Mar-Apr '03

NEW YORK - Visa and MasterCard will pay a combined $3 billion to Wal-Mart Stores Inc. and other retailers to settle a lawsuit over debit card fees that has raged for seven years, representatives of all sides said on Wednesday.

The settlement, which will include a lowering of total card fees at the heart of the dispute by an additional $1 billion later in the year, could have a dramatic impact on how consumers pay for such routine expenses as clothing and groceries.

It also could give a boost to retailers such as Wal-Mart and Sears, Roebuck and Co., which started the suit, and hurt banks that make money from fees on debit purchases such as J.P. Morgan Chase Co Inc., Citigroup Inc. and Bank of America Corp.

Visa USA will pay $2 billion and MasterCard International will pay $1 billion in separate settlements. Each will pay $25 million in cash by year's end and the rest in equal installments over ten years. That will mean $100 million a year for MasterCard and $200 million a year from Visa.

The agreements end a dispute that began in 1996 with a suit by Wal-Mart and other big merchants and mushroomed to include several million retailers across the United States.

The suit argued that Visa and MasterCard rules requiring merchants to accept their signature-verified debit cards imposed higher costs that are eventually passed on to consumers and stifle competition from smaller rivals whose systems use personal identification numbers (PINs).

Debit cards verified with a signature incur fees of $1.50 per $100 transaction compared with about 10 cents for purchases using PIN systems, retailers said. The retailers claimed it cost them tens of billions of dollars over more than a decade.

CONSUMERS COULD BENEFIT
"We have freedom to choose, which will lead Visa and MasterCard to actually compete on price, which will lower prices to merchants and lower prices to consumers," Lloyd Constantine, a New York-based lawyer representing retailers, told Reuters.

Starting August 1 through the end of the year, Visa and MasterCard will lower debit fees by a total of $1 billion, in accordance with their market share, Constantine said. This means Visa will likely pay about $800 million, he said.

In addition, after 2003 ends, Visa and MasterCard will no longer be able to require retailers who accept their credit cards to accept their debit cards as well. This so-called "honor all cards" policy was at the center of the dispute.

"Unlike most class actions in which the damages are only monetary, this one will actually have an impact on future competition," said antitrust lawyer David Balto, who is based in Washington, D.C. "Consumers will feel the impact in cheaper prices, safer debit cards and greater choices."

Visa and MasterCard both hailed the settlement.

"We believe this settlement is a reasonable and responsible resolution that serves the interests of consumers, merchants and our member financial institutions," Daniel Tarman, a vice president at Visa, said in a statement.

Noah Hanft, MasterCard's general counsel, told Reuters it was "able to preserve the key benefits that underlie the 'honor all cards rule' and at the same time give the merchants some of the flexibility to choose the payment choices they want to offer consumers."

But others said the settlement would be harmful.

"Consumers are the losers in all of this," said David Robertson of credit card industry publication the Nilson Report.

There is no guarantee retailers will pass on to consumers the savings from lower fees and choice could be limited as retailers may now refuse to accept certain debit cards, said Robertson, who was speaking before details of the settlements emerged.

And consumers who now count on racking up frequent flier miles on debit purchases may be in for a surprise. Many of those programs are extended only to signature-based purchases and a shift to PIN transactions could eliminate the benefit, he said.

The two pacts were reached under heavy pressure from U.S. District Court Judge John Gleeson of the Eastern District of New York in Brooklyn, as the case had been set for trial this week.

The value of a settlement by Visa had been expected to be northward of any negotiated by MasterCard, because it has a higher market share. It controls 80 percent of the signature-based debit card market compared with MasterCard's 20 percent. Visa and MasterCard are associations owned by the thousands of financial institutions that issue their cards.

Despite the large size and significance of the settlement, it was far lower than previous damage claims by retailers, which were in excess of $39 billion.

Visa Will Settle With Retailers for $2 Billion Over Debit Fees

The Case Is Likely to Bring Drastic Changes
to Industry, Such as More PIN Transactions
By Mitchell Pacelle, Jathon Sapsford and Kara Scannell
Staff Reporters - The Wall Street Journal
May 1, 2003

Visa USA Inc. agreed Wednesday night to pay retailers $2 billion to settle a high-stakes lawsuit over debit-card fees, people familiar with the case said, a move that will eventually allow retailers to put a squeeze on the profits banks wring out of the nation's checkout counters.

The settlement follows Monday's news that MasterCard International Inc., a co-defendant in the case, had agreed to a $1 billion settlement. Both Visa USA and MasterCard agreed to pay $25 million upfront, and lower the fees they charge for most debit-card use beginning Aug. 1, these people said.

"We are confident merchants will continue to accept the popular debit card, providing customers with the widest array of payment options," said Visa spokesman Daniel Tarman. "And we are pleased that our card holders will continue to enjoy all the benefits and features Visa cards offer."

Credit-card experts expect the case to unleash drastic changes in the way retailers process plastic -- which could include higher credit-card fees, a boon for some smaller industry players, and fundamental changes in the way consumers use debit cards.

Currently, Visa and MasterCard have the power to insist that retailers accept their debit-card fees, or risk losing the ability to accept Visa and MasterCard credit cards. The settlements require both card associations to end that policy, although it was unclear Wednesday night what the new policies will be.

"There's blood in the water," says David Schneider, executive vice president of corporate development for Pulse EFT Association, a company that processes debit-card transactions. "The retailers are going to seize on that."

Merchants currently are required to allow holders of Visa and MasterCard debit cards to sign for their debit-card purchases, a practice that obligates merchants to route the transactions through the card associations' own systems. Those networks are more expensive than alternative networks, which use personal- identification numbers instead of signatures.

The settlements will put an end to both card associations' power to force merchants to accept their debit cards, and are likely to make pricier signature- based transactions far less viable in the marketplace. Merchants will gain more freedom to run debit-card transactions through alternative networks like Star, Pulse or NYCE, whose costs average about one-third as much as signature-based debit-card fees.

Analyst Howard K. Mason, who follows the industry for Sanford C. Bernstein & Co., expects to see signature-based transactions plunge from their current level of about two-thirds of all debit-card transactions. Eventually, he says, such transactions are likely to become a mere niche in the marketplace, favored perhaps by restaurants or retailers that choose not to offer PIN systems.

"Very posh restaurants may feel it's gauche to present you with a PIN pad," he notes. "But I must tell you, if you go to a posh restaurant in France, they'll present you a PIN pad."

An end to the ability of Visa and MasterCard to force signature transactions on retailers is likely to unleash heated competition among the networks that process PIN transactions, leading to lower fees. This will be a boon for these independent networks, which are likely to pick up considerable traffic.

Some industry experts expect the card associations and their member banks to compensate for eroding debit-card fee revenue by jacking up fees charged to merchants on credit-card transactions. If such increases materialize, they are likely to benefit card issuers like American Express Co., Mr. Mason predicts, which will be able to raise prices, as well.

Some merchants are less likely to protest such increases, Mr. Mason maintains, because credit cards allow consumers to buy more than they otherwise might. Others say the card companies could now be vulnerable in the core credit-card market as well. The merchants, having achieved a victory in debit cards, could now feel emboldened enough to take on Visa and MasterCard in their core credit- card market.

The current court case has "galvanized the merchant community," said Mr. Schneider at Pulse. It has "created a coalition of merchants who are now very focused on these issues and it will be difficult to shake that going forward."

News that Visa had entered settlement talks came Wednesday just moments before opening arguments were scheduled to begin in federal district court in Brooklyn, N.Y. Judge John Gleeson told a packed courtroom that the parties were engaged in "earnest and good-faith efforts" to reach a settlement. To give the parties breathing room to complete the discussions, he adjourned the court session until Friday morning.

Visa had been under pressure to negotiate since Monday's settlement. Terms of the Visa settlement mirrored that of the MasterCard deal, except for the size of the payment, the people familiar with the matter said. Because Visa does more signature-based debit-card volume than MasterCard, retailers were able to extract from Visa double what they received from MasterCard. Both Visa and MasterCard agreed to end their "honor all card" policies that require merchants to accept their debit cards. It is unclear what new agreements they will forge with retailers in take their place.

If Visa had gone forward with a trial and won, the verdict could have been bogged down for years in appeals. That delay might have placed Visa at a competitive disadvantage, some observers say, because merchants might have steered retailers to use MasterCard debit cards over Visa's.

Earlier Wednesday, Lloyd Constantine, who represents the retailers, characterized the MasterCard pact as an agreement in principle. "We're currently finalizing the memo of understanding, which will then be turned into a formal settlement agreement, which would be taken to the judge for his approval in the next few weeks," he explained.

Visa, Retailers Work to Settle Suit Over Debit-Card Policies
By Kara Scannell - Staff Reporter - The Wall Street Journal
April 30, 2003

BROOKLYN, N.Y. -- Visa USA is in settlement talks with retailers to end a lawsuit over the fees paid in debit-card transactions.

Details of the negotiations came moments before opening arguments in the years-long lawsuit were to begin in federal court. Two days earlier, Visa's co- defendant, MasterCard International, bowed out of the legal fight and cut a deal with the retailers.

Judge John Gleeson announced before a packed courtroom that the parties were engaged in "earnest and good faith efforts" to reach a settlement. He said he "applauded those efforts." To give the parties breathing room to complete the discussions, he adjourned the court session until Friday morning.

Lawyers for Visa and the merchants declined to comment outside the courtroom.

On Monday rival MasterCard agreed to pay $1 billion and lower the fees it charged to retailers to settle the lawsuit, according to people familiar with the decision.

At the heart of the dispute is Visa and MasterCard's "honor all cards" policy. That practice, a cornerstone of the card business, meant that merchants had to accept Visa and MasterCard branded debit cards, even though they often meant higher fees.

Debit cards, the fastest-growing part of the card market, deduct cash for a transaction directly from a cardholder's bank account, rather than billing the purchase to a credit-card account that charges interest.

Retailers including Wal-Mart Stores Inc. and Sears, Roebuck & Co. brought the suit in 1996.

Visa Debit-Card Trial Adjourned for Settlement Talks
By Bob Van Voris - April 30, 2003

New York, April 30 (Bloomberg) -- Visa USA Inc. and Wal-Mart Stores Inc. got more time to settle their antitrust dispute over debit-cards after the judge in charge of their trial adjourned it before opening arguments.

The adjournment followed settlement negotiations between the two sides that lasted past midnight. The delay, which will last until Friday, came two days after MasterCard International Inc., the No. 2 credit-card company, settled its part of the case.

An estimated 5 million merchants, led by Wal-Mart, sued Visa, the world's largest credit-card company, and MasterCard in 1996. Retailers, who claim more than $39 billion in damages, want to void a rule that makes them take debit cards if they accept the companies' credit cards. Debit transactions authenticated by a signature can cost as much as 10 times more than those that use a personal identification number, or PIN, the merchants claim.

U.S. District Judge John Gleeson, who ordered the adjournment, told lawyers and journalists who packed his Brooklyn courtroom that the two sides ``were engaged in earnest and good-faith efforts'' to resolve the case.

Settlement talks were ``serious,'' said Lloyd Constantine, a lawyer for the retailers. Any settlement with Visa will not be linked to the one with MasterCard, he said.

Daniel Tarman, a spokesman for Visa, declined to comment.

The merchants' suit targets the two companies' "honor all cards'' rule. It requires merchants that take Visa or MasterCard to accept all cards with the companies' logos, including debit cards.

MasterCard's Settlement

MasterCard agreed to pay retailers $1 billion and to cut debit-card transaction fees, to be introduced within a few months, according to people familiar with the settlement. The agreement allows merchants to reject debit transactions authenticated with customer signatures, the people said.

MasterCard's agreement strengthens the merchants' position in bargaining for a settlement with Visa, lawyers said. Retailers have a minimum amount they can demand in any negotiations, making settlement talks more costly and difficult for Visa, which has twice the market share of MasterCard.

Consumers used Visa and MasterCard debit cards to make $317.8 billion in purchases last year, yielding $4.8 billion in fees for banks that issued the cards, according to the Nilson Report, an industry publication.

Gleeson recently made it easier for retailers to make their case. He ruled April 1 that credit and debit cards are separate products, a key requirement to establish the merchants' antitrust claim that the two products were illegally linked. He also said Visa's credit-card market share was so large that it could force merchants to take an unwanted product.

If the Trial Resumes

Should retailers not reach a settlement and show at trial that linking acceptance of credit and debit cards violates U.S. antitrust laws, they could refuse to accept debit transactions that require a signature. Merchants, including Sears, Roebuck & Co., Circuit City Stores Inc. and Safeway Inc., could instead encourage customers to use those validated with PINs, which carry lower fees. That would mean a drop in revenue for Visa and MasterCard member banks.

The retailers have argued that Visa and MasterCard undercut debit-card competition from regional networks such as Concord EFS Inc.'s Star Systems Inc. and First Data Corp.'s NYCE Corp. Visa has said that, at trial, it would point to a fast-growing market in PIN-based transactions to rebut that claim.

Visa and MasterCard promoted debit cards that require a customer's signature, setting higher fees for banks to charge than competing networks that process cards authorized by PIN. Debit cards draw funds directly from the user's bank account. Credit cards provide users with short-term loans.

Retailers Win $1 Billion Accord Through
MasterCard Settlement
By Jathon Sapsford and Kara Scannell, Staff Reporters
The Wall Street Journal
April 29, 2003

MasterCard International Inc. broke with Visa USA Inc. and agreed to pay the nation's biggest retailers about $1 billion to settle a lawsuit against the two credit-card behemoths over the fees they charge.

The agreement could mean lower prices for consumers and lower earnings for the banks that are part of the credit card association that issues MasterCards. The retailers who brought the lawsuit, including Wal-Mart Stores Inc., Sears, Roebuck & Co. and others have said that a victory in the case would mean merchants would pay less to banks and card associations, and that they would be free to pass those savings on to their customers.

While terms of the settlement weren't disclosed, people familiar with the matter confirmed that it involved damages of about $1 billion. It isn't clear whether the settlement will be paid completely in cash.

It also leaves Visa, the other large credit-card brand jointly owned by member banks, alone to face the retailers at trial in New York federal court.

Many of the nation's biggest banks will feel the impact of the settlement. Though banks such as J.P. Morgan Chase & Co. and Bank of America Corp. won't have to shoulder any of the direct settlement cost, which will be covered by a MasterCard reserve that will be paid out over time, they probably will face a significant cut in some revenues. That is because retailers now will have greater freedom to route certain MasterCard transactions over networks that are cheaper to merchants -- and thus bring in less money to the banks.

At the heart of the dispute was MasterCard's "honor all cards" policy. That practice, a cornerstone of the card business, meant that merchants had to accept Visa and MasterCard branded debit cards, even though they often meant higher fees.

Debit cards, the fastest-growing part of the card market, automatically deduct cash for a transaction directly from a cardholder's bank account, rather than billing the purchase to a credit card account that charges interest.

But merchants often are expected to clear Visa and MasterCard debit-card transactions through the Visa and MasterCard routing systems, requiring a customer signature rather than the cheaper alternatives that require
personal- identification numbers.

On a typical $100 transaction, it costs a merchant $1.49 to route a debit-card transaction through the Visa or MasterCard credit card network, compared with nine cents to route the same transaction through a rival system operated by First Data or others.

Merchants said they are forced, unfairly, to pay those higher costs by the policies of Visa and MasterCard, under which a retailer that accepts the brand's credit cards must also accept that brand's debit cards. The merchants want the right to refuse the debit cards because of their higher fees.

Terms of the MasterCard accord weren't disclosed. U.S. District Court Judge John Gleeson of the Eastern District of New York in Brooklyn ordered the terms to be kept under seal so as not to prejudice a jury that will still need to deliberate the case against Visa. MasterCard, based in Purchase, N.Y., declined to provide details of the settlement. Visa said in a statement that it planned to press on with its case.

Analysts following the case, though, say the settlement is a clear victory for the retailers. Though the $1 billion settlement is less than the $5 billion to $25 billion in combined damages that the credit-card industry had been bracing for, the retailers accepted a lower amount in exchange for MasterCard's easing of its "honor all cards" policy.

The lawsuit over the fees originally was filed in 1996 by a number of retailers who claimed they were paying too much for debit-card transactions. The case has been repeatedly delayed by a series of pretrial motions. Most recently, Judge Gleeson denied a request by MasterCard to be tried separately from Visa.

By settling, MasterCard has achieved the separation that it failed to get through those motions. The move will mean that Visa now will fight off the assault from the retailers on its own. Visa has shown little sign that it plans to reach a deal with the plaintiffs.

"Visa is focused on demonstrating at trial that our practices are legal, appropriate and in the best interest of consumers," the Foster City, Calif., credit card association said in a statement.

According to people familiar with the matter, Judge Gleeson has been unusually tough with both parties, seeking to force a settlement rather than pursue a protracted trial. Lawyers involved say Judge Gleeson has been pressing each side to reach an agreement for weeks. He has told the parties that the lawyers would be held to strict guidelines meant to speed the case along.

Outside of the courtroom Monday, Lloyd Constantine, the lawyer representing the retailers, said the settlement discussions had been going on at an intense pace "for the past five days." Just when the plaintiffs and both Visa and MasterCard were scheduled to go through the jury-selection process, the judge surprised a packed courtroom with the settlement announcement. Opening arguments in the retailers' case against Visa have been postponed until Wednesday. Mr. Constantine declined to comment on the settlement.

Experts following the case said that MasterCard, which has a smaller debit-card program than Visa, had an incentive to separate itself from Visa because its share of any plaintiff demands for damages, if weighed alone, would be smaller. That is, in part, because MasterCard has been achieving much of its growth in recent years in its core credit-card market, and has been putting less emphasis on debit cards than Visa.

MasterCard, for the first time in 25 years, has more than half of the total of the combined market for credit cards branded with either Visa or MasterCard, according to the Nilson Report, a trade journal that follows the card industry. Add to that a rising brand image thanks in part to a successful television-ad campaign, and industry analysts say that MasterCard had every reason to back out of the case and settle.

The basic allegations raised in the suit by the merchants apply to both Visa and MasterCard. With one party, MasterCard, effectively conceding defeat, it raises the pressure on Visa.

But few expect Visa's strategy to change much as a result of the settlement. "I don't think it will change the trial strategy for the defendant. They have an argument they want to persuade the jury to go with," said Joseph Cohen, a partner at Beirne, Maynard & Parsons, a Texas law firm that isn't involved in the suit.

Although no banks are named in the lawsuit, the suit's outcome will nevertheless affect them, since Visa and MasterCard both are associations owned by the thousands of banks that issue the cards.

Wall Street brokerages say if Visa also settles or loses the case, earnings at the big banks that issue Visa cards such as Bank of America or Wells Fargo & Co. could drop by as much as 1% to 2% a year. The banking industry has declined to comment on the suit.

The credit-card market is still bigger than debit cards, with about $1.2 trillion in purchase volume last year, compared with $480 billion for debit cards. But the growth is in debit cards. Transactions with those cards have been jumping by as much as 24% a year in recent years. That is more than three times the 7% growth rate in credit-card usage, according to the Nilson Report.

Employees Don't Want to Pay More for Healthcare-Survey
By Johanna Bennett - Dow Jones Newswires
April 29, 2003

NEW YORK -- If employers expect their workers to help them curb health-care costs, they are going to face a hard sell.

According to a survey by human resources consultant Towers Perrin, to be released Tuesday, even though employees agree that rising health-care costs are a problem, they don't believe it's their problem to fix.

Entitled "Keeping Employees Engaged About Health Care," the survey found that while the vast majority of employees agree that health-care costs are outpacing inflation and hurting profits, less than half of them believe that the companies they work for are unable to absorb the higher costs or that it is fair to ask workers to pay more out of pocket.

"This is a legacy of the historic view that health-care benefits are an entitlement that employers should provide regardless of the cost," said Rich Ostuw, senior consultant at Towers Perrin.

The schism between employers and employees comes as corporate attitudes towards health-care benefits are starting to shift.

"There is a real disconnect (between employees and employers), said Alwyn Cassil, spokeswoman for the Center for Studying Health System Change, a Washington, D.C.-based health-care policy research group.

In the late 1990s, corporations were willing to swallow rising health-care costs, helped by rising profits and the savings generated by HMOs. But after four consecutive years of escalating, double-digit premium hikes and faced with depressed profits, employers want workers to share more responsibility for medical costs and become more effective consumers.

"Employers have for better of worse created very high expectations about healthcare benefits," said Larry Boress, vice president of the Midwest Business Group on Health, a Chicago-based coalition of employers in an 11-state region whose members include Sears Roebuck & Co. (S), Ford Motor Co. (F) and 3M Co. (MMM). "But now you have the economy causing problems and employers are struggling to make ends meet."

Known as "consumerism," the trend is the latest strategy that employees and health insurers are embracing to curtail runaway health-care inflation.

This year alone, health-care costs have increased an average of 15%, and in some cases more than 25%. Driving those costs are new and more expensive medical technology, new drugs and more visits to hospitals and physicians, some of whom are charging higher fees.

Out-of-pocket costs for many employees rose as companies hiked deductibles and co-payments or asked workers to pay a higher portion of premiums. But these expenses are often only a small fraction of what the employer pays to provide workers with health-care coverage or how much medical treatment actually costs.

Meanwhile, employers have generally done a poor job of educating employees about the gap, according to health-care experts. And it is coming back to haunt them as labor unions and management begin fighting over efforts to change or scale back employee and retiree benefits, said Helen Darling, president of the Washington Business Group on Health, an advocacy group for business based in Washington, D.C.

"We are going to have labor strikes in the next two years because of this," Darling said.

Only 46% of employees surveyed by Towers Perrin said they believe that employers are unable to absorb higher health-care costs. And around the same portion said it is unfair to ask employees to pay more for their benefits.

Younger workers are even less inclined to support sharing cost increases. Only 28% of employees under the age of 35 thought it was fair to be asked by their bosses to consume some of the annual cost increase, compared with 50% of older workers.

"The issue of getting affordable and appropriate healthcare is on everyone's mind....There is no one party alone who is responsible if this is going to work," said William McGuire, chief executive of UnitedHealth Group (UNH), the nation's largest health insurer.

New types of health plans, such as the special health-care account that some employers give workers to pay medical costs and tiered hospital plans offer financial incentives to those who are able to keep their health care spending under control. Meanwhile, a number of insurers and other companies are developing Web sites and other services that offer health advice and cost and quality information about doctors and hospitals.

And a growing number of employers are investing in toll-free telephone numbers for medical advice, dispensing consumer help books and even investing in health-care coaches.

"All of us as individuals need to be more educated and involved in the process," said McGuire. "Employers are taking the time and making the effort to make information available to employees, just as employees are making efforts to access information."

MasterCard Settles Suit Over Debit-Card Policies
Wall Street Journal Online News Roundup
April 28, 2003

NEW YORK -- MasterCard International reached a last-minute settlement with Wal-Mart Stores Inc. and thousands of other retailers over the card issuer's debit-card policies, a federal judge said Monday.

The surprise announcement by U.S. District Judge John Gleeson, coming just as the trial was set to begin, left Visa USA as the remaining defendant in the closely watched lawsuit.

Judge Gleeson gave no details of what he called the "11th-hour settlement," saying only: "The case is settled as to MasterCard." He ordered MasterCard, Wal-Mart and other plaintiffs in the suit not to speak publicly about the settlement.

"I don't want this jury pool tainted by that," the judge said, before he began questioning potential jurors for what was left of the suit. Opening arguments were expected later Monday in Brooklyn federal court.

A MasterCard spokeswoman in the courtroom declined comment on the settlement, citing the judge's order. A Visa spokesman also declined comment.

The case centers on how stores process transactions made with debit cards -- the highly popular plastic cards that deduct cash from consumers' existing bank accounts, rather than building up their debt with credit accounts. The retailers claim Visa and MasterCard have tried to monopolize the fast-growing market by charging excessive fees and restricting competition.

When the debit card was introduced years ago as an alternative to credit, Visa and MasterCard developed their own versions that carried their logos but cost merchants more in fees. They insisted merchants accept any card, whether debit or credit, so long as it carried the Visa or MasterCard brand.

Retailers, though, say that has forced them to pay excessive fees to Visa and MasterCard, rather than routing customers through less-costly alternatives. As a result, the retailers are seeking to end what Visa and MasterCard call the "honor all cards" policy. They also will ask the court for compensation for years of paying outsize fees to the card associations and their banks.

Earlier this year, MasterCard told the judge it wanted a separate trial, claiming retailers had failed to produce credible evidence that it joined in a conspiracy with Visa to monopolize the debit-card market. The judge denied the motion.

Lawyers for the merchants have declined to place a dollar figure on damages they will seek if they prevail at trial, but some independent analysts said Visa and MasterCard could have been liable for as much as $45 billion.

As Judge Gleeson interviewed possible jurors Monday, he told each of them the trial could last through the end of July. Any verdict could be delayed for years on appeal, analysts have speculated.

Big Credit Card Suit Goes to Trial
By Jennifer Bayot - New York Times
April 28, 2003

When consumers use debit cards to make purchases, they face a simple choice: to sign for the purchase or to punch in a personal identification number.

Most consumers are scarcely aware that their decision is at the center of a large class-action lawsuit, starting trial today in Federal District Court in Brooklyn and pitting the nation's retailers against Visa and MasterCard. The dispute is over whether the card companies can compel merchants to accept their debit cards, which, when processed with signatures, have much more expensive service charges for the merchants than the PIN-based cards.

Each side in the six-year-old lawsuit lays claim to consumers' best interests. Led by Wal-Mart and Sears, Roebuck, the retailers say that the credit-card networks are charging them excessive transaction fees that they must pass on to their customers. The card companies respond that merchants are trying to stifle consumer choice and to dodge a legitimate and reasonable cost of doing business. Both sides say the outcome will shape how consumers use debit cards in the future, and experts following the case agree.

"It's a tremendously important case to consumers," said David Balto, an antitrust lawyer and a former director of policy at the Federal Trade Commission. "Visa and MasterCard together dominate a core consumer industry in a way that no company has since AT&T. Not even Microsoft."

If the retailers win, Mr. Balto said, "it's going to dramatically change competition in credit cards and debit cards. In the same way that the AT&T case led to a world we couldn't really imagine back then, so will this case."

The retailers want not only billions of dollars in damages � estimates range from $4 billion to upwards of $24 billion � but also to overhaul their fee arrangements with Visa and MasterCard.

PIN-based transactions are routed through regional debit networks, which instantly withdraw funds from customers' bank accounts and charge merchants about 15 cents for a $100 purchase. A signature-based, or off-line, purchase goes through Visa or MasterCard's network and costs vendors 10 times as much� at least $1.50 for a $100 sale. The merchants say they must charge higher prices as a result. Signed transactions are also more prone to error and take a day or two to post.

In their lawsuit, the merchants are challenging the networks' "honor all cards" policy, under which retailers who want to accept their credit cards must also accept their debit cards. The requirement is legal, Visa and MasterCard argue, because the two types of cards are part of a broader market for payment options.

In 2001, there were more than $386 billion in debit-card transactions; Visa and MasterCard's off-line debit offerings accounted for about 70 percent of them. At the same time, the regional networks are growing faster, which may weaken the merchants' argument that Visa and MasterCard's rules have stifled competition.

Both sides are fighting over the debit-card transaction fees outside of the courtroom as well. In January, the National Retail Federation, Food Marketing Institute and International Mass Retailers Association began a campaign entreating consumers to punch in their pass codes when they use their debit cards.

Meanwhile, to entice customers to sign for purchases, MasterCard last winter counted each debit card transaction as an entry in a cash sweepstakes, but only if it was signature-based. Using the same condition, some banks have started allowing debit cards to earn airline miles.

Many banks that issue Visa or MasterCard debit cards charge customers as much as $1.50 every time they enter their PIN's at checkout, according to a survey released this month by the New York Public Interest Research Group.

The lawsuit's momentum � many thought it would never reach trial � may reflect a shift in how Visa and MasterCard's payment networks are viewed. Antitrust experts say that the rules governing the network may be outdated and stifling to competition now that the Visa and MasterCard dominate the industry.

Behind AMR, a Chairman Who Flies in All Directions
By Micheline Wayward - New York Times
April 28, 2003

AMR Corporation, parent of American Airlines, reached deep into the corporate playbook by naming Edward A. Brennan chairman after the resignation of Donald J. Carty as chairman and chief executive.

The appointment is being viewed within the industry as providing a seasoned executive to shore up the relative inexperience of Gerard J. Arpey, the new chief executive.

Although Mr. Arpey has spent 20 years at American, and is a second-generation airline executive whose father held positions at T.W.A. and Continental, he has only been president of American for the last year. General Motors made a similar move more than a decade ago when it appointed John Smale, a seasoned executive, to oversee its new president, John F. Smith Jr.

The appointment will mean other changes to the busy schedule of Mr. Brennan, 69, the former chief executive of Sears, Roebuck. He currently sits on five boards in addition to AMR, where he has been a director for the last 16 years. Although he is no longer a director at Sears, Mr. Brennan is a member of the boards of Allstate, the insurance company spun off to Sears shareholders; McDonald's; Exelon; 3M; and Morgan Stanley.

Mr. Brennan signaled this weekend that he would resign from some of the boards he sits on to concentrate on American.

"He recognizes that he can't do everything," said Gus Whitcomb, a spokesman for the airline, adding that Mr. Brennan had not determined which board seats or how many seats he would give up.

Mr. Whitcomb said the speed with which Mr. Carty departed and the appointments meant the airline was still sorting a number of corporate governance issues. "It came about quickly," he said. Mr. Brennan and Mr. Arpey were named to their jobs Thursday, in the midst of union outrage over retention bonuses and $41 million in funding to a pension plan for seven senior executives, including Mr. Carty and Mr. Arpey.

American's unions had agreed to wage and benefit concessions the airline maintained were critical for it to avoid filing for bankruptcy protection. American has since canceled the bonuses but the pension funding remains in place. Mr. Brennan sits on the board's compensation committee, which approved the plan.

While Mr. Brennan's new role has not yet been defined, some retail industry analysts wondered whether his track record as Sears chief executive would help or hurt Mr. Arpey. While at Sears, Mr. Brennan drew shareholder ire for the struggling fortunes of its retailing operations, at a time when its nonretailing subsidiaries � Allstate, Dean Witter and the real estate company Coldwell Banker � were enjoying success.

Mr. Brennan bowed to the criticism by spinning off Dean Witter and Allstate, selling Coldwell Banker, and bringing in Arthur C. Martinez, a former Saks Fifth Avenue executive, who succeeded Mr. Brennan in 1995 and who is credited with completing the turnaround of Sears.

Burt Flickinger III, managing director of the Strategic Resource Group, a retailing industry consulting firm, doubted Mr. Brennan would be a great help to American. "All the things that saved Sears did not happen on Ed Brennan's watch," he said. "You've got a guy who's been a good soldier on a lot of good boards, but the consummate Ronald Reagan-type that everybody likes. He's not the Gen. George S. Patton Jr.-type, able to dig a great corporation out of the ditch and get it back on the runway and flying again."

But Michael Useem, professor of finance at the Wharton School of Business at the University of Pennsylvania, said Mr. Brennan's experience at Sears, and his presence on boards like 3M, which has been through its own turnaround efforts, and McDonald's, which is trying to regenerate itself, ultimately could help the airline. Mr. Brennan could provide Mr. Arpey with management tips to which he might otherwise not have access, given his age, 44, and lack of experience.

"It's better than any management book you could read,'` Professor Useem said.

American's naming of Mr. Brennan mirrors what happened at General Motors in 1992. A group of outside board members, upset with G.M.'s billion-dollar losses and shrinking market share, voted to oust G.M.'s chairman and chief executive, Robert C. Stempel. The board named John F. Smith Jr. as president and chief executive, and John Smale, the retired chief executive of Procter & Gamble, as its chairman.

That move, considered a ground-breaking event in corporate governance, was the first time since the 1950's that the G.M. chief executive did not hold the chairman's job. Mr. Smith, a decade older than Mr. Arpey is now, had only been G.M.'s president for six months when he was promoted.

While Mr. Smale played a low but active role in company affairs, he was in contact with Mr. Smith on an almost daily basis by telephone or fax, and his influence was most greatly felt in the marketing operations of G.M.

The G.M. directors were advised in their efforts by Ira M. Millstein, a senior partner at Weil, Gotshal & Manges, who has since become an authority on governance issues, arguing strenuously in favor of independent boards. The law firm also advises American, leading to speculation Mr. Millstein might have played a role there, too. He declined comment Friday, citing the firm's relationship with the airline.

Mr. Brennan's board seats present another issue the airline must tackle, corporate governance experts said. Of his directorships, his seat on the board of Morgan Stanley presents the greatest potential for conflict, they said. Morgan Stanley serves as a financial adviser to AMR, and its chief executive, Philip J. Purcell, sits on the AMR board.

Morgan Stanley could not be reached for comment.

Moreover, Mr. Purcell was hired by Mr. Brennan to run Dean Witter, the brokerage firm that Sears purchased in 1981, and which Morgan Stanley subsequently acquired. Dean Witter used holders of the Sears credit card as its basis for subscribers when it introduced the Discover card.

Professor Useem said the issue was less critical before Mr. Brennan was named American's chairman.

But, he said, "In this era of squeaky clean governance where everybody has to strip down to their underwear, to have Ed Brennan on Morgan Stanley's board and Phil Purcell on AMR's board would appear to the naked eye that the relationship is not one of arm's length and sufficient independence."

Likewise, Mr. Brennan's elevation should automatically cause him to review his board seats, said Carol Bowie, director of corporate governance research at the Investor Responsibility Research Center in Washington.

"In best practices in governance, somewhere between five and seven should be the maximum number of board seats held by a retired person who doesn't have a regular day job. If someone has a day job, certainly a maximum of three," Ms. Bowie said. She added that Mr. Brennan is well regarded as a director.

"Depending on how extensive his duties might be, it may well be expected that he would pull back from his other board duties," she added.

Mr. Whitcomb at American said the airline did not know how actively Mr. Brennan would participate in company affairs. He also said American had not yet given new committee assignments to directors. "Those issues have still not been decided," Mr. Whitcomb said.

Mr. Whitcomb also said the airline's board had not decided on a severance package for Mr. Carty, 58, a veteran of more than 20 years at American. He earned $811,000 in 2002, and based on calculations that credit him for 31 years of service, is theoretically eligible for a pension of $1 million a year.

American is not required to disclose the package until it releases its proxy statement for 2003 next year. But analysts said the airline might make it public as soon as it is determined so that the issue is behind it quickly.

Sears Ads Shift with New Strategy
Campaign puts focus on value, variety of brands
By Jim Kirk, Tribune staff reporter - Chicago Tribune
April 28, 2003

Sears, Roebuck and Co., struggling to find its niche in the increasingly crowded retail world, returns this week to a price-and-value message in its advertising.

It's a strategy that the Hoffman Estates-based company, the nation's No. 3 retailer, hopes will clearly define its image to customers and turn around a sales slump.

But while some retailers, such as Target Corp., have embraced hip, image-based advertising to attract a diverse customer base, Sears is trying what could be called the "anti-Target" strategy: focusing exclusively on products and value.

The campaign, the creation of Young & Rubicam's Chicago office, will revolve around the tagline, "Sears. Good life. Great price." The message will show up in all of the retailer's marketing communications, from print and broadcast advertising to in-store promotions, said Janine Bousquette, Sears' chief marketing officer.

"It's more than an ad campaign. It's the fundamental premise of the franchise," Bousquette said. "This campaign is very clearly focused on establishing what makes Sears different and relevant. It's a clear celebration of the breadth of our products."

Whether consumers will feel that way is the question. The new campaign is Sears' fourth major advertising about-face since the late 1990s, after the company dumped its "Softer Side" strategy to return to more of a full-store marketing focus. Critics say the many changes resulted in customer whiplash, which they contend has been partly responsible for repeated sales declines at the 872-store retailer.

The new campaign, in fact, resurrects part of an old message--Sears' "Good Life at a Great Price" tagline that was shelved a few years back.

Sears executives wouldn't comment on the cost of the new campaign. But the retailer spends close to $1 billion a year on advertising.

Sears executives know they have a lot riding on the new message. With sales down and intense competition from retailers, including Wal-Mart Stores Inc. and Home Depot Inc., pressure is building on Sears Chief Executive Alan Lacy to produce a turnaround.

The new work also comes only weeks after Sears announced it would sell its huge credit card business, which has put even more pressure on management to fix the retail operation.

As part of his plan to overhaul the company, Lacy recently began an extensive store renovation, with changes that include centralizing checkout lanes and reducing some poor-selling merchandise.

Lacy bought catalog retailer Lands' End to improve Sears' apparel offering. And he overhauled his management team, adding Bousquette, formerly of eToys and PepsiCo, and Mark Cosby, a former KFC executive who is Sears' president of full- line stores.

Bousquette, who joined last fall, promptly ordered up new advertising in a creative shootout between her two ad agencies, Young & Rubicam and Ogilvy & Mather.

While the new campaign is Y&R's work, both agencies will continue to work on their pieces of Sears' business. O&M, for example, will still work on Sears' Craftsman and Kenmore brand advertising.

The new campaign has a more urgent, retail feel and is a stark departure from Sears' message during the past 18 months. Gone are the fun, quirky vignettes that characterized Sears' advertising during the "Sears. Where else?" campaign.

Though that campaign gave the Sears brand some personality, the new management team didn't think it was sufficiently driving sales.

The new campaign seeks to tell consumers that Sears offers an array of brands.

In one spot for its appliance brands, a voice asks, "Do you have a big family ... or a small family?" The ad shows a large family standing around a washer and dryer. It is followed by a scene showing only a mother and baby.

The voice then says, "Do you spend more time cooking ... or cleaning? At Sears, we know a lot about appliances and our customers." A montage of appliance brands scrolls across the screen. The ad goes on to say that Sears offers better service and selection.

If viewers aren't yet convinced that this is an ad for a retailer, it offers a price-match guarantee before ending with the new tagline.

Wal-Mart to Pay $750,000 Civil Penalty, Govt. Agency Says
Dow Jones Newswires
April 25, 2003

WASHINGTON -- Retailer Wal-Mart Stores Inc. (WMT) has agreed to pay $750,000 to resolve charges it failed to report exercise equipment hazards.

The Consumer Product Safety Commission said Friday the civil penalty resolves a lawsuit filed in May 2001 by the Justice Department on behalf of the safety agency.

In the suit, the government charged Wal-Mart with failing to report safety hazards associated with exercise gliders it sells.

"This case demonstrates that retailers, like manufacturers, importers, and distributors, are required to report consumer product defects and injuries to the Consumer Product Safety Commission in a timely manner, and that there are penalties for those who fail to do so," said Hal Stratton, the commission chairman.

"Prompt and timely reporting by companies will allow us to act swiftly to protect consumers from injuries," he said.

Under the law, manufacturers, distributors and retailers must immediately report product hazards to the CPSC.

The government charged Wal-Mart failed to report hazards with Weider and Weslo brand exercise gliders, despite knowing of at least 29 consumers injured while trying out the gliders in Wal-Mart stores across the country.

"The injuries included fractured vertebrae, herniated discs, and a compression injury to a woman's spine," the CPSC said.

The regulator says the lawsuit and civil penalty settlement represent the first time a retailer has been sued and paid a penalty for failing to report a safety problem where the retailer was not also an importer or private labeler.

Under the settlement, Wal-Mart also agreed to establish internal recordkeeping and monitoring systems to keep track of information about product safety hazards, the CPSC said.

A Wal-Mart spokesman couldn't immediately be reached for comment.

-By Jeff Bater, Dow Jones Newswires; 202-862-6616; Jeff.Bater@dowjones.com

Asked why the retailer settled, Wal-Mart spokesman Bill Wertz said the company shares the goal with the CPSC of product safety.

Wertz also said it wanted to avoid the costs of a trial.

"We acknowledged no wrongdoing," he said. "We believe we acted responsibly in this case."

AMR Seen With Smooth Management Change In Rough Times
By Ann Keeton - Dow Jones Newswires
April 25, 2003

CHICAGO -- Gerard Arpey, named chief executive officer at AMR Corp. (AMR), parent of American Airlines, is the logical choice to keep the troubled airline on course, industry experts said Friday.

Late Thursday, the world's largest airline said Donald Carty would step down as chairman and chief executive. Following a day-long board of directors meeting, the airline named board member Arpey, 44, as chief executive, and longtime director Edward A. Brennan, 69, former chairman and CEO of Sears, Roebuck & Co. (S), as chairman.

Arpey faces a difficult task.

Last week, the airline's fate was thrown into doubt when unions discovered that management had withheld information on perks for themselves while asking employees to take big cuts in pay and benefits. Carty, 56, said in a statement that he had resigned to improve employee relations and give the company the best possible change for long-term success.

Two of the airline's unions said Thursday they would accept new changes in concessions in their contracts, hoping the financially-strapped airline could avoid bankruptcy. But the third union, representing flight attendants, still hasn't weighed in. If the union turns down the contract, the company is expected to immediately make a bankruptcy filing.

On the Association of Professional Flight Attendants' hotline, spokesman George Price said Friday that membership still has specific concerns not shared by other unions about certain terms of the contract.

Arpey has come up through the ranks at American, with "airlines in his blood
- and in his brain," said industry consultant George Hamlin of Global Aviation Associates, Inc., in Washington, D.C.

Arpey was named president and chief operating officer of American last year after holding the posts of chief of operations and chief financial officer. His father is the retired head of Texas Air.

American has a strong culture for promoting management from within, Hamlin said, and that will likely continue. Brennan's appointment will give Arpey a chance to focus on day-to-day operations - no easy task since the airline is teetering on the brink of bankruptcy, and must patch up problems with its labor groups, he said.

"Brennan will give comfort to investors who think Arpey's hair isn't white enough to hold the top job," Hamlin said. In another year or two, Arpey will likely find a successor to take on more of his operations duties, Hamlin said.

Robert Crandall, former AMR chief, said recently he would come out of retirement to help the airline. Now, Hamlin said, with the resignation of Carty, who worked under Crandall, "this is really the end of the Crandall era." Hamlin began his own career in the airline business at TWA when Crandall was controller there.

Brennan has been on AMR's board for 17 years.

The main problem for Arpey, AMR's new CEO, is that he is one of the old guard, said airline consultant Mike Boyd, head of the Boyd Group in Evergreen, Colo.

As second in command under former CEO Carty, unions see Arpey as "one of the Carty Six" who kept benefits for themselves while saying they would share sacrifices with the rank and file. "The one thing that American has always had is an esprit de corps - employees always felt like they were just a little bit better than other airlines. Now that they don't trust management, I think that's been lost," Boyd said.

Executives at the pilots and mechanics unions quickly came on board with management on new contract changes Thursday. "They understand that they need management to run the airline," Boyd said, but it doesn't mean unions are comfortable making the concessions.

Boyd said it would have been better for the company if AMR had sought a new CEO from the outside. "But at this point, who would take the job? No one wants to lead a company into bankruptcy," he added.

Ray Neidl, an analyst in New York with Blaylock & Partners, L.P., said the departure of Carty, an experienced airline executive, was "unfortunate" for the company, but called Arpey a good second choice. He said now it's up to employees to give a little to keep the company out of Chapter 11. If the flight attendants agree to a new contract and there's no employee unrest at the airline, "I would say there's only a 20% chance of bankruptcy," the analyst said. He said now "a lot depends on how service holds up."

Spokesman for the flight attendants union and the Transportation Workers Union of America, representing mechanics and other ground workers, couldn't immediately be reached for comment Friday. A spokesman for the pilots said he would comment later Friday after talking with union leaders.

As for Brennan, the incoming chairman capped a 37-year career at Sears with a nine-year stint as its chairman and CEO. By the time he retired in 1995, Brennan had overseen the spinoff of the company's Dean Witter banking and brokerage business, Coldwell Banker real estate unit, Discover credit card, and Allstate insurance unit.

While Brennan had transformed a conglomerate into a company focused once again on its original retail business, Sears remained unwieldy and unfocused amid competition from a new generation of retailers led by Wal-Mart Stores Inc. (WMT). Turnaround efforts by his successors, Arthur C. Martinez and Alan J. Lacy, have been inconclusive.

Whatever his record as a chief executive, Brennan's credentials as a board manager are unassailable, said Sid Doolittle of McMillan-Doolittle, a Chicago retail consultant.

"Board management is about skill and sensitivity, and bringing about consensus at a serious time," Doolittle said. "That has nothing to do with running an airline, it has to do with managing a group of businessmen. Does he have that skill? Absolutely."

While Brennan has no experience running an airline, "he's been on the board so long that you can't exactly call him an outsider," said David Stempler, president of the Air Travelers Association, an advocacy group in Washington, D.C.

Stempler said there is precedent for outsiders joining the top ranks of airline management. "Leo Mullin came to Delta with a lot of experience in customer management," he pointed out. Delta Air Line's (DAL) chairman and chief executive previously held posts at banking and utility companies.

Mullin, too, recently came under fire for accepting hefty compensation as the airline was losing money but, unlike Carty, he survived the storm.

"What happened to Carty is really Shakespearian," Stempler said. "He was very highly thought of in Washington, and now he slips on a banana peel."

Carty's disclosure missteps will likely cost the airline millions of dollars, Stempler said, since the company sweetened union contracts Thursday to keep workers from a new vote on deals they ratified a week ago.

Recent corporate scandals have made businesses more sensitive to criticism, Stempler said, adding, "In another climate, the company might have worked harder to keep Carty." He noted that the controversial employee retention packages at AMR were added at a time when the company had lost some key executives. If management had been upfront with employees, it have been able to make a case for the executive perks, but as in other cases "it was the cover-up that killed them," Stempler said.

Brennan at American Controls
Former Sears Chief Takes Interim Post as
Airline's Executive Chairman

By Jim Kirk and Lorene Yue, Tribune Staff Reporters.
Tribune staff reporter Bruce Japsen contributed to this report
Chicago Tribune - April 25, 2003

From stocks and socks to airplanes and a possible bankruptcy.

Former Sears, Roebuck and Co. CEO and native Chicagoan Edward Brennan is in the spotlight once again after being named executive chairman of troubled American Airlines.

Brennan, who left Sears in 1995 after running the retailer for nearly a decade, was named to the post late Thursday after CEO Don Carty was forced out by the board. The airline's president, Gerard Arpey, was tapped to become chief executive.

Brennan could not be reached for comment.

The most-tenured member of American's board, the 69-year-old Brennan is a logical choice to guide the airline and its board as they struggle to avoid a bankruptcy filing, observers said. Keeping Carty on board wasn't an option, they added, with enraged airline employees threatening to scrap $1.8 billion in previously-agreed-to wage cuts after learning of a management-benefits package critics said was deliberately kept secret.

"He has a calm steady hand. He has the patience to get the job done," said Andrew J. McKenna, chairman and CEO of Schwarz Paper Co., who has served with Brennan on several boards, including those of McDonald's Corp. and Dean Foods.

How long his tenure will run isn't clear; sources said the post is considered interim.

Still, although Brennan, whose grandfather worked with Sears founder Richard Sears, has never run an airline, nor a company in such straits as American, those who know him say he will be a plus for the beleaguered carrier.

"He is the perfect person to be in charge of something as important as American Airlines at a time things are not going well," said Dr. Larry Goodman, chief executive of Rush-Presbyterian-St. Luke's Medical Center in Chicago, where Brennan serves as chairman of the hospital's board.

Goodman said Brennan understands the complexities of running various businesses.

"He is an extremely quick study," Goodman said. "Each business has its own idiosyncrasies and he is sensitive to that."

Current Sears director and former Leo Burnett Co. CEO Hall "Cap" Adams said Brennan is "not one of those directors who talks just to hear himself talk."

"When he talks everyone shuts up." Yet Brennan doesn't arrive in the seat without controversy.

Brennan spent nearly four decades with Sears, Roebuck and Co., rising through the ranks from selling men's clothing in Madison, Wis., in 1956 to being offered a seat on the retailer's board of directors in 1978.

By 1986, he was chairing the company's board. His tenure at the top was marked by some of the toughest years Sears has weathered.

In the early '90s, the company was plagued by poor earnings, a weak economy, accusations that the auto-service division defrauded consumers and a whopping $2 billion bill at its Allstate insurance division to cover claims from Hurricane Andrew.

Those developments angered shareholders, leading one activist group in 1993 to demand that Brennan step down as chairman. As criticism mounted, he began untangling the company from some side businesses that Sears acquired under his watch.

That year, Sears spun off Dean Witter, sold 20 percent of Allstate Insurance to the public and sold Coldwell Banker Residential Services and Sears Mortgage Banking Group.

Analysts said he became too focused on operations and lost sight of changing tastes in the retail industry.

"He didn't have a total vision for more excitement," said veteran retail analyst Walter Loeb. "It was practically all focused on operations."

He retired in August 1995, turning over the top job to Arthur Martinez.

Copyright � 2003, Chicago Tribune

Retailers, Credit-Card Issuers to Battle in U.S. District Court
By Jathon Sapsford and Mitchell Pacelle - Staff Reporters
The Wall Street Journal
April 25, 2003

Lawsuit Over Debit Cards May Affect Nation's Banks

A long-running battle between retailers and the credit-card industry finally goes to trial Monday, in a case that could have financial implications for the nation's banks.

Retailers including Wal-Mart Stores Inc. and Sears, Roebuck & Co. have accused the two biggest names in credit cards, Visa USA Inc. and MasterCard International Inc., of using their dominance to charge excessive fees and restrict competition in the fast-growing market for debit cards. The trial will be held in U.S. District Court in New York City's Brooklyn borough.

Although no banks are named in the lawsuit, its outcome nevertheless may affect them, since Visa and MasterCard both are associations owned by the thousands of banks that issue the cards. The retailers are demanding billions of dollars in damages and stark changes to the lucrative fee arrangements that Visa and MasterCard have with their retailers. Banks could face some liability should a jury rule in favor of the retailers, though Visa and MasterCard officials both say they have strong cases and expect to prevail.

While victory for the retailers is by no means assured -- and any judgment for the retailers could be held up for years on appeal -- Wall Street analysts already are beginning to handicap the exposure of the banking industry.

"The key issues for banks revolve around their potential exposure to financial penalties and the extent to which lost fee revenue could impact earnings," said John McDonald, an analyst with UBS Warburg following the case. Mr. McDonald added that the potential impact of lost fee revenues could cut earnings at the top card-issuing banks -- including Bank of America Corp., Wells Fargo & Co. and Wachovia Inc. -- by 1% to 2%.

The retailers haven't publicly specified the damages they are seeking, but estimates range from $5 billion to $25 billion or more, according to people involved in the suit.

New York lawyer Lloyd Constantine, who represents the retailers in the case, declined to specify how much his clients are seeking, but says he isn't aiming to put either of the networks out of business. "What does it mean if you have a judgment of a gazillion dollars if you can't collect it," he said. "It means nothing. It's like Confederate money."

A verdict in favor of the retailers could mean Visa and MasterCard would have to tap their existing reserves and credit lines. A sizable damage award has the potential to overwhelm those resources, raising the possibility that the card associations would turn to their member banks to help cover the cost.

MasterCard's agreements with its member banks permit the association to assess fees to its member banks in such cases, though it has stopped short of saying it will do so. Visa says its board would have to decide whether member banks would have to pay if a damage award depleted Visa's resources. MasterCard's decision would also be up to its board.

But, Mr. Constantine says he is convinced he has legal grounds to go after member banks in the event that either association is unable to pay a sizable verdict. "But it isn't an open-and-shut case," he acknowledges.

James Hance, Bank of America's chief financial officer, addressed the industry's exposure during a conference call with analysts this month. "We think this has a long way to go," he said. "If there is some whopping massive settlement or something, does it [go] downstream? I don't know."

He added, however, that the impact could be offset by higher volumes, and that the bank doesn't believe the litigation "has a material impact on us."

Other bankers are weighing potential liability in relation to the size of their businesses. Citigroup Inc., for instance, has a credit-card operation that dwarfs its debit cards, meaning that its impact would likely be smaller.

And even if Visa and MasterCard do assess the banks, it is unclear whether the amount will be based on debit or credit volume. "I think we've got a long way to go on this one," said Todd Thomson, Citigroup's chief financial officer, in a conference call with analysts. Other issuers, including Wachovia and Wells Fargo, declined to comment.

Next week's trial caps a years-long battle for control of the lucrative fees generated by the use of plastic. Consumers use both debit and credit cards for millions of transactions every day, each of which drops another fee into the coffers of Visa, MasterCard and their member banks.

Retailers, though, say that has forced them to pay excessive fees to Visa and MasterCard, rather than routing customers through less-costly alternatives. As a result, they are seeking to end the "honor all cards" policy. They also will ask the court for compensation for years of paying outsize fees to the card associations and their banks.

Lawyers for Visa and MasterCard contend the plaintiffs are merely trying to gain the right to refuse any card they consider against their own interests, restricting consumer choice. "This would cause chaos at the cash register," says Noah Hanft, MasterCard's general counsel.

But the retailers also say they have consumers' interests at heart. The higher fees charged by the Visa and MasterCard debit cards ultimately mean higher prices, they say, a cost that shoppers now shoulder, and could be reduced by a favorable ruling in the case.

The trial opens as the practices of the credit-card industry come under legal attack on several fronts. This month, following a six-month trial, a California state-court judge ordered Visa and MasterCard to refund $800 million to consumers for improperly disclosing the fees they charge for cards used in foreign countries. A similar suit was subsequently filed against American Express Co.

And in May, a federal appellate court is scheduled to hear oral arguments on Visa and MasterCard's appeal of a 2001 federal-court ruling. That ruling, on a suit brought by the Justice Department, found that the two card associations had engaged in anticompetitive behavior by instituting rules stating that member banks that issued cards branded American Express or Morgan Stanley's Discover would be kicked out of the Visa and MasterCard networks.

If that ruling holds up on appeal, American Express is expected to once again begin talking to American banks about issuing American Express credit cards, in an effort to dent the dominance now enjoyed by Visa and MasterCard.

Accountant Admits to Bilking Clients of $8 million;
One Retiree Has 'Nothing' Now
The Associated Press
April 24, 2003

CHICAGO (AP) -- An accountant has admitted running six fraudulent investment programs that prosecutors contend cost victims about $8 million.

Jeffrey Goldberg, 51, of Buffalo Grove pleaded guilty Wednesday in U.S. District Court to two counts of mail fraud for stealing from 130 clients. As part of a plea agreement, Goldberg was ordered to make restitution. He could receive up to four years in prison when he is sentenced in June, according to prosecutors.

Among those defrauded was Royce Williamson, who said he lost $800,000.

Williamson said he retired from Sears, Roebuck & Co. in 1992 with a large lump sum that he asked Goldberg to invest. He said that as the stock market soared in the 1990s, he believed his investments had doubled in value.

Williamson said he often signed papers for Goldberg, not realizing he was giving permission to invest in a scheme. The scams ranged from real estate to a technology company.

"I'm now 62 years old, and I'm starting all over," Williamson said. "I have nothing."

American Airlines Ousts CEO, Bankruptcy Looms
By Kathy Fieweger and Jon Herskovitz
April 24, 2003

CHICAGO/DALLAS, April 24 (Reuters) - American Airlines ousted its Chief Executive Don Carty on Thursday after employees rebelled over his failure to disclose executive bonuses and pensions, and sources said the world's largest airline may still file for bankruptcy by Monday.

In a stunning announcement that followed sharp criticism of Carty's silence about executive perks while workers were accepting deep wage cuts, AMR Corp. AMR.N , the parent of American Airlines, said it was replacing him with current President and Chief Operating Officer Gerard Arpey.

"The AMR Board of Directors accepted the resignation of CEO and Chairman Don Carty today," AMR said in a statement. "The board named Edward A. Brennan as executive chairman and current President and COO Gerard J. Arpey as the new chief executive officer."

Brennan, 69, is the retired chairman, president and CEO of Sears, Roebuck and Co. S.N . Arpey, 44, has devoted his entire professional career to American Airlines, where he began as a financial analyst in 1982 and became a corporate officer in 1989, the company said.

BANKRUPTCY SOON?
American Airlines may still file for Chapter 11 bankruptcy protection in New York by Monday, sources familiar with the matter told Reuters. The sources said
the timing depends on whether the flight attendants, who have been reluctant to
endorse deep pay cuts, go ahead and ratify the concessions.

The board was ready to file for bankruptcy on Friday, the sources said, but decided upon advice of lawyers to give flight attendants one more shot at accepting concessions, delaying a filing most likely until Monday.

It would be the largest bankruptcy filing in airline history, outstripping that
of No. 2 carrier UAL Corp.'s UAL.N United Airlines last December.

The other two major unions at American -- pilots and mechanical workers -- said on Thursday they agreed to certify their votes on wage concessions after getting changes from the company that would alter profit-sharing terms, reduce the terms of the deal to five years from almost six years, and allow the contracts to be open for renegotiation after three years.

The flight attendants union did not agree to the changes by a deadline on Thursday afternoon, sources said. AMR is likely to give that labor group until Monday to reach a decision to certify a vote, they said, although the situation is fluid.

The Association of Professional Flight Attendants said it has been meeting with the new CEO Arpey, who asked to have discussions with the group's leadership, union spokesman George Price said.

"APFA will continue to do everything possible to avoid Chapter 11 bankruptcy filing by AMR," Price said.

He said the flight attendants union did not accept the terms that the other unions accepted but had not rejected them either.

"We've done everything in good faith," Price said.

Earlier this month, members of the three unions ratified concession deals aimed at saving the carrier $1.8 billion a year in labor costs. Two of those unions called for a new vote on the deals and another threatened not to ratify the concessions, aimed at keeping American out of bankruptcy, because of anger over the executive perks.

AIRLINE CRISIS
The impending filing in U.S. Bankruptcy Court in New York comes after AMR's board met throughout the day on Thursday in Dallas to consider the fate of airline, which posted the largest loss in aviation history last year and lost more than $1 billion in the first quarter of 2003 alone.

Airlines have been suffering through the worst crisis in their history since the Sept. 11, 2001, attacks against the United States hurt travel. Since then
the airlines have suffered one setback after another, including higher fuel prices, the Iraq war and a new pneumonia-like virus that has crimped travel.

But what ultimately brought down Carty was his failure to tell the airline's unions of special pension trust funding and retention bonuses for executives until after rank-and-file workers agreed to steep pay cuts.

The move infuriated workers and brought a hail of criticism about his handling of the matter from government, shareholders and ultimately the board of directors.

It came at a time when corporate America is under more scrutiny than ever because of a string of scandals over accounting, fraud and executive excess.

AMR narrowly avoided a bankruptcy filing twice in recent weeks as it wrangled with unions over the wage concessions.

Bankruptcy financing of as much as $1.75 billion is in place for AMR from Citigroup Inc. C.N , J.P. Morgan Chase & Co Inc. JPM.N , CIT Group Inc. CIT.N and Merrill Lynch & Co Inc. MER.N , sources have said.

Shares of AMR, extremely volatile in recent weeks, closed up 6.3 percent in New York Stock Exchange trading at $4.04 on Thursday.

American Air CEO Resigns, Ch. 11 Looms
Crain's Chicago Business
April 24, 2003

(Reuters) -- American Airlines ousted its Chief Executive Don Carty on Thursday after a controversy erupted over executive bonuses and pensions, and sources said the world's largest airline may still file for bankruptcy as early as Friday.

"The AMR Board of Directors accepted the resignation of CEO and Chairman Don Carty today," AMR Corp., the parent of American Airlines, said on its Web site. "The board named Edward A. Brennan as executive chairman and current President and COO Gerard J. Arpey as the new chief executive officer."

Brennan, 69, is the retired chairman, president and CEO of Sears, Roebuck and Co. Arpey, 44, has devoted his entire professional career to American Airlines, where he began as a financial analyst in 1982 and became a corporate officer in 1989, the company said.

American Airlines may still file for Chapter 11 bankruptcy protection on Friday morning, a source familiar with the matter told Reuters on Thursday.

Two of the three major unions said they agreed to certify their votes on concession deals after securing modifications that would alter profit-sharing terms, reduce the terms of the deal to five years from almost six years, and allow the contracts to be open for renegotiations after three years.

The flight attendants union did not agree to the changes by a deadline on Thursday afternoon, sources said. AMR may file for bankruptcy as early as Friday if it cannot get the flight attendants on board, but it is likely to give that labor group until Monday to reach a decision to certify a vote .

The impending move in U.S. Bankruptcy Court in New York comes after AMR's board met throughout the day on Thursday in Dallas to consider the fate of the world's largest airline, which has been embroiled in a big dispute with unions.

Carty angered labor unions at AMR's American Airlines by disclosing special pension trust funding and retention bonuses for executives only after
rank-and- file workers agreed to steep pay cuts.

Meanwhile, sources told Reuters on Wednesday that lawyers are reworking a potential AMR bankruptcy filing, which would be the largest in aviation history, surpassing that of rival UAL Corp. and United Airlines in December. AMR has narrowly avoided this fate several times in recent weeks, but its future remains uncertain as an unprecedented airline industry crisis continues.

Bankruptcy loans for as much as $1.75 billion are in place for AMR from Citigroup Inc., J.P. Morgan Chase & Co Inc., CIT Group Inc. and Merrill Lynch & Co Inc., sources have said.

Shares of AMR, extremely volatile in recent weeks, closed up 6.3 percent in New York Stock Exchange trading at $4.04 on Thursday.

AMR CEO Carty Resigns Amid Fallout Over Perks

AMR Reaches Compromise on Concessions with Unions
By Scott McCartney, Staff Reporter - The Wall Street Journal
April 25, 2003

AMR Corp.'s American Airlines, struggling to save labor concessions needed to keep the company out of bankruptcy, reached agreements with two of its three unions that take some of the sting out of the deals and said its chairman and chief executive officer, Donald J. Carty, had quit -- only days after AMR disclosed that it had granted pay perks for top executives.

The company still needs prompt acceptance from its flight attendants union. Without that, it told unions that it would quickly file for bankruptcy-law protection Friday morning.

The flight attendants union hasn't responded publicly. A person familiar with the situation said the group decided that it wouldn't vote on the changes, effectively turning them down for now.

Following Mr. Carty's resignation, the board named Gerard J. Arpey, 44 years old, as CEO and director Edward A. Brennan, former chairman and CEO of Sears, Roebuck & Co., as non-executive chairman. Mr. Arpey has been president and chief operating officer for the last year, after holding jobs as American's operations chief and its chief financial officer.

In agreements with the Allied Pilots Association and the Transport Workers Union, which represents baggage handlers and maintenance and ground workers, the company agreed to shorten the new contracts to five years from the nearly six years previously agreed to. In addition, negotiations on a new contract can begin as soon as 2006.

Further, employees and management will participate in a performance program that will offer bonuses of up to 10% if the company meets or exceeds goals for financial results and such measures as on-time arrivals.

Under pressure from Mr. Carty, the company's three unions last week voted to give up $1.8 billion in job, pay and benefit cuts to keep the carrier from filing for bankruptcy-law protection. However, as the voting was ending, the company disclosed in its year-end financial filing that it had granted hefty "retention'' bonuses for seven top executives and spent $41 million to create a trust to protect pensions of 45 senior executive, should American end up in Chapter 11.

The disclosure infuriated union leaders, who hadn't previously been informed of the perks, despite the company's pledge that it had revealed its books. Two unions said they would hold new votes and the third threatened to withhold its president's signature from its contract. Those moves would put the dispute in court and likely force American into bankruptcy.

Board members had planned only to meet in person for one day, but people close to the situation cautioned that negotiations could drag on beyond Thursday, or more time might be given for unions to consider a compromise to end the standoff. Separately, the boards of the Allied Pilots Association and the Association of Professional Flight Attendants were also in session Thursday, and the Transport Workers Union was involved.

Mr. Carty and other senior American executives negotiated with union leaders for a resolution late into the night Wednesday, in advance of the AMR board meeting.

Though American posted a huge $1 billion loss for the first three months of the year, Mr. Carty said earlier this week that prospects for the airline had improved slightly. Still, he has said it needs the givebacks to avoid a bankruptcy filing.

The new airline-bailout bill from Congress will bring American more than $400 million in cash, and travel has begun to pick up slightly with the end of the war in Iraq.

Internal factors are still in turmoil, however.

In February, Mr. Carty set a March 31 deadline for union leaders to approve tentative agreements on $1.8 billion in contract concessions to keep AMR and American out of bankruptcy-court reorganization. After winning approval of tentative pacts, AMR filed for a 15-day delay in making its year-end 10-K filing to the Securities and Exchange Commission and gave unions the same 15 days to ratify the agreements.

Kmart's Investor Bullish on Future
By Gary Haber, Business Writer - Detroit Free Press
April 24, 2003

He sees chain thriving once shoppers return

Edward Lampert, the man who will become Kmart Corp.'s largest shareholder, has a message for Kmart shoppers: We're going to win you back.

WHAT'S NEXT In order to meet its target of emerging from bankruptcy on May 5, the retailer will:

Close its investment deal with ESL Investments Inc. and Third Avenue Value Trust, which are pumping millions of dollars into the company.

Pay off its existing line of credit and close on a new $2-billion line of credit package.

Its new 9-member board of directors, including ESL Investment chairman Edward Lampert, will elect a chairman.

Pay promised bonuses to executives for leading it out of bankruptcy, including $1 million to chief executive Julian Day.

Cancel its existing stock and issue new stock on an exchange to be determined.

Announce its March sales figures next week.

On the day after a Chicago bankruptcy judge approved Kmart's reorganization plan, Lampert, the multimillionaire hedge fund manager from Greenwich, Conn., told the Free Press that he wants the retailer to keep the focus on customers.

"You need to provide them with goods and services that give them value," Lampert said Wednesday. "It's one thing to have customers who shop at Kmart once or twice a year. It's another thing to get them to shop once or twice a week."

It will take more than offering cheap prices on six-packs of soft drinks to attract shoppers, he acknowledges. "That's not a sustainable business proposition."

Lampert has every reason to be interested in Kmart's future. Once the Troy retailer emerges from bankruptcy on May 5, Lampert will control 49 percent of the company's stock and four of the nine seats on its board of directors. Lampert himself will fill one of those chairs.

Lampert, a savvy investor with a fondness for undervalued retailers -- he's the second-largest shareholder in Sears Roebuck & Co. and holds major stakes in Office Depot, AutoZone, AutoNation and Payless Shoe Stores -- also talked about why he invested millions in the 103-year-old retailer.

"It's a nationally known company, with a very significant history of success before the last decade or so," Lampert said. "The company's size, scope and recognition make it universally known in the U.S."

Kmart, he said, "can be a very successful national company. It was once, and it can easily become one again -- by easy, I don't mean tomorrow."

Lampert has invested millions of dollars in Kmart, purchasing $2 billion worth of Kmart creditor claims -- it's never been disclosed exactly how much he paid - - and is pumping $350 million in cash into the company.

Lampert said no decisions have been made about whether Kmart headquarters will remain in Troy. He also wouldn't talk about any possible combination of Kmart and Sears.

"My focus is on Kmart as a business and a vibrant healthy retailer going forward," Lampert said.

Lampert clearly talks like a man who'll be with Kmart for the long run, said Ulysses Yannas, an analyst who follows the company for Buckman, Buckman & Reid.

"You don't buy something like this and flip it," Yannas said. "He's made a huge investment in the company."

Yannas said investors can expect Lampert and other board members to take an active interest in the company.

"You don't run the risk of having a board that's just there to collect their honorariums," Yannas said. "You better believe this will be an active board. It's not somebody else's money they're playing with. It's their money."

Indeed, Lampert says he'll play an active part in Kmart's future.

Just how actively involved he is with the company, "may be different at different points in time," Lampert said.

Getting Kmart out of bankruptcy and the appointment of Julian Day as its president and chief executive officer were crucial first steps toward Kmart's recovery, Lampert said.

"I think he's very smart, very thoughtful," Lampert said of Day, a former Sears executive. "He doesn't have preconceived notions about things, which is important in retail."

But as smart an investor as Lampert is, some observers wonder what the future holds for Kmart.

Jeff Green, a retail consultant with Market Insite Group in Mill Valley, Calif., said it will be "very, very tough" for Kmart to win back disaffected customers.

Doing that will take more than improving inventory control and customer service, Green said. The company needs to find classy, cutting-edge brands to lure shoppers.

Day has said the company would focus post-bankruptcy on offering low prices on certain items to lure customers, building up its private brands such as Joe Boxer, Martha Stewart Everyday and Disney Kids, and filling shelves with a selection of merchandise tailored to fit each store's local demographics.

"It would be interesting to know how much money they have earmarked for marketing," Green said.

Retail consultant Howard Davidowitz questions how Kmart will fare in an increasingly tough retail market. Its major competitors, Wal-Mart and Target, are adding stores at a voracious pace, while Kmart has closed 600 stores during bankruptcy. Kmart now has 1,513 stores.

"Fifteen years ago, you had 50 discounters in America that don't exist today," said Davidowitz, chairman of Davidowitz & Associates, based in New York. "Why don't they exist? They were destroyed by Wal-Mart and Kmart."

Retail behemoths Wal-Mart and Target "have such dramatically better mousetraps than Kmart, it's night and day. You can't compare," he said.

But don't be surprised to see Lampert strolling the aisles of a Kmart store somewhere in America, checking out his investment.

Lampert said he wants to visit a cross-section of stores across the country to get an aisle's-eye view of what shoppers are seeing. It's part of his hands-on management style, he said.

"If you're in Ohio, Indiana, Los Angeles or Florida, you might see me in those stores," Lampert said. "Our way of investing demands a lot of field research. It's important to go into those stores."

Kmart to Focus on Details
By Karen Dybis - The Detroit News
April 24. 2003

Lampert says he hopes to succeed where others have failed

DETROIT -- Kmart Corp.'s new owner says he sees a long, profitable future for the retailer, but don't expert Edward Lampert to throw millions of dollars into renovating Kmart's 1,500 stores.

Rather, Lampert views his Kmart holdings as the ultimate stock option. He believes Kmart has potential if the company pays attention to the details of operating one of the nation's largest discount-store chains.

"A lot of people have tried to turn it around. I don't think any of them have had the level of investment that we have," Lampert said Wednesday from his Greenwich, Conn., offices. "They ended up taking more out of the company than they put in."

In his first interview since becoming a major Kmart shareholder, Lampert skipped over questions about whether Kmart's headquarters will remain in Michigan. He also avoided inquiries about whether he has met with the company's main brand partner, Martha Stewart.

But Lampert said he will be the one to, finally, turn around Kmart's financial fortunes.

His wallet backs his words. Lampert has invested more than $100 million of his own money into Kmart. His hedge fund, ESL Investment Inc., picked up more than $2.2 billion in claims from Kmart creditors for pennies on the dollar during the retailer's 15-month bankruptcy.

As a result, Lampert will be Kmart's majority owner when it emerges from bankruptcy protection on May 5. An exact percentage won't be known for a few months while Kmart tallies up its bankruptcy claims. But Lampert acknowledged his stake could rise as high as 60 percent.

Because of his sizable investment, Lampert got to appoint four members to Kmart's nine-member board of directors. Besides himself, Lampert's choices included two of his business partners and one of his hedge-fund investors.

Lampert's professional resume is relatively brief. A Yale University graduate, he parlayed a sales and training internship at Goldman Sachs Group Inc. into a full-time job. His interest in companies that were underappreciated but had growth potential pulled him toward starting his own company.

He founded ESL in the late 1980s and grew it into a highly profitable hedge fund, a type of private investment pool favored by millionaires and known for being riskier than stocks or bonds. His retail investments include Sears, Roebuck & Co. as well as AutoZone, AutoNation and Liz Claiborne.

Lambert declined to address rumors that a possible merger of Sears and Kmart could be in the offing. But he touched on other topics, including:

* His investment philosophy:
Lampert said he buys into companies with the intention of guiding them to make more money. He typically takes a leadership role, sometimes even to the point of overwhelming the company's current managers.

Lampert said he was drawn to Kmart because of its January 2002 bankruptcy. He wondered how this once mighty American icon had stumbled so badly.

"As investors, as students of business generally, we were intrigued by what had happened here and whether there might be some type of opportunity," Lampert said.

* Kmart's progress in bankruptcy:
"For those people who say that staying in bankruptcy was a viable alternative, I think that they don't really understand the nature of how an employee thinks or a customer thinks when a company's in that circumstance," Lampert said. "The reason that most retailers who stay in bankruptcy for a long time end up failing is because people lose hope."

Indeed, many people believe Kmart could not have made it to this point without Lampert's money or influence. He and fellow reorganization investor Third Avenue Fund were among those pushing for Kmart to shed the mantle of Chapter 11 as quickly as possible.

* His thoughts on Kmart's managers:
He noted that the retail industry's best companies have long-term ownership, including Kmart's rival, Wal-Mart Stores Inc.

As for Kmart, Lampert appears to hold CEO Julian Day -- who joined Kmart in March 2002 -- in high regard. Lampert indicated that he plans to give Day room to run the day-to-day operations but reserve the right to step in.

"I felt that this was a company that had the potential to be very successful going forward if you had alignment between the owners of the company and the people managing the company," the 40-year-old said. "We believe we have an opportunity to participate in helping to restore the health of a very important U.S. company."

* Kmart's strong points:
He recognizes Kmart's advantages. Kmart has loyal customers, enough to generate $25 billion in sales despite the company's high-profile bankruptcy. Nothing Kmart's critics can ever say will erase that number from Lampert's mind.

"I haven't really spent a lot of time talking to any analysts or what have you," Lampert said. "I think that everyone's entitled to their opinion. But there's a very large segment of the American population who shops at Kmart and there's $25 billion in sales. That $25 billion in sales is more important than anyone's opinion."

* Where Kmart needs to improve:
Lampert also realizes it will be hard to always meet customers' expectations. Kmart long has been criticized for having unkempt stores and empty shelves.

"It's hard to have consistency in 1,500 or 2,000 stores. I think that there will always be stores doing better than others," he said. "You want to raise the level of all the stores so the worst-performing stores are still performing at an acceptable level and the best- performing stores are really doing great."

Lampert said he likes what Kmart has done at its White Lake prototype store. But he questions whether a makeover could cure Kmart's ills.

"If you take enough money you can make the store look like Saks Fifth Avenue and Neiman's. I think the real issue is you need to spend the money wisely," Lampert said. "The company does not have the resources of some of its direct competitors. But it has enough resources I think to service the customer base I think in a very substantial way."

Edward Lampert

Age: 40
Hometown: Greenwich, Conn.
Family: Married in 2001, one daughter
Education: Graduated from Yale University in 1984 with a bachelor's degree in economics; accepted at Yale and Harvard law schools
Resume: Goldman Sachs -- July 1984 internship; risk arbitrage department from March 1985 to February 1988; left to form ESL Investments
Track record: Average return of 24.5 percent per year, nearly double the performance of the Standard & Poor's 500 index. Only two down years -- 1990 and 2002.

Sears Pension Plan Inadequate, Sears Canada Retirees Say
By Dana Flavelle - Business Reporter - Toronto Star
April 23, 2003

Cost of living increases too small, they argue
Pensioners benefit from management style, CEO says

Sears Canada Inc. retirees say they're not getting reasonable cost of living increases from their pension plan even though the fund is running a healthy surplus and company executives are awarded handsome pay increases.

But Sears chief executive Mark Cohen, whose bonus more than doubled last year to $2.19 million, said yesterday he's satisfied the company's pension plan is "more than equitable" compared to its peers.

As well, the retirees are benefiting from the fund's "conservative management" style because unlike most companies' pension plans these days, Sears' is running a surplus, Cohen said in response to a question raised at Sears' annual general meeting yesterday.

But when pressed further by a pensioner who noted Sears' executives had been given a "lot of money" last year, Cohen cut her off saying: "Your question doesn't have a form or substance I can answer."

The pension fund had a $217 million surplus in it at last accounting, according to company documents.

It was one of several exchanges between Cohen and a handful of disgruntled stockholders, who have watched the department store retailer's share price drop from $42.50 when Cohen joined the firm in January, 2001. Shares closed yesterday at $15.31.

One criticized the stores' dwindling selection, while another complained merchandise quality had declined.

As well, three institutional investors made proposals aimed at increasing the board of directors' independence by forcing Cohen to step aside as chairman and making Sears' offshore suppliers meet tougher labour law standards.

The proposals were put forward by the pension plan of the Ontario Public Service Employees Union, in conjunction with British Columbia-based investment firms Real Assets Investment Management Inc. and Working Enterprises Ltd.

But the motions were easily defeated after failing to win the support of the largest shareholder, Sears Roebuck & Co., in the U.S. The parent firm owns 54 per cent of Sears Canada.

Cohen acknowledged the company's share price had suffered due to its "lack of performance," though he also noted the whole stock market had fallen during that time. He also agreed the stores are stocking fewer items in a bid to avoid holding money-losing clearance sales.

"We have focused on owning the right merchandise rather than simply large quantities of merchandise," he said.

But he said shareholders could look forward to future gains as the retailer begins to reap the rewards of its "brand renewal" program in the second half of the year.

The company ended the year with 2.7 per cent less in sales, but doubled its operating profits, which exclude the impact of one-time charges. It plans to increase sales by 2 per cent this year and operating profits by 15 per cent, Cohen said.

Cohen outlined in more detail the strategy the company has been pursuing since early last year, which will include the re-introduction of storewide sales by mid-summer, he said.

However, the new program will differ markedly from its previous approach, he said, as all the items offered at reduced prices will have been bought specifically for that purpose.

This merchandise will be offered at discount prices at specific times and still generate a profit, he said.

"This distinction is a critical point of differentiation for Sears Canada," he said.

Rival Hudson's Bay Company, which operates the Bay and Zellers, recently articulated a similar strategy.

One campaign plans to feature the retailer's exclusive brands, such as its Jessica line of clothing and Kenmore appliances.

Kmart Cleared to Exit Bankruptcy Early
By Emily Kaiser - Reuters
April 23, 2003

A judge approved Kmart Corp.'s bankruptcy exit plan Tuesday, paving the way for the discount retailer to emerge from Chapter 11 early next month with 600 fewer stores and 80 percent less debt.

The retailer hopes to exit bankruptcy on May 5, two months sooner than it had originally planned, but it still faces the tough task of convincing Wall Street -- and customers -- that it can compete and survive in a cutthroat market dominated by Wal-Mart Stores Inc. and Target Corp..

After four days of marathon hearings and negotiations to resolve some 188 objections, Judge Susan Pierson Sonderby approved the reorganization plan, which gives key investors ESL Investments Inc. and Third Avenue more than half the company's stock and four of nine seats on the board of directors.

"Let me just say how jubilant I am, and how jubilant everyone at Kmart is," Julian Day, Kmart's chief executive officer, told reporters after the hearing in U.S. Bankruptcy Court here.

The Troy, Michigan-based retailer declared bankruptcy in January 2002 after a disappointing holiday shopping season.

Some analysts still question whether Kmart has found the right formula to compete once it emerges from bankruptcy, but Day dismissed those concerns as "ill-informed."

He said the company would focus on a three-part strategy of offering low prices on certain items to lure customers, building up its private brands such as Joe Boxer and Disney Kids, and filling shelves with a selection of merchandise tailored to fit each store's local demographics.

PAYDAY
Day, the only Kmart executive on a new board of directors made up of people appointed by creditors, receives a $1 million bonus when the company emerges from bankruptcy. Several other top executives will receive bonuses as well.

Day said Kmart had used the bankruptcy process "in an excellent fashion," closing some 600 stores, reducing long-term debt by more than 80 percent and canceling or amending leases with unfavorable terms.

After Kmart emerges from bankruptcy, it plans to fund operations with money from investors ESL and Third Avenue, proceeds from store-closing sales and $2 billion in exit financing.

"Kmart will emerge a stronger company, with a healthy balance sheet, a store-centric philosophy and the right leadership to revitalize this organization," Edward Lampert, chairman and CEO of ESL Investments, said in a statement.

Kmart has closed nearly 30 percent of its stores since filing for bankruptcy, leaving it with about 1,500. The retailer has forecast 2007 sales of $30.2 billion, up from an estimated $25.4 billion for 2003. It expects to return to profitability in 2004.

The reorganization plan leaves current shareholders with worthless stock, while banks, bondholders and other creditors will be issued new shares.

The current shares, which have been trading on the Pink Sheets electronic quotation system since they were delisted from the New York Stock Exchange late last year, will be canceled when Kmart emerges from bankruptcy.

Jack Butler, Kmart's lead attorney, said Kmart intended to remain a publicly traded company and would announce "in due time" on which exchange the shares will be listed.

C 2003 Reuters

Head of Minority Outreach to Leave Sears
Crain's Chicago Business
April 21, 2003

Gilbert Davila, the Sears, Roebuck and Co. executive in charge of marketing to minority groups, is leaving his post as vice-president of multicultural management for the Hoffman Estates-based retailer on May 2 to join Burbank, Calif.-based Walt Disney Co., a Sears spokeswoman confirms.

Sears Chairman and CEO Alan Lacy tapped Mr. Davila in August to develop a companywide strategy for reaching out to Hispanic, African-American and Asian customers. Mr. Davila, 39, joined Sears in 1995 as director of multicultural marketing. A search for his replacement is under way, Sears says.

Sears Posts Operating Loss;
Though Net Up, Revenue Off
By Lorene Yue - Tribune Staff Reporter - Chicago Tribune
April 18, 2003

With Sears, Roebuck and Co.'s department stores showing few signs of a rebound, pressure is mounting on the retailer's specialty division to improve its performance.

The Hoffman Estates company said Thursday that sales from its menagerie of retail concepts fell to $6.6 billion in the first quarter, a 1.8 percent drop from the same period last year, even as it added the strong Lands' End line.

The lower sales left the retail division with a quarterly operating loss of $23 million.

Since Sears put its credit division, the profitable half of its corporate operations that contributed nearly 60 percent of last year's earnings, up for sale, the company needs to sharpen sales at its decorating, hardware and automotive concepts.

"This is a tough time to be a retailer, period," said Neil Stern, a partner at Chicago retail consulting firm McMillan/Doolittle. "Everybody's doing poorly and Sears is part of the pack."

First-quarter earnings were $192 million, or 60 cents a share, on revenue of $8.8 billion. That compares with $110 million, or 34 cents a share, for the same period in 2002. The weakness in the retail division and a move to bump up its provision for uncollectible credit card accounts, a fund that offsets Sears' credit card holders who stopped paying their bills, nipped at profits.

Despite declines in its two business segments, Sears executives said they were pleased with the company's performance in what is traditionally a slow quarter.

"We delivered on a plan, which we feel is a solid accomplishment in this retail environment," said Alan Lacy, chairman and chief executive officer. He added that the company is still making strides in getting its store operations, particularly at its full-line stores, back on track to show sales growth in the second half of the year.

Full-line stores, which are those attached to shopping malls, are the backbone of Sears' retail operations and have posted three consecutive years of declining sales. Same-store sales at Sears' 872 full-line stores fell 6.7 percent in 2002 from the previous year.

That adds pressure on Sears' specialty division--which includes the Great Indoors, hardware stores, dealer stores, Lands' End catalog sales and National Tire and Battery outlets--to keep from contributing to the overall sales decline.

"One of the pros and cons of shedding the credit division is that they will become a retailer and they will be judged as a retailer," Stern said. "That puts the microscope on not just the full-line stores, but the other retail concepts."

All those formats, with the exception of dealer stores, are struggling. And store expansion, which can inflate sales, has nearly crawled to a halt.

"The home run is the dealer stores, which are growing and profitable," Stern said. "They are selling stuff that the company is great at in towns where you don't have Best Buys and Home Depots."

Dealer stores are a network of 767 independently owned stores that have the Sears name but only carry appliances, electronics, lawn and garden items and some home improvement merchandise. Same-store sales rose 4.2 percent at dealer stores last year, according to the 2002 annual report.

Sales for the specialty division are not broken out in quarterly reports.

When Sears opened seven Great Indoors stores last year, it helped specialty- division sales jump 7.6 percent. The home remodeling retail concept has been a hit since the first store opened in February 1998.

Shoppers loved the idea of finding ways to decorate and overhaul their bathrooms, kitchens, bedrooms and living rooms under one roof. Sears loved reaching out to a new group of consumers who weren't shopping in its full-line stores, and it built 19 more Great Indoors stores in four years.

Now the rollout program has stalled as Sears looks for ways to trim construction costs that can reach $25 million. "The investment level is too high, the operating cost structure is too high," Lacy said. "It is basically on hold until we can get the profit model more favorable."

Sears' hardware stores, which operate as Sears Hardware and Orchard Supply Hardware, had same-store sales growth of 0.3 percent in 2002.

Two years ago, Sears reported slight same-store gains in the division that had 274 stores at the time. By the end of 2002, there were 249 hardware stores.

Sears hopes to stimulate hardware-store sales by adding appliances to the merchandise mix in select markets. If successful, Sears will have a new venue to help recover market share recently lost to big-box competitors Best Buy, Circuit City, Home Depot and Lowe's.

Meanwhile, National Tire and Battery stores continue to lose sales. The division had a same-store sales decline of 4.1 percent last year.

In the short term, Sears will have to battle what executives have called a challenging second quarter and second half of the year. Too much apparel and heavy discounting will create margin pressures in the second quarter, said Glenn Richter, Sears' chief financial officer.

The company estimates earnings between 85 cents and $1 per share. The analyst consensus is between $1.14 and $1.18 a share. Sears' estimates for 2003 remained between $4.95 and $5.15 per share, topping Wall Street's expectations of $4.85 to $4.87 a share.

Sears Drops in 1st, Says it Will Miss in 2nd
By Sandra Guy, Business Reporter - Chicago Sun-Times
April 18, 2003

Sears, Roebuck and Co.'s core businesses--retail and credit--continued to suffer in the first quarter, and the retailer warned Thursday that second- quarter results will be worse than Wall Street expected.

Skeptical analysts questioned Sears' new borrowings, which enabled it to stash $3.8 billion in cash; the adequacy of its reserves for bad credit-card debts, and whether it can achieve a big enough turnaround to meet its full-year earnings expectations.

Sears CEO Alan Lacy said he believes the Hoffman Estates-based company will rebound later this year when all 870 revamped stores will sport Lands' End clothing, high-end cookware and expanded appliance and home-decor sections. Sears also intends to sell part or all of its credit-card business by year's end.

"We've made good progress, but we have much to do to get the cost structure where it needs to be," Lacy told analysts during a conference call Thursday.

Sears' profit rose, but only because last year's first quarter included one-time items that slashed profit by $190 million, or 59 cents per share.

Net income for the quarter ended March 29 totaled $192 million, or 60 cents per share, compared with last year's pared-back $110 million, or 34 cents per share. Analysts had reduced their expectations to 57 cents from 87 cents after Sears warned in February that rising credit-card delinquencies would lower profits.

More telling were Sears' weak results at retail, which recorded a $23 million operating loss compared with last year's $87 million profit.

Retail revenue edged down 1.8 percent, to $6.6 billion, but the decline would have been 6.8 percent had it not been for sales of Lands' End merchandise. Sales at stores open at least a year, which have slid for 19 straight months, dropped 6.7 percent because of a late Easter, the weak economy and Sears' tweaking of its merchandise in historically weak "softlines" such as apparel and home fashions.

For example, Sears intends to reposition its Covington apparel brand under new softlines chief Mindy Meads, a Lands' End veteran who replaced Kathryn Bufano earlier this month. Covington will become more trendy so it no longer overlaps Lands' End's classic designs, Lacy said. Covington's sales topped $200 million last year and are expected to take in $500 million this year, Lacy said.

Total revenue in the quarter dropped 2 percent to $8.8 billion from $9.04 billion a year ago.

Credit-card income, which accounts for two-thirds of Sears' operating profit, dropped 10.8 percent, or $48 million, to $395 million from a year ago, because Sears increased its provision for uncollectible accounts in the quarter by $100 million, or 27 percent, from last year, to $1.79 billion.

Sears has been transferring its shoppers from its store card to its Gold MasterCard. The MasterCard receivables, which totaled $12.4 billion in the first quarter, are expected to total $14 billion by the end of the year. Yet only about 40 percent of the MasterCards have been activated.

Bankruptcies increased 28 percent, delinquencies jumped to 7.87 percent from 7.31 percent a year ago, and the net charge-off rate for the quarter increased to 6.11 percent from 5.43 percent last year.

Sears set its second-quarter earnings-per-share range at 85 cents to $1, compared with Thomson First Call's consensus estimate of $1.18. Lands' End will help sales, but not enough to offset seasonal sales and greater markdowns to get rid of higher inventory levels, Sears officials said.

Since Sears still expects to earn $4.95 to $5.15 a share for the full year, it must show impressive results in the latter half, when comparisons with last year will be easier. Thomson First Call estimates Sears' 2003 earnings will be $4.86 a share.

"Like most retailers, Sears will have to wait for the consumer to come back, and it is anyone's guess when that will happen," said Neil Stern, analyst at Chicago retail consultancy McMillan Doolittle.

Lacy and Sears Chief Financial Officer Glenn Richter refused to explain how the company built up its cash reserve. It's a conservative stance that enables Sears to pre-fund the balance of its $2.7 billion in debt that matures this year, said Richter.

The cash buildup may reflect Connecticut multimillionaire Edward Lampert's priority of gaining greater returns on investment rather than making acquisitions. Lampert, a hedge fund manager who is now Sears' No. 2 shareholder, is believed to have a strong voice in Sears' decision-making. Lampert consulted with Lacy every two to three months and met with him occasionally in New York, said Joseph Grabowski, an analyst at Strong Capital Management who formerly worked at Sears' investor relations department.

Sears' turnaround strategy includes restructuring its stores to better compete with Kohl's and Target, and enticing higher-income buyers of tools and appliances to buy clothes, kitchenware and bedding and bath accessories.

A key part of the strategy is Sears' new Whole Home brand, which will encompass home decor, gourmet cookware and bedding and bath products.

Home Furnishings News, a trade magazine, reported this week that Sears will exit the ready-to-assemble furniture business by late spring, and will devote more than half its bed and bath floor space to Whole Home merchandise. Sears also will sell a limited selection of Lands End bed and bath products, the magazine said.

The magazine reported that Sears' cookware business will expand by 25 percent to include higher-end brands such as KitchenAid.

Whole Home Decor will include master bedroom ensembles and decorative pillows and throws, the magazine reported. The emphasis on home decor will be complemented by closet shops and Men's Big and Tall shops in select Sears stores.

In the meantime, Sears has ceased expanding its high-end home-decor store, The Great Indoors. Its immediate focus will be building stand-alone stores that sell many of the items found in a convenience store.

Five of the pilot stores, to be called Sears Grand, will open within two years, including one opening this fall near Salt Lake City and a second one slated for spring 2004 next to Gurnee Mills mall.

Unlike Sears department stores, the new stores will sell magazines, greeting cards, household cleaning supplies, CDs and DVDs, a limited selection of groceries, such as pop and snack foods, and health and beauty products like toothpaste, shampoo and hair spray.

Separately, Bank One Corp., Citigroup Inc. and Bank of America Corp. are expected to bid on Sears' credit-card portfolio along with card rival Morgan Stanley, which owns Discover. Analysts estimate the credit-card portfolio could fetch bids from $2.7 billion to $6 billion.

Lacy said Sears is in the early stages of its plan to sell the credit card business and that its plan is on track.

Sears shares declined 1 cent Thursday to $26.63. They have plunged 50 percent in the last year.

Sears Earnings/Outlook -3: Street Sees 2Q EPS $1.18
Dow Jones Newswires
April 17, 2003

Sears expects "modest" near-term retail sector growth, noting the current economic environment and cautious consumer sentiment. The company forecast second-quarter earnings below Wall Street's views, but said it's on track to meet earnings-per-share expectations for the full year.

For the second quarter, Sears expects earnings between 85 cents and $1 a share, with a mid-single-digit same-store sales decline. First Call currently projects second-quarter earnings of $1.18 a share.

In the year-earlier second quarter, Sears earned $1.31 a share on $10.14 billion revenue.

Sears projects full-year earnings of $4.95 to $5.15 a share, above Wall Street's estimate of $4.86. The projection excludes any effect related to Sears' review of its credit-card unit, which the company announced in March it was looking to sell in an effort to focus on retail operations and end losses from high customer credit delinquencies.

Sears earned $4.92 a share in 2002, on revenue of $41.37 billion.

Sears Earnings/Outlook -4:
Credit Unit Oper Net Dn 10.8%
Dow Jones Newswires
April 17, 2003

In the first quarter, Sears' credit division posted operating income of $395 million, down 10.8% from a year earlier largely because of a $100 million, or 27%, increase in the provision for uncollectable accounts.

The provision was raised because of higher charge-off rates, an increase in the size of the MasterCard portfolio and increased bankruptcies. Charge-off rates for the quarter rose to 6.1% from 5.4% a year earlier.

"The credit and financial products segment continued to perform as expected during the first quarter, including the typical post-holiday decline in receivables," said Chairman and Chief Executive Alan Lacy. "Delinquencies and charge-offs, as well as profitability, are tracking to plan."

Sears said the evaluation of options for the credit segment is progressing as scheduled, and the company expects to conclude the process in the second half of the year.

Sears Says Easy Comparisons In Retail,
Credit to Boost 2H
By James Covert - Dow Jones Newswires
April 17, 2003

NEW YORK -- Although it cut its second-quarter profit guidance, Sears, Roebuck & Co. (S) backed its outlook for the year, saying that easier year-over-year comparisons at both its retail and credit operations would aid second-half results.

In a Thursday conference call on first-quarter earnings, Sears Chairman and Chief Executive Alan J. Lacy said the company remains "somewhat cautious" in its outlook for the year, citing a shaky economy that has hampered sales at its full-line department stores.

The Hoffman Estates, Ill., retailer said its first-quarter net income jumped 75% to $192 million, or 60 cents a share, beating Wall Street's view by 3 cents, according to Thomson First Call. In the year-ago quarter, the retailer had net income of $110 million, or 34 cents a share.

That improvement, however, reflected $190 million, or 59 cents a share, in one-time charges in the year-earlier period. Sales at the company's full-line department stores declined during the most recent quarter. In addition, an increase in uncollectable accounts at its credit-card operation, which Sears said last month it may sell later this year, fueled an 11% decline in operating profit at the credit unit.

Sluggish first-quarter apparel sales have resulted in higher-than-expected inventory, and clearance sales will likely hurt second-quarter profit margins, the company said. Sears said it now expects second-quarter earnings of 85 cents to $1 a share, well short of Wall Street's expectation of $1.18 a share.

Nonetheless, Sears faces easier comparisons in the second half of the year, executives noted. A big store-remodeling program last year took place in the third quarter and was completed in the early part of the fourth quarter, the company noted. Also, a surprise warning last year about a deterioration in Sears' credit-card operations occurred at the close of the third quarter.

Lacy said his second-half optimism is also fueled by big improvements that are expected at the company's retail stores in the fall. By the end of the year, Lands' End clothing will be rolled out to all 870 of its full-line department stores. Lands' End was launched at 220 Sears stores in March, expanding the brand's presence to a total of 400 Sears locations.

In addition to the expansion of Lands' End, a new management team in Sears' apparel division headed by a former Lands' End executive is expected to further improve the company's new, lower-priced Covington private-label clothing line. Covington's looks will start to show a little more fashion in the second half of the year, offsetting the classic looks of Lands' End, CEO Lacy said.

Elsewhere in the store, price competition has hurt margins in consumer electronics, but inventories are in good shape, Lacy said. And while analysts have worried of late that home-improvement giants Home Depot Inc. (HD) and Lowe's Cos. (LOW) are steadily chipping away at Sears' dominant position in appliance sales, Lacy said he thinks Sears' appliance sales were comparable or better than those of competitors.

To protect its 38% share of the appliance market, Sears is enhancing its guarantees on matching competitors' prices, improving its delivery capabilities, and making adjustments in the way it trains its sales force, Lacy said. By the second half of the year, those changes should turn more browsers in the appliance department into buyers, Lacy said.

Rochdale Investment Management, a New York investment firm that sold its stake in Sears last summer, won't get back into the stock until it sees evidence of an improved retail environment, said David Abella, an analyst at the firm. In addition, Abella says he'll be looking for a demonstrated improvement in the company's apparel business, and a completed sale of the credit operation.

"Now that they've gone forward with it, if it doesn't take place that will raise a lot of red flags that it isn't worth what they said it was," Abella said of the credit operation.

Sears Posts Profit, But Stores At A Loss
By Dave Carpenter, Associated Press
Chicago Tribune Online - April 17, 2003

CHICAGO -- Sears, Roebuck and Co. posted a $192 million profit for the first quarter Thursday but reported weak sales that caused it to lose money from its main retail business.

Earnings topped the same period in 2002 by 75 percent, but only because of an accounting change and one-time items totaling $190 million a year ago.

In results more indicative of Sears' struggles, its credit division posted 11 percent less income after increasing reserves for bad credit-card debt and retail sales slipped by 2 percent.

Net earnings for the first three months of the year amounted to 60 cents a share, compared with $110 million, or 34 cents a share, a year earlier.

Revenues were $8.88 billion, down 2 percent from $9.04 billion.

Per-share earnings were 3 cents higher than the consensus estimate of analysts surveyed by Thomson First Call, who pared back their expectations after Sears' profit warning in February.

The Hoffman Estates-based company warned that second-quarter results will be weaker than expected because of the uncertain economy and cautious consumer spending. It estimates earnings of 85 cents to $1 a share, well below the $1.18 analysts had predicted.

But for the full year, chairman and chief executive Alan Lacy maintained that gains from the continuing rollout of Lands' End apparel in Sears' stores are helping to keep the company on track for its target of $4.95 to $5.15 a share in earnings. That's higher than the $4.86 anticipated by analysts.

"Sears' performance was in line with our guidance despite a challenging quarter for the consumer and retail sector as a whole," said chairman and chief executive Alan Lacy. "While we are feeling the effects of major merchandise category exits and edits as well as the weak economic conditions, we continue to improve the fundamentals of our retail and credit operations."

Sears had an operating loss of $23 million for its retail business, where it has suffered 19 straight months of lower sales figures. Retail revenue dipped 1.8 percent to $6.6 billion, and same-store sales were down 6.7 percent for the quarter.

The company said increased revenues from the addition of Lands' End, which it acquired last June, were more than offset by overall sales declines in its 870 full-line stores.

The credit division saw operating income drop to $395 million from $48 million after it boosted its provision for uncollectible accounts by $100 million, or 27 percent, over last year's period.

Three weeks after putting its the profitable but troubled credit-card division up for possible sale, Sears said it doesn't expect to complete the evaluation of its options until the second half.

Sears shares rose 11 cents to $26.75 in morning trading on the New York Stock Exchange.

Sears Charges Into Turnaround
Ari Weinberg - FORBES.COM
April 17, 2003

According to senior management at Sears, Roebuck, the retailer's revitalization is going according to plan. For Sears investors, that change couldn't come fast enough.

Shares of the 110-year-old Hoffman Estates, Ill.-based retailer are up 23% since the company said on March 26 that it was "exploring strategic options" for its flagging credit card business. In announcing earnings Thursday morning, Sears (nyse: S - news - people ) showed that improvement for its Sears Card and Sears Gold MasterCard portfolios means a better-than-expected increase in net charge-offs. Despite reporting first quarter net income of $192 million, or 60 cents per share, and 3 cents better than the analyst consensus, Sears stock was off 1% in morning trading to $26.38.

"We're confident we are on the right path," said Sears Chairman and Chief Executive Alan Lacy. "We feel good about the steps and progress we have made." In 2002, Sears made several changes to its business model that included exiting certain retail lines, acquiring catalog clothing retailer Lands' End and remodeling stores.

As the company rolls out Lands' End products to its more than 800 stores by September, Sears expects that the integration, along with favorable comparables from charges taken in the last two quarters of 2002, will push it towards its full year earnings goal of $4.95 to $5.15 per share. But, as several analysts pointed out on the call, Sears has a ways to go. On top of the 60 cents from the first quarter, the company expects to earn 85 cents to $1 per share in the second quarter--below current expectations.

Compared to the first quarter of 2002, retail sales of $6.6 billion were off 1.8% for an operating loss of $23 million. The Lands' End integration--now in place at 400 of 800 stores--added $49 million in expenses during the quarter. For the second quarter, Sears Chief Financial Officer Glenn Richter says the company expects comparable sales to decline in the mid-single digits after a 6.7% drop in same-store sales for the first quarter.

Sears Canada added $10 million in operating income, compared with a $110 million operating loss for the first quarter of 2002.

While the long-term prospects of Sears depend on store makeovers, the immediate concern for investors is the company's ability to slough off its credit unit. Goldman Sachs (nyse: GS - news - people)is handling the sale of part or all of the portfolio. The company is reportedly looking for $6 billion on its $30.1 billion portfolio. But operating income at the unit was down 10.8% to $395 million for the quarter. "It was better than we planned, with lower-than-expected charge-offs," said Richter.

Charge-offs were 6.11%, up from 5.42% at the end of 2002. Gold MasterCard charge-offs rose to 5.06% from 3.41%.

As Sears shifts its better customers to Sears Gold MasterCard from Sears Card, an interesting trend has developed for delinquent Gold MasterCard accounts--they increased far greater than those at the supposedly down market Sears Card. The Gold MasterCard delinquency rate rose to 4.72%, compared to 3.76% for the prior quarter. Sears card dropped to 10.14% from 10.34%. This comes as the Gold MasterCard portfolio increased by less than $800 million in receivables to $12.3 billion.

"We feel very good about where credit is heading and we're well priced for the risk," said Lacy on the conference call.

But how well Sears is prepared to handle that risk is shown by the additional $1.9 billion in cash and equivalents on its balance sheet. At $3.8 billion, Richter said Sears decided to pre-fund some of its upcoming commitments. But the company will need that only if it can't get the priceit wants for its credit cards.

And, despite the company's assessment that credit cards are stabilizing better than expected, the trend in the portfolio could make reported potential buyers like General Electric or Bank One think twice.

Sears Reports 1Q EPS 60c
Dow Jones Newswires - April 17, 2003

Sears Roebuck & Co. - Hoffman Estates, Ill.

1st Quar March 29:

	2003	2002
Revenue	$8,880,000,000	$9,037,000,000
Inc bef adj	192,000,000	a 318,000,000
Acctg adj	....	(208,000,000)
Net income	192,000,000	110,000,000
Avg shrs (diluted)	318,100,000	324,000,000
Shr earns
Inc bef adj	.60	a .9
Acctg adj	....	(.64)
Net income	.60	.34

Figures in parentheses are losses.

a. Includes a charge of $40 million on converting Eatons stores to Sears in Canada and a gain of $58 million from an investment in Advance Auto Parts.

Sears Roebuck & Co.'s (S) earnings topped Thomson First Call's consensus estimate of seven analysts by 3 cents a share, and were in line with the

retailer's February guidance of 50 cents to 65 cents a share.

Same-store sales for the quarter fell 6.7% as the weak retail environment, merchandise category exits and the late Easter holiday affected results.

In the year-earlier second quarter, Sears earned $1.31 a share on $10.14 billion revenue.

Sears projects full-year earnings of $4.95 to $5.15 a share, above Wall Street's estimate of $4.86. The projection excludes any effect related to

Sears' review of its credit-card unit, which the company announced in March it was looking to sell in an effort to focus on retail operations and end losses from high customer credit delinquencies.

Sears earned $4.92 a share in 2002, on revenue of $41.37 billion.

NYC Judge Seeks To Streamline Cumbersome
Credit Card Case
Associated Press - April 17, 2003

NEW YORK (AP)--A timekeeper will keep attorneys on a short leash. The judge and lawyers will break with custom and directly address the jury on key issues before and during the trial.

Lunch breaks will last 45 minutes. Exactly.

The stringent and unusual measures have been imposed by U.S. District Judge John Gleeson to try to streamline and simplify a complex antitrust case nearing trial in federal court in Brooklyn.

The case pits Visa USA and MasterCard against Wal-Mart Stores Inc. and other retailers in a dispute over debit cards. Jury selection starts on Monday.

In an order issued Tuesday, Gleeson laid down the law on what he called "conduct for the upcoming trial."

The judge rejected credit card companies' request to ease time restraints -150 hours total for the plaintiffs and 170 for the defense -and notified them he would have an official timekeeper in the courtroom. The limits were aimed at keeping the trial from lasting longer than three months.

"The parties will be informed at the end of each trial week of the total time used by each side," the judge wrote.

The judge even considered letting jurors question witnesses and discuss the case, but he dropped the idea amid objections by both sides.

The retailers' lead attorney, Lloyd Constantine, called time limits a "great idea."

Daniel Tarman, a Visa vice president, also insisted the company "supports any effort to assure the jury understands a very complex case." Calls to MasterCard lawyers were not returned.

Wal-Mart, Sears Roebuck and Co. and other merchants across the nation are seeking billions of dollars in damages in a class action suit brought in 1996. The retailers allege the defendants secretly schemed to extend their dominance to debit cards by mandating an "honor all cards" policy, meaning any merchant who accepts their credit cards must accept their look-alike debit cards as well.

The plaintiffs claim excessive transaction fees have cost them more than $15 billion in the past decade-costs ultimately passed on to the consumer. The credit card companies argue that the "honor all cards" rule is necessary to protect consumer choice.

In pretrial orders, Gleeson announced he would give a precharge at the trial's outset to "help the jury better understand the evidence as it comes in." Judges normally make such remarks only after all the evidence is in and jurors are about to deliberate.

Lawyers would be permitted to make "transition statements" before a witness takes the stand to "identify the essential fact or legal elements the testimony will help establish."

Lunch, the judge added, "will be 45 minutes in length, and will be taken approximately at 12:45 p.m."

How Wal-Mart Keeps Getting It Right
Business Week Online
April 16, 2003

Unlike fellow consumer giants McDonald's and Home Depot, few barriers seem capable of crimping the savvy discounter's growth Last year, while its peers struggled to cope with faltering consumer spending, Wal-Mart (WMT ) kept charging ahead. The world's largest retailer reported a 20% increase in earnings, to $8.2 billion, on revenue that grew 12%, to $245 billion, for the fiscal year ended Jan. 31. This year could be even more difficult for the retailing industry if fallout from the Iraq war takes its toll.

For Wal-Mart, however, what may prove a major obstacle to rivals should be no more than a bump in the road. Analysts think the Bentonville (Ark.) discounter can grow at its current pace for years to come, as it expands in the U.S. and beyond. Within the next decade, if you buy this scenario, Wal-Mart's revenues could exceed the gross domestic product of the Philippines, whose $350 billion economy grew 4.6% in 2002.

This success stands in stark contrast to the recent troubles of other consumer giants, particularly Home Depot (HD ) and McDonald's (MCD ), which many on the Street believe have hit their peak and are now slowing -- perhaps even fading. And it also raises two intriguing questions: What is Wal-Mart doing that Home Depot and McDonald's aren't? And what, if anything, might conceivably cause Wal- Mart to stumble? Those riddles will become even more intriguing as Wal-Mart continues its march to dominate retailing -- and perhaps finds itself confronting antitrust troubles.

FALLING STOCKS. McDonald's and Home Depot are finding that maintaining a lead is harder than building one. The luster of the Golden Arches has dulled as the No. 1 burger chain, with $15.4 billion in annual sales, has come late to the trend toward healthier eating -- a movement that seems to have buoyed waves of new competitors, most notably Wendy's and Subway. Yes, McDonald's has held onto its 43% slice of burger-chain sales -- but beef-patties' share of the fast-food market is shrinking.

Home Depot, which sells roughly 30% of U.S. home-improvement supplies, is losing some of its momentum to Lowe's (LOW ), where earnings and sales growth in 2003 should be about 18%, analysts predict, vs. 8% for Home Depot. Both McDonald's and Home Depot are overhauling operations, but their stocks have plummeted about 50% over the past 12 months, both hitting multiyear lows. At McDonald's, in the fourth quarter of 2002, the downward trend produced the first-ever quarterly loss.

"What has happened with both of these companies is that they lost sight of the customer," insists David Szymanski, associate professor of marketing at Texas A&M University, who blames a combination of declining service and run-down stores. "If the customer experience diminishes, people will go elsewhere," he adds. The reverse appears to be the case for Wal-Mart, whose customer base has grown as it has added more stores in suburban markets and lured shoppers from malls and traditional supermarkets.

ROOM TO GROW. In large part, that's because Wal-Mart has pulled off a difficult balancing act: On the one hand, it continues to woo large numbers of customers who respond to new concepts, things like Sam's Club and the chain's Supercenters. At the same time, while avoiding market saturation, it has been improving and expanding its roster of core Wal-Mart stores. Even though Sam Walton's creation seems omnipresent, it isn't. The U.S. has "only" 2,826 Wal- Mart discount or combined grocery and general merchandise Supercenters, plus 525 Sam's Club warehouse stores.

While those are some awesome numbers, Wal-Mart has plenty of room for expansion. Current plans see an additional 245 domestic outlets by January, 2004 -- at least 200 of which will be Supercenters. That should still leave a potential for 2,000 more stores in the U.S. by 2011, figures Mark Miller, an analyst at William Blair & Co. Miller thinks Wal-Mart can hit $660 billion in sales by then, an expectation that's evident in Wal-Mart's stock price: It has dropped over the past 12 months, but by only about 12%, to around $54.

By contrast, McDonald's, which plans to shut 600 underperforming stores in 2003, seems to have overpopulated the world, with 30,000 outlets in 119 countries. And Home Depot could be falling into the McDonald's trap, at least according to some analysts Its answer to Lowe's is to add 200 additional stores to its 1,550 existing outlets in 2003. Many analysts fear that this will push Home Depot perilously close to market saturation. One skeptic, Federated Investors retail analyst Eric Meyers, says a better new-store figure would be "something south of a 100," adding that he would "feel a lot better" about the stock if that were the case.

THE NEXT WAVE. Wal-Mart can still expand largely because it has come up with successful variations on its discount model. When its core business began to mature in the 1990s, Wal-Mart started to build combined grocery and general- merchandise superstores -- 180,000-square-foot behemoths that now account for 54% of revenues from Wal-Mart-branded locations in the U.S., according to Emme Kozloff, an analyst at Bernstein Research.

As the growth of superstores slows over the next several years, Wal-Mart will look to its much smaller Neighborhood Markets for the next wave of expansion. It now has 50 such stores, which represent very little of total revenues. Miller expects to see a further 1,350 by 2011, when he believes they should account for 5% of revenues.

That outlook contrasts sharply with expectations for McDonald's and Home Depot, which have failed to find new, growth-sustaining formats. McDonald's efforts to diversify by buying nonburger businesses such as Donato's Pizza have fizzled, and Home Depot has experienced similar problems with its specialty stores, Expo Design centers. While they target higher-income consumers, their sales remain small against warehouse-store revenues.

TINKERING WITH THE FORMULA. Wal-Mart, however, continues to experiment more successfully, with analysts speculating that it may add convenience stores to its retailing repertoire. And unlike McDonald's, Wal-Mart regularly embraces products that strike a chord with consumers. Already the leading U.S. consumer source of groceries, apparel, toys, jewelry, DVDs, CDs, sporting goods, and bedding, analysts say Wal-Mart is mulling expansions into new lines like gasoline, insurance, and banking services. "They're really attuned to changes in the marketplace," says Szymanski. "They don't just follow customers, but lead them." (See BW Online, 11/27/02, "Will Wal-Mart Rule the World?")

That ability explains Wall Street's love affair with Wal-Mart, which has combined smart marketing with aggressive use of technology to hold down costs. It's widely regarded as having the most advanced supply-chain system among discounters. Compare that to Home Depot, which has only recently begun the difficult task of centralizing inventory control.

Wal-Mart also has room to expand overseas, considering that "there are still a lot of places in the world where it doesn't do business," says Carl Steidtman, chief economist at Deloitte Consulting. "Their growth potential," he adds, "is tied to the rise of the global middle class." This year, in addition to those it plans in the U.S., Wal-Mart will open 120 to 130 stores in countries such as Mexico and Japan. By contrast, Home Depot, which has only 101 stores outside the U.S., has yet to prove that its model translates overseas. As for McDonald's, it has already discovered the limit to how many non-U.S. restaurants the burger market can stomach.

ENEMIES APLENTY. Size also could turn out to be Wal-Mart's Achilles' heel, however, especially given how large many analysts think it could get. Its stores and product lineups are so standardized, that if it stops clicking with customers, the effects could ripple quickly through the entire chain. Perhaps more likely is the possibility that a variety of backlashes against Wal-Mart's marketplace muscle could slow momentum.

The mammoth retailer has been criticized for everything from labor practices to contributing to urban sprawl. It's the target of some 40 lawsuits by employees who claim they were forced to work overtime for no extra pay. And an Internet search for "anti-Wal-Mart" turns up dozens of Web sites protesting the retailer's seemingly unstoppable growth.

"The price the rest of the community pays [when Wal-Mart shows up] is that other competitors are wiped out," declares Burt Foer, President of the American Antitrust Institute, a nonprofit research group in Washington, D.C. "In the short term, that serves the consumer. In the long term, there may not be very much competition out there."

"O.K. FOR A PYGMY." Ira Kalish, an economist at retail consultant Retail Forward, thinks the biggest threat to Wal-Mart "is local governments trying to protect local retailers." Last October, the city council in Inglewood, Calif., responded to pleas from a grocery-store union by passing an ordinance banning the construction of stores bigger than 155,000 square feet. Wal-Mart is appealing the rule, but it's just one challenge in a long list of battles. Some 164 towns have successfully blocked Wal-Mart, according to Sprawl-Busters Consultants in Greenfield, Mass. Wal-Mart declined to comment for this article.

Some observers think anti-Wal-Mart fervor could eventually reach the level that led to the antitrust case against software titan Microsoft (MSFT ) a few years ago. "The bigger and more powerful Wal-Mart becomes, the more it will be subject to antitrust scrutiny," says Stephen Calkins, professor at Wayne State University Law School in Detroit. "Practices that are O.K. for a pigmy can be illegal when engaged in by a giant." Assuming that Wal-Mart continues to wield unprecedented influence while making hefty profits, "by 2009, Wal-Mart will be battling the U.S. Justice Dept.'s attempts to block a retail monopoly," predicts Forrester Research analyst Christine Spivey Overby.

So far, no foe has yet mounted a serious antitrust attack on Wal-Mart. For one thing, even though it controls about two-thirds of the nation's discount-store business, it still accounts for only 10% of all retail sales in the U.S. -- too little to sustain an antitrust complaint, experts say. The clearest avenue for antitrust litigation would be through the Robinson-Patman Act, which prohibits price discrimination. But these are hard cases to win, in part because, as Calkins notes, it would be difficult for an aggrieved retailer to establish that Wal-Mart's low price on any particular product made a big difference to the competitor's overall results.

STIFLED VOICES. Some competitors have tried to make the case that Wal-Mart's sharply lower pricing caused them to lose profits over a substantial period of time. And in 1995, an Arkansas judge found in favor of a small drugstore operator that had sued Wal-Mart, alleging unfair pricing practices. Wal-Mart appealed and won a reversal of that decision.

So at least for now, the world's appetite for low prices on food and other consumer products is trumping the chorus of Wal-Mart foes who fear its pricing practices. As long as that's so, who can say how big Wal-Mart might become?

SARS Threatens U.S. Apparel Industry

By Jean Scheidnes - Reuters - April 13, 2003

NEW YORK (Reuters) - As the worldwide death toll from SARS rises, business ties between the New York-based U.S. fashion industry and the textile manufacturing hubs of Asia are increasingly vulnerable to the pneumonia virus that originated in southern China.

So far, the outbreak has not had a measurable impact on textile production, but there are fears of disruptions throughout the garment supply chain if employees flee, factories shut down or countries are quarantined.

Typically, clothing merchants log thousands of miles a year in frequent visits to overseas suppliers. But virtually all U.S. companies have suspended travel to Hong Kong, mainland China, Singapore and Vietnam in accordance with an advisory by the U.S. Centers for Disease Control and Prevention.

Kellwood Co., which supplies apparel to Sears, Roebuck and Co., J.C. Penney Co. Inc. and Wal-Mart Stores Inc., gets 70 percent of its supplies from Asia. Since it has curtailed travel, it is holding twice as many teleconferences as usual.

Although companies say they can do business via phone, fax, e-mail and sophisticated computer imaging, the absence of face time opens the door for rifts in relationships as well as potential quality and design glitches.

Gap Inc., the top U.S. specialty apparel retailer, usually sends quality assurance teams to China, which supplies about 14 percent of the goods sold in its Old Navy, Banana Republic and Gap chains, but such trips have been halted.

The company recently reversed a two-year decline in same-store sales, largely because of new product designs. Flaws in the merchandise could undermine this newfound standing with consumers.

DEATH TOLL RISING
As of Sunday, SARS, or Severe Acute Respiratory Syndrome, had killed 128 people worldwide and infected nearly 3,200. The flu-like disease, which originated in southern China late last year, hit Hong Kong in March and spread around the world through air travelers.

One of the first victims was a U.S. garment merchant doing business in Asia, according to news reports.

Beyond the loss of life, the disease has delivered a heavy economic blow across Asia, hitting hotels, airlines and eateries. The world's most vital high-tech supply routes have been imperiled.

"The global supply chain results in massive cost benefits, but it distributes risk to every corner of the globe," said economist Richard Hastings of New York- based credit advisory firm Bernard Sands. "In the worst-case scenario, SARS would ruin the low-cost environment everyone has enjoyed for years."

If apparel firms must shift production to different countries, most likely in Latin America, labor costs could rise and deliveries would be delayed, Hastings said.

ORDER SYSTEM AT RISK
Retailers increasingly rely on systems that allow them to test-market fashions early in a season and then reorder best-selling items as rapidly as possible. This saves them from profit-eroding discounts later on.

Liz Claiborne Inc., which has such a system, said it is supplied by nearly 300 factories in 35 countries. The risk of problems in any one location hurting the company are therefore relatively small.

Travel restrictions will affect importers who must make quality checks overseas before the goods are loaded for shipment.

But even those who pay for merchandise after it arrives and they've checked it for quality may face inventory problems. They need to keep their stores stocked with products that correspond with marketing campaigns planned months in advance.

"There have already been delays in shipments because of the heightened security concerns, and this is adding to the delay," said Barry Brandeis, manager of Twin Era, a New York-based garment maker and importer.

For a few companies, SARS poses risks to demand as well as to the supply chain, given the fall-off in tourism and shopping activity in and around affected countries.

Coach Inc., which markets high-end handbags and accessories, has a significant stake in Japan. But so far, no SARS cases have been identified in Japan or South Korea, two of Asia's largest economies and markets for luxury goods.

The epidemic is weighing more heavily on Coach's European rivals, which are more exposed to SARS-affected countries like Hong Kong, where retail sales have plunged by more than 50 percent over the past three weeks.

The companies at greatest risk are France's LVMH and Switzerland's Richemont, according to a recent J.P. Morgan research note. Southeast Asia accounts for 13 percent of global revenue from luxury goods, the firm said.

Employers Helping Guardsmen
By Mike Cronin - Bend, Oregon Bulletin
April 13, 2003

It would be surprising if Jolynda St. Clair wasn't nervous.

Her 29-year-old husband, Aaron, is on his way to Baghdad this weekend with a Hillsboro-based Oregon Army National Guard infantry unit that has trained for house-to-house combat.

"Sometimes I worry that I might raise my child alone," said St. Clair, 23, from her Redmond home during a Friday telephone interview. "But we're Christian, so we trust in God."

What also helps are the phone calls, baby sitters, car pools and home repair offers St. Clair receives on a regular basis from The Home Depot in Bend, where her husband has worked for four years.

"It's awesome, what they're doing for us," she said. "They're always ready to help me out if I need anything. It's really great."

Home Depot is just one example of area employers seeking to ease the burden on National Guard families with members now serving on active duty.

Federal law requires employers to give back jobs and health insurance to those serving in the military upon their return.

Some local employers go even further, paying the difference between employees' regular wages and military incomes to reduce families' financial hardship.

Home Depot executives recently extended the period they will pay that difference from 90 days to six months, said John Simley, a spokesman for the Atlanta-based company on Friday. That extension also applies to existing health insurance coverage, he said.

Sheridan Letzer, assistant manager of the company's Bend store, said on Friday he employs two National Guard members.

About 1,700 of Home Depot's employees nationwide are currently on active duty in Operation Iraqi Freedom, Simley said.

Sears, Roebuck and Co. and Wal-Mart are other businesses offering benefits that exceed the federally mandated minimum.

Sears compensates its active-duty employees the difference between their civilian and military pay for up to 24 months, said Jan Drummond, a company spokeswoman, from her Illinois office on Friday. Those employees also receive their full complement of benefits during that period, she said. "The war is striking a very deep emotional chord," Drummond said. "We want to support our 200 or so employees now on active duty."

Jeremiah Johnson, 23, is the only National Guardsman working at Sears' Bend location. The U.S. Army veteran is a specialist with a U.S. National Guard Reserve unit based in Vancouver, Wash., that trains ROTC cadets.

He is confident the company he's worked for since January will take care of him if he's called up.

"I've talked to a few people and they seem pretty willing to work with me," said the Prineville resident who served in the Army infantry for three years.

Wal-Mart has about 1,200 employees now serving on active duty in the National Guard, said Tom Williams, a company spokesman, from his Bentonville, Ark., office on Friday.

"We pay the difference in salary for the length of service � time doesn't matter," he said. "All benefits stay exactly as they want them. We don't do any disruption in pay or a decline in benefits."

Bend's Wal-Mart store employs two National Guardsmen on active duty in Iraq, said manager John Thomas in a Friday interview. "They've got a job whenever they come back," he said.

Les Stiles, Deschutes County sheriff, said he has an employee in the National Guard who will be deployed in June. The sheriff said his agency makes sure the deployed worker's family health insurance won't lapse. "There's nothing in writing," he said, but the sheriff's department will cover the individual and his family until military insurance kicks in.

For smaller operations, the loss of National Guard employees is often more difficult to absorb.

Dave Boise owns a construction company in Bend. He employed one person, Cpl. James Dilts, who's the lone member of the Oregon Army National Guard's 1249th Combat Engineer Battalion A Company left in the Bend armory.

When Dilts, 36, recently reported for active duty at the armory, where he's responsible for his unit's administrative duties, Boise lost his only worker.

The rest of his unit is in Fort Lewis, Wash., awaiting deployment orders.

"It's tough to give someone up who's worked with you for three or four years," Boise, 37, said in an interview on Friday. "It puts stress on employers, but it's something people gotta deal with," Boise said.

Dilts made clear he's proud of his service in the National Guard. Still, he misses working with Boise, whom he called "a great boss," he said Friday. As for his boss, the feeling is mutual. "I want to make sure he knows his job is here when he comes back," Boise said.

Disparity Between CEOs, Workers Under Scrutiny
The Pension Chasm

By Kirstin Downey - Staff Writer - Washington Post
April 13, 2003

As workers' pensions are eroding, employees, shareholders, unions and legislators are focusing new attention on the many ways top executives' retirement packages outshine those of their employees.

Financially ailing Delta Air Lines, for instance, has asked its workers to accept pay cuts and pension changes that many oppose. At the same time it has set aside $25.5 million in cash to create a special fund to guarantee executives' pensions if the airline should be forced to declare bankruptcy, according to recent corporate filings.

Sen. John McCain (R-Ariz.) last week called the Delta deal "insulting," coming at a time when the foremost recipient of Delta's largess, chief executive Leo F. Mullin, was approaching Washington seeking a multibillion-dollar federal aid package for the industry.

In recent years, Verizon Communications Inc.'s top executives boosted their pay and bonuses by tying them to the company's operating income, which was boosted in turn by high investment returns racked up by the company's $40 billion pension fund. When Verizon stopped doling out regular cost-of-living pension adjustments to retirees, 90,000 of them organized a vote last year on a shareholder proposal demanding that executives stop using the pension fund in their bonus computations. They proposed the measure again this year, and the company agreed last month to separate the executive compensation structure from the pension fund.

At Sears, Roebuck & Co., five top executives receive pension credit for two years of service for each year on the job, according to company filings, which boosts their pensions compared with those of rank-and-file workers. This proxy season, Sears is facing a union-backed proposal requiring the company to obtain shareholder approval of any future "extraordinary pension benefits for senior executives" -- including giving them credit for additional years they didn't work.

The gap between worker and executive retirement benefits is just part of the widening divergence in compensation between employees and their bosses. The average chief executive's pay was 42 times that of the average hourly worker in 1980, according to Business Week. By 2000, the CEO compensation was 1,531 times as much as the hourly worker's.

Pension issues have received prominence recently because of the flurry of shareholder proposals at upcoming annual meetings. Also, there were hearings and proposed legislation last week on plans to revive conversions of traditional worker pension plans to plans that can mean cuts in benefits, especially for older workers.

"The workers of America deserve better pension-law oversight and protection from their government," Janet Krueger, a 23-year International Business Machines Corp. employee from Rochester, Minn., testified at a pension hearing. She said her prospective pension eroded sharply after IBM converted it to a "cash balance" plan in 1999. In a later interview, she complained about the generous pension IBM had constructed for chief executive Louis V. Gerstner Jr. during the same period.

Company officials defend Gerstner's pay and pension package as a just reward for managing the company well. "The IBM board of directors determined Mr. Gerstner's retirement package based on a number of factors, including the company's overall performance during his tenure," spokesman Bill Hughes said in a statement. During Gerstner's nine-year tenure, he said, total stockholder return increased 938 percent.

The vocal debate also comes at a time when fewer American workers are covered by any kind of pension plan, and when those who are have seen their investments in supplemental plans, such as 401(k)s, hammered by the fall in stock prices since the Wall Street technology bubble burst three years ago.

The pension gap is "the utmost in hypocrisy," said Karen Friedman, director of policy strategies at the Pension Rights Center, a nonprofit pension-advocacy center that counsels workers who have seen their plans cut back or terminated. "Companies that are cutting back on pension benefits are giving huge benefit packages to CEOs at these companies. There's a basic element of unfairness."

Company spokesmen and compensation experts counter that rich pension plans have become a standard perk for top executives, and that companies that don't offer them won't attract the best people.

Jan Drummond, a spokeswoman for Sears, said accelerated pension vesting for top executives is a standard part of executive compensation packages among top-tier officers at very large companies. "Very skilled, talented people have a choice about where they reside in employment," Drummond said. "If we want to attract them, we need to have a competitive package."

Tom Donahue, a spokesman for Delta, said the $25.5 million special retirement fund for executives was approved by the company's board of directors in early 2002, in the wake of the Sept. 11, 2001, terrorist attacks, which wounded the airline industry.

"In an industry that was destabilized and uncertain, our officers were a rich target for executive recruiters," Donahue said. "It was considered a priority to maintain our executive management team."

Robert A. Varettoni, a spokesman for Verizon, said the company dropped its policy of linking executive pay to high pension-fund reserves after it became apparent there was widespread support for making the change. "We want to be responsive to our shareholders, and retirees are a significant shareholder base," he said.

Employment lawyer Lawrence Z. Lorber, who testified for the U.S. Chamber of Commerce at last week's pension conversion hearings, said the difference between executive and worker pension plans reflects "harsh business realities" caused by bad economic conditions, a weak stock market, an aging workforce and intense competition.

"It's an unfortunate confluence of the need to save money and the need to attract your savior," Lorber said.

Basic pensions, which are IRS-qualified and tax-deductible but limit annual benefits to $160,000, "are not enough to keep executives comfortable in the style to which they had become accustomed," said Carol Bowie, director of governance research at the Investor Responsibility Research Center. New and elaborate forms of enhanced executive pensions spread prolifically in the 1990s, she noted. "Once it starts, it spreads, because everybody wants one. It's sort of like having your cake and eating it too."

The pension gap is an issue labor organizers believe will resound with workers. A Web site being unveiled tomorrow by the AFL-CIO's investment office will highlight the discrepancies.

"The difference in treatment is unbelievable," said Richard L. Trumka, secretary-treasurer of the AFL-CIO, many of whose member unions are major institutional shareholders through their pension funds. Another tactic is pushing shareholder resolutions.

While inventive ways to embellish executive pension plans have proliferated, new studies show that workers' plans are at increasing risk.

A report last week by the Washington-based Employment Benefits Research Institute, a nonprofit group, found that the number of workers covered by any kind of retirement plan has fallen in the past two years, dropping from 60.4 percent of all adult, full-time wage and salaried workers -- an all-time high -- to 58 percent.

Today's worker pensions are often different from the traditional annuity, offering a fixed monthly income, that workers could depend on receiving at retirement -- called "defined benefit" plans. Now many pension plans are what are called defined-contribution plans, such as 401(k)s. They require that workers invest their own money, often but not always with an employer match. The benefit thus depends on how well the employee invests the money.

These kinds of pensions are problematic for John Rother, policy director at AARP, who called the shift "reflective of a change in philosophy, of shifting risk to the individual."

He said that 401(k)s "sound good, because you have choice, but suddenly, years later, people wake up to see that none of these changes were as good as the old- style pensions would have been."

Citing hard times, some companies recently have scaled-back their matches to 401 (k) accounts. Employers' matching contributions dropped from 3.3 percent of worker pay in 1999 to 2.5 percent in 2001, the most recent year for which numbers are available, said the Profit Sharing/401(k) Council of America, a benefits-industry group. And in the past year, investment broker Charles Schwab Corp., Goodyear Tire & Rubber Co., El Paso Corp. and Ford Motor Co. have all announced they were dropping their matching contributions, at least for the near future.

"It's tied to the downturn in business and the pressure of health care costs," said Edward Ferrigno, council vice president. "Companies have done it as part of a strategy to avoid layoffs."

Avoiding layoffs was the specific reason Schwab cited in suspending its matching grants, said company spokesman Glen Mathison. He said the company intends to restore the match "as soon as possible."

Then there's the cash-balance debate, which unfolded at hearings before the Internal Revenue Service and the Treasury Department last week. Retirees from several companies testified against a proposal that would end a moratorium blocking companies from changing traditional pension plans.

Traditional plans often use a formula that bases a worker's benefit on his or her highest salary, or a final salary average. IBM and several other large companies created a storm of protest when they switched to a formula in which benefits didn't accrue near the end of a career but spread out over a longer period. Companies argued that this was fairer for today's workers, who change jobs more frequently. But some older workers said the shift meant a big cut in their benefits.

Patricia A. Friend, international president of the Association of Flight Attendants, told the hearing on cash-balance plans that some flight attendants would earn so little in retirement under some of the converted plans that they would qualify for federal housing assistance.

Staff writer Albert B. Crenshaw contributed to this report.
� 2003 The Washington Post Company

Sears and Gurnee Mills Decide it's Time to Redesign
By Kim Mikus
Around the Malls - Daily Herald - Suburban Chicago
April 13, 2003

The retailer known for selling Lands' End clothing, Kenmore appliances, Craftsman tools and DieHard batteries is trying a new strategy.

In a daring move, Sears is launching a new store concept designed to compete against the Target Greatlands and Super Wal-Marts.

Sears is putting one of its five trial stores at Gurnee Mills, giving some teeth to the huge Lake County mall's move to create an updated image away from its original outlet focus.

Retail experts believe it's a good move for the mall, which is a major tourist attraction.

"Outlets are a dying strategy," said analyst Will Ander of Chicago-based McMillan/ Doolittle. Gurnee Mills is repositioning itself to help support its identity as a regional power mall.

"Sears will bring a new dimension to the mall," agreed analyst John C. Melaniphy III of Melaniphy & Associates.

It's unclear what the new Sears store will look like, Ander said. A Salt Lake City suburb will house the first store of its kind later this year.

From what we do know, the new concept is expected to sell a great deal of Sears traditional products as well as house cleaning products, dry grocery goods, cards, CDs and books.

"Sears is building from the ground up," said Kurt Morey, marketing manager for the Gurnee mall.

The store takes the place of Waccamaw, which Sears demolished last week. The store is expected to open next spring.

Kohl's is another major player coming to Gurnee Mills. The chain, the hottest in the country in sales growth in recent years, is building a store that's expected to debut in late August, according to Morey.

The new anchors add breadth to the shopping mix at Gurnee Mills, which opened as an outlet and discount mall more than 10 years ago. From the beginning, Gurnee Mills was at a disadvantage in attracting outlet stores because many already had located at two outlet malls a few miles north on Int. 90 near Kenosha.

"The new anchors fit in with the trend in offering something for everyone," Morey said.

He said that the mall's mix will include value-driven stores such as Burlington Coat Factory and Value City; entertainment such as the theater and ice skating rink; and conventional stores including Sears, J.C. Penney and Kohl's.

"We'll have the traditional, outlet and entertainment," Morey said.

Will the Sears concept work at Gurnee Mills, a location where it'll be up against a Wal-Mart and Sam's Club across the street and a Target just down the road?

Ander believes it's a positive move. "I commend Sears for trying new things," Melaniphy agreed.

Sears, like many retailers, needs to do something to boost sales. Last week, Sears reported sales at stores open at least a year fell 3.1 percent in March - marking the 19th consecutive month that its same store sales have dropped.

This month, Sears expects sales to fall in the mid-single digits. The bad news goes beyond Sears as Wal-Mart posted its worst monthly performance in more than two years.

Sears Samples New Niche
By Mary Ethridge, Beacon Journal Business Writer
Akron (Ohio) Beacon Journal
April 12, 2003

Retailer refocuses some hardware outlets on appliance sales, a market vital to chain

Calling Dr. Freud --- How about Dr. Phil?

Sears Roebuck & Co., which at 116 years old seems practically neolithic, has had a gender identity crisis--and just about every other kind of anxiety--over the last decade or so.

Sears is a place where socket wrenches sit by the sandals.

But split personalities are never easy to convey, especially in a 30-second spot.

The 1990s were particularly tough on Sears. It was fighting madly to hold on to its 40 percent share of the retail appliance market, according to Stevenson Co., a North Carolina research firm

First, Sears tried to cater to its softer clients: ladies who wanted pantyhose and housewares. But it turned out that these ladies didn't much care for the higher-margin clothes, experts said.

(Think Ronald McDonald in polyester.)

The company laid off thousands. This year, Sears announced it is selling its credit card operation, an industry it helped to pioneer.

Sears recently snapped up Lands' End, a catalog that sells and extols the virtue of prep school and life on a yacht. I guess it's not much different from finding Martha Stewart brands at Kmart. We got over it.

Sears is going to don its latest personality as small-town appliance vendor at the Sears Hardware store at 949 S. Aurora Road in Macedonia.

Sears isn't the first retailer to seek a smaller life beyond the mall. Wal-Mart Inc. began experimenting with neighborhood stores more than a decade ago. Sears quickly followed suit.

Six other such Sears Appliance and Hardware stores will be test-marketed around the country, said John Costello, vice president of public relations for Sears Hardware. If it works, the concept will be taken elsewhere.

"We picked Northeast Ohio because we know what a fierce market it is,'' said Costello. "If we can make it here, our chances are pretty good elsewhere.''

Scott Krugman of the National Retail Federation said it's important for good retailers to change frequently, but not beyond recognition to the point the brand is lost, he said.

"If you take longtime, well-known brands and put them in exciting settings, it can give them new life,'' said Krugman.

All is not rosy news, however. The NPD Group recently reported that major appliance purchases would be at the top of the list of cutbacks by American consumers.

The Sears Appliance and Hardware Store pilot stores, such as the one in Macedonia, will have 260 appliance models, including 50 that can be taken home that day.

In addition to the pilot store in Macedonia, others are being tested in suburban Chicago, Cincinnati, Detroit, Houston and Long Island, N.Y.

They will be evaluated in three to four months, according to the company.

The first Sears Appliance and Hardware store opened in Batavia, Ill., in
mid- March.

To make room for the new appliances, including washers, dryers and microwave ovens, about 16,000 pieces of low-selling products had to be removed from each store.

Sears sells only a handful of brands of appliances: Amana, Frigidaire, GE, Maytag, Whirlpool and Sears' own Kenmore and Kenmore Elite. The Kenmore brands are the nation's top sellers.

Sears opened its first Sears Hardware store in 1989. It also operates Orchard Supply Hardware stores in California.

Morgan Stanley Directors Skip Meeting
By Mike Comerford, Daily Herald Business Writer - Daily Herald - Surban Chicago
April 12, 2003

Morgan Stanley on Tuesday called 2002 "the year of defense" and this year "the year of offense."

Plagued last year by falling profits, ethics investigations and a workforce reduction of 9 percent, the New York-based investment bank opened its annual meeting at the headquarters of subsidiary Discover Card in Riverwoods with what one company official called a "gloomy preamble."

It was an annual meeting company officials didn't appear to be looking forward to.

Chief Executive Officer Philip Purcell declined to meet with the press and, for the first time, asked Morgan Stanley's board of directors not to attend. Purcell said he was "trying to be efficient with directors' time."

If company officials feared the worst, they were not far off.

High-profile shareholder advocate Evelyn Y. Davis and other shareholders peppered executives about the absence of the directors. Later, Davis' proposal to elect directors on an annual basis passed for a second straight year, with 59 percent of the votes cast.

"This is outrageous for the directors to not attend an annual meeting," said Davis, 73, known for her flamboyant and often pointed questioning of corporate officers.

However, Morgan Stanley's board is widely expected to reject the recommendation to change its staggered system of voting on seats.

"We have a very complex company and it takes time for directors to become familiar with our business," Purcell said.

Davis and others also questioned Purcell about employment of controversial Internet stock analyst Mary Meeker and the company's $200 million settlement with the government for analyst practices and conflicts of interests.

Company officials downplayed the firm's 14 percent downturn in sales, to $32 billion. Profits also were down 17 percent to $3 billion. The stock price on Friday fell 30 cents, to $41.54. That is off 27 percent from its 52-week high of $57.

Instead, company officials pointed to profitability that was greater than many of its competitors and market share gains despite a sluggish economy and the war with Iraq.

Its return on equity was 14 percent, Morgan Stanley points out, which is a better investment than government bonds and other investments.

Reasoning that the coming together of so many negative events won't repeat themselves, company officials said the firm is poised for a robust comeback.

In 1981, it was Purcell, who still maintains a Winnetka residence, who advised Sears, Roebuck and Co. to buy financial services firm Dean Witter Reynolds and Co. and who then led the creation of Discover Card in 1985. In 1997, he was key in the merger of Dean Witter Discover & Co. with Morgan Stanley.

Currently, Discover is based in Riverwoods, where it has 2,200 employees, and is undergoing one of largest building projects in Lake County. Discover won't disclose the cost of the expansion but another project similar in scope, the Condell Medical Center in Libertyville, is being built for $90 million.

Morgan Stanley also owns Van Kampen Investments, which employs 600 in Oakbrook Terrace. A spokeswoman said the firm had its second best year, with 2002 net sales of about $15 billion last year and $66 billion under management.

Wal-Mart Said to Consider Bid to Buy BJ's Wholesale
By Chris Reidy, Globe Staff - Boston Globe
April 11, 2003

The website Daily Deal reported yesterday that giant retailer Wal-Mart Stores Inc. is considering a bid to buy BJ's Wholesale Club Inc., a Natick-based chain that operates about 140 club stores with sales last year of nearly $5.9 billion.

BJ's officials could not be reached last night. A spokes-man for Wal-Mart said the Arkansas-based company does not comment on speculation.

According to Daily Deal, Wal-Mart is primarily interested in BJ's East Coast locations for its Sam's Club chain and is prepared to make an offer valued at up to $1.4 billion.

Sean Daly, president of Tower Hill Holdings Inc., told the website that he has heard that Wal-Mart has recently made an offer for BJ's. Tower, a Charlottesville, VA, investment firm, owns less than 5 percent of BJ's shares.

Many retailers are struggling with the sluggish economy, but BJ's has issues of its own. By sales, it is a distant third in the three-chain club store world, competing against Costco Wholesale Corp., based in Washington state, and Sam's.

BJ's, which sells many of the same items that can be found at a typical big supermarket, concentrates on consumers. Costco and Sam's put more emphasis on small-business operators.

A few years ago, all three chains fared well as they focused on regional markets near their home bases. But now because of expansion, all three players compete against one another in many of the same markets.

Though its March sales rose 16 percent, BJ's reported last month that fourth- quarter profit decreased 14 percent. On that day, BJ's stock shares fell to their lowest level since mid-1997. Management, meanwhile, has experienced turnover. In September, Mike Wedge was promoted to chief executive after the unexpected departure of his predecessor.

This story ran on page D3 of the Boston Globe on 4/11/2003. � Copyright 2003 Globe Newspaper Company.

Retailers Post Soft March Sales
Dow Jones Newswires
April 10, 2003

NEW YORK -- Retailers Thursday recorded lackluster March sales, hampered by weak consumer demand amid the soft economy and a late Easter holiday.

Wal-Mart Stores Inc.'s (WMT) same-store sales, or sales at stores open at least a year, inched up 0.7%, for the five-week period ended April 4, compared with a 9.5% increase last year.

The world's No. 1 retailer had expected same-store sales growth in the low- single digits. Analysts had anticipated the Wal-Mart's same-store sales, a key measure of retail performance, would increase by 1.5%.

Total sales at the Bentonville, Ark., company rose 7.8% to $23.18 billion.

The Wal-Mart division eked out a 0.3% increase in same-store sales, while total sales at the division grew 7.2% to $14.95 billion. The Sam's Club warehouse business fared much better, with its same-store sales up 2.6% and total sales increasing 7.6% to $3.1 billion.

Sales at Wal-Mart's international division jumped 13% to $4.06 billion.

March was a tough month for retailers, as unusually cool spring weather and the war in Iraq led some retailers to adjust their sales guidance during the month. It also didn't help that Easter fell three weeks later this year. The March selling period last year included the Easter holiday.

Discount retail rival Target Corp. (TGT) saw its same-store sales dip 2.3%, as total sales rose 4.6% to $3.89 billion for March. As a result of weak sales performances in February and March, and the company's outlook for April, "we are unlikely to fully achieve our profit plan in the first quarter," Bob Ulrich, Target's chairman and chief executive officer, said in a prepared statement.

The Target division posted a 1.3% decline in same-store sales, while total sales increased 6.1% to $3.32 billion.

Mervyn's and Marshall Field's remained sluggish, with same-store sales falling 8% and 6.1%, respectively.

Sales Decline At Department Stores Federated Department Stores Inc.'s (FD) same-store sales dropped 6.5%, in line with its lowered forecast for a 6% to 7% decline.

The Cincinnati-based operator of Macy's and Bloomingdale's said its "disappointing" March sales reflected the impact of the U.S.-led war on Iraq as well as unseasonably cool spring weather in much of the country.

The company's total sales fell 5.9% to $1.23 billion.

Federated said it expects to achieve its first-quarter earnings guidance of 14 cents to 19 cents a share, despite weak sales so far in April.

Same-store sales at J.C. Penney Co.'s (JCP) department-store chain fell 5.5% for the five weeks ended March 29. Penney had expected flat to slightly lower monthly sales.

Total sales declined 4.2% to $2.84 billion, as department-store sales fell 6.6% to $1.17 billion.

Penney, of Plano, Texas, said comparable sales at its Eckerd drugstore unit decreased 3%, weighed down by a 12% decline in front-end sales because of the shift in the Easter holiday. Pharmacy sales rose 1.3%, but the use of lower priced generic drugs hurt those sales by 2.4 percentage points.

Catalog sales dropped 13%.

While Penney expects April to benefit from the late Easter holiday, the retailer said it expects first-quarter sales to be lower than previously expected. Penney also lowered its first-quarter earnings estimate to a range of 18 cents to 23 cents a share, from a previous forecast for earnings in the low 30-cent range.

At Sears Roebuck & Co. (S), domestic same-store revenue declined 3.1%, and total revenue slipped 2.3% to $2.4 billion.

Despite the decline, Sears, Hoffman Estates, Ill., said its March sales were better than expected thanks to the strong performance of its home-improvement business.

The department-store operator said home-improvement sales included double-digit growth in lawn and garden and low-single-digit growth in tools and paint.

Sears, in a prerecorded sales call, said it posted the weakest March sales in the kids and home fashions departments. Same-store sales in the kids segment were down in the midteens, and same-store sales in home fashions fell in the high teens.

For April, Sears said it expects same-store sales to drop in the mid-single digit range.

Gap Sees Solid Sales Growth Gap Inc. (GPS) continued to report strong monthly sales results, as its March same-store sales rose 9%, compared with a 12% decline a year earlier. Total sales jumped 13% to $1.4 billion.

The San Francisco-based apparel retailer attributed its strong sales to improvement in overall merchandise margins due to "more regular price selling and higher markdown margins."

Same-store sales rose 6% at Gap's U.S. division, 6% at the international division and 17% at Old Navy, reversing year-earlier declines at these stores. Banana Republic, however, saw its same-store sales decline 5%, compared with a 4% drop a year earlier.

Specialty retailer Limited Brands Inc. (LTD) said its same-store sales fell 4%, and total sales slipped 0.5% to $690.1 million.

The Columbus, Ohio, retailer, which operates Victoria's Secret, Bath & Body Works, Express, Limited Stores, Total Apparel and Limited Brands stores, saw declines at all of its stores.

Same-store sales fell 2% at Victoria's Secret, 3% at Express, 5% at Limited Stores and 3% at Total Apparel, all reversing year-earlier sales increases. Bath & Body Works, meanwhile, saw sales decline 10% from 3% last year.

Court Tells Visa, MasterCard To Refund About $800 Million
By Jathon Sapsford - Staff Reporter of The Wall Street Journal
April 9, 2003

In the latest in a series of setbacks for the nation's two biggest credit-card networks, a California court ordered Visa and MasterCard to refund $800 million to consumers because of a dispute over poorly disclosed fees for using cards overseas.

California Superior Court Judge Ronald Sabraw said the two card associations, owned by thousands of banks around the country, violated state law by failing to sufficiently disclose currency-conversion fees they charge customers who use their cards to buy goods in foreign currencies.

The award, which will go toward refunds for California consumers affected by the charges, is significantly higher than the $500 million that the card industry had been bracing for.

The lawsuit, filed against Visa USA Inc., Visa International and MasterCard International Inc., has been the subject of a six-month trial in Oakland, Calif.

While the judge's decision wasn't unexpected, it marks yet another setback for an industry under increasing fire for allegedly unfair practices. Critics have long charged that the two card companies maintain an unhealthy dominance over the consumer credit-card market.

In a separate high-profile case scheduled to go to trial in New York federal court later this month, Visa and MasterCard are defending themselves against retailers including Wal-Mart Stores Inc. and Sears Roebuck & Co., which accuse the associations of forcing merchants to take Visa and MasterCard debit cards as well as credit cards.

If the courts rule against Visa and MasterCard in the New York case, it could bolster the ambitions of rivals such as First Data Corp., which are hoping to dent the dominance of Visa and MasterCard with competing card-payment networks. Last week, First Data announced the $7 billion acquisition of Concord EFS Inc., a move that industry executives say will pose a challenge to Visa and MasterCard by combining two alternative networks that will dominate the fast- growing market for debit cards.

Both Visa and MasterCard said the California ruling doesn't signal the end to the dispute over currency-conversion fees. "We are disappointed by the court's decision, particularly in light of the judge's acknowledgment of the favorable rates that Visa consumers enjoy when using their Visa card internationally," Visa said in a statement. "We intend to appeal this decision."

MasterCard said that it, too, would appeal the decision, and that the ruling effectively usurps the regulatory powers of federal agencies that govern the banking industry. "By establishing a requirement for MasterCard to mandate how its member financial institutions disclose the currency conversion process to their customers, Judge Sabraw also is usurping authority that properly resides with federal authorities, who regulate financial disclosure," MasterCard said in a statement.

Consumer complaints about the fees first surfaced after customers said they didn't realize they had been paying them until months or years after the fact. Those fees often run as much as 3% of each transaction. Visa and MasterCard last year alone earned a combined total of at least $240 million from foreign- exchange fees generated by cards issued in the U.S., according to the Nilson Report, a newsletter that covers consumer payment systems.

The California ruling, which covers fees generated since 1996, doesn't seek to ban charging fees for currency conversion. Rather, it focuses on what was deemed to be inadequate disclosure of the fees. The plaintiffs in the case argued that by embedding the fee in the transaction amount, Visa and MasterCard concealed the fee from card users.

Card-issuing banks explain the foreign-exchange fees when they mail new cards to customers, but few mention them again on their bills. Visa and MasterCard say a requirement to disclose that fee on each transaction would hold the card associations to a higher standard of disclosure than other businesses. They note that retailers aren't required to disclose to consumers how much they mark up the goods they sell, or how much they might be charging to cover the costs of importing those goods .

"Judge Sabraw is ignoring the fact that consumers naturally understand that commercial suppliers of goods and services impose a markup over their costs," MasterCard said in a statement.

Court's Ruling May Spell the End of Megadamages
By Kathryn Kranhold, Staff Reporter
The Wall Street Journal
April 9, 2003

From tobacco and automobiles to pharmaceuticals and insurance, industries facing billions of dollars in potential tort liability cheered Monday's ruling by the U.S. Supreme Court that could place significant limits on punitive damages.

But lawyers for both plaintiffs and defendants say it's too early to celebrate the death of colossal damages: The ruling leaves state courts plenty of leeway in applying the limits. The ruling could affect cases that are set for trial and also awards being appealed.

Several attorneys noted that punitive damages actually are awarded in very few cases. And Charles Platt, an insurance defense attorney with LeBoeuf, Lamb, Greene & MacRae, L.L.P., says while the ruling is clear on the "guideposts" for awarding punitive damages, they won't necessarily be followed. "Different state courts will undoubtedly interpret the ruling differently," says Mr. Platt, who represents Nationwide Mutual Insurance Co., General Electric Co.'s insurance units, and Equitable Life Insurance, a unit of French insurer Axa SA.

The Supreme Court ruling struck down a jury's award of $145 million in punitive damages to a Utah couple, who had sued State Farm Mutual Automobile Insurance Co. following a car accident in which the husband had been found liable. The couple sued their insurer for failing to settle a claim against them and exposing them to personal liability beyond the limits of their policy. In addition to the punitive damages, the jury awarded the couple $1 million in compensatory damages.

Writing for the majority in the high court's 6-3 decision, Justice Anthony M. Kennedy wrote that in most cases, the ratio of punitive-to-compensatory damages shouldn't exceed single digits. Under that standard, the punitive award against State Farm shouldn't have exceeded $9 million.

William S. Ohlemeyer, associate general counsel for Altria Group Inc., parent of Philip Morris U.S.A., said the ruling could have a major impact on several tobacco cases involving the company either set for trial or pending before appellate courts. In one case on appeal in Oregon, a jury awarded a male smoker $100 million in punitive damages and $168,500 in compensatory, a 500-to-1 ratio. Under the single-digit guideline, Philip Morris could argue that punitive damages should be reduced to approximately $1.5 million.

In a class-action case on appeal in Florida, a jury awarded $145 billion in punitive damages against several tobacco companies, including Philip Morris; the jury didn't determine compensatory damages. Based on its market share, Philip Morris was held responsible for $74 billion of the punitive award. In its appeal, the company is arguing that without a compensatory-damage award, there is no basis for calculating appropriate punitive damages.

Monday's ruling "certainly strengthens the arguments we have made" in that appeal, Altria's Mr. Ohlemeyer says. "It's pretty simple and straightforward opinion. ... It's one of the few times in that last few years that the U.S. Supreme Court has spoken so directly." (See related article1.)

But Michael Piuze, a Los Angeles plaintiffs lawyer, says, the "opinion leaves open what will be allowed in the extraordinary case." Given the U.S. Department of Justice's description of the tobacco industry as a "50-year fraud," he says, most tobacco liability cases are "not the ordinary case."

In a suit against Philip Morris, a Los Angeles jury awarded $850,000 in compensatory damages and $28 billion in punitive damages to a 64-year-old woman who smoked and was dying of lung cancer. A judge later reduced the punitive award to $28 million. Mr. Piuze, who represented the woman, says the ultimate punitive award represented a 33-to-1 ratio. "I don't believe that single digits ultimately will be found to apply to tobacco cases," he says.

Martin Feldman, a Merrill Lynch tobacco-industry analyst, echoed that idea in a report Tuesday. The U.S. Supreme Court appeared to state that in some cases higher ratios of punitive damages to compensatory damages "may in fact be acceptable," he wrote.

Fritz Zimmer, a partner with the San Francisco office of Drinker Biddle & Reath who defends medical-device and pharmaceutical companies, says he expects the ruling will "curtail" excessive awards. The Supreme Court ruling says a jury can't consider a defendant's wealth, nor can it impose damages for conduct outside the state where the case is heard. In the Utah case, the plaintiffs brought in evidence of State Farm's actions outside Utah.

"It's no secret that the plaintiff bar actively tries to pursue the company, rather than the particular facts at issue," Mr. Zimmer says.

Some attorneys point out that gigantic punitive damage awards are rare, and even when juries award them, they are rarely paid because judges reduce them. Glen Morgan, a Beaumont, Texas, attorney who has represented several plaintiffs with asbestos-related cancer, says in two recent victories, juries haven't awarded punitive damages at all. And in a case involving five plaintiffs, the jury awarded $70 million in compensatory damages and only $60 million in punitive damages.

The threat of possible punitive damages, however, is a powerful legal weapon. It can help settle cases before trial, says Steven Kazan, an Oakland, Calif., attorney who represents cancer patients with asbestos claims. "The idea of large punitive-damage awards is far more important to industry as a lobbying argument and public relations tool than it is a real problem for them or a real advantage for plaintiffs," he says. In many cases, seeking a huge punitive- damage award can backfire. "If you overreach, you're not going to get anything," he says.

Sears' New Full-line Stores Chief Shakes Up Management
Lorene Yue - Chicago Tribune - April 8, 2003

Inside Retailing

Mark Cosby, the new head of Sears, Roebuck and Co.'s full-line stores, put his first imprint on the division Monday by shaking up his management team.

"He's beginning to shape his own team," said a spokeswoman for Sears. She said Cosby, who joined Sears Dec. 1, has finally had the opportunity to establish his priorities.

Kathryn Bufano, who joined Sears in January 2002 as executive vice president of soft lines, was replaced by Mindy Meads. Meads, executive vice president of soft lines for Land's End, joined Sears' ranks when the retailer bought the catalog firm last year.

She will continue to oversee soft lines for Lands' End in her new role.

Also leaving the Hoffman Estates headquarters is Mary Conway, who was executive vice president of store operations.

Cosby promoted Bill White to executive vice president of store operations. White, who has worked for Sears for more than 30 years, was head of Sears' automotive business.

Stunning Shakeup Among Top Sears Brass
By Sandra Guy, Business Reporter - Chicago Sun-Times
April 8, 2003

Two top Sears executives who played leading roles in redesigning Sears Roebuck and Co. stores left the company Monday in a stunning shakeup.

The reshuffling proved that Mark Cosby, a fried-chicken executive whose appointment as president of full-line stores in December surprised retail analysts, intends to make his mark in a bold way.

*Mary Conway, 54, who had worked for Sears for 32 years, most recently as executive vice president of store operations, was replaced Monday by Bill White, also a 32-year veteran. White was most recently senior vice president of Sears automotive.

*Katryn Bufano, 50, who joined Sears in January 2002 to oversee the introduction of Covington and Lands' End apparel into Sears stores, was replaced by Mindy Meads, 51, who had headed Lands' End's merchandising and design.

Meads, who now works in Lands' End's headquarters in Dodgeville, Wis., will head up merchandising for both Sears and Lands' End, according to a company memo.

Wendy Liebmann, president of WSL Strategic Retail consultancy, said Monday she was shocked by the move. Since Sears is still in the process of introducing Lands' End clothing into its stores, Bufano's replacement shows that top management wanted "a fresh, new and experienced executive in that position," Liebmann said.

None of the executives could be reached for comment.

Sears spokeswoman Jan Drummond confirmed the changes, saying, "It's an indication that Mark Cosby is shaping his team for the future in both the softlines arena as well as our full-line stores."

Despite Sears' massive restructuring of its stores to better compete with Kohl's and Target, including shopping carts and fewer but more fashionable clothing lines, Sears has reeled from sales declines for the past 18 straight months.

Sears Replaces Two Key Executives
By Kelly Quigley - Crain's Chicago Business
April 7, 2003

In a move it says will boost profitability at its full-line stores, Sears, Roebuck and Co. on Monday named a Lands' End executive to head its apparel business and appointed a new director of store operations.

The Hoffman Estates-based department store chain named Mindy Meads, who is in charge of merchandising for Lands' End, to executive vice-president of Sears' softlines. She replaces Kathy Bufano, who held the position since January 2002 and is leaving the company.

Ms. Meads, 51, served in senior merchandising positions with Lands' End for the past 12 years and will continue to head that clothing line.

"This shows a growing influence of the Lands' End acquisition," says retail analyst Neil Stern, of Chicago-based McMillan Doolittle LLP. "Obviously, apparel is going to be a critical area for Sears' success."

Sears' bought Lands' End last year for $1.8-billion, in hopes of at turning around its tired apparel unit by attracting more upscale shoppers.

Sears on Monday also promoted Bill White, who joined the retailer in 1971 and was most recently senior-vice president of the automotive department. Mr. White is now executive vice-president of store operations, replacing Mary Conway, a 32-year Sears veteran who also is leaving the company.

Sears spokeswoman Jan Drummond said Mr. White, 55, has led a successful turnaround of the automotive business and "has a real sharp focus on customer needs." Both he and Ms. Meads will report to Full-line Stores President Mark Cosby, a former KFC executive who joined Sears in December.

Ms. Drummond would not comment on whether Ms. Bufano, 50, or Ms. Conway, 54, left the company voluntarily or were fired. She could only say that Mr. Cosby is "rebuilding his team with an eye to the future."

This management shakeup comes in the wake of CEO Alan Lacy's decision late last month to sell Sears' credit card portfolio, which made up nearly two-thirds of the company's profits in 2002. He plans to use cash from the sale to raise cash, lower debt and turn around the ailing retail business.

Mr. Lacy has already given the stores an $800-million overhaul to make the chain look and feel more like a big-box discounter, and launched a new clothing label, Covington, which like Lands' End is aimed at luring new shoppers.

Why a Sears-Kmart Merger Could Happen
By Sandra Guy - Business Reporter - Chicago Sun-Times
April 7, 2003

Kmart Corp. and Sears, Roebuck and Co. might be headed for a merger, but it could turn into a fatal dance, retail analysts say.

The links between the two reeling retailers have become too apparent to ignore.

The most obvious is the Greenwich, Conn., multimillionaire who holds an enormous stake in both. Edward Lampert, a hedge fund manager known for investing in undervalued companies, is Sears' second-biggest shareholder, and he will become the biggest shareholder in Kmart Corp. when it emerges from Chapter 11 bankruptcy protection later this month. Last week, Lampert nominated himself as a member of Kmart's new board of directors.

What does Lampert intend to do now?

A few theories have emerged, though retail analysts admit it is anyone's guess:

* Kmart and Sears could merge and play off one another's strengths. Look no further than Sears Canada, which has won exclusive rights to sell Martha Stewart Everyday home fashions, starting this summer, at its 123 department stores and in its catalogs. In the United States, Kmart has the exclusive rights.

* Kmart could fail to turn itself around and liquidate. Sears could grab the choicest Kmart stores as part of its plan to open free-standing stores away from malls to better compete with Kohl's and Target.

* Both Kmart and Sears could disappear within five years, but Lampert will have benefitted from a hoped-for premium on the sale of Sears' credit-card business, and end up controlling the store leases.

To make matters more intriguing, top executives of Sears and Kmart are no strangers. Sears CEO Alan Lacy and Kmart CEO Julian Day worked together in an "office of the chief executive" at Sears. Both men reported to former Sears CEO Arthur Martinez, who is a board member of Martha Stewart's company, Martha Stewart Living Omnimedia. Day left Sears after he lost the CEO job to Lacy.

Analysts who scoff at the speculation say Sears has no money to acquire Kmart property or to spiff up its stores, and they believe Sears risks turning off its U.S. customers by selling home decor from Martha Stewart, who's still under federal investigation for alleged insider trading.

Lampert is not talking, nor are the other players involved.

Sears spokeswoman Jan Drummond said, "There is no relationship between Kmart and Sears."

Retail experts disagree.

Sean Egan, managing director of Egan-Jones Ratings Co., said Lampert might consider merging Kmart and Sears in hopes of realizing cost savings in distribution and financing, and to gain leverage with suppliers.

If Kmart were to go out of business, Lampert might believe his investment is protected because he bought the stock so cheaply, Egan said. Lampert has reportedly spent $400 million to acquire Kmart debt and will invest more than $100 million in cash into the chain outside bankruptcy, according to the Detroit Free Press.

As for Sears, Lampert might have been the guiding force behind the Hoffman Estates-based retailer's shocking announcement March 26 that it would sell its credit-card business. Credit-card operations provide more than 60 percent of Sears' operating profit.

"It would be surprising if [Lampert] isn't watching it closely, and if Lacy isn't listening to his major shareholders," Egan said.

Lampert has steadily increased his investment in Sears. Last October, his investment company owned 22.8 million shares, or 7.2 percent of Sears. On Dec. 31, he had 28 million shares, or 8.9 percent, according to documents filed with the Securities and Exchange Commission.

Wendy Liebmann, president of WSL Strategic Retail, a consulting firm in New York, said Sears might see Kmart's choicest sites as a way to reduce its dependence on its mall stores.

"You can see the co-partnering of Sears' strengths in the home, such as Kenmore appliances and Craftsman tools, married to Martha," Liebmann said. "It would be quite interesting."

Other analysts believe a Kmart-Sears pairing makes no sense.

Jim Ostroff, an associate editor at the publisher of the Kiplinger Letter, said, "It is analogous to pairing up on the dance floor the dead and the dying."

Sears would have no interest in Kmart's properties, which are in poor locations and require millions in rehabs, Ostroff said.

Kiplinger is forecasting that Sears sales nationwide will drop this year by about 8 percentage points from last year.

"Save for Nordstrom, every department store is struggling," Ostroff said. "The discounters continue to eat the department stores for lunch."

Kiplinger is predicting that Kmart and bankrupt retailer Spiegel Group will go out of business by the end of 2004.

Whether Sears would benefit from Martha Stewart's home decor and accessories is another open question.

Robert Passikoff, president of Brand Keys, a New York brand and customer loyalty research consultancy, said his research showed Sears' shoppers had lower opinions of Sears when it was paired with Martha Stewart's goods.

Robin Lewis, a retail and apparel brand consultant in New York, had a harsher assessment of Sears' future.

"It is the Titanic," he said. "They've been moving chairs around for 20 years.

"I predict within no more than five years, Sears as we know it as a retail operation will cease to exist," Lewis said.

Sears' fatal mistake occurred in the 1980s when it passed on a chance to acquire Home Depot, and refused to get out of the apparel business, Lewis said.

As for Kmart, Lewis said, "It should have been shot in the head 15 years ago."

Stealth Investor is Taking a Big Bite of Big Store
By Sandra Jones - Crain's Chicago Business
April 7, 2003

Edward Lampert, the stealth Connecticut multimillionaire poised to take control of Kmart Corp., has been quietly buying up big chunks of Sears, Roebuck and Co., making him the retailer's second-largest shareholder.

ESL Partners L.P., the $5-billion hedge fund that Mr. Lampert owns and runs, began acquiring Sears shares in earnest six months ago, shortly after the price plummeted to a decade low in the wake of bad news at its highly profitable credit card business.

The Hoffman Estates-based company revealed that it would have to increase reserves for bad accounts as a growing number of customers failed to pay their bills, sparking a stock selloff and eventually leading Sears to put the unit up for sale last month.

Mr. Lampert, a former Goldman Sachs & Co. risk arbitrager, takes large positions in a few companies that he studies meticulously and then often angles for a seat on the board, in order to influence the company's direction.

It's a pattern he has followed for more than a decade at several companies, including Memphis-based car dealer chain AutoNation Inc., Memphis-based auto parts retailer AutoZone Inc., Britain's Saatchi & Saatchi plc, the advertising agency now owned by Paris-based Publicis Groupe SA, as well as Troy, Mich.- based Kmart.

His hedge fund, which he runs with several former Goldman colleagues, has grown an average 24.5% a year through 2001, almost double the rate for the Standard & Poor's 500, according to Institutional Investor.

Mr. Lampert doesn't discuss his strategy, but his past investments suggest one unmistakable fact: He expects a return for his money, and if a target company isn't performing, he takes action.

"Eddie is a person with a very clear idea of what he wants to do and how he wants to do it," says shareholder activist Robert Monks.

Mr. Monks was himself a high-profile Sears antagonist in the early 1990s, when he agitated for the divestiture of its financial services businesses. In 1989, he teamed with Mr. Lampert and the young investor's mentor, Richard Rainwater (who made his name as the Bass family money manager), in a successful proxy fight to defeat proposed anti-takeover measures at defense contractor Honeywell Inc.

'Very smart, very aggressive'

Sears' decision to shop around its credit card unit � an unusually bold move for the company � illustrates the kind of influence Mr. Lampert can have when he takes a financial interest in a company. Analysts and investors familiar with Mr. Lampert's style and his relationship with Sears say they have no doubt he played a role in that decision.

"He typically takes a direct role in the companies (whose stock) he owns," says Charles Elson, a corporate governance expert who serves with Mr. Lampert on AutoZone's board.

A New York-based spokesman for Mr. Lampert declined to comment, saying that Mr. Lampert "doesn't like to draw attention to himself." A Sears spokesman said only, "It's important to discuss important moves with your biggest shareholders." Boston-based State Street Corp. is Sears' largest holder, with a 9.5% stake.

Mr. Lampert was an important shareholder even before his most recent purchases, according to several former Sears executives. His holdings didn't show up in public filings until last October, when ESL Partners' stake crossed the 5% threshold that requires disclosure under Securities and Exchange Commission (SEC) rules.

At yearend, ESL Partners held 28.1 million shares, or 8.9% of Sears' outstanding common shares, according to documents filed in February with the SEC, up from 22.9 million shares, or 7.2%, in October, when Mr. Lampert disclosed his stake.

"He's very smart, very aggressive, and he's not afraid to give his thoughts about what's best for the company," says Joseph Grabowski, an analyst at Menomonee Falls, Wis.-based Strong Capital Management Inc., which owns about 2 million Sears shares.

Mr. Grabowski, who worked in Sears' investor relations department until last May, recalls fielding weekly calls from Mr. Lampert's associate and says that Mr. Lampert and Sears Chairman and CEO Alan Lacy talked "every few months" while he was at Sears.

According to Mr. Grabowski, Mr. Lampert is skeptical of moves that cost companies money, like Sears' $1.8-billion acquisition last June of Dodgeville, Wis.-based catalog retailer Lands' End Inc.

Early on, Mr. Lampert questioned Sears' Great Indoors, a big-box home store created under former Chairman and CEO Arthur Martinez to compete with Home Depot Inc.'s Expo Design Center. The high-cost operation is described as a "disappointment" to management in Sears' most recent annual report.

Mr. Lampert's interest in Sears began to build when he heard Mr. Lacy's October 2001 plan to remake the stores and increase operating income by 50% in three years.

"His philosophy is just to fix up the stores, generate cash and return it to the shareholders," says Mr. Grabowski.

Whether Mr. Lampert can make a big return on Sears is unclear. The stock has enjoyed a 17% increase since Sears disclosed that it will sell its credit card business, delivering the investor an initial paper profit. But there are doubts that the stock price will climb further anytime soon.

Mr. Lacy is halfway through his turnaround plan and critics are skeptical that the old-line retailer can be reinvented. If the stores continue to languish, Mr. Lampert will have to rely on stock buybacks or dividend increases to boost the value of his shares.

Mr. Lampert could buy more shares and seek a seat on the board. Or, a more dramatic option would be to push for some combination of Sears and Kmart. Kmart's strip mall locations may be attractive to Sears, which is stuck in increasingly unpopular malls.

Mr. Lampert, one of Kmart's largest debt holders, became a powerful behind-the-scenes player in the company's reorganization proceedings. Pending Bankruptcy Court approval, he and his partners will control more than 50% of the new stock.

Suspense continues
By all accounts, Mr. Lampert is secretive, intense and fiercely single-minded when he latches onto a company. In 1989, a year after ESL Partners was founded, Fortune magazine listed him among a dozen young money managers in line to become "the next Warren Buffett."

At 40, he's ranked by Forbes among the top 300 richest people in the U.S. with a net worth of about $800 million. He has invested money for the rich and famous, including, according to news reports, Hollywood mogul David Geffen and Michael Dell of Dell Computer Corp.

The reclusive Mr. Lampert was thrown into the spotlight in January when he was the victim of a bizarre kidnapping. He was abducted from the parking garage of his Greenwich, Conn. office and held overnight in a local hotel room before escaping. The kidnappers were caught after ordering a pizza with his credit card.

"It's hard to say what his ultimate agenda is," says Matthew Spitznagle, an analyst at Chicago-based Northern Trust Global Investments, which holds 1.4 million Sears shares. "Anything can happen."

Commentary: Old, Ill, and Uninsured

By Howard Gleckman - Business Week - April 7, 2003

Remember the 1990s image of retirement? Cash out at 55. Arizona. Golf. Nice pension. Good company-sponsored health insurance. The golden years.

Or not. Everyone knows that the market has ravaged Americans' 401(k) accounts. Less noticed, however, is what's happening to that other pillar of secure retirement: affordable health insurance. As medical inflation kicks in again, waves of employers are ditching or scaling back coverage for their retired workers. At this point, only about one-third of U.S. seniors enjoys any sort of job-based coverage, down from nearly 50% a decade ago.

Company plans are designed to wrap around Medicare, which doesn't pay for prescription drugs or catastrophic expenses such as long-term hospitalization. A quarter of seniors buy some of this missing coverage through Medigap policies, although even these supplemental plans rarely cover drugs. Another third of retirees, who have nothing but Medicare, are dangerously underinsured and often can't afford to buy the drugs or other care they need.

Now, as Corporate America cuts loose millions of additional retirees, this underinsured population is set to balloon dramatically. As retiring baby boomers lose their company coverage, they will have to buy their own medical insurance or live without it. Overall, they can expect to pay as much as $100,000 in health-care costs from the day they retire until they die, new studies show. "If you are 50 or younger today, you can look to a future where you are on your own" for retiree health care, says Maureen Cotter, a global practice director at consultants Watson Wyatt & Co.

The message is all too clear: Employees better start thinking seriously about socking away a lot more for retirement, because a growing share of health costs will fall on their shoulders. Washington has been mulling plans to spend $400 billion on prescription drugs for seniors. But even that would subsidize only about 20% of the cost, not nearly enough to replace company coverage. Of course, most Americans already save too little for old age, and it's a difficult time to put away even more in light of the battered job and stock markets. Still, if today's workers don't realize just how much they will be responsible for, many will wind up woefully underinsured.

Clearly, though, the employer-based retiree health care system is in tatters. A decade ago, 40% of large companies paid for seniors' health care. Today, that has plunged to just 23%. Overall, only government workers can expect to enjoy much coverage in coming years. In the private sector, everyone is now vulnerable, including unionized workers, who typically have the most protection.

Just look at the auto makers. General Motors Corp. (GM ) shells out $5 billion a year on health care, two-thirds of that for its 450,000 retirees. Already, GM has sharply cut retiree benefits for workers hired after 1992. In labor negotiations this summer, the United Auto Workers and the Big Three will battle over company efforts to slash those costs even more. AFL-CIO officials expect the issue to be critical in other labor talks around the country, too. Retirees "are the first place employers look for big savings," says Richard Banks, the federation's collective bargaining chief.

Even the companies that aren't abolishing coverage are shifting costs to retirees. In 1993, when new accounting rules required public companies to disclose their liabilities for future retiree health costs, many corporations capped annual payouts for former workers. About half have hit those caps, effectively forcing retirees to pay for rising expenses.

That's the case at Northeast Utilities System in Hartford, an energy company with 6,000 employees and 7,000 retirees. In 2002, its veteran workers who retired at 65 paid just $144 in annual medical costs. By 2006, they will shell out $1,698, the company says. Meanwhile, a quarter of large companies that still offer insurance may shift to plans that require retirees to pay the entire premium themselves, according to a recent survey by Hewitt Associates Inc. Others, such as IBM (IBM ), are moving from traditional health insurance plans to annual health-care accounts that workers can use to buy coverage when they retire.

Retirement will be even tougher for people who want to quit before they become eligible for Medicare at age 65. Northeast Utilities (NU) estimates that someone who retires before 65 in 2006 will pay an average of $2,131 a year, a huge cost for most seniors. "It's a changing deal from what other generations expected," concedes Jean M. LaVecchia, NU vice-president for human resources.

Most Americans have no idea just how large their new health-care burden will be. A new study by the Employee Benefit Research Institute in Washington figures a 65-year-old who retires today and lives to age 85 can expect to pay on the order of $100,000 for health care. Those who retire a decade from now can count on paying at least twice that, including Medicare premiums, drugs, and all other out-of-pocket costs. Few retirees have anything close to that kind of cash. But unless medical inflation slows sharply, seniors will face a stark choice: either scale back their care or use precious dollars more wisely.

Target Defends Growth of its Credit Card Operations

Eric Wieffering and Melissa Levy, Staff Reporters
Minneapolis Star Tribune
April 6, 2003

Forget Cynthia Rowley's "tickled pink" bedding collection or David Kirk's Lily Ladybug boots. The hottest item at Target these days is a 2-by-3 1/2-inch piece of plastic.

About 9 million Target Visa cards have been issued since late 2001, making it one of the fastest-growing credit cards in the country. Increased spending by cardholders, as well as interest charges and service fees, have helped boost Target Corp.'s bottom line in a weak retail climate.

"The sole reason we're in the credit-card business is to give our guests a reason to visit the store more often and spend more on each visit," Douglas Scovanner, Target's executive vice president and chief financial officer, said in a recent interview.

But the growth in Target's $6 billion credit portfolio, and the Minneapolis-based company's ability to manage risk at a time of rising joblessness and personal bankruptcies has given some analysts pause.

Target's write-offs of uncollectible debt in the year ended Feb. 1 soared almost 79 percent, to $322 million. Analysts have been unnerved, too, by recent blow-ups in Visa card operations at Sears, Roebuck & Co.; Spiegel Inc., parent of Eddie Bauer; and electronics retailer Circuit City Stores Inc..

Credit operations allowed Target to meet Wall Street's profit expectations for the fourth quarter and accounted for almost all of the growth in its pretax profit in the crucial holiday season. Any company that grows its credit operations as fast as Target has is bound to draw close scrutiny, said Bonnie Lee Tillen, a credit analyst with Standard & Poor's.

Although Target's Visa portfolio appears robust, "we continue to monitor it closely," Tillen said.

Modern era
Extending credit is not a new business for Target. Its department stores, now known as Marshall Field's, have offered private-label cards to customers for 80 years.

But the modern era began in 1995, when Target consolidated its credit operations in the former Prudential Insurance building overlooking Brownie Lake in Minneapolis. That same year it unveiled a proprietary Target charge card for use in its fast-growing discount chain, which now numbers more than 1,100 stores. In three years, that card helped boost pretax profit from credit operations by more than 50 percent, to $320 million, in 1998.

By the late 1990s, however, U.S. households were receiving about 3 billion credit card solicitations a year. Most offered much lower interest rates than the 21 percent or more charged on Target's private-label cards. Another plus: the Visa and MasterCard cards could be used anywhere, while Target's proprietary cards could be used only in its stores.

"We noticed a definite flattening of growth," said Ronald Prill, president of Target Financial Services.

To add insult to injury, Target, like all merchants that accept Visa, pays a fee, usually around 1.2 percent, every time a customer uses a third-party Visa card in its stores. Rather than fight the trend, Target -- like Sears, Circuit City and other retailers -- opted to join it. Others, such as Richfield-based Best Buy and Wal-Mart, essentially sub-contracted out their credit operations to established bank-card operators.

Target began testing its Visa card in the fall of 2000, when 350,000 swapped their private-label cards for the Target Visa card. Since then, almost 6 million active account holders have been switched to the Visa card. The remaining 3 million cardholders were signed up in the company's stores -- where approval of a credit line of thousands of dollars often requires less than five seconds.

Executives say the Visa card is doing just what they'd hoped: prompting shoppers to spend more at its Target stores.

The average balance on the card is $1,100. About one-quarter of card charges occur at Target stores or on its Web site. While the average transaction at a Target store is $40, Target Stores president Gregg Steinhafel recently told analysts that shoppers who use its Visa card spend 50 to 60 percent more on their shopping trips than other customers.

Last year the company mailed more than 3 million "10 percent off" certificates to card holders whenever they charged between $1,000 and $2,000 on their cards, depending on where the purchase occurred. Customers who redeemed those certificates on average spent more than $100 during their reward visit, Scovanner said. He noted the retailer sends out the coupons with a short expiration date -- usually 30 days -- to encourage extra trips to Target stores.

Smart chip tests
In Orlando, Fla., Target is testing a "smart chip" program for its Visa cards that would allow downloading of electronic coupons onto the card.

And the retailer has even begun tracking customers' Target Visa use at other stores.

"We've begun to do a certain amount of marketing for the wayward shoppers searching in the wrong store, to get them to shop in our store for a higher percentage of their purchases," Steinhafel said during the company's fourth- quarter earnings conference call in February.

Target expects its credit card receivables portfolio -- the amount of credit debt outstanding -- to grow to $7 billion in 2003. It expects to issue as many as 2.5 million more Visa cards this year, and it continues to hawk the card aggressively at its Target stores.

On a recent Saturday afternoon at the Target store in Northeast Minneapolis, an employee stood behind a small booth near the cash registers and asked nearly every passer-by to apply for a Target Visa card and receive 10 percent off that day's purchase. As an additional incentive, she offered a gift of a calculator in a box emblazoned with the retailer's red bull's-eye logo. The cashiers made similar appeals.

By offering the card only to customers, Target executives say they're avoiding the expense and risk that have plagued other credit-card operators.

At Target, about 16 percent of its credit-card bills are paid in full every month, while at Sears the rate is 8 percent, Prill said. Target also spends "considerably less" than the $100 a typical bank credit card may spend on direct mail for every new card customer, he said, and it has shunned the 0 percent "teaser" rates, convenience checks and balance-transfer offers that Sears and others have used to pad their credit-card rolls.

"If our goal was to maximize our credit-card operations, we'd have a far larger credit-card portfolio than we do," Scovanner said.

Nonpayment of bills
But analysts saw cause for alarm. Maybe Target Visa customers spend more at Target, but an increasing number weren't paying their bills. Write-offs -- defined as debt seven months overdue -- tripled as a percentage of the Visa portfolio between May and November of last year.

Issuers of all types of proprietary and general-purpose credit cards in the United States lost $18 billion in 2002 as a result of consumer bankruptcy filings, a 15 percent increase from 2001, according to the Nilson Report, a publication that follows the credit-card industry.

Bankruptcies represented about 28 percent of all credit-card write-offs in 2002, but at Target, that total was 40 percent. "The effect of bankruptcies on our portfolio is harsher than we modeled a year ago," Scovanner acknowledged.

Target wasn't the only retailer watching its write-offs rise. In October, Sears fired the head of its credit operations and said losses in its Gold MasterCard operations were running $200 million higher than forecast.

Patricia Lee and Suzanne Foley, analysts with the influential research firm CreditSights in New York, questioned the overall wisdom of retailers such as Target venturing into the general Visa business "given the highly competitive market and the amount of infrastructure required to effectively manage the portfolios."

In an earnings conference call last November, Scovanner testily dismissed one analyst who questioned the overall health of the portfolio.

Write-offs had climbed higher still, to 7.3 percent of the total portfolio, by the time of the February conference call, but this time Target executives went out of their way to calm jittery analysts and investors. For the first time, they provided detailed information about the performance of credit operations. At the same time they promised analysts and investors that write-offs would stabilize in the next three to six months.

"That's borne out having near perfect ability to predict write-offs in the short run," Scovanner said in an interview.

Like most companies, Target pools its credit-card debt and sells it to investors in what's known as a receivables master trust. Target's so- called "plastic bonds" maintain an AAA rating.

Tillen of Standard & Poor's praised Target's generally conservative approach to signing up new customers, but noted other companies have pursued similar strategies only to run into trouble later. People nervous about their job security or seeking to preserve cash will apply for credit cards, she said.

"Rather than pay cash, they figure a Visa card would probably help them more," Tillen said.

Last month Sears said it would try to sell its credit business, and credit card woes at Spiegel Inc. led it to file for bankruptcy protection.

At Sears, its $28 billion credit portfolio contributed 60 percent of total company profits. At Target, that total is 15 percent of pretax profit and is unlikely to climb much higher, Scovanner said. As a result, investors need not worry about the company's credit operations causing any unpleasant earnings surprises, he said.

"There has never been a quarter in this corporation's financial history in which adverse credit-card results have been any kind of a material, explanatory factor in describing our overall corporate results," he said. "I personally doubt that ever will occur."

SEC Asks CPI Corp. to Amend Some Financial Reports
Reuters - April 4, 2003

CPI Corp. (NYSE:CPY - News), which operates portrait studios in Sears, Roebuck and Co. (NYSE:S - News) stores, on Friday said the U.S. Securities and Exchange Commission (News - Websites) asked the company to amend certain previous filings because it recognized portrait studio revenue before it delivered the portraits.

CPI, of St. Louis, Missouri, said the SEC on April 4 requested the company amend its form 10-K for fiscal 2001 and its reports for the first three quarters of this fiscal year. It asked CPI to reflect portrait studio revenue recognition at the time of the physical delivery of the portraits, instead of at the time the customer approves the photographic proofs and makes a commitment for the order, the company said.

CPI said it is in the process of analyzing the SEC's request, including consultation with its independent accountants.

The company said it believes its traditional revenue recognition policy is in accordance with generally accepted accounting principles and does not produce materially different results than recognition upon physical delivery.

Bank One Considers Buying Sears Card Portfolio, Executive Says
By Scott Silvestri Bloomberg
April 2, 2003

Bank One Corp. Chief Executive Jamie Dimon is considering making his bigges
purchase, Sears, Roebuck & Co.�s $30.8 billion credit-card unit, said an
executive at the bank, the third-largest U.S. credit-card issuer.

The acquisition would close the gap between Bank One and its bigger rivals, Citigroup Inc. and MBNA Corp. Sears, which put the operation up for sale last month to focus on retailing, may get between $3 billion and $6 billion, analysts estimate.

�It would be hard for us not to take a look at� the Sears business, said Bank One Card Services Chief Executive Philip Heasley in an interview. �Acquisitions are opportunistic and we will look at anything that potentially makes sense.� He declined to elaborate.

Dimon, who has said he wants to expand the bank�s credit-card portfolio by 16 percent to about $85 billion in the next two years, will probably bid against Citigroup, General Electric Co. and Morgan Stanley, which owns the Discover card, analysts have said.

�My only concern would be the credit quality of the Sears portfolio and what they would pay if they were to buy it,� said Bob Maneri, who helps manage $62 billion, including Bank One shares, at Victory Capital Management in Cleveland. �Jamie's made no secret that he'd like to expand that business and it's not any secret that they've been shopping.�

Hoffman Estates, Illinois-based Sears, the largest U.S. department-store chain, hired Goldman Sachs Group Inc. to advise it on the sale of the unit, which accounts for almost two-thirds of its profit. It has 25 million accounts and about 8,000 employees.

�People Forget�

�Sears kind of started the whole credit-card business in the United States and a lot of people forget that,� said Bank One�s Heasley. �Then they gave birth to Discover.�

If Bank One were to make the purchase, it would be the company�s largest since Dimon took over as CEO in March, 2000. In July, 2001, it bought Wachovia Corp.�s $6.2 billion credit-card unit to gain 2.6 million customer accounts.

Sears began letting customers pay in installments for purchases of pianos, farm tools and encyclopedias in 1911. The retailer has increased its dependence on credit-card earnings because it's losing clothing sales to rivals such as Kohl�s Corp. Sales of its Kenmore washers and Craftsman tools brands are being eroded by such chains as Home Depot Inc.

The business has the nation�s largest in-house, proprietary card portfolio with $18.4 billion in Sears receivables. It also has $12.4 billion in MasterCard receivables. The business generated more than $1.5 billion of operating income in 2002.

Operating income at the credit division declined 15 percent in the fourth quarter to $363 million as the company set aside more funds for uncollectable accounts. Delinquencies rose to 7.69 percent, from 7.58 percent in the prior-year period.

�The portfolio has loss rates that are not the lowest in the world,� said Victory Capital Management's Maneri. �From the outside you always fear the worst.�

Sears to Focus New Message on its Merchandise
By Jim Kirk - Chicago Tribune
April 2, 2003

MEDIA AND MARKETING

Sears, Roebuck and Co. made a loud splash last week when it said it would unload its credit card operation.

However, it is making sure its plans for communicating a new retail vision to consumers are barely causing a ripple--for now.

What we do know is this: There is a new tagline in the works that consumers probably won't get the first big glimpse of until the fall.

Saying that the well-liked "Sears. Where Else?" campaign launched in the fall of 2001 fell short of driving traffic to its stores, Sears executives indicated that the company's new message will tell the consumer why he or she should shop at Sears right now.

"The collection of categories at Sears is unique and powerful," said new chief marketing officer Janine Bousquette, who, along with Chief Executive Alan Lacy and store operations president Mark Cosby, addressed the Tribune editorial board on March 28, two days after Sears announced it was unloading its $32 billion credit card operation.

But Bousquette indicated that the change in communication will be gradual. "There's not some set date when everything changes," she said.

Sears will put more emphasis in its marketing and advertising on the merchandise it carries. And though Bousquette indicated that specific advertising assignments aren't shifting between Sears' two advertising agencies- -apparel agency Young & Rubicam, Chicago, and hardlines agency Ogilvy & Mather, Chicago--there are indications that she's not keeping the lines between the two so distinct.

For instance, Y&R has been tapped to handle a new advertising campaign this spring for Sears' softening appliance business, which normally would be the domain of O&M.

What is not clear is whether Sears plans on keeping the appliance business with Y&R, which is shooting the new campaign. A spokeswoman for Sears said that both agencies continue with their main assignments and downplayed Y&R's handling of the campaign, saying the retailer will shift assignments based on how busy the agencies are.

We don't know if that's the type of strategy that will bring in a winning campaign. It may be at its best keeping the anxiety levels high at its advertising agencies.

Judge Won't Dismiss Retailers' Suit Vs Visa, MasterCard

By Colleen Debaise of Dow Jones Newswires
April 1, 2003

NEW YORK -- A federal judge refused to dismiss a class-action lawsuit brought against Visa USA Inc. (X.VSA) and MasterCard International Ltd. (X.MST) by several of the nation's largest retailers.

The 1996 suit, which seeks $8.1 billion in damages, accuses Visa and MasterCard of using monopoly power in the credit-card industry to dominate the debit-card business. Under antitrust law, damages could be tripled to $24.3 billion.

U.S. District Judge John Gleeson in Brooklyn also rejected an argument by MasterCard that it should have a separate trial on the allegations, made by Wal- Mart Stores Inc. (WMT), Sear Roebuck & Co. (S) and a host of other retailers.

Visa and MasterCard said they were still reviewing the 16-page ruling, issued Tuesday, and couldn't immediately comment.

In a significant move, Judge Gleeson decided, prior to trial, to grant summary judgment to the retailers on a number of antitrust claims against Visa and MasterCard.

The judge's ruling was quickly praised as a victory by the retailers.

"Around 70% of this trial was decided in summary judgment," said Lloyd Constantine, lead attorney for the retailers. "That leaves 30% of the case and the relief to be decided."

The trial is scheduled to begin April 28.

The judge said key issues "that lie at the heart of the merchants' claims" must still be decided at trial, including a contention that Visa and MasterCard's "honor all cards" policy stifles competition.

The retailers claim they are unfairly forced by Visa and MasterCard's "honor all cards" policy to accept any card bearing Visa and MasterCard's logo, whether it's a debit card or a card card. The problem, the retailers claim, is that they must pay excessive transaction fees on debit cards, driving up costs for consumers.

Visa and MasterCard argue that the "honor all cards" policy benefits consumers, because it prevents merchants from dictating when and where consumers can use debit cards.

The retailers contend that Visa and MasterCard have conspired to suppress regional debit-card networks such as NYCE and Star that charge merchants cheaper transaction fees.

The regional networks generally use an online system that automatically deducts money from customers' bank accounts after a PIN number is entered. In contrast, Visa and MasterCard use an off-line system that raises rates for merchants and requires only a customer's signature.

The suit involves the largest retailers in the country and millions of smaller merchants.

"The merchants are seeking damages to compensate them for being forced to accept more than $1.4 trillion in slow, fraud-prone, off-line signature debit transactions at exorbitantly high and fixed prices during the last decade," said Constantine, the attorney for the retailers.

In a statement, Daniel Tarman, vice president of Visa, said: "We are now focused on going to trial and defending consumers' right to choose how to pay at the checkout counter."

Noah Hanft, general counsel of MasterCard, said the credit-card network was "disappointed" by the ruling but defended the "honor all cards" policy.

"We're confident that once the jury has evaluated all the evidence, it will uphold this pro-competitive rule, and protect this critically important consumer benefit," Hanft said in a statement.

Kmart to Erase 660 Jobs; Biggest Hit at Headquarters
Chicago Tribune
April 1, 2003 - Associated Press

TROY, Mich. -- Kmart Corp. on Monday announced the elimination of 660 jobs as part of the retailer's downsizing as it attempts to emerge from bankruptcy.

Four hundred jobs will be cut at Troy headquarters, 123 corporate positions will be cut around the country, and 137 positions currently open will be eliminated.

Julian Day, Kmart president and chief executive, said the 400 headquarters jobs are mostly middle management.

The announcement of the cuts comes about a month before Kmart plans to exit Chapter 11 protection. The company said in January that it would cut jobs at headquarters but did not at the time disclose the extent of the cuts.

Kmart, which this year shuttered 316 stores, affecting more than 34,000 employees as part of its reorganization, employs about 2,900 at its headquarters.

The company has 170,000 employees, Mike Macik, Kmart executive vice president of human resources, said at a news conference in Royal Oak Monday.

"We continue to take the necessary actions to create a financially healthy, cost-effective organization that is positioned to compete in the discount sector," Day said.

He said the cuts will save the company $90 million for the 2003 fiscal year and $150 million annually.

Kmart filed for bankruptcy on Jan. 22, 2002. Last year, it closed 283 stores, affecting more than 22,000 workers.

It is trying to focus on a longer-term goal of differentiating itself from competitors Wal-Mart Stores Inc. and Target Corp. by making its stores more tailored to the neighborhoods where they are located.

Kmart has suffered as Wal-Mart offered lower prices and Target established a more stylish image.

A week ago, Kmart reported that it lost $3.22 billion for fiscal 2002. For its fiscal fourth quarter ended Jan. 29, it had a net loss that narrowed to $1.1 billion, or $2.13 per share, compared with a loss of $1.65 billion, or $3.31 per share, a year ago.

Net sales for Kmart's fourth quarter fell to $8.87 billion from $10.88 billion in 2001. Sales at stores open at least a year declined 9.8 percent from a year earlier. Such sales are known as same-stores sales and are considered the best measure of a retailer's health.

Day said February results, also released a week ago, left him "cautiously optimistic."

Same-store sales were down just 2.5 percent, with a loss of $54 million for the four weeks ended Feb. 26, the first month of the 2003 fiscal year. For the month, sales totaled $2.17 billion.

Allstate CEO Liddy 2002 Bonus $3.1M
vs. $103,356
Dow Jones Newswires
March 28, 2003

WASHINGTON -- Allstate Corp. (ALL) Chairman, President and Chief Executive Edward Liddy received a bonus of $3,101,250 for 2002, compared one of $103,356 the year before, according to a proxy filed Friday with the Securities and Exchange Commission.

The bonus is awarded based on an operating earnings per-share objective set by the board.

According to the filing, up to $3 million of the award is paid, with the rest deferred and paid out under the company's deferred compensation plan.

Liddy received a salary of $1,033,747 in 2002, compared with $990,000 the year before.

Allstate granted Liddy options for 550,000 shares in 2002. The options expire in February 2012 and have an exercise price of $33.38 each. If Allstate's stock price were to rise 5% annually through the expiration date, the options would be worth about $11.5 million.

Liddy received options for 400,000 shares in 2001.

Allstate didn't provide Liddy with any payments under a long-term inncentive plan in 2002. The previous year, Liddy received $1,024,873 under the plan.

Allstate is a personal-lines insurance company.

Sears' Card Sale May Lift Its Stock Significantly
Andrew Bary - BARRON'S ONLINE
March 31, 2003

FOLLOW UP

Creditable Move

SEARS ROEBUCK'S SURPRISE ANNOUNCEMENT that it is putting its $31 billion
credit- card loan portfolio up for sale drew muted applause on Wall Street last week, reflecting concerns about the health of its credit and retailing operations.

But if the sale nets anything close to the $6 billion to $7 billion mentioned in the media, Sears Roebuck's stock could have considerable appreciation potential.

The shares, which rose 1.60, to 23.80, last week, are way below their 52-week high of 60 and trade for just five times projected 2003 profits, one of the lowest price/earnings ratios in the Standard & Poor's 500. Sears' numerous skeptics on the Street may not fully recognize that even a $4 billion sale price for the card operation would leave the retailer with a fortress-like balance sheet and still-considerable earnings power.

Sears chief executive, Alan Lacy, told analysts and investors on a conference call Wednesday that the credit-card operations, which account for about 60% of the big retailer's profits, are no longer crucial to the company and that selling the business probably would lift the depressed stock. "Having our share price at this ridiculously low level is not acceptable," he said, with no small frustration.

The initial news reports that Sears is seeking $6 billion to $7 billion for the credit-card division were greeted with widespread skepticism, given weaker trends in the business and depressed stock-market valuations of credit-card specialists, such as MBNA.

The Street talk is that Sears may get $3 billion to $4 billion, a roughly 10% "premium" for the $31 billion in credit-card receivables. That price seems low, considering that the credit-card division posted $1.5 billion in pre-tax operating profits in 2002 and is expected to generate $1.4 billion this year.

Let's say the card division earns just $1.2 billion this year, reflecting the weak economy and adjustments to bring Sears's credit policies in line with the rest of the industry. That still leaves about $800 million after taxes. A $4 billion price tag would be just five times earnings, low even by the standards of the credit-card sector, where industry leader MBNA trades at just under 10 times forecast '03 profits of $1.60 a share.

The Sears credit-card business is widely described as "troubled" in the media, owing to rising loan losses, but it remains one of the industry's most profitable, with a return on assets of 2% and a return on equity of over 25%.

Sears adviser on the card sale, Goldman Sachs, is the leading banker for such transactions and presumably told Sears that a $6 billion-to-$7 billion sale price was reasonable. One has to assume that Goldman wouldn't have let such a figure appear in the press without some sense that it could get that price for Sears. Lacy wouldn't confirm that Sears is seeking such a price.

Assuming Sears gets only $4 billion for the business, it probably would net more than $2.5 billion after taxes, boosting its book value to $30 a share from $21 a share. Importantly, such a sale would lift Sears' cash to $4.5 billion, from $2 billion currently, and free roughly $3 billion of equity that has been supporting the card business. That equity presumably could be converted to cash, giving Sears a net cash position of $6 billion ($4.5 billion of cash, plus $3 billion of freed-up equity less $1.5 billion of debt). That $6 billion would be equal to about $19 a share and could be used for a massive share buyback.

Sears expects its retail operations to generate $1.3 billion in pretax income this year. Given weak sales trends, let's cut that number to $1 billion, equal to more than $2 a share. Sears also should retain some profits from its card operations, because it likely will be paid for new-account generation and other services rendered to the buyer. These earnings estimates are before any stock buybacks.

Given these conservative assumptions, Sears stock looks cheap. The bear case, of course, is that Sears is a dinosaur that will eventually be flattened by the likes of Wal-Mart Stores, Home Depot and Target. Yet Sears remains quite profitable, and a successful credit-card sale for $4 billion would give the company enormous financial strength. Barron's was too early on our bullish take on the company ("The Brighter Side," 3 July 15, 2002), but the stock easily could trade into the 30s if the card sale goes well.

A notable new investor in Sears is a successful $5 billion investment fund run by the low-profile Edward Lampert, whose kidnapping at his Connecticut office and subsequent release made headlines in January. Lampert's fund, ESL Investments, acting through its operating arm, RBS Partners, bought 28 million Sears shares in the fourth quarter, becoming the second-largest shareholder. Lampert has a strong track record, and his firm's big Sears stake shows he thinks the stock is cheap. Lampert wouldn't comment.

Sears Redesigns Sunday Circulars
Crain's Chicago Business
March 31, 2003

Sears, Roebuck and Co., which is in the process of selling off its credit-card division and remodeling stores to include its recently acquired Lands' End line, is making changes to one of its key marketing strategies, the Sunday circular, executives said.

"The whole company is focused on the customer" that is a change for us," a company spokeswoman said. "We are trying to communicate to our customer, in a simple interesting way, the great merchandise we have to offer," she said. "It's all about Sears as a destination."

One of the first changes in this direction has been to the retailer's 53 million weekly circulars that are distributed with Sunday newspapers, a vehicle considered by many in retail as a marketing cornerstone.

Hoffman Estates-based Sears has initiated a new look for the circular, starting with more fashionable covers. One circular this month, for example, showed off its spring Covington fashions. Other elements of the circular have become less cluttered. Sears also made the back half of the circular about three-fourths of an inch longer and created tabs, so that different sections, such as appliances and so-called softlines like clothing, appear more distinct from each other.

So far, the circular stays with the tagline "Sears: Where else?" but that is likely to change; the retailer is under discussion with its advertising agencies and other consultants regarding a new theme. WPP Group's Y&R Advertising and Ogilvy & Mather Worldwide, Chicago, are Sears' agencies.

Some Sears watchers believe the changes to the circular reflect the growing power of Janine Bousquette, Sears' executive vice president and chief customer and marketing officer. Ms. Bousquette, who joined the retailer in October, seems to have scored a victory in what is a common battle between merchants and marketers at retail stores. Merchants tend to demand that as many products as possible appear on the pages of Sunday inserts, said one veteran in the business. Few retailers, like Target, are able to resist and strike more of a branding message via the design and appearance of their circulars. Ms. Bousquette's predecessors had little success in cutting down on the Sunday insert's clutter, one former Sears' executive said.

Sears' new focus on its department store comes as executives this week announced their plans to sell its credit card division, which has 25 million accounts. Sears rival JCPenney was able to successfully divest itself of its credit card division and refashion its apparel offerings.

Sears, McD's Shrink Down to Their Cores
A risky back-to-basics Push
By Sandra Jones and James B. Arndorfer - Crain's Chicago Business
March 31, 2003

Sears, Roebuck and Co. and McDonald's Corp, two pioneering American icons that have lost their way, are returning to their roots in a bid to become relevant again.

The Big Store is putting its credit business up for sale in a move to raise cash, lower debt and focus on turning around its tired format. The Golden Arches is shopping around a controlling stake in its tangential restaurant chains � Chipotle Mexican Grill Inc., Boston Market Corp. and Donatos Pizzeria Corp. � leaving it free to concentrate on reinvigorating its hamburger business.

For Sears, the move is loaded with risk. The Hoffman Estates-based retailer will be shedding a unit that has fueled its profits for a decade, leaving its retail business nowhere to hide if its latest makeover fails. Oak Brook-based McDonald's, for its part, is taking a chance that it can grow without relying on its newest acquisitions.

Both are tapping into what experts say is a growing trend among old-line companies to reconnect with their past at a time when consumer confidence has been shaken by a weak economy, the plunging stock market, corporate scandals and the war.

"This is a big topic right now at a lot of companies and a unique moment in time," says Scott Davis, managing partner in Chicago for Prophet, a San Francisco-based brand consulting firm. "In the mid-to-late '90s, we wanted everything that was hot and new. Now, consumers are seeking to go back to something safe and familiar and predictable. That's what these two great institutions have to rediscover."

While the financial motivations for the steps are different at each of the two companies � Sears has more at stake for the moment � these two giants of American consumerism share many of the same problems.

Both have suffered a long string of declining same-store sales � 18 consecutive months at Sears and two years at McDonald's. Both were groundbreaking companies that have been stifled by entrenched bureaucracies and outmaneuvered by younger, more nimble rivals. And both are struggling to revive their identities.

Sears, once the world's largest retailer, has slipped to the No. 4 ranking, as shoppers flock to Wal-Mart Stores Inc., Kohl's Corp. and Home Depot Inc. McDonald's, the world's largest restaurant chain, has been losing ground to healthier convenience-food chains including Doctors Associates Inc.'s Subway restaurants, a rejuvenated Wendy's International Inc. and a spate of small sandwich shops like Panera Bread Co.

Perhaps most significant, the CEO of each company is under pressure to prove his mettle in turning around a troubled legacy.

Sears Chairman and CEO Alan Lacy has been on the job since fall 2000, cutting costs, eliminating thousands of jobs and giving Sears' stores an $800-million overhaul to make the chain look and feel more like a big-box discounter. He spent $1.8 billion to buy Dodgeville, Wis.-based catalog company Lands' End Inc., and brought Lands' End clothes and shoes into Sears stores in hopes of attracting upscale shoppers who think of Sears only for washing machines and tools.

But the turnaround stalled and Sears' stock price plummeted last October to around $20, where it remains, when the company disclosed troubles in its credit card business and set aside an additional $222 million in reserves to cover uncollected bills.

The company had expanded its general purpose Gold MasterCard business, launched in 2000, too rapidly, distributing cards to people with questionable credit. Analysts expect that Sears will have to allot more money for reserves before the year is over as more customers fail to pay their bills.

Getting rid of credit crutch
During a conference call last week after Sears announced that it's putting its credit card business up for sale, Mr. Lacy said, "The divestiture of all or part of our credit operations represents an opportunity to create a more focused, profitable retail company."

But surviving as a stand-alone retailer will be a difficult task.

The operating margin at Sears' retail business is 3.8%, compared with an industry standard of around 8% to 10%, according to Philip Zahn, retail analyst in Chicago at New York-based credit rating agency Fitch Inc.

And a key measure of efficiency � sales, general and administrative expenses as a percentage of cost of goods sold � is 30% at Sears, compared with 21% at Wal-Mart, according to Kevin Silverman, an analyst at ABN AMRO Asset Management in Chicago. Sears has to mark up goods an average 39% to cover its costs, compared with 27% at Wal-Mart, he says.

"It's clear they've got to get their profits up," says Mr. Silverman. "They won't be saved by credit anymore. Their survival now depends on getting as efficient as possible."

Perhaps it's no coincidence that McDonald's and Sears both are looking to get back to basics at the same time. McDonald's Chairman and CEO James Cantalupo joined Sears' board in 2000, the year Mr. Lacy ascended to Sears' top job, and was no doubt intrigued by the pitch Mr. Lacy and his team made to the board for returning the company to its retail roots.

Burgers off the back burner
Mr. Cantalupo was tapped in January to become McDonald's chairman and CEO, after predecessor Jack Greenberg retired as the company was headed for its first quarterly loss ever. Mr. Cantalupo has said that he intends to focus intently on fixing service and food problems at the company's flagship hamburger business.

McDonald's originally invested in the non-hamburger chains under Mr. Greenberg in hopes that, in time, they would make up for the Golden Arches' dim prospects. Last year, the fast-food giant's group of non-hamburger chains, called partner brands, accounted for a mere $1.07 billion, or 2.6%, of McDonald's total $41.53 billion in systemwide sales, and was a minor drag on earnings.

Expanding the chains would require both money and time that managers can ill afford as McDonald's core business suffers. Same-store sales slipped 2.1% in 2002, the second straight year of decline.

The potential sale of the partner brands was first reported by TheDeal.com last week. A McDonald's spokeswoman declined to comment on the partner brands beyond saying that the company is "always looking for ways to maximize their potential."

Getting back to basics has worked for other big brands: IBM Corp., Apple Computer Inc. and Continental Airlines Inc., to name a few, points out Mr. Davis.

"There are countless stories of companies that return with a vengeance," he says, "and that's what they have to focus on right now."

�2003 by Crain Communications Inc.

Future of Sears Rides on Retailing
Lacy: If it Doesn't Work, `Sears Doesn't Work'
By Lorene Yue, Staff reporter - Chicago Tribune
March 30, 2003

Not in a decade, since Sears, Roebuck and Co. killed its legendary catalog and spun off its Allstate and Dean Witter financial-services arms, has there been a more important business decision at the 117-year-old retailer.

Last week's decision by Chairman and Chief Executive Officer Alan Lacy to jettison Sears' credit card operation, responsible for nearly 60 percent of the profit last year at the Hoffman Estates-based retailer, was a dramatic, even shocking, move.

By divorcing itself from its financing operations, Sears is forced to confront the disturbing reality of its retail side: A collection of dingy and outdated stores selling a hodgepodge of merchandise ranging from power tools to lingerie, and a muddled marketing message that leaves consumers wondering what Sears wants to be.

But fixing those core problems is exactly the task that Lacy and his new retail management team say they must tackle if Sears is to survive.

"If the retail business doesn't work, then Sears doesn't work," Lacy said. He's spent two years overhauling the stores to reduce clutter and eliminate certain product categories, re-engineered the checkout system and pumped up the apparel lines with Lands' End and in-house label Covington.

But finding success as a retail-only operation, industry analysts say, will be difficult for the company, which has leaned on its money-making credit operations in recent years. The first obstacle is articulating a clear strategy, which Lacy and his two top retail executives--Mark Cosby, president of full-line stores, and Janine Bousquette, chief customer and marketing officer--struggled to define in an interview last week.

But by fall, they said, customers can expect to see changes in the stores, as well as a new marketing campaign that will focus on the concept of "home and family." Their message is that Sears provides the convenience of buying many items, including its Craftsman tools, DieHard car batteries, Kenmore appliances and Lands' End apparel, at one place.

Sears must mesh a more polished image with a more satisfying customer experience to drive retail sales. Same-store sales have declined for 18 consecutive months, one of the worst showings among its peers.

"The most important thing here is to grow their top line, and that is going to be hard," said Marie Driscoll, a retail analyst with Argus Research in New York. "They have Lands' End and they have Covington, but is that enough to bring people to the stores? They've got heavy-duty competition out there, and what they are offering is not that compelling."

Sears must move fast. Competitors, including Best Buy, J.C. Penney, Target, Wal-Mart Stores, Home Depot and Lowe's Cos. are expanding quickly, stealing customers in merchandise categories that Sears once ruled.

"In every category, our best-in-class competitor is bigger than us," Lacy said.

Losing market share
Although Sears sells nearly 40 percent of appliances bought nationwide, last year was the first time the retailer lost market share to competitors. Shoppers, Cosby said, didn't think of Sears as a place that offers the best deal. To combat that, part of Sears' new strategy will be to lower prices on some key items to match other retailers.

Lacy and his team declined to say specifically where they would focus price- cutting efforts, though they indicated that consumers have failed to come through the doors because Sears' entry-level prices are too high.

And though he's trying to draw shoppers back into the stores, Lacy will test a new format--a stand-alone Sears that also will sell such convenience items as chips and soda is under construction near Salt Lake City.

Meanwhile, the rollout of more Great Indoors stores is on hold until Sears can find a cheaper way to build the home decorating and remodeling outlet. The cost of building some Great Indoors stores has reached $25 million, making it hard for those locations to turn profits. Lacy wants to lower the construction cost and be careful to build in neighborhoods where shoppers are looking to spend a lot on new kitchens or bathrooms.

"We were trying to out-Expo Expo," Lacy said, referring to Home Depot's home- decorating version. "We were being way too aggressive."

A tough sell
All of the new retail-only strategy, of course, hinges on selling off the credit division so executives can focus on the retail turnaround. But there's no guarantee of a buyer--or an offer Sears will accept.

Financial and credit card industry analysts recognize that unloading Sears' $18.4 million private-label portfolio and its $12.4 billion MasterCard at the premium Lacy thinks it deserves will be difficult, as the number of delinquent accounts have risen.

"There are very few players who are going to be able to swallow this thing," said James Daly, editor of Credit Card Management, a trade publication. "In Sears' MasterCard portfolio, 15 percent of it is clearly subprime, and I don't see much of a market there for subprime. If they want to get rid of it, they would have to sell it at a discount."

Lifting the stock price
Although Lacy remains vague on how much he believes the division is worth, industry observes say Sears could get anywhere from $4 billion to $7 billion. Any deal that is struck won't be finalized until the second half of the year, Lacy said.

Whatever price Sears gets, Lacy plans to use the proceeds to repurchase shares and pay off debt. His goal: Lift the stock price from what he called an unacceptably low level. Sears stock closed at $23.75 on Friday, down from a 52-week high of nearly $60 a share.

But critics warn that a stock buyback could provide only a temporary lift and ultimately won't do anything to expand the business.

What Sears won't do, Lacy said, is blow the proceeds on an acquisition that would dilute shareholder value.

Lacy acknowledged that separating out the financial operations leaves the whole company vulnerable to a takeover.

"That is a risk," he said. But doing nothing, he added, is even riskier.

Savings Sell in Any Language - WalMart's Global Strategy
By Traci Carl Associated Press - Daily Herald - Suburban Chicago
March 30, 2003

MEXICO CITY -- A Wal-Mart store bustles as customers roam the aisles in search of bargains and snap up free samples of tequila before bundling their purchases into waiting taxis.

The activity is proof that Wal-Mart Stores Inc. has learned how to achieve the same kind of success in its international ventures as it has in thousands of stores across the United States.

Wal-Mart, which grew up in small-town America, is increasingly dependent on foreign expansion as it faces slowing growth at home.

"The U.S. market is pretty saturated," said Ken Perkins, retail analyst for Thomson First Call. "Clearly, they need to expand into foreign markets to generate the ongoing growth they've had."

Wal-Mart, which opened its first store in Rogers, Ark., in 1962, grew into the world's largest retailer (and the world's largest corporation) by concentrating first on small, rural towns where it had little competition. Its trademark low prices and focus on customer service were later introduced to larger U.S. cities and then abroad, to Mexico, Canada, Puerto Rico, Argentina, Brazil, Britain, Germany, South Korea, Japan and China.

The formula of low prices and good service works in other countries as it does in the United States.

"The majority of what I look for is here. They have specials, and the prices in general are more accessible. This is where I save money," said Enrique Flores, a government worker shopping at the Mexico City store.

Wal-Mart's first foreign store was a Sam's Club opened in 1991 outside Mexico City. Wal-Mart is now the biggest retailer in Mexico and is tackling the rest of the Americas, Asia and Europe.

Although Wal-Mart built its business from scratch in the United States, in overseas markets it starts out by purchasing already successful local chains. It also differentiates its foreign stores from its U.S. outlets, buying at least 80 percent of its merchandise from nearby vendors to keep costs down and cater to customers.

In Mexico, where 90 percent of merchandise is bought locally, bakery staples include freshly made tortillas and, around the Day of the Dead holiday in November, "bread of the dead." In Argentina, the clothing department stocks school uniforms.

"By going global, we have an opportunity to understand who the local manufacturers are," said Ray Bracy, vice president of international corporate affairs for the Bentonville, Ark.-based Wal-Mart. "And we can explore whether they can support us globally."

In Mexico, the company has 597 stores and restaurants in 58 cities. In addition to the discount chain Wal-Mart and its bulk cousins Sam's Club and

Wal-Mart: Jumphead
Bodega, Wal-Mart owns VIPS, diners that serve everything from cheeseburgers to chicken enchiladas. It also owns the supermarket chain Superama and the clothing and home goods store Suburbia.

Forty percent of Wal-Mart's 1,270 foreign stores are in Mexico. Inside the United States, Wal-Mart has more than 3,400 stores.

Overseas growth hasn't been trouble-free. In Germany, Wal-Mart lost a long court battle with regulators over selling staple foods below wholesale prices. In Puerto Rico, the government tried to block its purchase of a local supermarket chain, arguing that it violated antitrust laws.

Even in Mexico -- where real estate billboards brag: "Houses in front of Wal-Mart!" -- the federal antitrust agency ordered the retailer to subscribe to a code of conduct for its dealings with suppliers.

But the company's international operations grew 11.4 percent during the fiscal year that ended in January, and generated $41 billion in sales, or 17 percent of the company's total income. In South Korea alone, the chain reported $340 million in sales in 2001, up 40 percent from the year before.

Asia is a big focus for the company. In December, Wal-Mart announced it was raising its stake in the Japanese supermarket chain Seiyu to 34 percent to become the top shareholder.

Two months earlier, it said it planned to open an unspecified number of stores in Shanghai, adding to the 22 stores already in China that draw huge crowds of customers.

The plan is part of Wal-Mart's desire to not only export from China, but set up shop there. It says it has imports $12 billion a year in goods from China, and now wants to sell those products in the country's developing consumer market.

In Mexico, there is little resentment that a U.S.-owned company is the largest retailer, competing with stores like Costco and French supermarket giant Carrefour.

The chain often clusters its stores and restaurants together. On weekends, the complexes fill with shoppers attracted by low prices and promotions that include everything from clowns to small amusement park rides.

The biggest complaint about Wal-Mart internationally is usually from its competitors.

In Mexico, the cavernous stores have cut into the country's lively street trade. Vendors in the centuries-old markets of Tepito, a rough neighborhood known for selling stolen and cut-rate goods, complain that Mexicans now prefer to buy their televisions and DVD players from Wal-Mart.

Pricing basketballs with her daughter, Hermilinda Antonio repeated what most customers said draws them to Wal-Mart: It has everything, and it's cheap.

"You just follow the little smiley face," Antonio said.

Credit Card-Free, Sears May Be Stronger
Crain's Chicago Business
March 27, 2003

(Reuters) "Sears, Roebuck and Co. may be better placed to fend off fierce competition from fellow department stores, discounters and specialty retailers if it sells its troublesome and sometimes distracting credit card unit, analysts said on Thursday. Sears put the credit card business up for sale on Wednesday "a move Wall Street welcomed in hopes it would put management focus back on fixing stores" but the retailer still faces the monumental task of giving customers a good reason to shop at Sears, the analysts said.

It may be the biggest U.S. department store chain by a long shot, but its smaller rivals such as Kohl's Corp. and J.C. Penney Co. Inc. have been nibbling away at its dominant market position in recent years.

To make matters worse, Home Depot Inc. and Lowe's Cos. Inc. have been going after the home appliance market, denting what had been a Sears stronghold.

"They have good products but they're being attacked by specialty stores on all sides," said Stephen Deedy, head of the retail and consumer products group at consulting firm Cap Gemini Ernst & Young.

"The credit business has been a financial godsend . . . but lately it's been a big management distraction," he said. "This gives them the chance to jettison a profit-making asset . . . and put the cash back into the retail business � that's an advantage."

The credit card business accounts for the lion's share of Sears' profits, but it has also generated more than its share of headaches lately. Sears fired the head of the division last fall, shortly before it was forced to set aside an additional $222 million to cover bad accounts.

TOUGH TASKS AHEAD
Selling the credit business would free up management to focus on fixing the retail business, which has posted 18 straight months of lower sales at stores open at least a year.

Sears boasts a powerful brand name, enviable store locations, and exclusive offerings such as Kenmore appliances, Craftsman tools and Lands' End clothing.

The retailer has been remodeling stores, improving the signage and layout and adding conveniences such as shopping carts in hopes of attracting shoppers. It's also rolling out newly acquired Lands' End merchandise in hundreds of its stores in a bid to boost clothing demand.

But analysts said Sears has confused its customers by mixing marketing messages. Is it a low-priced retailer or a brand-name store with higher service levels?

"It's a question of identity," said Kevin Regan, senior managing director with consulting firm FTI Consulting.

"They do have a couple of brand names, but those brands are apparel product lines that everyone else has. They've also got a great hardware and tool business, but they're competing against very good players in Lowe's and Home Depot," he said.

And its rivals have been getting stronger.

Kohl's has carved out its fast-growing, profitable niche by offering a mix of discount store conveniences " such as shopping carts and central checkout counters" and a department store's wider merchandise selection.

The retailer is expanding rapidly at a time when many other chains are closing stores, and just opened its first locations in California, the most populous U.S. state.

J.C. Penney, in the third year of a five-year turnaround plan, is winning plaudits from analysts for improving its merchandise selection with more fashionable clothing and home decor, and backing up the new products with a massive advertising blitz.

Wall Street hasn't shown much faith in Sears yet either. Kohl's shares trade at a price-to-earnings ratio of just over 31, ahead of the sector average of 26.6. J.C. Penney trades at a little more than 16 times earnings, while Sears sits at a lowly 5 times earnings.

"It's still not clear why customers should go shop at Sears," Ernst & Young's Deedy said.

Kmart Investor Hush-Hush on Retailing Plans
Lampert's Interest in Sears Also Uncertain
By Jennifer Dixon, Business Writer - Detroit Free Press
March 27, 2003

At the same time secretive, savvy investor Edward Lampert was buying a controlling stake in Kmart Corp., he was quietly amassing enough stock in Sears, Roebuck and Co. to make him its second-largest owner.

Analysts and retail experts say they don't know why Lampert is betting on two warhorses of American retailing.

Could he be thinking merger? Is he hedging his bets? Does he want to get his hands on Sears and Kmart's real estate? Or is he just rummaging for bargain prices in the retail bin?

"He sees things others don't," said a New York analyst whose company forbids speaking to the media. "I can't imagine what he has up his sleeve."

Kmart insiders say that while Lampert is involved in the turnaround, they aren't sure where he is taking the retailer.

"Nobody knows," said someone inside Kmart, who asked not to be identified for fear of retribution. "It's driving everybody nuts."

Whatever Lampert's thinking, the Greenwich, Conn., multimillionaire would have a huge impact on Kmart's employees, vendors and landlords. He will become its largest single owner when the Troy retailer is expected to come out of bankruptcy at the end of April.

Lampert earned a personal fortune estimated at $800 million by paying attention to detail and investing large amounts of money in undervalued companies in sleepy industries. His company, ESL Investments, has had only one down year out of 14.

ESL Investments is essentially a private investment club for wealthy people. According to the New York Times, his clients in the last 10 years have included David Geffen, the media mogul, and Michael Dell of Dell Computer. ESL investors are asked to put up at least $10 million and lock up their money for at least five years. Lampert then invests that money.

While Lampert has a reputation for activism as an investor, he seems to be taking more of an interest in Kmart than usual.

He and a fellow investor in Kmart are to name four of its nine new board members as Kmart emerges from Chapter 11 bankruptcy protection April 30. Lampert has not asked for a seat on Sears' board.

Lampert serves on the boards of two other retailers in which he has a stake.

Kmart insiders say Lampert is deeply involved in turning around the retailer. He has at least two to three lengthy conference calls a week with the company's chief executive, Julian Day, and participated in a number of meetings with the executive team.

And William Crowley, the president and chief operating officer of ESL Investments, is at Kmart's headquarters regularly, according to someone who works in the building.

A former Kmart executive, referring to Lampert, said: "He is real involved and to my thinking, this will become more apparent as time goes on."

Lampert has a lot riding on Kmart, with an investment in the company estimated at about half a billion dollars.

ESL and a second investor, Third Avenue Trust, are to control in excess of 50 percent of all shares when Kmart comes out of bankruptcy.

While the discount chain's insiders are unsure of Lampert's plans for Kmart, analysts are equally uncertain about his interest in Sears.

Documents filed with the Securities and Exchange Commission last year show he was increasing his investment in Sears steadily. In October, he owned 22.8 million shares, or 7.2 percent of the company. By Dec. 31, 2002, he owned 28 million shares, or 8.9 percent of the business.

Through his spokesmen, Lampert has declined requests for comment about his plans for Kmart and Sears. Analysts say there are several possibilities for his interest in two icons of American retailing:

Kmart and Sears real estate. Michael Markowski, director of research at Stock Diagnostics.com, which specializes in cash flow research on more than 10,000 stocks for investors, said Lampert might believe the value of Kmart and Sears is in store leases -- and the locations could be snapped up by other retailers like Wal-Mart Stores Inc. if Kmart and Sears are pushed out.

A liquidation of Kmart, should it not survive outside bankruptcy, that could potentially allow Lampert to recoup his investment and make a profit.

A merger. Kmart gets some of Sears' best-known brands, Kenmore appliances and Craftsman tools, lawn and garden equipment. Sears stores get Martha Stewart's exclusive Everyday line of home, garden and decorating goods carried only by Kmart in the United States. Sears will begin to carry Stewart's Everyday line in its Canadian stores this summer.

Sean Egan, managing director of Egan-Jones Ratings Co. in suburban Philadelphia, said any investor with as much money tied up in Sears and Kmart would have to consider a merger.

"It would be unusual for any investor with the position he has in both these companies not to seriously consider putting them together," Egan said.

"He can make the argument of economies of scale, hope to raise additional equity and be cashed out that way," Egan said. "It would be unreasonable for any decent investor not to consider that."

Adding to the merger speculation: Kmart's chief executive is a former Sears executive. Day, Kmart's president since March 2002 and chief executive since January, worked at Sears from March 1999 to September 2000. He left when he was passed over for the top job.

Day said recently that he has a strong relationship with Lampert, and the two first met "a couple of years ago. I met him before I came to Kmart."

Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm in New York, says that despite his track record of success, Lampert might have chosen a pair of losers in Sears and Kmart.

"He's a man who made a fortune so he's not to be underestimated, but I disagree," Davidowitz said. "I think these two investments are both insane."

Kmart, he predicted, ultimately will liquidate.

Besides lacking key executives, including a chief merchant who would decide what goods to sell, the company's reorganization plan lacks evidence that managers have a strategy to set the retailer apart from competitors in the minds of shoppers.

And while Kmart will come out of bankruptcy with no debt and $2 billion in financing, it has turned a monthly profit only once in the last year -- $349 million on $4.7 billion in sales in December. In 2002, Kmart lost $3.22 billion on sales of $30.76 billion.

Sears, Davidowitz said, also lacks a vision and its revenues have been stagnant over the past three years -- $41.4 billion in 2002, $41 billion in 2001, $40.8 billion in 2000.

Lampert's company has two seats on the board of AutoNation Inc., a retailer of new and used vehicles, and one on the board of AutoZone Inc., an auto parts and accessories chain. One of his investment companies owns about one-fourth of each business, making Lampert the largest single owner of both.

Lampert told the Sun-Sentinel of Ft. Lauderdale, Fla., in an interview last year that "as a board member, you ask a lot of questions and bring your knowledge to bear, but it ultimately falls to the CEO. . . . My focus is very much on being a partner of management to see the company improve its performance and create value for shareholders."

But when it comes to his plans for Kmart, and the future of the century-old retailer with its roots in Detroit, Lampert isn't saying.

Edward Lampert's Key Retail Holdings
DETROIT FREE PRESS
March 27, 2003\

Kmart

Number of stores:	1,512
Annual sales:	$30.76 billion (2002)
Lampert's stake:	About 40 percent; stock will be issued after Kmart comes out of bankruptcy
Estimated value	About $500 million
Stock:	Delisted by the New York Stock Exchange last year; trading on the Pink Sheets for less than 50 cents a share
Board:	Lampert and a fellow investor in Kmart, Third Avenue Trust, can appoint four of the nine new board members.

Sears, Roebuck & Co.

Number of stores:	870 department stores 1,300 specialty stores in the United States and Canada
Annual sales:	$41.4 billion
Lampert's stake:	28 million shares, or 8.87 percent
Market value:	$594 million
Stock:	In the last year on a steady slide down, closed Wednesday at $24.14, down from a 52-week high of $59.90.
Board:	Lampert has no seat on the board

AutoZone Inc.

Number of stores	3,122 in the United States and 41 in Mexico
Annual sales:	$5.3 billion
Lampert's stake:	25.5 million shares, or 25.8 percent
Market value:	$1.796 billion
Stock	On a roller-coaster ride this last year but is trading in one of its highest ranges. It closed Wednesday at $72, down from its 52-week high of $89.34
Board	Lampert has one seat

AutoNation Inc.

Number of stores:	374 franchises
Annual sales:	$19.5 billion
Lampert's stake:	75 million shares, or 24 percent
Market value:	$966 million
Stock:	Trading around $13 from a 52-week high of $18.73. It closed Wednesday at $12.99.
Board:	Lampert and a colleague from his investment company each has a seat.

Inventor Loses Case Against Sears
By Kate Coscarelli - Newark Star-Ledger Staff
March 29, 2003

Sears, Roebuck and Co. did not infringe on a patent for a hybrid microwave oven held by an inventor from Edison, a federal judge ruled.

U.S. District Judge Alfred Wolin in Newark found that Melvin Levinson is not entitled to damages from Sears because ovens the retail giant sold did not steal his technique.

The patent in question is for a process that cooks food quickly, like a microwave, but leaves it browned and crispy, like a regular oven. It uses a special metal pan that captures microwave energy and a broiler to brown the top.

After three days of testimony this week, Sears asked the judge to render a verdict even before the eight-member jury had a chance to deliberate, saying Levinson had presented little evidence in his favor.

Levinson, 78, represented himself in the case.

"It's very typical of a prose plaintiff who is obsessed with their case and refuse to see reality," said Paul LiCalsi, who represented Sears.

He said the court's resources were wasted on the case.

Sears argued its hybrid ovens were based on different designs than Levinson's. Some of the Sears ovens used a special heating element; others had a broiling element with a lower wattage than Levinson's design, the company said.

Levinson argued that the heating element Sears used was similar to his.

Levinson, a member of the New Jersey Inventors Hall of Fame, said yesterday he would appeal the decision and hire an attorney. He said he feels confident about the appeal.

"Nothing can hurt me now," said Levinson.

Sears Credit-Card Sale Spurs Questions For Other Chains

By James Covert - Dow Jones Newswires
March 28, 2003

Sears Roebuck & Co.'s (S) decision to put its credit-card business up for sale has sparked questions about credit cards at a few major retail chains.

Foremost among them are Target Corp. (TGT) and Circuit City Stores Inc. (CC). In addition to proprietary cards that can be used only for purchases at their respective stores, both chains own general-purpose Visa card operations.

Launched in 2001, Minneapolis-based Target's Visa card has been met with some skittishness by investors, especially since last fall, when Sears reported a profit shortfall related to an increase in its allowance for doubtful accounts.

One big concern is the fact that both Sears and Target have grown their general-purpose card programs so quickly.

In the fourth quarter, Target's Visa card generated $212 million in revenue, compared to $171 million generated by its proprietary card. But Target emphasizes that it didn't grow its Visa portfolio through risky marketing strategies like balance transfers, convenience checks, or "teaser" interest rates. Target also notes that it has offered its Visa card only to existing Target proprietary cardholders, and hasn't sent out random direct-mail solicitations.

While the charge-off rate for its Visa card was 7.3% in the fourth quarter, up significantly from 2.2% during the first fiscal quarter of the year, Target said that rate is poised to begin falling this year.

"We're very pleased with the performance of our credit-card operations and have no plans for their sale," Target spokeswoman Cathy Wright said.

Todd Slater, an analyst at Lazard Freres & Co. in New York, said he believes Target has been much more conservative in growing its Visa card. Despite the sputtering economy, Slater expects to see an improvement in charge-off rates in the second half of the year.

"This company has managed credit for 100 years," Slater said. "It's not a new business for them, and they've been through credit crunches before."

While investors have balked at the liberal 240-day period Sears takes before writing off delinquent accounts, Target waits the more standard 180 days before taking action. In addition, Slater notes that Target's Visa Card accounts for less than 20% of Target's profits, compared with Sears' MasterCard, which contributed 60% of operating profit last year.

"The Sears retail business has been broken for some time, and credit has overtaken the majority of the company's earnings stream," Slater said. "If misused, credit can become a drug that is difficult to wean yourself off of. But I don't see that happening at Target."

The main purpose of Target's Visa program is to stem the loss of its proprietary card customers, who have flocked to the convenience of general- purpose cards, according to Slater. Target's reason for wanting those card customers is "more strategic than financial," he said, citing "smart cards" used by Target which track customer-behavior patterns.

High Chargeoffs At Circuit City Most retailers that have sold their credit-card businesses have done so in times of distress in order to boost their stock prices, generate cash, and focus on their retail businesses. Such was the case when J.C. Penney & Co. (JCP) sold its credit card operation several years ago.

Circuit City, which has struggled for the past two years to stem declining sales at its consumer-electronics stores, "hasn't made any announcements to sell the credit-card business," said Jim Babb, a company spokesman.

Circuit City declined to comment further, but there are plenty of reasons why the company should consider selling its credit-card business, according to David Campbell, an analyst at Davenport & Co., Richmond, Va.

Circuit City hasn't marketed its Visa card very aggressively, and it accounts for only a single-digit percentage of the company's profits. But charge-off rates have risen into the double digits since the company launched the Visa card last May. The high charge-off rates, along with revaluations of a $3 billion portfolio of securitized receivables, have hurt the company's earnings.

"They haven't spoken directly about monetizing the business, but it might not be a bad idea for them to at least look into it," Campbell said.

Sears CEO Alan J. Lacy noted this week that the company's sale of its credit-card unit will be made easier by the presence of a slew of third-party credit- service providers that have cropped up in recent years. Circuit City rival Best Buy Co. (BBY) is among those retail chains that have made good use of such third-party providers, Campbell said.

"It just seems that the retailers that use third-party are happy with the way that operates," he said. "There's greater sharing of customer information with the retailer now, and the arrangement precludes the need to necessarily have that asset on your balance sheet."

Will Sears Retain a Clear Identity?
By Sandra Guy, Business Reporter - Chicago Sun-Times
March 28, 2003

It is a troubling comparison but an inevitable one: After Sears, Roebuck and Co. sheds its credit card business, will it find itself with a muddled retail identity like Kmart and the defunct Montgomery Ward?

Sears, like Kmart and Ward before it, is struggling to find an identity between Wal-Mart's deep discounts and Target's cheap chic.

Though such comparisons are expected, a new and surprising possibility emerged Thursday when the Detroit Free Press reported that a multi- millionaire investor who owns substantial stakes in both Kmart and Sears could try to merge the two retailers or kick them out of their stores and sell the real estate.

Investor Edward Lampert, one of America's wealthiest men who made headlines in January when he was kidnapped from his Greenwich, Conn., home, owns a controlling stake in Kmart and has recently bought enough shares in Sears to become its second-largest shareholder. Lampert was returned safely after the kidnapping plot turned into a comedy of errors.

Steve Lipin, a spokesman for Lampert's ESL Investments hedge fund, said Thursday he could not comment on Lampert's investment in Sears or whether he will buy more shares.

A Sears spokesman could not be reached for comment late Thursday.

Michael Markowski, director of research at StockDiagnostics.com, said Lampert may consider Sears and Kmart more valuable dead than alive.

Another tie between Kmart and Sears is Kmart CEO Julian Day, who left the Hoffman Estates-based retailer shortly after he lost his bid for CEO to Alan Lacy.

Analysts drew comparisons in operational areas, too.

"When traditional retailers get in trouble because they are losing market share, they begin by cutting expenses, and sometimes they sell assets to help compensate for their declining market share," said Sid Doolittle, founding partner of Chicago retail consulting firm McMillan Doolittle.

"All three retailers (Kmart, Ward and Sears) have done that," he said when asked about such a comparison.

Unlike its troubled peers, Sears had $1.2 billion in operating profits last year, a 28 percent increase from 2001. Most of the profits were achieved from cutting costs and shedding operations.

Kmart is in Chapter 11 bankruptcy reorganization and Ward filed for bankruptcy protection for its second and final time on Dec. 28, 2000. Ward sold its credit card business to GE Capital in 1988 to help finance senior managers' leveraged buyout of the Chicago retailer.

Despite Sears' hopes for a windfall from the sale of its credit card business, some financial analysts said Sears is selling at the bottom of the market.

The credit card industry is weaker now because consumers have overextended themselves and, in a weak economy, fallen behind on their payments.

Sears' premium is expected to be 10 percent, though estimates of what its credit card business would fetch range from $2.8 billion to $7 billion.

Sears' portfolio is cause of great concern because its Gold MasterCard accounts are too new to show the full effects of future delinquencies and bad debts. Sears launched the MasterCard three years ago, and converted 23 million of its 60 million Sears cardholders to its more generous lines of credit.

Lacy said the last time he considered selling the credit card business was a few years ago, but the potential value to shareholders wan't compelling and Sears' retail business was in no position to stand on its own.

"We are looking for someone we can work with effectively for a long period, in support of our business and our customers," Lacy said. "It has to make sense economically for (the buyer) as well."

MasterCard Rule Hinders Bidding for Sears' Assets
Reuters - March 28, 2003

Morgan Stanley (nyse: MWD - news - people) could effectively be prevented from making a bid on the MasterCard portion of retailer Sears, Roebuck and Co.'s (nyse: MWD - news - people) credit card assets because of a rule by the credit card association.

Sears said on Wednesday it was considering a sale of its $30.8 billion credit card assets that are made up of its own store card and the Sears Gold MasterCard. Analysts and industry bankers have said Morgan Stanley could be a bidder, as it already owns the Discover credit card.

But any bid would be hindered by a MasterCard rule that bars any bank that issues a MasterCard from issuing a card by any other brand, such as American Express Co. (nyse: AXP - news - people) or Discover. The only exception is Visa, which has the same rule and makes an exception for MasterCard.

The rule would apply in this case because Morgan Stanley owns Discover, a MasterCard spokeswoman confirmed on Friday. It would also complicate any possible bid by American Express.

MasterCard and Visa were ordered to end their policy in 2001 after litigation by the U.S. Justice Department. But that order was later frozen pending an appeal, which is scheduled to start on May 8.

The Discover card was launched by Dean Witter in the 1980s when it was owned by Sears. The retailer later spun off Dean Witter and it was acquired by Morgan Stanley.

Representatives of Morgan Stanley, Discover and American Express all declined to comment on the speculation about Sears' assets.

Industry bankers said they would not rule out Morgan Stanley as a bidder.

The New York investment bank could always bid on the assets on the presumption that it would convert all the Sears MasterCards into Discover cards following the sale, although that would raise the cost of acquisition for them, bankers said.

About 40 percent of the Sears portfolio consists of MasterCard receivables.

Since the auction is expected to run into the second half of the year, Morgan Stanley could also enter the process in the expectation that the MasterCard appeal will ultimately be thrown out of court.

The rule would not affect any separate offer for Sears' store branded card. (Additional reporting by Tom Johnson)

The First Trillion-Dollar Company
By Lisa DiCarlo - Forbes 500s
March 28, 2003

NEW YORK - Last year, Citigroup became America's first trillion-dollar company, with $1.1 trillion in assets. Assets are one thing--after all, financial institutions have always had outsized asset bases--but could any Forbes 500 company ever top the trillion-dollar mark in sales?

Surprisingly, the answer is yes--and possibly sooner than you think. If it continues to grow at historical rates, Wal-Mart (nyse: WMT - news - people) will reach $1 trillion in sales in just ten years.

The Bentonville, Ark.-based company (2002 sales: $244 billion) has grown an average of 16% in each of the last five years. Another contender: General Electric (nyse: GE - news - people ). The Fairfield, Conn.-based conglomerate has grown an average of 8% over five years. If it remains on that trajectory, GE sales will hit $1 trillion in 2029. Barring a huge acquisition, no other Forbes 500s company will hit even half a trillion in sales within the next 50 years.

Of course, torrid rates of growth are much harder to sustain for larger companies than smaller ones. With stores in every U.S. state, Wal-Mart is now looking abroad to try to maintain its double-digit growth rate. There are now Wal-Mart stories in nine countries outside the U.S. Wal-Mart is also reportedly negotiating with Chinese companies about leasing space in China's upscale east coast region. The company could have as many as 60 stores in China, the fastest growing economy in the world, by 2005.

Wal-Mart is also expanding outside of its traditional product lines, most notably into groceries. While groceries are notoriously low-margin--many grocery-chains struggle to net a penny on the dollar--Wal-Mart has the potential to move them on a massive scale, further propelling it toward a trillion dollars in sales.

GE's expansion will come primarily from the nonphysical world. That is, the company will extend its already massive financial services business with more products for consumer and commercial customers. Chief Executive Jeffrey Imelt has not ruled out the subprime consumer lending business either. GE could expand its television efforts beyond NBC, which currently adds $7 billion to GE's top line, and its cable properties Telemundo and the Bravo network. With the U.S. government pushing to boost its defense budget, GE's heavy industrial business--which makes jet engines and other equipment --could get a big boost.

But a lot can happen on the way to 2013. In fact, the world's first trillion-dollar company may not even exist today. Remember, Cisco Systems (nasdaq: CSCO - news - people ) was only 16 years old when it became--briefly--the world's most valuable company in 2000. And Microsoft (nasdaq: MSFT - news - people ), which currently reigns as number one in market value, is just twenty-seven years old, a fraction of the age of many on the Forbes 500.

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No Turning Back for Sears' Conquistador
By David Greising - Chicago Tribune
March 28, 2003

Out at Sears, Roebuck and Co.'s Hoffman Estates headquarters, Chief Executive Alan Lacy has been talking about Hernando Cortes lately.

Lacy mentioned Cortes to close colleagues while finalizing a jolting plan to sell Sears' credit card business for a hoped-for $7 billion,

Why Cortes? The Spanish conquistador faced 650 exhausted and disgruntled troops battling their way up the coast of Mexico's Yucatan Peninsula.

Cortes sensed trouble and dealt with it directly: He burned his fleet of 11 ships. "There is no turning back now," Cortes said.

Lacy has created a Cortes moment with his abrupt move to dump Sears' struggling credit card business. If Lacy finds a buyer, Sears will thrive or fail based solely on its $32 billion retail business.

Lacy seems taken with Cortes' go-for-it approach. So far, it's easier to relate to his troops' point of view: At first blush, Lacy seems mad.

Sears can't possibly get Citigroup or General Electric or Bank One or anyone else to pay $7 billion for the credit card business, it seems. Returns are down, troubled accounts are up, and Sears still has not explained the surprise $222 million reserve it created last October. The stock still hasn't recovered from the tailspin caused by that move.

Then there's the total commitment to retail.

Sears' retail troubles are well known. Losing market share to Target and
Wal- Mart, watching J.C. Penney execute a smart turnaround, hurting from a weak Christmas season and worst-in-class sales results in January and February.

Lacy argues that Sears' results have improved, and he points to $1.5 billion in profit from the retail operation last year. Others shrug and say they won't buy the Sears story until they see top-line growth.

That, ultimately, is why Lacy is making his move. He wants Sears' organization to commit itself fully to retail. And he wants investors to focus on Sears' retail business, which he swears is on the verge of success.

"The absence of the credit business will put some very positive stress on the organization in terms of getting better faster," Lacy says. "There hasn't been enough drive for results in the retail culture."

The move to retail, then, is driven by a desire to focus Sears on just one business. No question, the company could benefit from a sharper focus on retail.

Lacy's bold move could work, but only if he scores big on a plan that has more "ifs" than Rudyard Kipling's famous poem:

	If Lacy gets something close to the $7 billion target price for the credit card unit--on the heels of last year's credit mess and in the midst of war and economic malaise.
	If he finds something more productive to do with the money than simply buying back Sears' stock.
	If last year's $2 billion purchase of Lands' End can bring new customers into Sears' stores.

Lacy and his supporters say those questions have been answered. Wall Street and the rest of us just haven't noticed. He is peeved at the company's "ridiculously low" stock price.

Sure, sales were down 5 percent last year. But Sears does deserve credit for 28 percent growth in operating profit despite those slow sales.

Investors want growth. But "you can't grow something that's not working. We had to get it in a position to grow profitably," Lacy says.

The Cortes example isn't the first time Lacy has used flame for a metaphor to drive his troops. Two years ago, in his first speech as CEO to Sears' annual Chairman's Conference, he told top executives they were on a "burning platform."

"We will act," said one of the slides Lacy used at that meeting. "This will take time. But we don't have time."

Lacy is in his third year as Sears' chief executive. He was running out of time to do something dramatic to turn Sears around.

Now Lacy has acted--in a big way that settles the question of whether a former chief financial officer could ever be gutsy enough to turn around Sears.

Lacy's plan to make Sears a stand-alone retailer might have a Cortes-style motivating effect. If it doesn't, just like Cortes, he's left himself nowhere else to go.

Sears: Less Plastic, More Profits?
By Robert Berner - Business Week on Line
March 27, 2003

COMMENTARY

Not necessarily. Putting its credit-card biz up for sale might help solve a short-term headache while not making a lot of long-term sense

Wall Street was certainly relieved with Sears, Roebuck & Co.'s disclosure on Mar. 26 that it's exploring the sale of all or a portion of its weakened
credit- card business. Sears shares rallied on the news, rising 13%, to close at $24.14. But is selling the business, which accounts for 60% of corporate profits, in investors' long-term interests?

Unquestionably, concerns about credit quality have weighed down Sears' stock price (S ) since the retailer warned of rising charge-offs last October (see BW Online, 10/2/02, "How Plastic Put Sears in a Pickle"). But a good case can be made that Sears' credit-card operations are so integral to its retail business that it can't afford to lose direct control of the card unit. "This will diminish Sears' ability to drive sales long-term," warns Richard Church, managing director at hedge fund Shumway Capital Partners.

What's surprising is that CEO Alan Lacy had argued that Sears retail and credit businesses were inseparable since he took the reigns in 2000. But in a conference call with analysts on Mar. 26, he said the sale would "create significant value for investors...and create a more profitable and focused retail company."

PRICE PRESSURE. Sears declined further elaboration, and a spokeswoman didn't return a call seeking comment. But Joseph Grabowski, a retail analyst with Strong Capital Management and a former Sears employee, says he suspects that the decision reflects Lacy's frustration with how credit was penalizing Sears' stock price. Church adds: "What I think is big shareholders and the board are putting a lot of pressure on management to get the stock price up."

The credit-card portfolio, with $30 billion in receivables, has certainly had a rough go. Last October, Sears spooked investors when it announced a sharp increase to reserves for potential bad credit-card debts, hurting earnings growth for the year.

Most of the increase was for rising charge-offs Sears expected on its new MasterCard product, which accounts for $12 billion of receivables. The balance of those receivables are on Sears' proprietary stores cards. However, Grabowski and some other analysts say investor concerns about credit are overblown.

UNPROVEN PORTFOLIO. Lacy indicated as much in the conference call, saying charge-offs and credit profits are tracking on plan and that the business "would be highly attractive to leading credit-card providers."

How much they would pay for the portfolio is hard to calculate, analysts who follow the credit industry say. Acquirers generally pay a premium of 20% over total receivables, which would place a value of $6 billion on Sears' portfolio. But that premium is for a well-proven MasterCard or Visa portfolio, which for Sears MasterCard is debatable.

Analysts say more interest could be seen for the more mature proprietary card portfolio, where the potential increase in charge-offs is less. Saks (SKS ), for instance, sold its card to Household Finance in July. Another likely interested party is General Electric's (GE ) G.E. Capital unit.

FOCUS ON RETAIL. In the conference call, Lacy wouldn't estimate what premium Sears expected to receive. He also declined to detail how the money would be used, other than that paying down debt, buying back Sears shares, and paying a special dividend would be priority considerations.

Lacy also said the divestiture would allow Sears to "sharpen our focus" on core retail and home-service business. He cited the strides Sears has made in turning around retail operations, which last year posted $1.16 billion in operating profits, up 29% from $901 million in 2001.

Virtually all that increase came from cost-cutting and none from top-line growth, however. In fact, Sears sales at stores open at least a year have fallen virtually every month since early 2001. Lacy's $1.9 billion acquisition of Lands' End last year has yet to prove it will significantly boost apparel sales. And Sears is losing market share in appliances, its most important retail category, to home-improvement retailers Lowe's (LOW ) and Home Depot (HD).

CAKE QUANDRY. Sears' credit-card operations are critical to selling its goods, particularly appliances, which account for nearly 40% of receivables, former employees say. Sears has been able to drive sales by how generously it grants credit to consumers.

It would lose much of that control with the sale of its credit business to an outside credit-card company, however. "The problem with going to third- party credit providers is that they're going to operate it for profit, which means they'll be far more discriminating who they open up credit lines to," says Shumway's Church.

The more control over its cards Sears tries to keep in the negotiations with an acquirer, Church adds, the lower price it'll receive. "You can't have your cake and eat it to," he says.

SUPERFICIAL REMEDY? History provides a clear warning of the danger. Montgomery Ward, the longtime Sears rival, sold its credit-card portfolio to G.E. Capital in the late 1980s, losing that substantial source of profit as well as control over that business. Montgomery Ward liquidated its retail operations in 2000.

Over the long-term, investors reward companies for generating profits through sales growth. Lacy is far from proving that Sears can do that. And selling all or part of the credit business may fix a short-term headache, but it won't likely help with the long-term problem.

Berner covers Sears from BusinessWeek's Chicago bureau
Edited by Douglas Harbrecht

Sears Bets On Retail
Mark Tatge - FORBES.COM
March 27, 2003

Why is Sears, Roebuck selling its profitable credit card unit to concentrate on a sagging retail unit that can't seem to attract shoppers?

That's a question that seemed to escape investors who cheered Chief Executive Alan Lacy's announcement that Sears (nyse: S - news - people) was seeking to sell all or part of its $31 billion credit card operation. The move could generate as much as $7 billion and extinguish $28.5 billion in debt, most of it associated with the credit card operation, leaving Sears virtually debt-free.

But the divestiture of Sears Credit, once a cornerstone of the company, would also leave Sears even more dependent on earnings from its lagging department stores, which the company has been unable to revive despite countless attempts. Sears' retail sales have declined for 18 consecutive months. Credit cards, even after racking up hefty losses of $1.5 billion last year, accounted for $1.5 billion, or 61%, of Sears' 2002 pretax income, making it the single biggest profit generator for the company.

Lacy, who was named CEO in October 2000, has yet to articulate how he plans to grow Sears' sluggish retail sales. Divesting credit, he says, will allow Sears to concentrate on its 872 department and 1,320 specialty stores.

Beginning this fall, Lacy is opening three pilot stores that mimic Target (nyse: TGT - news - people ) and Wal-Mart (nyse: WMT - news - people). The first one, slated for Salt Lake City, will offer products not normally found at Sears: toys, DVDs, CDs, dry grocery products, greeting cards, sundries, fertilizer and potted plants. "This is something they should have done 10 years ago," says Sid Doolittle, a Chicago-based retail consultant.

Whether the pilots will eventually be expanded into full-blown prototypes is unknown at this point. Sears has been in perpetual restructuring the past decade as it has started, closed or restructured numerous retail units in hopes of finding the right formula. So far, the retailer has been unable to crack so- called soft lines, an area it sees as key to attracting female shoppers and building overall sales. (Comparable-store sales for soft lines fell 12.2% year- over-year).

Former Sears CEO Arthur Martinez is credited with refocusing Sears in the
mid- 1990s on women's and children's apparel and moving the retailer's traditional mainstays out of shopping malls: hardware, tires, batteries and appliances. The effort improved traffic initially but slumped. Since then, Sears has continued to lose ground to off-mall retailers such as Wal-Mart, Target and Kohl's (nyse: KSS - news - people ). Sears has countered this by changing assortments and then taking big seasonal markdowns on its clothes and offering generous credit terms when the items didn't sell. (Sometimes that strategy backfired as the company suffered big credit losses.)

Sears generates about $1.1 billion in free cash flow annually--funds that could be used to acquire more specialty retailers such as Land's End, which Sears bought last year for $1.9 billion. Lacy said proceeds from any credit card sale could help pay down debt, buy back shares, increase the dividend or retool Sears' retail operation. Sears also would presumably have some kind of income- sharing arrangement so it wouldn't totally let go of all the income its credit operation produces.

Citigroup (nyse: C - news - people ), Bank One (nyse: ONE - news - people ), Bank of America (nyse: BAC - news - people ) and the GE Capital unit of General Electric (nyse: GE - news - people ) have all been mentioned as possible buyers. The operation could fetch between $3 billion and $7 billion, depending on the quality of the portfolio.

Lacy isn't willing to give up on retail. "The retail business is clearly not where we want it to be, but it is a very healthy business," he insisted.

Just how healthy is a matter open to debate. Operating income from Sears' retail stores and product services rose 28% year-over-year on 2002 sales of $31.4 billion. But analysts said those figures are somewhat deceiving given that most of that improvement has come from cost cutting. Sales from full-line department stores actually fell 5.2%.

Making matters worse, Sears' dominance in appliances and tools is being attacked by Home Depot (nyse: HD - news - people ), Lowe's (nyse: LOW - news - people ) and a host of regional appliance chains such as Abt Electronics in Chicago. Midwest Research says Sears' share of the appliance market in 2002 slipped to 39% from 39.8% a year earlier.

"Everybody is taking a little chunk out of Sears, and when you add it all up, you have eroding market share," Doolittle said. "The only way they are maintaining earnings is through cost cutting."

Credit cards have long been a linchpin of Sears' operation. It consistently generated sales and net income even while the retail side lagged. With 60 million accounts, one in five Americans has a Sears charge account. Sure, that relationship may not be what it used to be, but Sears effectively used credit as a way to draw customers into the retail store with teaser rates to help boost sales. The wisdom went like this: Even if we discount the clothes, we can make up what we lose by having customers charge it.

Wall Street bought Sears stock based on the earning power of its credit operation and the endless possibilities for cross-selling Sears' services and products. Selling or spinning off credit will bring greater transparency to Sears' retail operations, which is good for investors, but it poses risks for Sears by removing a safety net. The hope is that Sears won't face the same fate of another retail giant that sold off its credit card: Montgomery Ward. It ended up being liquidated.

Plan to Sell Credit Unit Gives Boost to Sears Stock
By Mike Comerford Daily Herald Business Writer
Daily Herald - Suburban Chicago
March 27, 2003

The decision by Sears, Roebuck and Co. to sell its credit card operations was being viewed as a major gamble on Wednesday, but one that was welcomed by Wall Street as shares surged 13 percent.

After the Hoffman Estates-based retailer made the announcement, its sagging stock bounced up $2.70 a share to $24.15, making it one of the hottest stocks of the day.

Analysts estimate the portfolio, with its Sears Card and Sears Gold MasterCard, could fetch between $4 billion and $10 billion. At the higher-end of the sale range, the eighth-largest U.S. credit card portfolio could sell for more than the entire company's stock valuation.

"Having our shares trade at this ridiculously low level is unacceptable," said Alan Lacy, chief executive officer, Sears.

Morgan Stanley, which merged with Sears subsidiaries Dean Witter and Discover, is considered one likely buyer.

Other potential buyers include Chicago-based Bank One Corp., General Electric Co. and Citigroup Inc., analysts said.

Sears has been suffering from credit problems, 18 months of falling store sales and recent downgrades in its credit ranking.

Lacy said he thinks the company can make it as a straight-retail company that has an outside financial firm manage its credit operations. Indeed, that is the model for most department store retailers.

"This is a company that had 28 percent profit growth last year despite negative sales, which I'd say is pretty good," Lacy said. "We knew we were walking away from a lot of revenue (by selling) � But we are focusing on our core business."

Sears expects to complete the review of its credit business, which has receivables of about $31 billion, by the second half of this year. A sale could then follow.

Lacy said he expects to use the proceeds from a sale to pay down the unit's $27 billion in debt. Any excess cash could be used for a stock buyback or a special dividend. He said a major expansion of its stores is not a major goal of this sale.

The credit card unit generated an operating profit of about $1.5 billion during 2002, a majority of the company's overall profits.

However, its provision for uncollectable accounts jumped to nearly $1.9 billion to help offset a rising delinquency rate.

Wall Street's concerns about Sears' credit operations intensified last October whe