of the items. If one of the covered items cannot be fixed, HomeSafe will provide a brand new replacement of like kind and quality. A third distinction is that with HomeSafe, consumers know that Sears HomeCentral's national network of more than 14,000 uniformed repair technicians, licensees and independent service technicians will repair or replace their items.

HomeSafe also offers broader coverage than many other home warranty plans through a Basic or Premier plan. The Basic Plan includes heating, electrical and plumbing systems, as well as water heaters, washers and dryers. Kitchen appliances such as refrigerators, range/ovens and built-in dishwashers are also covered in this plan. The Premier Plan extends coverage beyond the Basic Plan components to include air conditioning and heat pump systems, garbage disposals/compactors and built-in microwave ovens. Optional coverage for each plan may be selected for pools and spas, most garage door openers, stand-alone freezers, and sump pumps.

Specially trained HomeSafe representatives are available 24 hours a day, 7 days a week, to help customers diagnose the problem over the phone. When a house call is needed, a Sears HomeCentral national network repair specialist will be scheduled. If the specialist is unable to repair the item, homeowners can feel secure in knowing that HomeSafe will provide a brand new replacement of like kind and quality. And, appliances and systems need not be originally purchased from Sears to be eligible for coverage.

Consumers can purchase a HomeSafe Protection Plan or obtain more information on any Countrywide Insurance product, directly through Countrywide Insurance Services' Web site at www.cwinsurance.com or by calling us toll free at 888-419-9752. This product is not available in all states.

The HomeSafe Protection Mechanical Breakdown Insurance Policy is underwritten by Balboa Insurance Company, rated A (Excellent) by A.M. Best, a leading independent insurance analyst.

Countrywide Insurance Services is an independent, full-service agency that works with top-rated insurance carriers and has the authority to issue policies on behalf of most of its carriers. Countrywide offers consumers a one-stop, trusted source for a full range of affordable insurance solutions, including homeowners, home protection, automobile, life and annuity insurance products. The company is dedicated to quality customer service and provides fast, free, accurate no-obligation quotes online and by telephone.

Countrywide Insurance Services, Inc. is based in Simi Valley, California and is a subsidiary of Countrywide Credit Industries, Inc. CCR, a global, diversified financial services company. Founded in 1969, Countrywide is based in Calabasas, California and has more than 550 offices and more than 11,000 employees nationwide.

Circuit City Group, the second-largest U.S. consumer-electronics chain, said it will close eight distribution centers and cut 1,000 jobs, or 1.7 percent of its workforce, as it remodels most superstores and quits selling appliances.

Circuit City shares fell 20 percent after the company said it expects fiscal second-quarter earnings of 32 cents, well below the 43-cent average estimate of analysts polled by First Call/Thomson Financial. That excludes a charge of $30 million, or 9 cents, in the quarter ending August to close distribution centers. It earned 35 cents in the year-ago quarter.

In June, the company warned gross-profit margins would be narrower than expected, hurt by a drop in demand for major appliances. Remodeling stores and shedding appliances will make room for more consumer-electronic and home-office products.

``Circuit City should have never been in the appliance business in the first place, because too many people sell appliances,'' said Fredric Russell, president of Fredric E. Russell Investment Management in Tulsa, Oklahoma, which owns shares of retailer Dollar General Corp. ``The market for personal computers and wireless phones is so large, they don't need to distract themselves.''

Circuit City's warning also points to a slowdown in consumer spending, said Russell.

Maytag, Whirlpool
News that Circuit City will exit the appliance business sent shares of appliance makers Maytag Corp. and Whirlpool Corp. lower.

Shares of Circuit City fell 6 1/2 to 26 1/8 in New York Stock Exchange trading after dropping to 25 1/4, a 52-week low. The stock has fallen 42 percent this year.

Circuit City's same-store sales in the second quarter for consumer electronics and home-office products are increasing in the high single digits, while appliance sales have been negative, Chief Executive Alan McCollough said in a statement. Same-store sales exclude sales from new or closed stores.

Circuit City said it expects fiscal third-quarter earnings of 16 cents a share, including charges of $55 million, or 17 cents, to remodel stores, for excess retail markdowns and the loss of appliance sales. It expects fourth-quarter earnings of 98 cents, more than the 96-cent First Call average estimate, as the company sees benefit from the remodelings.

"Appliances are the short-term reason, but the real reason for the problems is an aging store base they haven't remodeled and a nimble competitor in Best Buy," said John Glass, an analyst at Deutsche Banc Alex. Brown, who today cut his Circuit City rating to `"market perform" from "strong buy."

Best Buy Co. is the largest U.S. retailer of consumer electronics. Circuit City's inventory-turnover rate, which measures the number of times a retailer must replenish a store's inventory, lags Best Buy's, according to Bloomberg data.

Appliances
Circuit City is exiting appliance sales as Home Depot Inc., the world's largest home-improvement retailer, this year began selling appliances. McCollough told analysts and investors during a conference call that Circuit City also saw more aggressive competition recently in appliance sales from Sears, Roebuck & Co. and Lowe's Cos.

"We want to have a consumer-electronics business without any distractions," McCollough said during the conference call.

Some Circuit City locations may continue to sell air conditioners during the summer months, McCollough said.

Whirlpool and Maytag are major appliance suppliers to Circuit City and will lose business, said Justin Maurer, an analyst at Merrill Lynch & Co., who has a "near-term neutral" rating on Maytag shares. Whirlpool shares fell 8.1 percent and Maytag shares dropped 2.4 percent.

Circuit City's exit is a $800 million to $1 billion opportunity for Sears, said Arthur Martinez, chairman of Sears, which has 35 percent of the appliance-retail market.

"I'm going to be asking our team to devise the most aggressive selling and marketing plan we can," Martinez said.

Store remodelings in Florida, which were begun earlier this year, will cut second-quarter earnings by 3 cents a share, and will cut third-quarter earnings by 2 cents.

Remodeling Costs The total cost of store remodelings will be at least $1 billion, Glass said. Circuit City said it will cost about $2.5 million to remodel each store, and it operates about 573 Circuit City superstores.

The company expects 2000 earnings of $1.60, including charges, less than the First Call average estimate of $1.99.

Circuit City will close six distribution centers by year-end, and two more centers in the next 12 months. The company said it will take three years to remodel its superstores. The new stores will have about 20,000 square feet of customer-accessible space, the company said.

"The store remodelings and pulling out of appliances will be disruptive for the next couple of years," said Alan Rifkin, an analyst at Lehman Brothers, who rates Circuit City "neutral."

Distribution centers to be closed are located in: Atlanta; Brandywine, Maryland; Chehalis, Washington; Chicago; Columbus, Ohio; Dallas; Des Moines, Iowa; and Fort Lauderdale, Florida.

The Richmond, Virginia-based company also operates 43 mall-based Circuit City Express stores and owns a 75 percent stake in the CarMax chain of used- and new-car dealerships.

909 North Washington Street, Suite 400
Alexandria, VA 22314-1556

July 17, 2000

Colin L. Powell
General, U.S. Army (Ret.)
Chairman
Tel. 703.684.4500
Fax 703.535.3900
www.americaspromise.org

Mr. Ev Buckardt
Chairman
National Association of
   Retired Sears Employees, Inc.
8700 West Bryn Mawr, S-800 South
Chicago, IL 60631-3507

Dear Mr. Buckardt:

Thank you for your recent letter informing me about the National Association of Retired Sears Employees and the issues your organization is addressing. After reading your letter, I asked Sears for factual information about the change in retiree life insurance benefits. Sears provided me with a fact sheet.

I understand the positions of  both Sears and the retirees, and I hope that the matter will be resolved in a manner that is acceptable to both parties. We greatly appreciate Sears partnership with America's Promise, and I thank you for your willingness to consider NARSE becoming a partner of ours as well. I am hopeful that NARSE will also join us in our efforts to strengthen the character and competence of our Nation's youth. If you would like to discuss partnership opportunities with America's Promise, please contact Barbara Douglas, Vice President, Partnership Development at (703) 535-3814.

Thank you, again, for taking time to express your views.

With all best wishes,

                                                    Sincerely,

                                                      /s/ Colin S. Powell

Sears, Roebuck & Co. said second-quarter profit jumped 17 percent as credit-card revenue and appliance sales increased. Chairman Arthur Martinez also warned that sluggish clothing sales aren't expected to pick up in the second half.

Net income rose to $388 million, or $1.11 a share, from $331 million, or 86 cents, a year earlier. Sears' credit-card unit led the gain with a 26 percent rise in profit. The division sold more securities backed by revenue from credit-card accounts and stepped up collection efforts with customers to reduce late payments.

At Sears stores, profit rose 9.8 percent on increased sales of home appliances and electronics. Clothing sales were little changed, though, as demand among many U.S. retailers for spring fashions was lower than expected. Martinez said competition will likely intensify in coming months as apparel chains try to clear out leftover inventory to make room for new merchandise.

``We're trying to be cautious, '' Martinez said in an interview. ``You would not want to be a wide-eyed optimist for the second half of the year in terms of apparel sales.''

Sears shares fell 1 11/16, or 5 percent, to 32 1/16 on the New York Stock Exchange. The stock has lost half its value from a high of 65 1/4 in August 1997, as Sears struggled with the lower prices offered at discount chains such as Wal-Mart Stores Inc. and the trendy clothes sold at specialty chains such as Gap Inc.

``I'd like all the cylinders to be firing,'' said portfolio manager Art Bonnel of the U.S. Global Investors Bonnel Growth Fund, which owns retail stocks, though not Sears. ``There's more exciting areas to be invested in than a retailer that's attempting to turn itself around.''

Consumer Slowdown?
Martinez said Sears will hold promotions to compete with price markdowns and clearance sales held by rivals. It also will stock less clothing in its stores for the remainder of the year to better reflect demand.

``I don't think the earnings numbers are going to really get whacked (because of) apparel problems in the next six months,'' said Kevin Johnson, a partner at Aronson & Partners, which held 760,700 shares as of March.

In the second quarter, price markdowns on clothing contributed to a decline in gross margin to 26.4 percent of sales from 27.1 percent a year earlier. Gross margin measures the profitability of sales.

Sales of electronics, appliances and other so-called hard goods helped fuel a 2.7 percent increase in sales at stores open at least a year.

Demand for those products is expected to grow steadily, indicating that six recent interest-rate increases by the Federal Reserve haven't dramatically curbed spending by shoppers, Martinez said.

``There's nothing in our consumers' behavior to suggest that a slowdown is underway or imminent,'' said Martinez, who also is chairman of the Federal Reserve Bank of Chicago's board of directors.

Sears, based in the Chicago suburb of Hoffman Estates, Illinois, has about 860 department stores and 2,100 specialty stores such as Sears Hardware, Sears Auto Centers and The Great Indoors home-decor stores.

Sears's earnings are expected to rise to $4.57 a share this year, from $3.89 last year, according to the average estimate of analysts polled by First Call/Thomson Financial.

Store Sales
About 72 percent of Sears' sales come from its stores. Revenue at that division rose 4.2 percent to $7.29 billion.

The company has been sharpening its focus on five of its best- performing departments -- appliances, tools, home fashions, electronics and kids' clothes -- to boost sales. Private-label goods such as Kenmore washing machines, Craftsman tools and TKS Basics kids' clothes help Sears compete with low-price rivals.

Sears is gearing up for the back-to-school shopping season. New kids' apparel and toys will feature Franklin the turtle, a popular cartoon and book series, following similar tie-ins to characters from Blue's Clues and Pokemon.

The company also is sponsoring a concert tour by singer Christina Aguilera to boost sales in the juniors' department.

Sears needs to woo back customers to its men's and women's clothing departments, after losing shoppers to Target Corp., Kohl's Corp. and other chains, said analyst Richard Church of Salomon Smith Barney.

``The mother goes to Sears to shop for her kids but not herself, and that's the problem,'' said Church, who rates Sears shares ``neutral.''

Sears is experimenting with shopping carts, wider aisles and a reduction in merchandise suppliers and styles to give its stores a more uniform look and make them convenient and easier for shoppers to navigate.

Credit, Buybacks
At the credit division, stepped-up credit-card collection efforts helped keep the provision for uncollectable accounts unchanged at $215 million. Delinquencies fell to 7.15 percent from 7.29 percent a year earlier.

The division also benefited from improved yield, or the dividends or interest a security earns, and revenue from securitization, or the pooling of loans that are then converted into packages of securities. Revenue from the credit division rose 6.2 percent to $1.1 billion.

Sears, which said July 6 it would exceed forecasts of 99 cents, topped the revised $1.05-a-share average estimate of analysts polled by First Call.

Sears spent about $400 million to buy back 10 million shares during the quarter. The buyback reduced the number of shares outstanding and helped boost per-share profit.

Martinez said he most likely will ask the board to approve another buyback plan. The company is close to completing a $1.5 billion repurchase program announced in March 1999, he said.

Sears had 348.4 million shares outstanding as of July 1, a 9.2 percent decline from last year's 383.6 million.

Sears, Roebuck and Co.'s board of directors is expected to name a new CEO in the next month, and the frontrunner is insider Alan Lacy, who oversees the Hoffman Estates- based retailer's credit, home services and online businesses.

Sources say the 46-year-old Mr. Lacy, president of services, became the prime candidate after a search begun early this year failed to produce a strong outside contender.

In addition, Mr. Lacy's working relationships with members of Sears' executive search team may give him an edge. As a senior vice-president of finance and strategy at Northfield-based Kraft Foods Inc., he worked with Michael Miles and Warren Batts, former Kraft executives who are on the Sears CEO search committee.

If the board chooses Mr. Lacy, it will be shunning an industry tenet that says retail CEOs must have merchandising experience. The directors, who are scheduled to meet next month, also might be acknowledging that Sears needs a strategic overhaul beyond the current push to improve its full-service stores.

Although Mr. Lacy has a financial background, he is considered a strong strategist and has been called on to fix ailing Sears businesses such as credit and home services. Analysts say he has done a good job reviving profits in the credit division, but the verdict is still out on home services.

"I don't see anything wrong with hiring a non-merchant," says Herbert Mines, chairman of Herbert Mines Associates Inc., a New York-based recruiting firm that specializes in the retail industry. "The real issues are the leadership capacity of the person they pick and whether that person has a good strategic vision."

Early speculation had Sears bringing in an outsider, someone with a fresh perspective who could rally the troops by playing savior, as outgoing CEO Arthur Martinez had done in 1992 (Crain's, April 24).

However, the complexity of the $41-billion Sears empire — with its retail, real estate, repair services and credit card operations — ruled out candidates.

"I think Sears is the most complicated retailer out there," says Salli LeVan, an executive recruiter who specializes in retail at TMP Executive Search, a unit of New York-based TMP Worldwide Inc. "Sears is a company that's diverse in every sense of the word."

Some CEO possibilities didn't make the grade because they already held lucrative stock options at their current jobs, and hiring them would have been cost-prohibitive for Sears.

In contrast to years past, the Sears CEO job is no longer considered a retail plum.

The increasing strength of discounters and specialty stores, along with the company's problems such as limited growth prospects and thin profit margins, made the job a tough sell.

However, naming Mr. Lacy, a five-year Sears veteran, to the CEO post would not be seen as a bold move by the board. It might suggest to Wall Street that directors are satisfied with the status quo at the retailer, which earned $1.45 billion last year, compared with $1.05 billion in 1998, despite revenues that slipped 1% to $41.07 billion.

Other internal candidates thought to be contenders include Julian Day, 48, executive vice-president and chief operating officer, who joined Sears in 1998, and Paul Walters, 46, chairman and CEO of Sears Canada Inc., a majority-owned subsidiary.

A Sears spokesman declined comment on the search, saying, "We're pleased with the progress made so far and the caliber of the candidates that have been considered."

Frisco, Texas: J.C. Penney Co., whose shares have fallen 59 percent in the past year, said it plans to remodel about half its 1,100 department stores by the end of 2002 to help revive sales.

The stores will feature wider aisles, better lighting and other improvements, many of which are being tested at a new store in Frisco, Texas, about a mile away from company headquarters..

The 87-year-old retailer wants to update its look to win back shoppers from trendier and lower-price rivals. The Frisco store borrows some concepts from Gap Inc.'s Old Navy -- the mannequins in the kids' department look lifelike and employees in the juniors' section wear headsets. It has central checkout areas for added convenience, and shorter clothing racks to make it easier to reach the merchandise and survey the store.

"The sightlines of the store are so clear, the lighting is so vivid,'' said Michael Taxter, director of J.C. Penney stores. The customer "can navigate the racks, and it's easy to shop.''

He declined to disclose the cost of the improvements. The No. 2 U.S. department-store chain will remodel about 150 stores this year and another 400 in 2001 and 2002, he said. It will take 90 to 120 days on average to revamp each store.

Rival Sears, Roebuck & Co. is experimenting with similar features to make shopping more convenient. It's paring product lines, centralizing checkout registers and making sure baby strollers and shopping carts can roll easily through the stores.

Both Sears and J.C. Penney have been struggling to keep up with new competitors such as Kohl's Corp., a discount department store chain that features central checkout, large signs and a wide, racetrack-like aisle circling the store.

Monthly sales at J.C. Penney stores open at least a year have declined by an average 2 percent since July 1999. That trails Sears' average increase of 2.7 percent and the 7 percent average increase at Kohl's.

J.C. Penney shares have fallen from a high of 78 3/4 in June 1998. The stock today rose 3/16 to 18 7/16 in New York Stock Exchange trading.

Integrating the Internet
A bright spot for Plano, Texas-based J.C. Penney in the past year has been its Internet shopping site, from which the company expects to generate about $1 billion of sales over the next three years.

To that end, the company will try to integrate the Web business throughout its new and remodeled stores. Stores in Frisco, Austin and Hurst, Texas, as well as Jacksonville and Tampa, Florida, are testing Internet kiosks that are linked to the J.C. Penney site.

The Frisco store has a catalog center where customers can pick up or return orders from the J.C. Penney catalog or Web site. It also has a lounge area in the middle of the store, where customers can place orders, print out gift registries, check e- mail and look up stock quotes, sports scores, weather and news.

New Features
Other experiments at the Frisco location include a big-and- tall men's shop, music-video screens in the juniors' area and Sega Dreamcast video games in the kids' section.

The store also has a full-day spa and salon, a photography studio and a vision-care center. To reduce clutter in the apparel areas, the store carries about 6 percent less inventory than the typical J.C. Penney.

The 275-employee store, located in Frisco's new Stonebriar Centre mall, will open for business on Wednesday..

At the Frisco location and others, the company is putting greater emphasis on private-label goods, which are more lucrative than national brands.

The women's apparel department is centered around a section featuring Crazy Horse, an exclusive clothing brand made for J.C. Penney by Liz Claiborne Inc. The men's section highlights St. John's Bay, a private casual-clothing brand, as well as national brands including Van Heusen, Haggar, Izod and Dockers.

National Brands
The home goods department has taken a somewhat different tack, highlighting its expanded line of national brands. The Frisco store is the first store in the U.S. to carry luggage made by Jansport, the backpack brand owned by VF Corp. It also stocks a wider selection of Dansk dishes, Veratex linens and other name brands.

That doesn't mean the company is abandoning its JCPenney Home Collection line of towels, pillows and other home goods. It introduced a new line of bed linens for kids and teenagers under the Arizona Jeans Co. name, another private label, about six weeks ago.

``JCPenney Home is a huge brand and we're not walking away from that,'' said Ann Gravseth, president of the company's home and leisure division. ``We just want to put in more of the brands that the customer is looking for.''

Cincinnati Supermarket operator Kroger Co., boosted by acquisitions, edged out Sears, Roebuck and Co. to become the nation's No. 2 retailer behind Wal-Mart, according to rankings released Thursday.

Since acquiring Portland, Ore.-based Fred Meyer for $13.5 billion last year, Kroger's revenues increased to $45 billion from roughly $30 billion before the merger, the National Retail Federation reported in its annual ranking of the top 100 U.S. retailers.

Kroger jumped five places, while Sears dropped to No. 3, with sales of $41 billion. Wal-Mart, with 1999 sales of a whopping $165 billion, has topped the list since 1992.

Rounding out the top ten were: Home Depot, which rose from sixth to fourth; Albertson's, which jumped from 12th to fifth; Kmart, which fell from third to sixth; Target, which dropped from fourth to seventh; J.C. Penney, which fell from fifth to eighth; Safeway, which slipped from eighth to ninth; and Costco, which fell from ninth to 10th.

New to the list is Amazon.com, the first strictly online retailer to register. It made its debut at No. 93.

If you think the street traffic is bad at the Taste of Chicago, try taking a look up in the sky. Blimps with names like "Snoopy 2" and "Bud One" compete with banner-towing airplanes for the attention of festivalgoers. The airborne ads hawk everything from real estate to dot-com companies--so long as the product can be sold in 35 letters or less.

"It can get crowded up there," said Andy James, president of A & M Aviation, which tows banners.

And with Chicago and its suburbs adding more festivals every year, "our business has increased every year [for] the 10 years we've been in business, especially the last two years," James said.

Sometimes pilots talk to each other on the radio, forming a line so they're all going in the same direction. Sometimes the tower at Meigs Field will arrange it.

Most advertising planes fly out of smaller suburban airports because it is easier and cheaper to keep their equipment there than at Meigs. A & M Aviation is based at Bolingbrook's Clow International Airport. Blimps fly out of Midway or smaller suburban airports.

The object of all this airborne activity is to get the attention of all those eyeballs on the ground, a captive audience of up to a million people.

For $325, an advertiser gets 15 minutes of exposure.

"You hit them right between the eyes," said Pat Knight, banner coordinator for A & M. "They hear the noise from the airplane, they look, and they're going to read it whether they want to or not.

"It's extremely flexible, it's economical and it's very eye-catching," said Laura Ortoleva, director of public relations for RE/MAX of Northern Illinois.

She ran airplane banner ads saying "RE/MAX No One Sells More Real Estate" at last year's Taste, and said it helped plant her company's name in the consciousness of thousands.

Other companies have turned to blimps.

Goodyear and Fuji used to be the only blimps in the sky, but in the last 10 years, American Blimp Co. of Oregon has been making a smaller, less expensive blimp that lights up at night. It has been snapped up by companies looking to make a splash.

Among them are Metropolitan Life and Budweiser, whose lighter-than-air craft will be seen at the Taste this year.

"They're so visual. They're slow and majestic, and so different from all the other advertising clutter on the ground," said Scottie Shaner, American Blimp Co. spokesman.

It can cost more than $250,000 a year for a blimp, but that's less than the cost of a single prime-time television commercial.

The low-cost banners are often used by individuals for personal messages, such as marriage proposals and anniversary greetings.

Not all the messages are positive. Last year, a group of retired employees of Sears, Roebuck and Co. used airplane banners to lambast Sears for reducing life insurance benefits.

"We flew a banner over the annual stockholder's meeting, and that got a lot of attention," said George O'Hare, a Sears retiree.

On Tuesday, O'Hare hired A & M to tow a banner between 5 and 8 p.m. over the lakefront. "Sears Chairman Arthur Martinez lives on Lake Shore Drive," O'Hare said. "I hope he sees it."