Mar-Apr '04

As expected, the buyer is a venture managed by low-profile New York real estate investor Joseph Chetrit, whose aggressive bid last month for the 110-story structure cut short formal marketing of the skyscraper. But the power behind the transaction is Bank of America, which made an equally aggressive offer to finance the deal at interest rates comparable to many home equity loans.

The Charlotte, N.C.-based banking giant is providing a 3-year financing package totaling $825 million, with floating rates that average 3 percentage points above the London Interbank Offered Rate, a common interest-rate benchmark for large commercial deals, according to sources familiar with the deal. LIBOR was 1.1 percent on Thursday.

A bank spokesman declined to comment, citing client confidentiality.

As a result of Sears Tower's strong cash flow, combined with the low interest rates and large amount of the loans, the new owners are projecting that their initial investment could be returned to them in about two years, sources said.

"It's not the low interest rates as much as the leverage that would make this deal work," said Bruce Cohen, chief investment officer of Chicago real estate investment bank Cohen Financial, which is not involved in the transaction.

About $150 million of the financing will be in the form of a mezzanine loan, a high-interest second mortgage, sources said. Bank of America is expected to resell the first mortgage loan to investors as commercial mortgage backed securities.

On top of the purchase price, the new owners are being required to put up a hefty cash reserve, perhaps as much as $40 million, to be used for office build-outs and other costs, sources said.

As a part of the loan approval process, Sears Tower was appraised at $925 million, making the deal seem less heavily leveraged than it would appear. Its annual net income, after taxes and operating expenses, is about $70 million, sources said.

For New York-based MetLife, which has been advised by investment bank Eastdil Realty LLC, the sale marks the end of a 14-year entanglement with a building that at times has not been worth the massive debt.

MetLife gained control of Chicago's signature skyscraper last year when it paid $9 million for the controlling interest of Trizec Properties Inc., which was looking to reduce the debt on its balance sheet. At the time, the debt totaled $766 million, including unpaid interest.

MetLife has been a lender on Sears Tower since 1990, when it made three loans totaling $600 million while Sears, Roebuck and Co. still owned the building. Four years later Sears surrendered its ownership interest to a Boston investment firm, and the interest rate on the MetLife loan was reduced to an average of 9.27 percent.

Chetrit, of New York-based Chetrit Group LLC, could not be reached for comment. His investors include a little-known local real estate firm, Skokie-based American Landmark Properties Ltd., sources said.

Anxiety over a possible attack on Sears Tower reduced its attractiveness to some existing tenants and many prospective ones. But in recent months, several key tenants have signed long-term renewals, including Bank of America.

In December the building's fifth-largest tenant extended its lease for 177,000 square feet of space until 2015.

"Those tenants have been given a very competitive cost structure to stay, and the new owners have to be just as aggressive," said Steven Stratton, managing principal in the Chicago office of Dallas-based tenant representative Staubach Co.

"If they try to play hardball, there will be struggles," he said.

Investors Sue Sears Over Bond Redemption
By Dan Wilchins
April 27, 2004

(Reuters) - A group of big bond holders, including J.P. Morgan, has sued Sears Roebuck & Co. (S.N: Quote, Profile, Research) for buying back its debt well before maturity in a move that left investors facing losses of tens of millions of dollars.

At issue is whether Sears was entitled to exercise an obscure provision of some of its bond documents and buy back at face value at least $700 million of bonds it issued in the early 1990s. The debt, issued when rates were much higher, was trading at prices well above face value in the open market.

In January, a group of bondholders including AIG Life Insurance Co. and the U.S. Steel and Carnegie Pension Funds sent a letter to Sears saying the department store chain lacked a legal basis to buy back the debt.

In February, Sears sued bondholders for the right to exercise the provisions after selling its credit card portfolio to Citigroup Inc. (C.N: Quote, Profile, Research)

In a complaint filed on Friday in Cook County Illinois circuit court, investors are now countersuing, claiming Sears violated its bond indenture by exercising the provision.

"Both sides seem to have valid claims. This could be a long, drawn-out court case," said Hillary Sale, a corporate law professor at University of Iowa College of Law in Iowa City.

The bonds in question were medium-term notes sold over several years in the early 1990s. They had coupons of around 9 to 10 percent, and most were set to mature around 2012.

The indentures for the notes contained an option for Sears to buy back the debt at face value that would arise if the value of outstanding Sears credit card bills fell by 33 percent from its highest three-month average level, and stayed at that lower level for three months, known as the "declining receivables" test.

The call provision was likely originally meant to show that Sears would protect investors if the value of its credit card business deteriorated dramatically, said Dan Zaldivar, a bond analyst at RBC Dain Rauscher.

If Sears's credit card business ran into trouble, its bonds would likely be trading at below face value, and Sears calling them at par would be welcome, Zaldivar said.

The provision was not likely meant to allow Sears to buy back its debt at par if it sold its credit card business, Zaldivar said.

But when Sears sold its credit card portfolio to Citigroup in November for $31.8 billion, the department store argued that its credit card assets had fallen, and it was entitled to buy back the high-cost debt at face value, in a move that would cut Sears' borrowing costs.

The move stung many investors, who had bought the notes for as much as 130 cents on the dollar, and weren't expecting them to be redeemable in this case, analysts said.

Investors in the lawsuit argue that the language of the call provision only allows for a buy-back if the value of the assets have fallen, not if they are sold.

Furthermore, although the credit card bills, or receivables, are owned by Citi now, the business is still essentially a Sears business, with some functions having been outsourced to Citi, the bondholders said.

Sears and Citi will jointly create a marketing plan for the cards, and jointly own the account information. Sears and Citi have described each other as "partners" in the deal, and either Sears or Citi can terminate the partnership at any time for the next 10 years, for any reason.

The total holdings of bondholders that are countersuing account for about $220 million of the $700 million of debt that Sears called. Among the bondholders suing are J.P. Morgan Chase (JPM.N: Quote, Profile, Research) unit J.P. Morgan Securities, American International Group Inc. (AIG.N: Quote, Profile, Research) units including AIG Life Insurance Co. and American General Life Insurance Company, and the U.S. Steel (X.N: Quote, Profile, Research) and Carnegie Pension fund.

J.P. Morgan declined to comment. Officials at the other companies were not immediately available for comment.

High Court Rejects Allstate Appeal Sought to Limit Minority Lawsuit
Chicago Tribune - Tribune News Services - Bloomberg News
April 27, 2004

WASHINGTON -- Allstate Corp. on Monday lost a U.S. Supreme Court bid to limit a lawsuit claiming it used customers' credit records to overcharge blacks and Hispanics for home and auto insurance.

The justices rejected Allstate's effort to throw out a claim that the use of credit histories to set rates had a disproportionate effect on minorities, even if it wasn't intentional. Not at issue in the appeal was the customers' additional claim that Allstate deliberately discriminated against them. The federal suit was filed in Texas.

Allstate argued the disproportionate-effect claim doesn't belong in federal court because it would interfere with states' authority to regulate insurance. The customers' suit says that basing rates on credit ratings is similar to outlawed "red-lining" practices of charging more to residents of non-white neighborhoods.

The Northbrook-based insurer said customers' credit histories are a "race-neutral insurance tool that has gained broad acceptance as a strong predictor of risk of loss." Studies show that people with poor credit ratings are more likely to suffer an insurance loss, Allstate's lawyers said.

Washington attorney Seth Waxman, who is representing Allstate, said that classification of customers is "fundamental" to the insurance industry and that the process inevitably hurts some groups.

Sanford Svetcov, a San Francisco attorney who is representing the people suing Allstate, challenged the company's contention that the lawsuit's federal claims interfered with state insurance regulation, saying state regulators have not stepped in to help stop the suit.

"Beginning in the early 1990s, Allstate used racially slanted credit formulas to place its non-Caucasian policyholders in higher risk rate classifications for auto and homeowner's insurance, based on credit rather than risk," Svetcov said.

The lawsuit, filed by six black or Hispanic customers who bought auto or homeowner's insurance from Allstate, seeks nationwide class-action status. A federal judge in San Antonio ruled the customers could pursue their claim that Allstate's use of customers' credit information to set rates, though a seemingly neutral policy, had a disproportionate effect on minorities.

The 5th U.S. Circuit Court of Appeals in New Orleans upheld the judge's ruling in September, saying Allstate didn't identify any state policy that would be harmed by the federal suit.

Although Texas and Florida have passed laws allowing some use of credit ratings in insurance policies sold starting this year, the laws don't apply retroactively to policies involved in the lawsuit, the customers' attorneys said.

Allstate is the nation's second-largest issuer of auto and homeowner's insurance, behind Bloomington-based State Farm Mutual Automobile Insurance Co.

Martha Stewart and Kmart: Together Again
By Tracie Rozhon and Kenneth N. Gilpin - The New York Times
April 27, 2004

Deciding they are better off together than apart, Martha Stewart Living Omnimedia and Kmart reconciled yesterday, ending a lawsuit and reaching a new deal to sell goods by Ms. Stewart.

The new contract extends the existing partnership on the Everyday brand with Kmart by two years, through 2009, and adds some new lines. In addition, Kmart does not have to pay Martha Stewart Living Omnimedia certain guaranteed minimums that were at the center of a lawsuit filed by Kmart in mid-February - in the middle of Ms. Stewart's criminal trial on charges of obstruction of justice related to a stock sale.

Martha Stewart Living Omnimedia contended the company was owed minimum guaranteed payments for sales in individual categories and on overall sales whether goals were met or not; Kmart contended the contract only required guarantees on overall sales. The new deal maintains payments for overall sales, but not individual categories, and Kmart agreed to withdraw its suit.

The companies' announcement said that Martha Stewart would develop some new product lines, include ready-to-assemble furniture. Last night, Elizabeth Estroff, a spokeswoman for Martha Stewart Living Omnimedia, declined to provide further details about the new product lines. (Nevertheless, she offered at least a hint: "We're in the midst of a brand new candles program.")

Ms. Estroff added that the new contract accomplished three things for the company: "It expands a mutually beneficial relationship, it brings us into new products and expands our line. Thirdly, it resolves a dispute."

Kmart did not return calls seeking comment.

Analysts had different views yesterday about which company got the better deal: Martha Stewart Living Omnimedia, whose reputation has suffered from its founder's court conviction, or Kmart, which emerged from bankruptcy protection last May but whose future is still cloudy.

"Forget the minimum. Forget the deal," said Bob Buchanan, the chief retail analyst for A. G. Edwards in St. Louis. "I don't understand why you would want to sell Martha Stewart after all her problems. I think it's a little bit strange."

Perhaps not so strange, said Laurence C. Leeds Jr., chairman of Buckingham Capital Management. "Her stuff obviously sells - her name has been tarnished but the value is still there."

Despite Ms. Stewart's legal problems, the Everyday lines sold just at Kmart - Everyday home, garden, holiday, paints and so forth - generate 17 percent of the company's revenue. Analysts estimated those sales at about $45.8 million last year, up about 10 percent from 2002.

But Mr. Buchanan said he had questions about Kmart's future. One survey done for A. G. Edwards under his supervision in the Memphis area found that Kmart's prices, on average, were 15.9 percent higher than those at Wal-Mart; another survey in St. Louis also found higher prices at Kmart.

"Short-term, that may bring Kmart some money," Mr. Buchanan said, "but I question a long-term strategy that is not competitive on price."

On the other hand, Mitch Kates, a partner at Kurt Salmon Associates, a retail consulting firm, greeted yesterday's announcement with pleasure - for both personal and professional reasons.

"Kmart needs the Martha Stewart deal," he said. "It's the best asset they've got."

He is the first to admit he buys Martha Stewart's merchandise.

"I furnished my guest rooms in the beach house with all the towels," he said. "Not because of her personality but because of the quality."

He paused, clearly thinking over what he just said.

"In my own bedroom, I have Ralph Lauren," he added. "But in my guest rooms, I go with Martha Stewart."

Supreme Court Rejects Effort By Allstate to
Block Bias Suit
By Robert S. Greenberger � Staff Reporter � The Wall Street Journal
April 27, 2004

WASHINGTON -- The Supreme Court rejected an effort by Allstate Corp. to block a lawsuit charging it with using a discriminatory credit-scoring system when selling insurance to minorities.

The justices rejected without comment the company's request that they review the case because it was brought under a federal statute, but involves state regulation. The suit now goes back to the lower court for trial or possible settlement.

The case was brought by Hispanic-American and African-American policy holders, who claimed that Allstate discriminated nationwide against minorities, beginning in the early 1990s, by using credit formulas that produced higher risk rates paid by minorities for homeowner and auto insurance. The lawsuit alleged direct discrimination, as well as disparate impact, which means that a rule or action tends to fall disproportionately on certain groups, such as women or minorities. Generally, it is harder to prove cases of disparate impact.

The lawsuit claimed that Allstate used its credit-scoring system as a pretext to charge nonwhites higher premiums.

In its filing with the Supreme Court, the company denied the allegations. It said credit-scoring is commonly used by insurance companies to establish risk and, hence, rates. The company said it takes into account such things as where the insured person lives, what kind of house the person lives in, and what kind of auto the person drives, when setting rates. "Such empirical data confirm the common-sense conclusion that an insured's credit history may provide crucial information about the insured's risk of loss," Allstate said.

The company said the people who brought the complaint are seeking court approval for a class-action suit that could consist of hundreds of thousands of plaintiffs. (Allstate v. Dehoyos, et al.)

Medco to Pay $29.3 Million to Settle Drug Switching Complaints
By Milt Freudenheim - New York Times
April 27, 2004

Medco Health Solutions, the largest pharmacy benefits management company in the nation, said yesterday that it had agreed to start telling patients, doctors and employers about billions of dollars in annual rebates that it has received from drug manufacturers for promoting their products.

The agreement settled state and federal complaints that accused Medco of violating consumer protection and mail fraud laws by switching patients to drugs that were said to add to costs for patients and their health plans.

State and federal officials said the terms of the settlement would establish new rules for a largely unregulated industry, providing more transparency and prohibiting actions that critics contend favor drug manufacturers at the expense of patients. The attorney general of Maine, Steven Rowe, said the agreement would "lift the cloak of secrecy around Medco."

"We will no longer have to guess," Mr. Rowe said, "about who will benefit from this P.B.M.'s drug switching and what the value of that benefit is."

Medco, based in Franklin Lakes, N.J., agreed to change some practices and pay $29.3 million to resolve the legal issues. The company did not admit any wrongdoing.

The settlement was announced by Medco, Justice Department officials and the attorneys general of 20 states. State and federal officials said it would be a precedent for other large pharmacy benefit managers, or P.B.M.'s, many of which are also the subjects of state investigations. That is especially important, they said, because benefit managers will have an significant role in the new Medicare drug benefit that will be offered to millions of elderly and disabled people in 2006.

A Medco spokeswoman supported that view. "We agree with the attorneys general that the agreed business practices are the new gold standard for P.B.M.'s," said the spokeswoman, Ann Smith. "Many of these practices have already been adopted."

The law officials declined to comment on the status of other cases involving the pharmacy benefit industry. Phil Blando, a spokesman in Washington for the industry's trade group, the Pharmacy Care Management Association, said that the group had a policy of not commenting on developments involving its members.

Patrick Meehan, the United States attorney in Philadelphia, where the federal suit was filed, said the settlement prohibited Medco from seeking to switch drugs when the net cost of doing so would be higher than the cost of the prescribed drug. Medco had been accused of switching patients being treated for cholesterol problems from Lipitor, made by Pfizer, to Zocor, a similar drug made by Merck, that often cost more.

In a lawsuit last September, the Justice Department accused Medco of receiving $430 million from Merck, its former parent, to switch patients to more expensive drugs like Merck's Zocor, in 201. Merck spun off Medco in August.

Under the settlement, Medco will pay a maximum of $2.5 million to make up for costs of additional doctor visits and other tests required after their doctor prescribed a new drug.

It also prohibits switching to more expensive alternatives when a drug like the antidepressant Prozac loses patent protection and is undercut by lower-cost generic versions, Mr. Meehan said. His assistant, James Sheehan, has been investigating arrangements between drug manufacturers and pharmacy benefit managers for four years.

Last September, Mr. Meehan's office filed a whistle-blower suit complaining that the company's actions had harmed federal employees' health plans served by Medco's mail-order pharmacies. Medco does not admit to involvement in the actions of former employees in Tampa, Fla., cited in the suit, who may have "done the wrong thing," Medco's chief executive, David B. Snow Jr., said. Money penalties have not been agreed to in the whistle-blower suit.

As part of the settlement, Medco also agreed to provide benefits valued at about $1 million to each of the 20 states in cash or medicine for state health-care clinics or cards that low-income and elderly residents could use to fill free generic prescriptions. The settlement also provides $6.6 million for the states' legal costs.

The states included Arizona, California, Connecticut, Delaware, Florida, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Nevada, New York, North Carolina, Oregon, Pennsylvania, Texas, Vermont, Virginia and Washington. For all the greater transparency promised by the agreement, however, the officials were unable to put a dollar estimate on the cost of the drug switches. Because actual prices in P.B.M. contracts are not disclosed, there was "no way to know exactly," said Thomas F. Reilly, the Massachusetts attorney general.

Mr. Reilly said that Medco would also pay $5.5 million "to compensate Massachusetts for losses suffered by our program in 1997 to 2000," in a separate deal.

Medco said the agreement would take effect in the next 120 days. It said $21.1 million of its costs, or 5 cents per diluted share, would be recorded as an expense in the first quarter of 2004 but would not affect its projected earnings for the year. Medco plans to announce its first quarter results today .

Anticipating one provision of the settlement, Medco said in a filing with the Securities and Exchange Commission that rebates it received from pharmaceutical manufacturers totaled $2.97 billion in 2003, compared with $2.465 billion in 2002 and $2.535 billion in 2001. Most of the rebate money was for drugs it placed on preferred lists called formularies, Medco said.

The settlement "is consistent with our goal to position Medco as the most transparent company in our industry," Mr. Snow, Medco's chief, said.

Under transparency provisions of the new Medicare law, pharmacy benefit managers and other sponsors of Medicare drug discount cards must pass along the full amount of any manufacturers' rebates to consumers. The P.B.M.'s will have to disclose rebate terms to Medicare officials (but not to the public), when the new Medicare payments for drugs begin in 2006.

Medco shares gained 22 cents and closed at $35.25 yesterday.

"There were no findings that substantiate any of the allegations made in the complaints," Ms. Smith of Medco said. Mr. Sheehan of the Justice Department said, "They do not admit violations, but they did change their practices."

ESL Partners Boosts Stake in Sears
Chicago Tribune
April 27, 2004

ESL Partners has boosted its Sears, Roebuck and Co. stake to nearly 14 percent from 9 percent last year, according to the Hoffman Estates retailer's proxy statement.

If the Greenwich, Conn., investment house--Sears' biggest investor--were to boost its holdings by another 6 percentage points (to 20 percent) it would constitute a "change in control" of the company, the proxy shows.

At that time, if any senior managers get the boot, they would be eligible for a big lump-sum payment under the terms of the agreement outlined in the proxy statement.

They'd also enjoy the immediate vesting of unvested stock options and restricted shares, as well as most company benefits for two years after the change in control.

ESL also owns more than half of Kmart Holding Corp.

Sears Canada's Cohen Says Sears, Roebuck
Didn't Plan Buyout
Bloomberg
April 26, 2004

TORONTO, April 26 (Bloomberg) -- Sears Canada Inc. Chief Executive Mark Cohen told shareholders at the company's annual meeting that speculation that the retailer's parent company, Sears, Roebuck & Co., had planned a takeover bid was wrong.

Cohen said Sears, Roebuck "never had any intention'' of making a bid in recent months, though he "can't speak to the future.''

Sears, Roebuck Chief Executive Alan Lacy declined to comment on Cohen's statement. Lacy, who is a director of Sears Canada, attended the annual meeting in Toronto.

CPI Chief Ousted, New Chairman & Interim CEO Named
Reuters
April 26, 2004

NEW YORK, April 26 (Reuters) - CPI Corp. (NYSE:CPY - News), operator of portrait studios at Sears, Roebuck and Co. (NYSE:S - News) stores, on Monday said it had ousted its chief executive.

The St. Louis company said J. David Pierson's removal as chairman, chief executive and president was effective immediately.

CPI named Jack Krings, president of its portrait studio division, as acting CEO, as well as chief operating officer and president. The company said David Meyer will succeed Pierson as chairman.

The company's statement provided no explanation for the move.

Mr. Krings has been Vice President of the Company; President, Portrait Studio Division. Mr. Krings joined the Company in October, 2001, as Senior Executive Vice President, Operations and was promoted to President of the Portrait Studio Division and elected Vice President of the Company in 2002.

From 1993 to 2001, he held executive positions with Sears, Roebuck and Co., including Vice President and General Manager of Licensed Business; Vice President, Human Resources; and Vice President and General Manager, Product Services.

EEOC Says Health Benefit Rule Is Good for Retirees; AARP Differs
By Amy Joyce Washington Post Staff Writer
April 24, 2004

The Equal Employment Opportunity Commission sought yesterday to reassure millions of retirees that its decision the day before, to allow employers to provide different levels of health benefits to employees when they are eligible for Medicare at age 65, was designed to help, not hurt them.

The commission's 3-1 vote Thursday to create the new regulation was in response to a federal appeals court ruling in 2000 that cited age discrimination law in ruling that employers had to provide equal benefits to all retirees. Since then, more and more employers have dropped health benefits for retirees.

The "net effect" of the ruling "was not to raise the value of post-65 retiree plans, but to reduce benefits," EEOC Chairman Cari M. Dominguez said in an interview yesterday.

The agency noted that a General Accounting Office study found that one-third of large employers and less than 10 percent of small employers offered retiree health benefits in 2000, compared with about 70 percent of all employers in the 1980s.

But the AARP, which lobbies on behalf of millions of retirees, said the new rule will slash benefits for many retirees over 65. The rule "says you can offer as generous a benefit as you want to retirees under 65, but as little as you want, or nothing, for those over 65," said Michael W. Naylor, AARP director of advocacy.

Naylor argued that the agency, which enforces federal discrimination laws, doesn't have the authority to change the law, and said AARP is "considering legal action" to halt the regulation, which still needs approval from the Office of Management and Budget. "What the rule does is carve out an exemption from the governing statute. We think exempting a very important benefit for a very large group of people is clearly changing the law, not administering it."

The Age Discrimination Employment Act "has a very broadly worded provision that allows the EEOC to write exemptions if the EEOC finds they are in public interest," said Neil Grossman, an attorney with Mercer Human Resource Consulting's Washington office. Dominguez said the agency used that provision make the new rule.

"Retiree medical is so obviously beyond affordability to employers," said Joseph J. Martingale, national leader for health care strategy at Watson Wyatt Worldwide, a benefits consulting firm. "Indeed it is a minority of employers who provide it. To impose a rule that says if you touch it you have to provide it for everybody . . . what the EEOC did was just common sense and in the best interest of retirees."

Of 26 million Medicare retirees, about one-third, or 12 million, have retiree medical benefits from their former employers, he said. "It's a distinct minority and a diminishing minority."

But the new rule will only mean fewer companies will provide retiree benefits, Naylor said.

"All of us understand the pressures employers are under with regard to health costs," Naylor said. "But robbing Peter to pay Paul here is not a good option for anyone and not a good option for the EEOC in particular."

Dominguez said the rule just reinforces what most companies already practice.

"The whole issue here was it's just very natural to have different benefits for those without Medicare and those who have it," said Mark Beilke, director of employee benefits research with benefits consultant Milliman USA. "If EEOC hadn't done this, people would terminate benefits or bring it down to the level for pre-Medicare retirees. This allows companies to continue to provide full, good coverage for those under 65."

The commission was flooded Friday with calls from retirees upset they could lose their employer-provided healthcare benefits, a spokesman said. That led Dominguez to release her statement to "America's Retirees."

"We were concerned the rationale, reasoning behind it wouldn't be fully understood," Dominguez said in the interview. She said she felt a little "beaten up," though "we did expect a reaction."

EEOC to Allow Insurance Cuts for Retired Employees
By Robert Pear � New York Times
April 23, 2004

The Equal Employment Opportunity Commission voted Thursday to allow employers to reduce or eliminate health benefits for retirees when they become eligible for Medicare at age 65.

The agency approved a final rule saying that such cuts do not violate the civil rights law banning age discrimination. The vote was 3 to 1, with Republicans lining up in favor of the rule and a Democrat opposing it.

Employers and some labor unions supported the change, saying it would help preserve coverage for early retirees. But AARP, which represents millions of Americans age 50 and older, strenuously objected.

The new rule creates a potentially explosive political issue, because it will create anxiety for many of the 12 million Medicare beneficiaries who also receive health benefits from their former employers.

"We are aware of the anxieties and misperceptions that have taken root," said Cari M. Dominguez, chairwoman of the commission, which was deluged with letters opposing the rule from more than 50,000 AARP members.

Employer-sponsored health plans help retirees pay medical expenses not covered by Medicare. Those expenses could include co-payments and deductibles, the catastrophic costs of severe illness and the cost of preventive care and prescription drugs, beyond what Medicare might pay.

Debate over the rule highlights the tradeoffs employers make as they decide what benefits, if any, to provide workers and retirees at a time when health care is gobbling up a growing share of total compensation.

The rule creates an explicit exemption to the Age Discrimination in Employment Act of 1967. In practice, it allows employers to reduce health benefits for retirees when they become eligible for Medicare at the age of 65.

A federal appeals court ruled in 2000 that such age-based distinctions were unlawful.

No law requires employers to provide health benefits to workers or retirees. Employers can legally provide benefits to active workers and not to retirees. Courts have said that if an employer provides benefits, it cannot discriminate among retirees on the basis of age.

But the commission said that under the age discrimination act it had authority to make "reasonable exemptions" to the law in the public interest. The law does not define "reasonable."

Leslie E. Silverman, a member of the commission, said the appeals court decision had confronted employers with an all-or-nothing choice: "Give all of your retirees the exact same benefits, which is incredibly difficult, or eliminate your retiree health benefits altogether."

Several commission members said that employers were more likely to continue providing health benefits to retirees under 65 if they were allowed to reduce or eliminate benefits for those 65 and older.

A preamble to the final rule says it "is not intended to encourage employers to eliminate any retiree health benefits they may currently provide."

But Michele Pollak, a lawyer at AARP, said that might well occur.

"This rule will allow employers to reduce or eliminate retiree health benefits for anyone over the age of 65," Ms. Pollak said. "More than 12 million Medicare beneficiaries currently receive retiree health benefits from employers and could potentially be affected."

Ms. Pollak said the commission did not have authority to create such an exemption. Ms. Dominguez insisted that it did, though she said the power was rarely used.

Paul W. Dennett, vice president of the American Benefits Council, a trade group for large employers, welcomed the rule, saying, "It removes a cloud that has been hanging over retiree health coverage since the court decision in 2000."

The American Federation of Teachers and the National Education Association also supported the rule. School employees often retire early and rely on employer-provided health benefits until they become eligible for Medicare.

Alfred Campos, a lobbyist for the National Education Association, praised the rule, saying, "It will encourage school districts to continue providing health insurance to retired teachers under 65."

Stuart J. Ishimaru, who cast the only no vote, said: "I came to the commission as a civil rights lawyer. Before making an exemption to a major civil rights law, you need a compelling reason, which I have not seen."

The proper role of the commission, Mr. Ishimaru said, is not to make health policy, but to protect people from discrimination.

The rule is subject to comment by other federal agencies, and it will be reviewed by the Office of Management and Budget. But it is within the jurisdiction of the employment commission and is expected to stand.

The rule reverses a position that the commission took in the court case and in a national policy statement issued in October 2000.

Under the rule, employers can coordinate retiree health benefits with Medicare.

"For example," the commission said, "in order to ensure that all retirees have access to some health care coverage, employers and unions may provide retiree health coverage to only those retirees who are not yet eligible for Medicare. They also may supplement a retiree's Medicare coverage without having to demonstrate that the coverage is identical to that of non-Medicare eligible retirees."

Opponents could challenge the rule in court. AARP said it would "explore a range of different steps, including litigation," to block the rule if it is not changed.

Congress considered the issue in debating Medicare legislation last year. The Senate version of the Medicare bill included a provision similar to the commission's rule, but it was dropped from the measure ultimately signed by President Bush.

AARP insisted on elimination of that provision before it announced its support for the bill in November. That endorsement played a critical role in passage of the measure.

In recent years, many employers have reduced health benefits for retirees, in part because of soaring health costs.

Employers said that uncertainty caused by the court decision, involving retired government workers in Erie County, Pa., would accelerate the erosion of retiree health benefits if the commission did not take action.

EEOC Votes to Let Employers Cut Retirees' Health Benefits
By Laurie McGinley and Sara Schaefer Munoz � Staff Reporters �
The Wall Street Journal
April 23, 2004

WASHINGTON -- The Equal Employment Opportunity Commission approved a rule that would let employers reduce or eliminate company health benefits to retirees eligible for Medicare.

Under the proposal, which must be reviewed and approved by several other federal agencies before taking effect, a company that cuts its benefits to Medicare-eligible retirees wouldn't be in violation of employment-discrimination law. The decision was immediately attacked by AARP, the older Americans' lobby, which threatened to sue to block the rule's implementation.

This is a reversal of the EEOC's prior policy, which concluded that reduction in retiree benefits as a result of Medicare eligibility was an illegal, age-based distinction under the Age Discrimination in Employment Act.

"Our proposal permits the common-sense practice of coordinating employer-provided retiree health benefits with eligibility for other benefits to continue," said the commission's vice chair, Naomi Earp. The rule was approved by a 3-1 vote, with one commissioner absent.

Michael Naylor, director of advocacy for AARP, said the group was "deeply disappointed" by the move. More than 12 million Medicare beneficiaries receive benefits from former employers, he said.

AARP's policy director, John Rother, said it was hard to gauge the immediate impact of the rule. The reason: The new Medicare prescription-drug law provides billions of dollars in subsidies for employers who keep providing drug coverage to retirees on Medicare. So, employers who might have been inclined to drop coverage might opt to maintain it instead. The fight over benefits stems, in part, from a lawsuit involving Erie County, Pa. A federal appeals court in August 2000 found that Erie violated the Age Discrimination in Employment Act because it offered a different level of benefits to Medicare-eligible retirees than to early retirees.

Unhappy about the court decision, employer groups and some unions pressed Congress to include in last year's Medicare prescription-drug bill a provision saying that the employers could offer varying levels of coverage to retirees based on Medicare eligibility. But that provision was stripped from the bill at the last moment as part of a successful effort by top Republicans to win AARP's endorsement of the Medicare bill.

Firms Can Cut Health Care for Retirees
By Bruce Japsen, Tribune staff reporter � Chicago Tribune Tribune
April 23, 2004

Benefit reductions at 65 don't violate rights, EEOC says

A federal agency has given employers permission to cut or drop retirees' health benefits once they become eligible for Medicare at age 65 without risk of age discrimination.

The U.S. Equal Employment Opportunity Commission approved a final rule Thursday, saying that such cuts do not violate workers' civil rights. The decision could take effect this summer, pending additional federal agency clearances, retiree groups said.

Employers supported the change, saying existing rules deterred employers from providing benefits. If a company provided health coverage for its retirees, there was pressure not to cut those perks even after the former workers hit 65 and became eligible for Medicare, the federal health insurance program for the elderly.

The rule creates an exemption to the Age Discrimination in Employment Act of 1967.

Senior groups, particularly the giant senior lobbying group AARP, fear the ruling could lead to benefit cuts. A spokesman for the group said it may challenge the ruling in court.

If the ruling goes into effect by summer, and employers decide to take advantage of it, retirees over 65 would have reason to worry.

The reason: Many employer-sponsored health plans offer better benefits than Medicare, including free doctors' office visits and low co-payments for drugs or other perks. Moreover, Medicare won't provide drug coverage until 2006, and that could mean a gap in coverage for some retirees.

Still, some experts contend that employers will be able to better coordinate retiree benefits to respond to changes in Medicare.

"It's a very important ruling," said Frank McArdle, who heads the Washington research practice of Hewitt Associates, an employee benefits consulting firm. "If anything, this will make it easier for employers to coordinate with the new Medicare law."

Currently, an estimated 12 million seniors with Medicare coverage also receive health-care benefits from employers.

It is not clear what companies will do as a result of the ruling, but given rising health-care costs, the decision gives them a tool to save lots of money.

Firms already have slashed health benefits and raised premiums for pre-65 retirees, and eliminated coverage altogether for future retirees because of soaring insurance costs.

"Some companies want to maintain good relationships with employees, and then there are others that are bottom-line oriented," said John Rother, AARP policy director. "Some may want to take advantage of this ruling by eliminating or dropping coverage of their retirees. We hope most employers will not do this."

It is also unclear what private health plans will offer when the Medicare health benefits kick in. That makes senior groups anxious.

"Your employer can offer you health benefits as an early pre-65 retiree but can terminate them at 65 without risk of age discrimination," AARP's Rother said. "This, unfortunately, is an invitation for companies to eliminate retiree health benefits for those who are 65 and over."

A survey of 400 large employers released earlier this year by Lincolnshire-based benefits firm Hewitt Associates and the Kaiser Family Foundation showed 20 percent were likely to terminate retiree health coverage for future retirees in the next three years.

In addition, 71 percent increased the health insurance premiums paid by retirees last year and 86 percent indicated they planned to increase contributions in the next three years.

But the EEOC claims the ruling put health benefits on an equal footing for all retirees.

"This rule is intended to ensure that the [Age Discrimination in Employment Act] does not have the unintended consequence of discouraging employers from providing valuable benefits to retirees," EEOC Chairman Cari Dominguez said in a statement announcing the decision, which was approved by a 3-1 vote.

Dominguez cited General Accounting Office estimates that 10 million retired individuals 55 and over count on employer-sponsored health plans as their "primary source of health coverage or as a supplement to Medicare."

The EEOC's decision reverses an August 2000 ruling by the 3rd U.S. Circuit Court of Appeals, which held that federal law requires employers to assure that pre- and post-Medicare-eligible retirees receive health benefits of "equal type and value," the EEOC said.

The agency's new regulation would create a narrow exemption from the prohibitions of the age discrimination law for the practice of coordinating employer-sponsored retiree health benefits with eligibility for Medicare or a comparable state health benefits program, according to Hewitt's analysis of the EEOC ruling.

The exemption would let employers provide retiree health benefits that are reduced or eliminated when retirees become eligible for Medicare health benefits or health benefits under a state-sponsored program. The regulations would apply to all existing retiree health benefits as well as to newly created ones.

Apparel Mistakes Look Bad for Sears
by Becky Yerak � Staff Reporter � Chicago Tribune
April 22, 2004

CEO Lacy admits some decisions hurt clothing sales

In its first full quarter as a pure retailer, Sears, Roebuck and Co. stumbled, posting a loss and conceding that falling clothing sales were largely self-inflicted wounds.

The Hoffman Estates-based retailer's results were in line with guidance it gave to Wall Street, and the company's stock rose 1 percent, to $42.14, on Wednesday despite reporting a loss of 9 cents a share before special items.

But steps that Sears has taken to shore up its apparel business don't appear to be paying off. And since selling its credit card business in November, Sears' fortunes are wholly dependent on its store operations.

"Our sales performance in the first quarter was mixed," Sears Chief Executive Alan Lacy said. "We were disappointed we didn't fully participate in an industrywide improvement in apparel sales."

In March, for example, eight of 12 department store chains exceeded Wall Street's monthly sales forecasts, but Sears was among the handful of laggards.

For the quarter, Sears posted higher sales of hardlines such as appliances, electronics, tools, lawn and garden and fitness products. Hot sellers included plasma TVs, Craftsman laser-guided tools and Honda-brand lawn mowers.

Some retail experts have started asking if Sears should devote its retail operations to hardlines, but Sears has consistently said it is committed to being more of a one-stop shopping experience. In June 2002, to improve its apparel reputation, Sears bought the popular Lands' End clothing line. The brand has been in all 870 Sears stores since September.

On Wednesday, explanations for declining apparel sales were an overriding theme in Sears' quarterly earnings conference call.

"Results looked better than expected, but they're struggling to get their retail operations where they need to be" after selling the credit card operations, said one analyst who asked not to be named. "In their key hardlines, they've been able to stabilize market share pretty well, but apparel is still the problem."

Faulty decisions

The apparel unit made several missteps in the first quarter, Lacy said.

For one thing, Sears was slow to stock spring inventory.

"We wanted to make sure we had sufficient time to clear out winter apparel," Lacy said. In reality, consumers were ready to buy spring products in February, he conceded.

Sears also worried about getting stuck with unwanted inventory and therefore overcompensated by buying too little.

"In hindsight, we adopted too conservative of an approach to our inventory buy for the spring, with total apparel inventories down 14 percent compared to last year," he said.

In addition, executive turnover in the apparel ranks haunted Sears.

"We lost some institutional knowledge," Lacy said. "[That] resulted in some disruption to how we approach spring."

To top things off, some Lands' End products arrived late to stores, he said.

That blunder prompted one analyst Wednesday to encourage Lacy to seek restitution from the pokey Lands' End supplier.

"Is there some way, particularly on the Lands' End supplier part of it, they can help pay you back?" Morgan Stanley analyst Gregory Melich asked Lacy. "It seems like a pretty big miss for a supplier to not get Lands' End stuff as asked."

Sears, however, on Wednesday said Lands' End is meeting expectations.

Within apparel, there were some first-quarter winners. Menswear sold well, as did proprietary Sears brands Covington and Apostrophe.

An expansion of Sears' towel lines also has had an "extremely favorable" response, Lacy said. Footwear sales also rose.

Separately, Sears, which bought back almost a third of its stock in 2003, said that it repurchased 18.6 million shares, or 8 percent of its outstanding stock, at an average price of $45.69 in the quarter.

Sears has authorization to buy an additional $700 million in stock.

Costly accounting changes

Sears lost $859 million, or $3.90 a share, in the first quarter, mainly due to accounting changes related to pension and medical benefits. That compares with a profit of $192 million, or 60 cents a share, for the same period last year, when Sears still had a credit business.

Sears reported a $41 million operating loss for the first quarter, compared with operating income of $309 million last year, which included operating income of $399 million and $6 million, respectively, from the divested credit and National Tire & Battery businesses.

In January, Sears said it would suffer a loss of 9 cents to 14 cents a share, excluding special items, in the first quarter.

Sears insists its apparel problems are getting fixed. By the end of the second quarter, Sears should have a more appropriate level of clothing inventory, in plenty of time for the back-to-school season, Lacy said. In the second quarter, Sears expects to earn 78 cents to 83 cents a share.

"We did self-inflict some of our current issues in apparel by not having enough product," Lacy said. But "we think that strategically we're on a very good track, and when we get the execution issues behind us, we'll be in good shape in the fall season."

Sears Posts Loss for Fiscal Period, Says It Missed Spring Retail Wave
By Amy Merrick � Staff Reporter � The Wall Street Journal
April 22, 2004

Sears, Roebuck & Co. reported a loss of $859 million for its fiscal first quarter, hurt by a big charge for an accounting change related to its pension plan and retiree medical benefits.

In the year-ago quarter the retailer earned $192 million, or 60 cents a share. Those results included the Sears credit business and the National Tire & Battery chain, which have since been sold.

Other department stores, helped this year by new spring fashions that were a hit with shoppers, have been reporting their strongest sales in several years. But Sears said its clothing sales were too little, too late. Overall, its core retail business lost money during the quarter.

For the quarter ended April 3, the Sears loss amounted to $3.90 on a per-share basis. The results included a charge of $839 million, or $3.81 a share, for the accounting change. Earlier this year Sears said it would recognize gains and losses in its pension and retiree medical-benefit plans on a more current basis. Excluding that charge, Sears would have posted a loss of $20 million, or nine cents a share.

Sears, based in Hoffman Estates, Ill., said its retail business typically loses money during the first quarter, and its operating loss was at the low end of its January prediction of a loss of nine cents to 14 cents a share.

However, Sears has lagged behind its competitors during a period of strong recovery in the retail industry. In March, its same-store sales edged up only 0.1%, while a Goldman Sachs composite index of department-store same-store sales rose 6.1%. Same-store sales are sales at stores open at least a year.

"I was disappointed that we did not fully participate in the industrywide improvement in apparel," Sears Chief Executive Alan J. Lacy said in a conference call with analysts. He said spring clothing hit sales floors late because stores were clearing out winter merchandise and dealing with delivery snafus involving the Lands' End brand. The retailer also ordered too little apparel, thinking it had to cut back drastically after overstuffing stores last year.

On the other hand, traditionally strong Sears departments such as lawn and garden products, tools and electronics all reported solid sales increases.

Merchandise sales and service revenue rose 3.1%, to $7.70 billion from $7.47 billion. Total revenue declined 12%, to $7.79 billion from $8.88 billion, because of the divested credit and tire businesses. Same-store sales increased 1.6%.

After selling its credit division to Citigroup Inc. last year, Sears now must convince investors that it will thrive with only its retail business. Though its shares soared last year, they have dropped roughly 25% from their December high. Yesterday, Sears shares rose 44 cents to $42.14 in 4 p.m. New York Stock Exchange composite trading.

Sears repurchased 18.6 million shares during the quarter, or slightly more than 8% of its shares outstanding, spending about $852 million. It also retired $1.8 billion of debt.

For its second quarter ending July 3, Sears said it expects to earn 78 cents to 83 cents a share. In the year-ago quarter, it earned $309 million, or $1.04 a share.

Accounting Change Hits Sears' Results
By Sandra Guy � Business Reporter Chicago Sun-Times
April 22, 2004

Sears Roebuck and Co. will keep cutting its work force and tweaking the assortment of goods it sells as it seeks to rebound from a first-quarter operating loss, lagging clothing sales and apparel-supply missteps, company executives said Wednesday.

Sears is under pressure to prove that it can survive as a retailer after it sold its profitable, $32 billion credit-card business to Citigroup on Nov. 3. Credit-card income had accounted for more than 60 percent of Sears' operating profit.

Wall Street analysts Wednesday expressed concern that Sears might use some of the proceeds from the credit-card sale to acquire a debt-laden retailer.

The analysts speculated that Sears may want to expand by acquiring Kmart, whose chairman, Connecticut multimillionaire and hedge fund manager Edward Lampert, is Sears' largest shareholder, or Mervyn's department stores, which Minneapolis-based Target Corp. put up for sale on March 10. (Target also has put up for sale its Marshall Field's department-store chain.)

Sears CEO Alan Lacy declined to comment on the speculation Wednesday during a conference call detailing results of the first full quarter following the credit-card sale.

Based on the earnings results, analysts believe the Hoffman Estates-based retailer needs a new strategy, and quickly.

Sears announced Wednesday a net loss of $859 million, or $3.90 per share, for the three months that ended April 3, compared with a profit of $192 million, or 60 cents per share, for the same period a year ago.

Most of the loss was due to a change in the way Sears accounts for its U.S. pension and post-retirement medical benefits. The change to a new accounting method, which Sears said enables it to more immediately recognize gains and losses in its benefit plans, set the company back $839 million, or $3.81 a share. That resulted in a bad start to 2004 on the heels of Sears' most profitable year ever -- a $3.4 billion profit in 2003 that was due mostly to the sale of the credit-card unit.

The accounting change reflected Sears' announcement on Jan. 27 that it will eliminate stock-option grants to most of its 17,000 salaried employees, and end guaranteed pension benefits and company-subsidized retiree medical insurance to all new hires and to employees younger than 40, starting Jan. 1, 2005. Sears said it took the action to compete against discount-store rivals such as Wal-Mart, Target and Kohl's.

Excluding the non-cash accounting charge and other items, Sears reported an operating loss of $20 million, or 9 cents a share. Sears' revenues during the quarter fell 12 percent to $7.79 billion as a result of shedding the credit-card unit and the National Tire & Battery stores.

Sears stock closed Wednesday at $42.14, up 44 cents, but far below its 52-week high at $56.06.

Sears is pinning hopes for a turnaround in its long-suffering apparel business on Lands' End, the Dodgeville, Wis.-based catalog and Internet retailer that Sears acquired in June 2002 for $1.8 billion.

However, Sears ordered too little clothing for the spring season, and the Lands' End orders arrived late, missing out on shoppers' spring buying sprees at rival retailers.

Women's apparel sales declined 1 to 3 percent during the quarter from the same period a year ago, and overall apparel inventory fell 14 percent.

Lacy said part of the problem was a loss of "institutional knowledge" that occurred when Sears consolidated its merchandising operations. Also, Sears overcorrected this year after buying too much apparel last year, Lacy said.

Heather Brilliant, retail analyst at Chicago-based Morningstar, said the quarterly results "look terrible."

Brilliant said she was surprised at Sears' $39 million operating loss in its retail segment during the first quarter.

"Sears needs to revamp its whole strategy" to better match its apparel offerings with its shoppers, Brilliant said.

A wholesale change will be tough because Sears isn't considered a fashion-forward retailer, especially when it is compared with rivals that appeal to teens such as Wet Seal and Abercrombie & Fitch, she said.

Lacy said Sears is working to improve its fashions, including plans to add the ALine brand of women's sportswear, casual business attire and handbags, and the Structure menswear brand, designed for men ages 20 to 35.

Lacy said Sears' Apostrophe brand, a line of women's "career" clothing that can be worn in the office or to go out after work, is performing well, and has grown 50 percent from a year ago. Sears declined to provide the sales numbers for the brand.

Sears also will redo its children's clothing and bed-and-bath departments, Lacy said.

It will cut 20 percent of the children's brands it now sells and make it easier for mothers to find the clothes their children want, Lacy said.

The retailer recently refurbished its home-fashions department, adding towels from more upscale brands such as Utica and Martex.

However, competitors are quickly copying Sears' strategies. J.C. Penney announced this week that it will open free-standing stores outside malls.

Penney has also been shuffling its mix of brand name and more-profitable private label clothing, which helped lead to its third straight year of rising same-store sales in 2003.

Sears said it expects second-quarter earnings of between 78 cents and 83 cents a share, with same-store sales flat or up slightly.

Contributing: AP

Seared
By Jesse Eisinger - Wall Street Journal
April 21, 2004

When Sears reports earnings today, investors will be looking for signs of a turnaround at long last.

After the company unloaded its credit-card unit last year for a higher price than bears had expected, investors poured into the stock. They argued Sears Roebuck was an inexpensive retailing stock and a company poised to become more focused on selling than on consumer credit. And, it was going to use its cash to buy back stock.

Lately, however, the shares have languished, even as the retailing environment is robust. Sales at Sears haven't seemed to benefit as much as competitors. J.C. Penney is turning around. Home Depot is, too. What do those guys have that Sears doesn't?

Same-store sales -- a measure comparing sales at stores open a year or more -- have been distinctly on the softer side at Sears. Comparable-store sales barely edged up in March, rising 0.1%. In February, same-store sales were a weak 1.1%, while in January they were up 4.6%. That will render the quarter fairly unimpressive, at a time when home-improvement and lawn-and-garden companies Lowe's and Home Depot, as well as department stores such as May Department Stores and Federated Department Stores and even J.C. Penney all have been doing much better. Few expect those companies to keep up the record of high-single-digit same-store sales growth throughout the year. If so, why should investors think that Sears would maintain its pace?

Retailing investors and analysts contend Sears's management isn't "merchandising" well. Merchandising is the great retailing skill, hard to define but easy to spot once it is happening. It is the ability to put the right amount of attractive products in easily accessible places in the store, all at the right price. Investors are coming to the conclusion that while J.C. Penney Chief Executive Allen Questrom has got it, Sears's Chief Executive Alan Lacy doesn't.

Investors continue to be concerned that the acquisition of Land's End hasn't worked as well as Sears had hoped. As many predicted, the prices on regular Land's End clothes appear to be too high for the general Sears customer, leading to markdowns. It also seems as though Home Depot and Lowe's are competing effectively in appliances, traditionally Sears's strength.

Sears shares appear cheap. The stock is at 11.2 times the profit estimate of $3.73 a share for this year and 9.9 times the estimate of $4.22 a share next year. Since same-store sales are weak and the retailer isn't planning to open many new outlets, such earnings growth seems hard to achieve.

ABOUT JESSE EISINGER

Jesse Eisinger writes the Ahead of the Tape column for The Wall Street Journal. Prior to writing this column, Mr. Eisinger wrote the Heard in Europe column for The Wall Street Journal Europe. Mr. Eisinger has also covered pharmaceuticals and biotechnology for TheStreet.com and Dow Jones Newswires. He has a BA in American Studies from Columbia University.

Sears Posts $859 Million Loss on Accounting Charge
By Dave Carpenter � Associated Press � Chicago Sun Times
April 21, 2004

A hefty accounting charge linked to its pension and post-retirement medical benefits saddled Sears, Roebuck and Co. with an $859 million loss in a first quarter that also was marred by continuing weak apparel sales.

The change to a new accounting method, which Sears said enables it to more immediately recognize gains and losses in its benefit plans, set the company back $839 million. That resulted in a bad start to 2004 on the heels of Sears' most profitable year ever-- a $3.4 billion profit in 2003 that was due mostly to the sale of its credit-card unit to Citigroup.

More troublesome for a company that has staked its future on retail were numbers showing Sears was left behind in the recovery that lifted competitors' fortunes in the quarter.

CEO Alan Lacy acknowledged to analysts on a conference call that weak apparel sales resulted in part from the company's failure to ensure it had adequate inventory, particularly Lands' End items, in stores for the spring season.

"We clearly had too much product last year and we just flat-out overcorrected, to a degree," he said.

The loss for the three months ended April 3 amounted to $3.90 per share, compared with a profit of $192 million, or 60 cents, for the same period a year earlier.

Excluding the non-cash accounting charge and other items, the company said it had an operating loss of 9 cents per share, which was a penny better than the consensus estimate of analysts surveyed by Thomson First Call.

Revenues fell 12 percent to $7.79 billion as a result of shedding the credit-card unit-- down from $8.88 billion for the first quarter of 2003.

Lacy noted a modest percent increase in same-store sales but admitted that "we were disappointed not to fully participate in the industrywide improvement in apparel sales."

Sears is still tinkering with the assortment of offerings in its 872 department stores. The Hoffman Estates, Ill.-based retailer will introduce two new apparel brands starting in the fall: Structure, which it acquired last September from Limited Brands Inc., for younger men and A-Line, offered through an alliance with the Jones Apparel Group, for career-oriented women.

Other planned changes include dropping 20 percent of its children's apparel assortment and, in consumer electronics, getting out of computers and adding more thin-screen TVs and digital cameras.

Lacy said the company also is considering opening Lands' End specialty stores in upscale malls or at freestanding buildings in major cities, citing a Lands' End store at the Minneapolis airport that has been "wildly successful."

Morningstar analyst Heather Brilliant said the lackluster apparel results demonstrate Sears' continuing inability to match its product inventory with its clientele, much of which goes to its stores for tools or home appliances.

"They really need to focus on the apparel business," she said, adding that the new brands could help. "They also have an image problem to overcome. People don't really think of Sears as fashion-forward, or even a destination for apparel."

The company said it expects to earn 78 cents to 83 cents a share in the second quarter, slightly above the First Call estimate of 77 cents.

Sears shares rose 56 cents to $42.26 in afternoon trading on the New York Stock Exchange.

Sears Swings to a Loss On Accounting Charge
Dow Jones Newswires
April 21, 2004

HOFFMAN ESTATES, Ill. -- Sears Roebuck & Co.'s first-quarter results plunged to a loss on an accounting charge and a 12% decline in sales.

However, the results met the company's expectations, and the retailer reiterated its earnings outlook for the year.

In a news release Wednesday, Sears said it posted a loss of $859 million, or $3.90 a share, compared with net income of $192 million, or 60 cents a share, in the year-ago first quarter.

Excluding an accounting charge of $839 million related to the company's pension and post-retirement medical benefit plans, the loss in the latest quarter was $20 million, or nine cents a share, a penny better than Thomson First Call estimates.

Revenue during the quarter fell to $7.79 billion from $8.88 billion. A First Call survey of three analysts expected revenue of $7.67 billion.

The prior-year quarterly earnings include the results of the domestic Credit and Financial Products and National Tire & Battery businesses divested2 in the fourth quarter of 2003.

Sears continues to expect full-year earnings of $3.60 to $3.80 a share before the accounting charge. The estimate includes the negative carrying cost of about 20 cents to 25 cents a share on the company's remaining legacy debt related to its former Credit and Financial Products business.

For the second quarter, the company expects to earn 78 cents to 83 cents a share, assuming that same-store sales during the quarter are flat to up slightly.

Analysts polled by Thomson First Call predicted, on average, earnings per share of 77 cents in the second quarter and $3.73 for the year.

In the year-ago periods, Sears posted income before items of 90 cents a share in the second quarter and $4.36 a share for the year.

Credit and financial products revenue during the quarter fell to $91 million from $1.41 billion last year. Sears sold its credit-card unit last year to Citigroup Inc. to focus on its retail operations.

Merchandise sales and services revenue rose to $7.7 billion from $7.47 billion in the first quarter last year.

"Our sales performance in the first quarter was mixed," Chairman and Chief Executive Alan J. Lacy said in a statement. "Our strong assortment and value proposition drove improved home group comparable store sales, while we were disappointed not to fully participate in the industrywide improvement in apparel sales."

First-quarter domestic gross margins rose to 26.8% from 26.4%, primarily due to the income from revenue earned under a long-term alliance agreement with Citigroup.

Sears Canada revenue rose to $1 billion from $843 million, on sales gains across most formats and the effects of foreign exchange. The unit reported an operating loss of $2 million compared with operating income of $10 million last year, mainly due to a $10 million restructuring charge.

The Next Wal-Mart?
Business Week Online - European Cover Story
By Jack Ewing with Andrea Zammert in Frankfurt, Wendy Zellner in Dallas, Rachel Tiplady and Ellen Groves in Paris, and Michael Eidam in Smyrna, Ga.
April 26, 2004

Secretive. Powerful. How far can Germany's Aldi go? At first glance, an Aldi Group store in Germany seems like an unlikely staging area for world conquest. Jars of asparagus and cans of sardines poke out of cardboard boxes piled atop pallets. The line at the registers is 10 people deep, and the product range is reminiscent of East Berlin, circa 1975. Two brands of toilet paper. One brand of pickles. But the prices are delightfully, breathtakingly low. Three frozen pizzas for $3.24. A bottle of decent Cabernet: $2.36. How about a $21 trench coat?

Germany may be the land of the $100,000 Mercedes-Benz land yacht, but it's also a land of ebbing wealth, where less than a fifth of the population has discretionary income of more than $375 a month, where even haut bourgeois families will lay out for a fancy car but stint on the staples. Thus Aldi stores are found not only in working-class neighborhoods but also in wealthy communities like Bad Homburg, a Frankfurt suburb where the Aldi parking lot is thick with BMWs and Mercedes. A cookbook devoted to recipes using Aldi ingredients has sold 1 million copies, and there is even a connoisseur's guide to Aldi wines, which often sell for a few dollars a bottle. A recent survey by Nuremberg-based market researcher GfK found that Aldi is Germany's third-most-respected corporate brand, just behind electronics giant Siemens (SI ) and auto maker BMW -- and ahead of DaimlerChrysler (DCX ). An astonishing 89% of German households shopped at least once at Aldi last year, according to GfK. That has made reclusive co-founder Karl Albrecht the world's third-richest man, with a fortune estimated at $23 billion by Forbes magazine. Aldi -- short for "Albrecht Discount" -- "is a huge cult," says Matthias K�v�r, a Cologne resident who maintains a Web site for devotees.

Lock on Budget Shoppers

Aldi is Europe's stealth Wal-Mart. Like the Arkansas-based giant, Aldi boasts awesome margins, huge market clout, and seemingly unstoppable growth -- including an estimated sales increase of 8% a year since 1998. It relentlessly focuses on efficiency, matching or even beating Wal-Mart Stores Inc. (WMT ) in its ability to strip out costs. Yet privately owned Aldi is also very old-school German, financing expansion with cash to avoid debt, shunning publicity, and moving quietly into new markets before the competition catches on. That has allowed the onetime local grocer in Essen to become one of the world's biggest retailers, with $37 billion in sales, a fraction of Wal-Mart's $245 billion but enough to give Aldi a 3.5% market share in Europe, vs. 6.8% for market leader Carrefour, according to Brussels-based market watcher M+M Planet Retail. Even mighty Wal-Mart has struggled against Aldi in Germany. Wal-Mart has other problems there, such as a lack of sites for its jumbo-size stores. But a big obstacle is that Aldi and other discounters already had a lock on budget food shoppers. "Aldi was doing the same thing as Wal-Mart before Wal-Mart got here," says Frank Pietersen, a retail analyst for KPMG in Cologne.

The discount chain already is having a Wal-Mart-type effect on the German economy. The main association of German retailers issued a report on Mar. 8 blaming Aldi and other "hard discounters" for running 35,000 small shops out of business last year. On the same day, Bavarian dairy farmers picketed Aldi stores, which they blame for a ruinous 15% plunge in milk prices since 2001. Aldi must take care not to let such criticism tarnish its reputation among German consumers.

What's next? Aldi now shows signs of stepping up the pace of its expansion on Wal-Mart's turf. Aldi opened its first U.S. store in Iowa in 1976 and has sales of $4.8 billion in North America, according to M+M. And Trader Joe's Co., a specialty grocer owned by a family trust that Aldi co-founder Theo Albrecht created for his sons, has become the hottest thing in U.S. retailing by extending the Aldi concept to upscale products like wine and cashew butter.

Aldi aims to open 40 stores a year until 2010, bringing the U.S. total to 1,000. Aldi is even buying up sites from retailers trampled by Wal-Mart. "It is an uncharacteristic weakness of Wal-Mart that it has not recognized how formidable a foe Aldi is," warns Burt P. Flickinger III of New York City-based Strategic Resource Group, a retailing and consumer goods consultant. He expects Aldi to have as much as 2% of the U.S. grocery market by the end of the decade, up from 0.65% now. Says Wal-Mart spokesman Bill Wertz: "We certainly recognize Aldi as being a tough competitor."
Will Aldi take over the world? It's clear it is on the march, advertising on the Web for workers and store locations in places such as Ireland and Australia. "One of the principles of Aldi is not to rush into things, but first to build a solid foundation. Once they have that, they move more quickly," says Dieter Brandes, a former Aldi executive who has published a book, The 11 Secrets of Aldi Success.

Aldi -- actually two associated retailing groups controlled by Karl Albrecht and brother Theo, both in their 80s -- is Europe's biggest "hard discounter," the term for a retailer that pushes prices even lower than traditional discounters. Hard discounters have doubled their share of the European grocery market in the past decade, to 9.5%, according to ACNielsen. "They're coming, and they're going to change the retailing landscape for good," says Volker Koch, Frankfurt-based analyst for M+M.

Aldi follows a simple but devastating strategy. A typical Aldi has only about 700 products, compared with more than 20,000 at a traditional grocer such as Royal Ahold's (AHO ) Albert Heijn and as many as 150,000 at a Wal-Mart Supercenter. Established brand names like Nestl� or Nivea or Persil are irrelevant at Aldi. Almost everything on display is an Aldi-exclusive label such as Frisco Dent toothpaste (61 cents for a family-size tube) or Rio D'Oro orange juice (74 cents a liter) in Europe. The Aldi lineup even seems to be winning over U.S. shoppers. "They're not the brands I'm used to, but they're good. Nestl� has nothing on this," says retired schoolteacher Silvia Randall, holding up a package of LaMissa hot cocoa mix at an Aldi in Smyrna, Ga.

Because it sells so few products, Aldi can exert strong control over quality and price. The limited selection simplifies shipping and handling. A survey by consultants McKinsey & Co. found shoppers perceived little difference in quality, assortment, or service at Aldi, vs. traditional retailers, but they rated Aldi better on price. "We have a lot of respect for Aldi quality," says Wolfgang Gutberlet, CEO of Fulda, Germany-based tegut, which operates about 300 food stores in western Germany.

Obsessed with Frugality

The fanatic attention to costs pays off. Aldi's operating margin in some regions of Germany is as high as 9.3%, according to McKinsey. "Aldi has taken the retail formula down to the most basic elements," says Neil Z. Stern, senior partner at Chicago retail consultant McMillan/Doolittle LLP, who believes Aldi is more efficient than Wal-Mart. One knowledgeable estimate puts pretax profits at $1.5 billion.

Aldi's formula is as much the result of necessity as brilliance. When Karl and Theo Albrecht returned from Allied POW camps after World War II, residents of bombed-out Essen wanted only the products they needed from one day to the next, for the best price. So the brothers restricted their assortment to a few hundred items and carefully monitored quality. "Our business was managed solely on the basis of the lowest price," Karl Albrecht said during a rare public appearance in 1975. The Albrechts have avoided the spotlight since 1971, when Theo was kidnapped for 17 days. He was released in return for a $4 million ransom -- after bargaining to get the price down, according to press reports.

Frugality remains an obsession. Theo Albrecht turned off lights when he entered a room if he thought daylight sufficed, according to Brandes. Theo still goes to work daily, while Karl has turned over day-to-day management to professionals. Brandes says little is likely to change when the Albrechts are gone: Ownership has been transferred to trusts to avoid disputes among heirs.

Will Aldi prove as successful a German export as BMWs? In Europe, retailers are certainly feeling the heat. The Netherlands' Albert Heijn cut prices on 2,000 products last year to try to thwart the hard discounters. ACNielsen even sells a risk assessment profile to help other retailers figure out when an Aldi product threatens sales. Foreign grocers have had lots of time to prepare for Aldi. In Britain, Aldi has just 1% of the grocery market 14 years after opening its first store. Tesco PLC has defended share with its own low-priced brands. Hard discounter Lidl, a unit of Neckarsulm-based Lidl & Schwarz Group, leads Aldi in France and Britain and is moving into Eastern Europe, where Aldi is so far absent. "I think they'll be challenged to extend their footprint any farther," says Richard Hull, who heads the retail team at London consultants Cap Gemini Ernst & Young Group.

Aldi's all-cash approach to expansion means risk is low. Analysts say Aldi could find a niche in U.S. markets that can't support a "big box" store such as Costco Wholesale Corp. And most U.S. retailers don't seem to recognize the threat. "[Aldi] is kind of bottom-feeding, and nobody notices it," says Tom A. Muccio, a former Procter & Gamble Co. (PG ) executive. Funny, that's the same mistake that German competitors made a few decades ago.

A Broker's Empty Promise, a Retiree's Shattered Dream
By Gretchen Morgenson � The New York Times
April 18, 2004

NORMAN HUFF spent 30 years working jackhammers, backhoes and other heavy construction equipment at the East Ohio Gas Company. When it offered him an early retirement package in April 2000, he was tempted but nervous: he had $386,000 in his retirement account, mostly in company stock, but he and his wife, Wilma, worried that this would not be enough if he were to quit his $40,000-a-year job.

Then Mr. Huff was invited to a retirement seminar at the Brookside Country Club near his home in rural Dalton, Ohio. Michael G. Dobbins, a vice president and broker at a local branch of Prudential Securities, addressed 50 to 75 prospective retirees from East Ohio Gas, suggesting that they could accept their company's buyout packages, invest their savings in a portfolio of stocks he favored and live comfortably on the earnings.

"He told me I'd be a fool not to take the buyout," Mr. Huff said. "He kept on stressing to us that we needed to get that stock I had accumulated over 30 years sold and make that money work for us. The amount of money we had, he said, in a matter of a few years we could possibly be millionaires."

Today, the Huffs are far from millionaires. In fact, they are worse off than they were when they met Mr. Dobbins. By April 2003, their retirement account had lost 65 percent of its value. Even though Mr. Huff and his wife said they had emphasized that keeping their principal safe was paramount, Mr. Dobbins invested their money in shares of technology, health care and financial services companies, and in equity mutual funds that carried sales charges, or loads.

With their savings down to around $100,000, Mr. Huff, 57, had to go back to work as a security guard at a local jam factory. He earns $6.75 an hour, well below the more than $20 an hour he was making when he took the buyout from East Ohio Gas.

The Huffs filed an arbitration case against Mr. Dobbins and Prudential a year ago, as is customary in disputes between securities firms and their clients. Last month, an arbitration panel from NASD, formerly the National Association of Securities Dealers, found both defendants liable for failure to supervise, breach of fiduciary duty and fraud. The panel awarded the Huffs what they had lost - approximately $225,000 - plus lawyers' fees of $74,000. In an unusual twist, it also required that the defendants take back the securities that Mr. Dobbins had sold to the Huffs, including shares of Nortel Networks, WorldCom, America Online and Cisco Systems.

Jim Gorman, a spokesman for Prudential Financial, which owned Prudential Securities at the time the investments were made, said the firm disagreed with the arbitrators' findings. Prudential Securities became part of Wachovia Securities last summer. Wachovia Securities said Mr. Dobbins would not be available for an interview. A lawyer for Mr. Dobbins also said the broker would not comment.

While the outcome of the case was felicitous for the Huffs, the circumstances surrounding their losses are becoming disturbingly common, some securities lawyers say. Looking to collect assets - and the fees they generate - stockbrokers have found people considering retirement to be receptive and trusting targets. Some companies even provide lists of prospective retirees to local brokerage firms.

As long as workers remain at their jobs, their company retirement savings stay out of the reach of stockbrokers. Thus, brokers have an incentive to recommend that workers accept early retirement offers. And like the Huffs, many investors, believing brokers' promises of stock market riches, have lost both their incomes and much of their savings.

THE decision about when you retire and what you do with your money at retirement is the biggest financial decision most people will ever make in their life, and it will determine their quality of life for years to come," said Barbara Roper, director of investor protection at the Consumer Federation of America. "As a result, it is a point at which people are as financially vulnerable as they are ever going to be and the point at which they are the most attractive financial target."

Jacob Zamansky, a securities lawyer in New York, represented the Huffs in their case against Prudential Securities. He has also filed an arbitration case on behalf of 20 former employees at East Ohio Gas and their spouses who lost $2.3 million investing with Mr. Dobbins. Mr. Zamansky said retirees from at least eight major companies with operations in the Midwest, including Detroit Diesel, MeadWestvaco, Frito-Lay and Rubbermaid had told him stories similar to that of the Huffs. All the investors were placed in fee-based accounts, with annual charges of at least 1 percent going to the brokerage firm.

"Major Wall Street firms have targeted and preyed on unsophisticated 'buy and hold' Ohio investors, placing them in inappropriate fee-based accounts that generated huge annual revenue streams for the brokers," Mr. Zamansky said. "They put their own financial interests ahead of their customers'."

These types of accounts are coming under increased scrutiny by the NASD, the largest self-regulatory organization in the securities industry. In a recent notice to members, the NASD warned that it could be a violation of industry rules to put a customer in a fee-based account that costs more than an alternative and noted that such accounts must be supervised to determine appropriateness.

There appears to have been little, if any, supervision over Mr. Dobbins at Prudential. Mr. Zamansky said that not one document was submitted in the arbitration to indicate any supervision over the broker and that Prudential was unable to produce any supervisor or branch manager to testify at the hearing.

Prudential's spokesman declined to comment further on Mr. Dobbins, other than to say that the firm planned to defend the cases filed against him and the firm.

Mr. Dobbins, who worked out of a branch of Prudential in Akron, Ohio, called the Dobbins Group, was the only broker advising his 1,300 clients. But he had as many as seven sales assistants helping him with administrative details. In his testimony before the arbitrators, he said that he had met many of his customers through retirement seminars he had led at local clubs or restaurants. He said that he counted former workers at AT&T, the Goodyear Tire and Rubber Company, Loral Space and Communications and the AES Corporation as customers, and that his clients generated annual revenue of more than $2 million for the firm.

Mr. Dobbins testified that he put many of his clients into a portfolio of stocks in three sectors - financial services, technology and health care - that he said would benefit from demographic shifts associated with the aging of baby boomers.

Mr. and Mrs. Huff said they told Mr. Dobbins that they knew nothing about the stock market and that he told them he taught investment classes nearby, at Kent State University. "We were really in awe," Mrs. Huff said.

When Mr. Dobbins came to the Huffs' house in August 2000 to open their account, he described the risk that they would be taking as small, holding up his thumb and forefinger an inch apart, Mrs. Huff said.

Two months later, the Huffs' portfolio had lost $20,000. Whenever the Huffs asked whether they should be doing something about their declining portfolio, they said Mr. Dobbins told them to stay the course.

By October 2001, their account had lost more than half its value. In that month's brokerage statement, the stated risk tolerance for their account inexplicably changed from moderate to moderately aggressive. They had not instructed the broker to make that switch.

Fee-based accounts, like those held by the Huffs, are often regarded as beneficial to investors because they eliminate the temptation to generate commissions by excessive trading. But for investors who trade infrequently, such accounts can be extremely costly, with management fees deducted yearly. Of course, a broker has an incentive to generate gains for clients in fee-based accounts because the broker then shares in the profits. But fee-based accounts can also prompt brokers to care more about bringing in new accounts than about managing older ones, some securities lawyers say.

Wilfred DeCoste, 60, of Louisville, Ohio, was another client of Mr. Dobbins. Mr. DeCoste worked at Detroit Diesel, a spinoff of General Motors, for 32 years. In late 1999, Detroit Diesel began offering buyouts to some workers. Mr. DeCoste was making $80,000 a year and was not planning to take early retirement, he said, until he attended a seminar at Kent State sponsored by Prudential and Mr. Dobbins.

"They were pumping you up that we were all set and had plenty of money to retire," Mr. DeCoste recalled. In September 2000, he and his wife, Marjorie, gave Mr. Dobbins $340,000 in cash they had saved.

The couple's money went into the three-sector portfolio, and by Christmas 2002, its value had dropped to $80,000. They sued Prudential and Mr. Dobbins and are awaiting an arbitration date. "My wife works as a cook at a restaurant, and she has got no look at retirement," Mr. DeCoste said. He went back to work teaching electrical courses at a local college.

Brokers at other firms also trolled for retirees. One at Merrill Lynch, for example, told Martha J. Taylor of Burbank, Ohio, that the $410,000 she had saved would be more than enough for a comfortable retirement, she said. So, in August 2000, she left her $40,000-a-year job as a truck driver for Rubbermaid, where she had worked for more than 27 years.

She met the broker, Joel Cessna, at a seminar he sponsored at a nearby banquet hall. "I'd gone through a divorce, and I was just trying to get back on my feet from that," she said. "This was all the money I had. He said: 'Don't you worry. You should never have to work another day in your life.' "

Ms. Taylor said Mr. Cessna told her that she could earn enough money in the stock market to withdraw as much as $3,000 a month. He put 85 percent of her money into technology and Internet stocks and stock mutual funds. The portfolio began to decline almost immediately.

When Ms. Taylor called to ask what she should do about the losses, she said Mr. Cessna told her that the stocks would rebound. But in April 2002, she was stunned by a call from Mr. Cessna. "He said, 'I hate to tell you, Martha, but you're going to run out of money,' " she said. By the time she moved her account, it held $38,000.

Now Ms. Taylor, who is 50, earns $22,000 a year driving a school bus for the Wooster city schools. She has sued Merrill Lynch and Mr. Cessna; her arbitration is scheduled for October. The New York Stock Exchange is also investigating Mr. Cessna.

Merrill Lynch declined to make Mr. Cessna available. A Merrill Lynch spokesman, Mark Herr, said, "The use of seminars is well respected, used throughout the industry and extremely beneficial to clients and prospective clients." Mr. Herr declined to comment on Ms. Taylor's case other than to say that the facts and circumstances surrounding her claim are unique to Ms. Taylor.

While it may seem surprising that people would consider retiring with relatively small amounts saved, Ms. Roper of the Consumer Federation said, "Americans tend to have very unrealistic expectations about when they can retire."

Mr. Zamansky said that such horror stories show how important it is for investors to know all their options. "These cases show the real need for investor education which would help people like these protect themselves against unscrupulous brokers," he said.

Consider the case of Gary D. Johnson, of Canal Fulton, Ohio, who worked at East Ohio Gas for 15 years as a compressor operator. For years, he and his wife, Lola, saved $600 a month to buy the company's stock. In 2000, however, he took the company up on its buyout offer and handed $240,000 in company stock to Mr. Dobbins at Prudential. "I told him I wanted to give it to him and not touch it," Mr. Johnson recalled. "He said in five years you'll have $500,000 and in 10 years you'll be a millionaire."

Mr. Dobbins also said he would throw in a $75,000 life insurance policy if Mr. Johnson opened an account, he said. But when ovarian cancer was diagnosed in his wife in November 2002, Mr. Dobbins said he knew nothing about such a policy, Mr. Johnson said.

Over three years, the Johnsons lost two-thirds of their retirement savings. Brokerage statements show that midway through his association with Mr. Dobbins, the risk tolerance listed for Mr. Johnson was changed from moderate to moderately aggressive, similar to what had happened to the Huffs.

Mr. Johnson, 60, is a plaintiff in the group arbitration against Prudential. He has been unable to find work since he retired from East Ohio Gas. "I've been trying to get a job as a janitor with the Northwest school system,'' near Canton, Ohio, he said. "But I've had six interviews, and I think they figure I'm too old.''

Wal-Mart, a Nation Unto Itself
By Steven Greenhouse - New York Times
April 17, 2004

SANTA BARBARA, Calif., April 13 � We already know that Wal-Mart is the biggest retailer. (If it were an independent nation, it would be China's eighth-largest trading partner.) We also know that it is maniacal about low prices. (Some economists say it has single-handedly cut inflation by 1 percent in recent years, saving consumers billions of dollars annually.) We know that its labor practices have come under attack. (It charges its workers so much for health insurance that about one-third of them do not have it.)

But the more than 250 sociologists, anthropologists, historians and other scholars who gathered at the University of California here on Monday for a conference on Wal-Mart came looking for more than the company's vital statistics. Like archaeologists who pick over artifacts to understand an ancient society, the scholars here were examining Wal-Mart for insights into the very nature of American capitalist culture. As Susan Strasser, a history professor at the University of Delaware, said, "Wal-Mart has come to represent something that's even bigger than it is."

Indeed, with $256 billion in annual sales and 20 million shoppers visiting its stores each day, Wal-Mart has greater reach and influence than any retailer in history. "In each historical epoch a prototypical enterprise seems to embody a new and innovative set of economic structures and social relationships," said Nelson Lichtenstein, a history professor at the University of California here and the organizer of the conference. "These template businesses are emulated because they have put in place, indeed perfected for their era, the most efficient and profitable relationship between the technology of production, the organization of work and the new shape of the market."

In the 19th century, he said, the standard-setting company was the Pennsylvania Railroad; in the mid-20th century, it was General Motors; and in the late 20th century, it was Microsoft. Today's prototypical company, he declared in opening the conference, is Wal-Mart, which, he said, rezones American cities, sets wage standards and even conducts diplomacy with other nations.

"In short, the company's management legislates for the rest of us key components of American social and industrial policy," Mr. Lichtenstein said.

Wal-Mart has created a very different model from General Motors, he added, noting that G.M. helped build the world's most affluent middle class by paying wages far above the average and by providing generous health and pension plans. Mr. Lichtenstein said G.M.'s wage pattern spurred other companies to raise compensation levels, while Wal-Mart's relatively low wages and benefits � its workers average less than $18,000 a year � were doing just the opposite.

The company's pay scale and hard-nosed labor practices, said Simon Head, a fellow at the Century Foundation and author of "The New Ruthless Economy: Work and Power in the Digital Age" (Oxford University Press, 2003) mean that "Wal-Mart is certainly a template of 21st-century capitalism, but a capitalism that increasingly resembles a capitalism of 100 years ago." He added, "It combines the extremely dynamic use of technology with a very authoritarian and ruthless managerial culture."

Wal-Mart declined to send a representative to the conference. "We were invited to attend, but we passed," said Sarah Clark, a company spokeswoman. "The agenda looked pretty biased against Wal-Mart."

If Wal-Mart is helping revolutionize labor relations, it is also revolutionizing consumer patterns. Ms. Strasser said it was the leading exemplar of a shift toward mass merchandising, which in her view has transformed customers into consumers. Many Americans, she said plaintively, no longer deal daily with craftsmen and neighborhood shopkeepers who give them advice on goods. Advertising is the source of shoppers' information.

Wal-Mart has made a traditional sales force obsolete for another reason, said James Hoopes, a historian at Babson College, in Wellesley, Mass. When retailing began centuries ago, salesmen were needed to explain goods to customers. But Wal-Mart follows a different model. Using technology, the company collects detailed information on the billions of purchases its customers make each year. Based on that information, it orders products (at low prices), confident that customers will like the merchandise and the prices, thus eliminating some of the need for an informed sales force.

Everyone at the conference seemed to marvel at Wal-Mart's extraordinarily sophisticated use of technology. The temperature of every one of its more than 3,500 American stores is controlled from its headquarters in Bentonville, Ark. Logistics gurus keep track of hundreds of thousands of shipments at home and abroad. Computers also keep close tabs on workers' hours and productivity.

"One store manager told me, `I could tell you last year, July 12, how much in sales the store did and how much was rung up by Sally Jo, the cashier, within a particular hour,' " said Ellen Rosen, a professor of women's studies at Brandeis University, in Waltham, Mass.

Wal-Mart's in-depth knowledge of what consumers want, coupled with its immense size, has given the company huge power over its suppliers, effectively changing the traditional relationship between manufacturer and retailer. It usually knows more than manufacturers do about what shoppers want this week and will want next year. With some suppliers complaining that the company has bullied them, Wal-Mart has caused factories from South Texas to Shanghai to increase efficiencies continually and to lower their costs and prices.

"It's changed the balance of global manufacturing," said Gary G. Hamilton, a China expert and sociology professor at the University of Washington.

And not just manufacturing.

"What do low-cost goods mean in light of the pressing issues of the global environment, global human rights and the global labor force?" Ms. Strasser asked. "And how do we move beyond the single-minded self-interest of price?"

Low prices come at a cost, she and other speakers insisted, arguing, for instance, that Wal-Mart encouraged overconsumption and overdevelopment, which place strains on natural resources and the environment.

"Everything is based on the consumer first," said Edna Bonacich, a sociology professor at the University of California, Riverside. "Is this the way we want to live?"

To Ms. Bonacich, a hopeful sign that at least some people would answer no came just days before the conference. On April 6 in Inglewood, Calif., a largely black and Hispanic suburb of Los Angeles, voters rejected a ballot initiative allowing Wal-Mart to build a store there, with many saying they were unhappy with its wage levels, fierce anti-unionism and efforts to circumvent land-use regulations.

Other conference participants pointed to a four-month labor dispute in which the grocery workers' union fought a push by Southern California supermarket chains to cut wages and benefits for many workers because they feared Wal-Mart's expansion plans in the state.

"The fact that it is starting to produce a backlash in a lot of different areas has heightened the interest," Ms. Strasser said.

But Mr. Hoopes questioned whether price-minded American shoppers would ever rush to the barricades to battle Wal-Mart.

"Wal-Mart has been tremendously helpful to the American consumer," he said. "It's lowered prices for lots and lots of people. People are voting with their feet and with their dollars by shopping at Wal-Mart."

He added, "If anybody is proposing that they're going to solve what they see as the Wal-Mart problem by urging people not to think of themselves as consumers, they're barking up the wrong tree."

Jeff Jones Out at Great Outdoors
By Jim Kirk - Media & Marketintg Column - Chicago Tribune
April 16, 2004

Out at Great Indoors: Another shuffling of top executives out of Sears, Roebuck and Co.'s trendy but underperforming retail concept, The Great Indoors, has insiders questioning what Sears' plans are for the chain.

Jeff Jones, who was senior vice president/general manager of the Great Indoors, is moving to Sears as executive vice president in charge of merchandising operations. He now reports to Mark Cosby, head of Sears' full-line stores. Jones held the Great Indoors post for a little over a year.

Jones had reported directly to Sears CEO Alan Lacy, who has been less than pleased with the performance of the home remodeling chain and is more focused on the new Sears Grand concept.

Today's Kmart Execs are Paid Less
By Greta Guest - Business Writer - Detroit Free Press
April 16, 2004

Working in the top ranks of Kmart isn't the jackpot it used to be, at least not yet.

Kmart Holding Corp. CEO and President Julian C. Day earned about $2 million in 2003 as he struggled to bring the nation's third-largest discount retailer out of bankruptcy and into the black.

Former CEO Chuck Conaway, largely credited with driving the Troy-based retailer into Chapter 11 bankruptcy, earned $14 million for seven months of work in 2000 and $8.7 million in 2001. Former president Mark Schwartz made $14 million in 2000 and 2001.

Under their leadership, Kmart's top brass used corporate jets for personal trips, drove leased Jaguars paid for with company money and gave out $28 million in loans to 25 managers weeks before the Jan. 22, 2002, bankruptcy filing.

Under Day's watch, Kmart fixed its balance sheet, pared excess inventory, cut costs and returned to profitability after three years of steep losses. Day, a former Sears Roebuck & Co. executive, joined Kmart in January 2003.

Kmart will ask shareholders to approve its new executive incentive plans and stock grants at the annual meeting on May 25 at its Big Beaver Road headquarters.

The plan sets a $25-million ceiling for compensation, according to the company's proxy. It also sets clear performance goals for annual bonuses.

"It's part of the cost containment strategy and part of Eddie Lampert sitting on top of them," said Ulysses Yannas, an analyst at Buchman, Buchman & Reid in New York. "Considering what these guys have done, it isn't much."

Edward S. Lampert, the millionaire financier of Greenwich, Conn., is chairman of ESL Investments and Kmart's largest shareholder with 52.6 percent of shares.

"It's pay for performance," said Kmart spokesman Jack Ferry. "What we are trying to do today in the new Kmart is create sustainable shareholder value."

Day was paid $2 million in 2003: $1 million in salary and a onetime bonus of $1 million when Kmart emerged from bankruptcy on May 6, 2003.

But that emergence bonus should not have been paid if the company wants to reward solely based on performance, said Nell Minow, editor of the Corporate Library,a Portland, Maine-based research firm.

"It is not as bad as the previous compensation plan. These people should only be paid if the company does well," Minow said.

Day also was the only Kmart executive to receive stock grants last year. He received grants to buy 1,038,507 common shares at $10 a share, and an option to purchase 519,253 shares at $20 a share. Both blocks would be vested over the next four years. Kmart shares closed Thursday at $42.74a share, theoretically making the options worth roughly $45 million if available to Day now.

He can exercise options on just one-fourth of the two blocks on May 6, a total of 389,441 shares. Buying these at the option prices and selling at the current market price would net Day a $11.5-million profit.

Day's counterpart at Target Corp., Robert Ulrich, earned $23.1 million in salary, bonus and stock options last year. And Wal-Mart Stores Inc. CEO Lee Scott earned $4.3 million in salary and bonus last year and had roughly $13.1 million in restricted stock grants.

Other top Kmart executives cited in the proxy and their 2003 pay:

David Marsico, vice president, Kmart SuperCenters, earned $487,400 in salary and bonus.

Harold Lueken, 41, senior vice president, general counsel and secretary, earned $325,673 in salary.

James Defebaugh, 49, senior vice president, deputy general counsel and chief compliance officer, earned $387,450 in salary and bonus.

Karen Austin, 42, senior vice president and chief information officer, earned $378,383 in salary and bonus. The proxy does not include pay packages of Kmart executives hired in the past few months. For example, James Donlon, 57, chief financial officer, will be paid a $550,000 base salary, according to his January employment agreement.

Donlon also received a restricted stock grant of 21,552 shares with a fair market value of $500,000, vested over the next three years.

And Janet Kelly, hired as Kmart's chief administrative officer in September, left Kmart on March 8. Her employment contract called for a $450,000 salary and restricted stock with a $1-million value. She also was paid $250,000 to compensate her for leaving Kellogg Co. Had she stayed at Kmart for a full year, Kelly would have received a second $250,000 payment.

Ferry said the company did not plan to replace Kelly.

Sears Pares Management Lineup
By Becky Yerak - Tribune staff reporter - Chicago Tribune
April 16, 2004

As part of a wide-ranging restructuring, Sears, Roebuck and Co. trimmed its executive suite and raised the possibility that additional jobs could be lost or outsourced at the Hoffman Estates-based department store chain.

Sears Chief Executive Alan Lacy told workers in an e-mail on Wednesday that he was reducing the number of managers who report to him to 11 from 15.

Sears started to review its corporate structure in December to reduce costs to better compete against retailers such as Wal-Mart Stores Inc. and Target Corp. that are stealing shoppers for general merchandise. At the same time, Home Depot Inc. and Lowe's Corp. are stealing share from Sears' key categories such as appliances.

Lacy, whose company last month announced plans to farm out 260 information technology jobs, also noted that the coming restructuring--called Project Sharp--will identify "potential work takeout and contracted service opportunities."

That could mean farming out some of Sears' work.

"An important goal of Project Sharp has been to improve our organizational structure to make Sears more effective and responsive," Lacy's e-mail said. He noted there will be "additional structural adjustments" for some departments that could occur this quarter.

That's not necessarily code for "layoffs," although Sears has acknowledged since December that the restructuring could result in another round of layoffs.

Of the four executives who will no longer report to Lacy, one is Lucinda Baier, former general manager of credit and financial products. She has left the company to pursue other interests.

Formerly reporting to Lacy but now reporting to other Sears executives are Gerald Kelly, chief information officer; Sara LaPorta, senior vice president of strategy; and Jeff Jones, executive vice president of merchandising operations.

Separately, William "Gus" Pagonis, 62, senior vice president of supply chain management, will retire in the next few months.

"I continue to have strong confidence in each executive, and the choices I made were difficult," Lacy said.

Sears' executive ranks have been a revolving door in recent years.

Sears eliminated about 40,000 jobs in 2003, ending the year with 201,000 workers.

But among the top 15 officers at Sears, six were new in 2003.

Field's Shoppers Lining Up
Federated Group Interested;
Multiple Buyers Could Mean a Name Change

By Becky Yerak, Tribune staff reporter - Chicago Tribune
April 15, 2004

The owner of Bloomingdale's and Macy's has designs on Chicago retailing icon Marshall Field's.

Cincinnati-based Federated Department Stores Inc. said Wednesday it may buy the 62-store Marshall Field's chain, which was put up for sale last month.

Target Corp.'s announcement in March that it was exploring a sale of its Field's and Mervyn's department store chains pleased Wall Street investors. For years, they have wanted Target to shed its slow-growing department stores so it could focus on its faster-growing discount chain.

Federated and May Department Stores Co. were considered the front-runners from the start, although most retail experts gave the edge to Federated.

"If you look at Federated's store map, it seems to have an open space in the center just waiting for Marshall Field's," Carol Levenson, analyst for Gimme Credit, wrote in a research note last month.

In the Chicago area, Federated's holdings consist only of four Bloomingdale's stores.

New York retail consultant Howard Davidowitz, however, thinks Federated and May could split the chain. In Chicago, he said, Federated could take Marshall Field's stores more upscale while May could assume control of the rest, which are mostly in B-grade malls.

Marshall Field's has 16 Chicago-area stores, plus one in Rockford.

"J.C. Penney just sold Eckerd, and there were two buyers," Davidowitz said. "I predict two buyers here. Or, if there's one buyer, I expect it to have an agreement eventually to sell some of the stores."

Davidowitz also said that, if there were two buyers, the Marshall Field's name would likely fall by the wayside, particularly if Federated kept just the Chicago-area stores. He said Federated is consolidating most of its holdings under the Macy's and Bloomingdale's names.

"Do you think they'd keep the Marshall Field's name with a few lousy stores?" he said.

Federated is one of the "companies interested in pursuing" Marshall Field's, spokeswoman Lena Klofstad told Bloomberg News.

A spokesman for Marshall Field's could not be reached Wednesday.

With few malls being built, acquiring a rival is one way for department-store operators to expand.

Target is picking an opportune time to sell Marshall Field's.

It was among eight department-store chains that surprised Wall Street in March with stronger-than-expected monthly sales.

In fact, the department-store sector, one of 2003's weakest retail links, posted its most robust sales gains in nearly 18 months.

Chicago retail veteran Sid Doolittle said he believed since last month that Federated would be the likely buyer. He added that May and other potential suitors--including J.C. Penney Co. and Sears, Roebuck and Co.--were either too conservative or too bogged down with other problems.

Still, he said there could be issues with a Federated purchase.

"Federated has got some stores in these markets and there could be a Justice Department question about overlap," Doolittle said. He added, however, that Bloomingdale's and Macy's have passed muster in other markets, including New York.

Northeast Securities Inc. recently analyzed the potential overlap of Marshall Field's with possible buyers, including Federated, May, Penney and Sears.

Studying 55 of Marshall Field's mall-based locations, the survey found that Penney and Sears were co-anchors with Field's at 79 percent and 70 percent of the malls, respectively.

The Field's chain is known to generations of Chicagoans for Frango mints, green bags and Christmas displays in the windows of the State Street store. It was the nation's first department store to include a dining room and offer a bridal registry.

It began as a dry-goods retailer on Lake Street in 1852 and was renamed Marshall Field & Co. in 1881.

Target predecessor Dayton Hudson bought Marshall Field's in 1990, stripped Chicago operations of their autonomy, and moved its headquarters to Minneapolis.

Target poured millions into Marshall Field's, including revamping its flagship State Street store.

At State Street, specialty retailers opened "mini-shops" last year in about 10 percent of the store to create excitement, attract shoppers and boost sales.

But despite its storied past it might not be worth as much as some Wall Street analysts had hoped.

Northeast dismissed speculation by other investment houses that Marshall Field's could fetch as much as $3.5 billion. "We believe Marshall Field's will sell for, at most, $2.4 billion," analyst Eric Beder wrote last month.

Davidowitz thinks it could be had for "a couple billion."

Federated, which has more than 460 stores in 34 states, has annual sales of more than $15.4 billion. Its other chains include Burdines and Lazarus.

Marshall Field's has annual sales of about $2.6 billion.

Charles F. Moran
Sears Exec Helped Build Affordable Housing
By Joan Giangrasse Kates - Special to the Tribune
Chicago Tribune - April 15, 2004

Charles F. Moran once knocked over a gallon of paint on the floor of the Hackensack, N.J., Sears store he trained in. But thankfully the incident didn't permanently stain his reputation at Sears, Roebuck and Co., where Mr. Moran worked for four decades, eventually heading the redevelopment of property owned by Sears into affordable housing for disadvantaged families on Chicago's West Side.

"My dad knew just about everything there was to know about the company, but he never forgot how it all began for him," said his son John. "Years after becoming a top executive, he visited that same New Jersey store to see if he'd find the paint stain still there, and sure enough it was."

Mr. Moran, 74, of Wheaton, a retired senior vice president for Sears, Roebuck and Co., died Monday, April 12, in his home from complications related to cancer.

He was born and raised in Brooklyn, N.Y., the son of a stockbroker father and a telephone operator mother. Mr. Moran received a bachelor's degree in 1952 from Drew University in Madison, N.J., where he was a star player and catcher on the baseball team. He later received an MBA from Farleigh Dickinson University in New Jersey.

During his college years, Mr. Moran also played baseball in the Northern League on a farm team affiliated with the New York Yankees, where he was assigned positions with numerous traveling All-Star baseball teams. He caught batting practice for the Brooklyn Dodgers on several occasions, including the 1949 Major League All-Star Game held at Ebbets Field.

In 1948, during one All-Star team appearance in Mauch Chunk, Pa., he met the woman who would become his wife of 52 years, Dolores Huber.

"They met after my mom took up a dare from her girlfriends to go and ask him for his autograph," said their son.

After a short stint in the Army, Mr. Moran joined Sears as a trainee in its Hackensack store. From there he went on to hold several management positions at stores in Baltimore and Buffalo during the 1950s and '60s. He also worked at the company's offices in Connecticut for several years, overseeing retail operations on the East Coast.

In 1973 Mr. Moran was promoted to general manager of Sears' catalogue division and began working out of the company's headquarters, then on Chicago's West Side. He was transferred in 1986 to New York City, where he became the chief administrative officer for Dean Witter Reynolds Inc., a company subsidiary. Two years later he returned to Chicago to serve for several years as the senior vice president and chief information officer for Sears, based out of the Sears Tower.

During that time Mr. Moran was responsible for overseeing the redevelopment of the original Sears headquarters location on the West Side into affordable housing for more than 300 families in North Lawndale.

When he retired from Sears in 1993 Mr. Moran was the senior vice president of administration, responsible for the day-to-day operations of the Sears Tower. More recently he was chairman of the board of Denny's Corp., as well as president of the Homan Arthington Foundation, which is responsible for the North Lawndale project.

Other survivors include his wife, Dolores; another son, Charles; two daughters, Mary Deatherage and Alice; and 11 grandchildren.

Mass will be said at 10 a.m. Thursday in St. Mark's Catholic Church, 303 E. Parkway Drive, Wheaton.

Sears March Same-Store Sales up 0.1 Percent
April 8, 2004

CHICAGO, April 8 (Reuters) - Sears, Roebuck and Co. (S.N: Quote, Profile, Research) on Thursday posted a slim 0.1 percent gain in March sales at stores open at least a year as sluggish demand for women's clothing offset strength in consumer electronics and lawn and garden products.

The largest U.S. department store chain said total sales for the five-week period ended April 3 reached $2.37 billion, down 1.3 percent from a year earlier.

Analysts, on average, expected Sears to show a 0.3 percent same-store sales gain for March, according to research firm Thomson First Call.

Sears has been upgrading its clothing offerings with brands such as Lands' End and Covington in hopes of boosting women's apparel sales, but results have been mixed. The March sales decline in that category came as many other retailers reported robust apparel sales.

Sears also blamed muted demand for home appliances -- its biggest category -- for the lackluster March sales.

The best-selling categories included consumer electronics, lawn and garden products, fitness equipment, tools, home decor and men's clothing.

The War on Wal-Mart
By Steven Malanga - The Wall Street Journal
April 7, 2004

Here is a story you're unlikely to read in the spate of press attacks on Wal-Mart these days:

When Hartford, Conn., tore down a blighted housing project, city officials hatched an innovative redevelopment plan: Lure Wal-Mart to the site, entice other retailers with the promise of being near the discount giant, and then use the development's revenues to build new housing. After Wal-Mart agreed, city officials and residents celebrated the idea of better shopping, more jobs and new housing in one of America's poorest cities.

But then outsiders claiming to represent the local community began protesting the project. Astonished city leaders and residents quickly discovered the forces fueling the campaign: a Connecticut chapter of the United Food and Commercial Workers Union; and ACORN, the radical community group. Outraged residents denounced outside interference. "These people looked for every possible reason to stop a project that the community wants," says Jackie Fongemie, a resident.

Though Wal-Mart has encountered opposition for years from anti-sprawl activists or small-town merchants, the Hartford drama exemplifies a new form of opposition, a coordinated effort of the Left in which unions, activist groups like ACORN and the National Organization of Women, and even plaintiffs' attorneys work together in alliances. They are fighting the giant retailer in statehouses, city halls and courts.

More than just a skirmish over sites, theirs is an assault on a company that embodies the productivity-driven, customer-oriented economy that emerged in the '90s, by opponents who argue that there is a hidden cost to business's increasing emphasis on low prices and high employee output. Opponents seek government or court edicts to force Wal-Mart and others like it to raise wages and offer workers more benefits, and they are rushing into battle just as the company expands to underserved urban communities, making the conflict a vital issue not just in Wal-Mart's traditional rural and suburban markets but, increasingly, in American cities.

Few would have imagined that when Sam Walton started Wal-Mart more than 40 years ago, he was hatching anything that would become so controversial. Though his first Wal-Marts, opened in the early '60s, were chaotic, with goods piled high on tables, the stores charged unparalleled low prices and crowds flocked to them. The company's success rested on "Mr. Sam's" formula of scouring the marketplace for the best prices and keeping a relentless rein on expenses. But the folksy country retailer, recognizing the importance of efficient systems, also led a technology revolution, installing computerized ordering and distribution that others quickly imitated. So efficient did the system become that Wal-Mart was soon selling goods in its stores even before it had to pay suppliers for them.

Pursuing this formula, Wal-Mart has led a productivity revolution in retailing which supercharged the American economy. Warren Buffett even declared that Wal-Mart -- not Microsoft -- has contributed more than any other business to the health of the economy.

Because non-union Wal-Mart represents the leading edge of this American business revolution, the left's crusade against it has emerged as a clash of worldviews, as unions and their allies try to convince the public that super-efficient operators like Wal-Mart lower workers' standard of living. The left has especially targeted Wal-Mart's push into grocery super centers, which have been pulverizing unionized grocery stores. In an age when supermarkets already operate on single-digit profit margins, Wal-Mart's entry into a market can still drive down grocery prices 15%.

A coalition of more than 30 unions and left-wing groups kicked off the campaign with a national day of protest in October 2002, urging shoppers to boycott the company as a "Merchant of Shame." The boycott got no results, but the coalition has more effectively waged legislative battles around the country. In California, the anti-Wal-Mart coalition has successfully lobbied more than a dozen cities and towns to pass ordinances to keep Wal-Mart out, while dozens of other such bills are in the legislative hopper.

The real issue in this battle is union wages. Unions argue that supermarkets in California pay store workers from $18 to $25 an hour (though Wal-Mart says those wages represent the high end of the union scale), while Wal-Mart pays its California store associates about $10 on average. The effect of Wal-Mart entering the market, union advocates say, would be a vast reduction in the wage pool. "While charging low prices obviously has some consumer benefits . . . these benefits come at a steep price for American workers," alleged a recent diatribe by California Democratic Congressman George Miller. Instead, union think tanks argue, Wal-Mart should be made to pay "sustainable" or "self-sufficiency" wages, a popular idea with the left, which holds that wages should be based on an area's cost of living. In many parts of California, liberal economists estimate, that means up to $38,000 a year for a worker supporting a spouse.

But the left's case ignores the greater benefit that an efficient operator like Wal-Mart brings to an entire economy by driving down prices and forcing other stores to perform better. A Wal-Mart-sponsored study, undertaken by the Los Angeles Economic Development Council, estimates that Wal-Mart's entry into the local market would save southern California shoppers $3.76 billion annually, or nearly $600 per household, creating up to 36,000 new jobs.

Despite opponents' charges, Wal-Mart has had little trouble recruiting workers, in part because the gap between its pay and union wages isn't as large as opponents claim, and because Wal-Mart is growing so rapidly that it attracts ambitious workers looking for a career. In particular, workers in minority communities traditionally friendly to the left's agenda have shocked opponents by welcoming Wal-Mart. Unions tried to stop the opening of the company's store in Crenshaw Plaza, Los Angeles, even unsuccessfully urging the Urban League not to work with Wal-Mart on a job-training program; but more than 10,000 locals applied to work at the store. "It's those who don't live in this community who did the most objecting to this store," says councilman Bernard Parks. "The community has clearly spoken, and it supports this store."

Though union-sponsored campaigns have meant little to consumers, the constant attacks are scoring in the elite media, whose members rarely go to Wal-Mart and can't understand the importance of the stores to middle-American shoppers. Once celebrated in the press for Sam Walton's folksy wisdom, Wal-Mart today is just as likely to be the subject of stories with headlines such as: "Is Wal-Mart Too Powerful?" -- which advance the left's line that Wal-Mart's business model is undermining the buying power of the American worker. So striking have the attacks been that a Kansas City newspaper columnist recently suggested that the national press is "angry that average Americans don't share their perceptions of Wal-Mart as the bad guys."

Not surprisingly, the press downplays Wal-Mart's virtues: that it has never been accused of funny accounting; that it doesn't reward its executives with exorbitant salaries or perks; that not only do other executives call it the most admired company in America, but shopping surveys show it is the consumer's favorite store. But acclaim from common folk may not protect a company when elite opinion turns against it, influencing legislators, regulators and the courts. That's why Wal-Mart has become the chief private-sector target of trial lawyers, sued more than any other company, as the plaintiff's bar and its allies seek to achieve through litigation what activists struggle to accomplish in organizing drives. And every battle they win will cost the American consumer.

Mr. Malanga is a contributing editor at City Journal, from whose Spring issue this is adapted.

Voters in California Reject Wal-Mart
By Alex Veiga, AP Business Writer
April 7, 2004

INGLEWOOD, Calif. - Voters in this Los Angeles suburb rejected a ballot measure Tuesday that would have allowed Wal-Mart to build a warehouse-sized store while skirting zoning, traffic and environmental reviews.

With all 29 precincts reporting and absentee ballots counted, Inglewood voters opposed the initiative, with 60.6 percent voting 'no' and 39.3 percent voting 'yes,' said Gabby Contreras of the city clerk's office.

That amounts to 7,049 votes against the initiative and 4,575 in favor. Contreras said there are about 40,000 registered voters in the city.

"This is very, very positive for those folks who want to stand up and ... hold this corporate giant responsible," said Daniel Tabor, a former City Council member who had campaigned against the initiative.

Inglewood's City Council last year blocked the proposed shopping center, which would include both a Wal-Mart Supercenter and other stores, prompting the company to collect more than 10,000 signatures to force the vote in the working-class community.

But Tuesday's vote is not likely to settle the debate, which has pitted religious leaders, community activists and unions against the world's largest retailer. Opponents have vowed to take legal action if the measure passes.

Wal-Mart has argued in Inglewood and elsewhere in California that its stores create jobs and said residents should be able to decide for themselves if they want the stores in their community.

But opponents say the Supercenters amount to low-wage, low-benefit job mills that displace better-paying jobs as independent retailers are driven out of business. They also fear the stores will contribute to suburban sprawl and jammed roadways.

Alversia Carmouche, a beauty shop owner who voted against the measure Tuesday, said she was convinced the behemoth discount store would ultimately hurt the community.

"Maybe the store would possibly be a good thing in the beginning, but it will drive out the smaller businesses," said Carmouche, 66. "I really feel it will absolutely close this town out."

Others argued the city southwest of Los Angeles is in need of the kind of jobs Wal-Mart has to offer.

"It's going to bring jobs in the community for young people," said Magda Monroe, 65, who voted for the measure. "I see nothing wrong with that, even if it's minimum wage (jobs), it's better than nothing."

Objections to the Bentonville, Ark.-based Wal-Mart have surfaced elsewhere around the country, including Chicago, where the City Council recently stalled a measure to approve the first Wal-Mart inside city limits because of concerns about the company's labor practices.

The company succeeded in lobbying residents of Contra Costa County in suburban San Francisco. Residents there voted last month to allow a Supercenter. But Wal-Mart also lost a vote that day to allow it to open another store near San Diego.

But organizing a ballot initiative in Inglewood was a rare move by Wal-Mart, said Ken Walker, regional director at Kurt Salmon Associates, a retail consulting company.

Previously, Wal-Mart has battled zoning boards, but Walker said this is the first time he's seen the discounter taking the issue to a public referendum.

Wal-Mart officials have said they have not decided what they would do if the initiative failed. The company spent more than $1 million on its Inglewood campaign, according to campaign-finance records, while opponents have spent a fraction of that amount.

Spiegel to Sell Eddie Bauer Unit
By Kelly Quigley Crain�s Chicago Business Online
April 6, 2004

Spiegel Inc. on Tuesday confirmed it is seeking a buyer for its profitable Eddie Bauer business and said it reached a deal to sell its Newport News catalog unit for $25 million in cash.

Downers Grove-based Spiegel said its financial adviser Miller Buckfire Lewis Ying & Co. will solicit buyers for Eddie Bauer, a chain of more than 450 U.S. stores that sell outdoor clothing and home decor.

Industry observers had been predicting the sale ever since Spiegel filed for bankruptcy protection in March 2003.

Over the past year Spiegel has sought to bolster Eddie Bauer�s financial performance by closing more than 60 underperforming stores and planning new stores in promising markets.

�Based on an analysis of alternatives and negotiations with our creditors� committee, we believe the value of Eddie Bauer can be best realized by pursuing a sale at this time,� Spiegel Interim CEO Bill Kosturos said in a statement.

Any auction for Eddie Bauer is likely to draw a crowd of potential buyers and could ultimately fetch $800 million, industry bankers said. The unit�s retail and online operations generate about $1.3 billion in annual sales and are profitable, according to sources.

Potential buyers include Sears, Roebuck & Co.; Limited Brands; Talbots Inc. and L.L. Bean, as well as a host of private equity funds, industry bankers said. Two sources said that L.L. Bean already considered bidding on the unit but decided against it.

Spiegel also said Pangea Holdings Ltd., an investment-banking firm, has agreed to buy its Newport News business for $25 million in cash plus assumption of debt. Under the agreement, expected to be filed in New York's U.S. Bankruptcy Court today, Pangea would keep Newport News� headquarters in New York and continue to operate a distribution center in Virginia.

The deal will be subject to higher offers and court approval. A court hearing is expected in mid-April.

�These actions are important steps toward negotiating and moving toward filing a plan of reorganization,� Mr. Kosturos said.

He said Spiegel also is reviewing options for its third unit, Spiegel Catalog, and is in preliminary negotiations with a potential buyer.

Marketing Surprise: Older Consumers Buy Stuff, Too
By Kelly Greene � Staff Reporter � The Wall Street Journal
April 6, 2004

Sony, Ford Look to Boomers And Beyond, Challenging Obsession With Youth

Grandma Films Some Sharks

Linda Carter, a 51-year-old hotel manager in Palm Desert, Calif., was planning last year to spend a thousand dollars or so on a new engine for her 1970 Volkswagen Beetle. Then a TV ad for a Sony digital camcorder caught her eye.

The spot featured a gray-haired astronaut filming Earth from space with his own camcorder. The tagline: "When your kids ask where the money went, show them the tape." Soon after, Ms. Carter walked into a local electronics store and walked out with a $1,200 Sony camcorder.

Ms. Carter was impressed by the ad's focus on her age group. "As we got older, we stopped getting attention," she says. "But we're still spending a lot of money."

The push by Sony Corp. to hook people such as Ms. Carter is part of a budding revolution in marketing. After decades of obsessing over people in their twenties, some of the world's best-known companies are setting their sights on older consumers, an audience habitually written off as poor, excessively frugal or stuck in a rut of buying the same brand.

Ford Motor Co. plans to sell a sedan for empty-nesters with a trunk that holds eight golf bags. Target Corp. stores are carving out large chunks of space for khaki pants and flowing linen separates aimed at older bodies. Music retailer Virgin Megastores is redesigning its stores to appeal to Led Zeppelin and Miles Davis fans.

Driving the shift are big numbers. The 78 million Americans who were 50 or older as of 2001 controlled 67% of the country's wealth, or $28 trillion, according to data collected by the U.S. Census and Federal Reserve. What's more, households headed by someone in the 55-to-64 age group had a median net worth of $112,048 in 2000 -- 15 times the $7,240 reported for the under-35 age group. And within five years, about a third of the population is going to be at least 50 years old.

One challenge: How do you get the attention of older customers while making it clear to younger people that your brands are still cool? Some companies are discovering that ads featuring older people can speak to younger people too. Sony found that its commercials showing a grandmother taking underwater pictures of sharks scored well with young viewers, who related to the adventure. Other companies continue to use young models but slip in messages that are likely to resonate with older audiences -- the approach used by Anheuser-Busch Cos. in its successful marketing of the low-carb Michelob Ultra beer.

Sony has poured more than $25 million into advertising to make the company's camcorders, digital cameras and other high-end gadgets more appealing to people between 50 and 64. Sony calls them "zoomers" to reflect their increasingly active lifestyles. The push is successful so far: Camcorder sales shot up to a "high double-digit growth" rate last year, says Chris Gaebler, market intelligence and strategy director for the company's U.S. electronics unit. "Ten percent growth is considered good."

Walt Disney Co.'s Walt Disney World rolled out a program called "Magical Gatherings" last year. It allows customers to use a Web site to plan trips and is largely aimed at people over 50 who are organizing outings with golfing buddies, old schoolmates or their grandchildren.

And Microsoft Corp. started publicizing software tools in February -- with easier-to-read text, audio alerts and mouse alternatives -- to help older workers who are developing vision, hearing and wrist problems.

David Wolfe, a Reston, Va., marketing consultant who studies the 45-plus population, believes the traditional view of older consumers started to crack in early 2002. That's when Disney's ABC television network tried to grab comedian David Letterman and his younger audience for the 11:30 p.m. time slot held by 64-year-old newscaster Ted Koppel's "Nightline." Mr. Koppel stuck up for his age group, saying at the time that "60- and 70-year-old people buy things." Ultimately he kept his show, and "the imbroglio made it OK for the first time to really question Madison Avenue's thinking," says Mr. Wolfe.

Recent research has begun to cast doubt on the conventional wisdom that marketing should mainly be directed at young people. One argument runs that it's best to "get them young" because older people have already decided their brand loyalties. But a 2002 study by AARP, the Washington-based advocacy group for people over 50, and RoperASW found that for most products the majority of people over 45 aren't loyal to a single brand.

Anheuser-Busch, the largest U.S. beer maker, attempted to reach the 50-plus age group and wound up creating one of its top-selling brands. The push was sparked by the realization around 2000 that "another 29 million people would be in [the 50-to-69] age bracket by 2010, and they're living a more active lifestyle," says Bob Lachky, vice president of brand management for Anheuser-Busch's U.S. beer unit. "We thought, 'There is an opportunity here that nobody else is capitalizing on.' "

In an attempt to woo older drinkers back to beer from wine and other less-filling beverages (which people tend to prefer as they grow older), Anheuser-Busch created a low-carb formula and tagged it "Michelob Ultra." The name plays off a brand better known to older drinkers than younger ones. In 2001, the company started rolling out the product in three retirement hot spots in Florida -- Punta Gorda, Naples and Fort Myers -- and then in a few national markets.

The beer maker initially hired seven "mature marketers" age 50 and older to talk up the new brand at golf clubs, retirement communities and veterans' halls. It has since expanded the team to 36 people. As it turned out, the target audience didn't want Anheuser-Busch to "talk to my age" or show people with gray hair in Michelob Ultra ads, says Mr. Lachky. "They said, 'Talk to my lifestyle.' They were more interested in learning about lower carbs and lower calories." So advertising shifted to younger models in active pursuits.

The pitch seems to be working. The Ultra brand, rolled out nationally in September 2002, is now on the verge of breaking into the top 10 beer brands sold in the U.S. by volume, says Mr. Lachky. "You can't lose sight of what got us here," he says. "There was a nugget of knowledge in this 50-plus demographic that spawned this power brand."

Ford is attempting to solve the riddle facing all auto makers: What will baby boomers, who have snapped up sport-utility vehicles, start driving as their kids move away from home? It's a crucial question, since the average American household buys 13 new cars over the course of a lifetime -- including seven after the head of the household turns 50, according to CNW Marketing Research Inc., of Bandon, Ore.

About five years ago, as U.S. car buyers started buying more SUVs than cars for the first time, Ford's marketers started asking them why. "They told us, 'We don't feel like we're in the game when we're driving cars. There's an SUV in front of us and a big truck behind us, and it doesn't feel safe,' " recalls Amy Marentic, marketing manager for the Ford Five Hundred, a car being rolled out this fall to target older drivers. "We took that information and said, 'OK, we know boomers buy SUVs and some minivans, so let's put these guys back in the game with a car -- because we know deep down they love sedans. Once they're done driving their kids to soccer games and hockey games, they won't need SUVs."'

The Five Hundred will include popular SUV features such as raised seating, all-wheel drive, space to haul a 10-foot ladder and a roomy trunk for all those golf bags. It's also the first Ford to be built on a Volvo chassis, in an attempt to appeal to boomers' affinity for European styling, Ms. Marentic says.

The sedan's marketing won't mention that the Five Hundred is designed for an aging population because Ford believes boomers are fighting the idea that they're getting older. The car would be a good fit for Ms. Marentic's own father, for example, who commutes 60 miles each way to his job in Michigan. "But I would never say, 'Hey, Dad, this will be easy on your back now that you're 63,' because he still runs marathons," Ms. Marentic says.

Older music lovers are an increasingly important audience for retailers at a time when many young people are downloading music free or at low-cost Web sites. Music sales slipped to $12.6 billion in 2002 from a peak of $14.6 billion in 1999. Retailers would like to take a cue from the concert business, where boomers have made $100-plus ticket prices routine and many of the biggest-grossing acts are boomer favorites such as the Eagles.

In November, the Virgin Group's Virgin Megastores revamped its San Francisco store to include sections that appeal mostly to older listeners. In the jazz section, Virgin added reproductions of 1930s jazz posters from famous clubs, reference books and Miles Davis T-shirts. In the new "mind, body and spirit" zone, there are relaxation CDs, self-help books, personal journals, yoga balls and DVDs about the Pilates exercise method. Rather than explicitly label the sections by era or age group, Virgin says they target different "lifestyles."

"There are a lot of people who want to buy music but aren't quite sure where to start," says Dave Alder, senior vice president of product and marketing for Virgin Entertainment Group, North America. (He's 39 and plays guitar in a rock band.) "If you liked Led Zeppelin in the '70s, there's no reason you wouldn't like the Darkness or Jet." Virgin started adding kiosks three years ago, with more than two million clips of songs, along with staff recommendations and reviews, to help older listeners make such links.

Virgin declined to release sales figures, but Mr. Alder says the experimental store is outperforming the company's other 21 U.S. locations. Several of those sites are set to get the same sort of makeover later this year, a spokeswoman says.

Many companies are just starting to reach out to older adults. When Procter & Gamble Co. began research 18 months ago to pinpoint a variety of consumer "segments" it should target, "it quickly became very clear, due to the sheer number of people who fall into [the 50-plus] segment, that this is ... an important group to focus on in ways that we haven't before," says P&G spokeswoman Stefani Valkonen.

P&G has started to shake up stereotypes among its own marketers and managers. One tool: a video depicting a day in the life of an older consumer. So far, P&G has pinpointed about 30 existing products -- such as Puffs tissues and Downy fabric softener -- that it can market more directly to people 50 and older. Work has begun on advertising plans and on a new partnership with AARP that may include joint marketing and research.

Marketers at Sony had to overcome skepticism within the company before targeting older consumers. "It's very easy to convince executives here that we have to target generations X and Y, because it's easy to think that if you get that first purchase, you get set in your brand ways," says Mr. Gaebler, the market intelligence director. He used demographic research to show the significant differences in buying power between generations.

"A hundred dollars is a lot of money for a 20-year-old, but it's not a lot of money for a lot of people over the age of 50. You're at the senior end of your earning career, and you might contemplate buying a $5,000 home-theater system," he says.

Sony's commercials featuring older videographers resulted not only in a sales spurt but even more surprisingly in a boost to younger generations' "youthful perception of Sony." Mr. Gaebler thinks the younger crowd could relate to the risky feats played out in the spots, including the ad in which a grandmother gets into an underwater cage and takes pictures of sharks attacking.

The results convinced "executives inside our company that this is a group worth targeting," Mr. Gaebler says. "Now, it's almost as if we don't have a distinct 'zoomer' effort. From executives to engineers, they're thinking about zoomers when they make decisions."

Eckerd Deal Seen Changing Drugstore Landscape;
Sears Considering
By Jackie Sindrich
April 5, 2004

NEW YORK, April 5 (Reuters) - It's hard not to notice the proliferation of U.S. drugstores when you can stand on a Manhattan street corner and often spot three or more of them.

But the landscape is in for a dramatic change following J.C. Penney Co. Inc.'s (JCP.N: Quote, Profile, Research) announcement on Monday it will sell its Eckerd chain to two competitors.

Penney said Canadian drugstore chain Jean Coutu Group (PJCa.TO: Quote, Profile, Research) will buy 1,540 Eckerd stores, mostly in Northeast and mid-Atlantic states, for $2.375 billion.

Woonsocket, Rhode Island-based CVS Corp. (CVS.N: Quote, Profile, Research) , the No. 2 drugstore chain, will pick up the remaining 1,260 stores, mostly in the South and Midwest along with Eckerd's Pharmacy Benefit Management unit, for about $2.15 billion.

The transaction will push CVS to the top U.S. drugstore chain spot by number of stores -- it will boast about 5,500 locations -- and pull it neck-and-neck with current market leader Walgreen in terms of sales, with annual revenue of more than $33 billion.

The key question: Can CVS can compete with industry powerhouse Walgreen, as discount chains like Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) race to add their own pharmacies.

CVS will have to deal with much more than slapping its name onto the acquired stores. Despite a three-year turnaround effort, Eckerd's operating profit fell nearly 30 percent during the first nine months of fiscal 2003 as it battled pricing and inventory issues.

It is as yet unclear how many stores CVS will be forced to close, due to overlap with Eckerd locations.

Analyst Jack Russo of A.G. Edwards & Sons said the deal "clearly gives (CVS) challenges as the (Eckerd) stores were poorly run over the last two years. Is bigger better?"

Ulysses Yannas, an analyst for Buckman, Buckman & Reid, said he expected it to be two years before the company gets Eckerd's management and customer service back on track.

"(The deal) puts pressure on all the second-tier drug stores, like Rite Aid Corp. (RAD.N: Quote, Profile, Research) and Duane Reade Inc. (DRD.N: Quote, Profile, Research) ," Yannas said. "It's not going to be easy for them."

PIECE OF THE DRUGSTORE PIE

With the appeal of favorable demographics and a lucrative market -- prescription drugs -- it seems everyone wants a piece of the drugstore pie.

Department store retailer Sears, Roebuck and Co. (S.N: Quote, Profile, Research) confirmed on Monday it is considering opening a pharmacy inside one of its off-mall Sears Grand pilot stores, although "nothing's been nailed down yet."

Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) , the world's largest retailer and one of the nation's largest sellers of prescription drugs, operated 3,200 pharmacies at its discount centers at the end of January and has consistently named pharmacy items as one of its strongest sales drivers.

Meanwhile, Walgreen, of Deerfield, Illinois, has increased its store base by more than half since 1999, and plans to add 450 stores to its some 4,400 locations in fiscal 2004. Steadily rising sales and profits, buoyed by prescription drugs, have accompanied the chain's rapid expansion

Analyst Neil Currie of UBS Warburg said in a research note that previously, CVS faced a disadvantage to Walgreen due to its limited access to the fastest-growing pharmacy markets in the South. But now, the chain is set to capture more drug sales as it taps the booming retiree populations there.

The Eckerd stores purchased by CVS were also coveted by Rite Aid, sources said. Yannas said the future is bleak for Rite Aid, now that CVS has swiped away its chances at expansion in the South.

Camp Hill, Pennsylvania-based Rite Aid, trying to turn itself around after a massive 1997-1999 accounting scandal that left it teetering on the verge of bankruptcy, posted a quarterly profit in January as it picked up customers diverted by the California grocery strike.

But some analysts were concerned Rite Aid would have to do a better job in improving store appearance and staffing to mitigate relentless pressure of new-store openings by Walgreen.

Stymied by Politicians, Wal-Mart Turns to Voters
By John M. Broder - The New York Times
April 5, 2004

INGLEWOOD, Calif., April 2 � As Wal-Mart continues its march across the American landscape, this Los Angeles suburb of 112,000 people is the latest testing ground for the company's exercise of political and marketing muscle.

Inglewood voters go to the polls on Tuesday to decide whether to turn over 60 acres of barren concrete adjacent to the Hollywood Park racetrack to Wal-Mart to create a megastore and a collection of chain shops and restaurants.

The ballot initiative is sponsored by Wal-Mart, which collected more than 10,000 signatures to put the question to voters after the Inglewood City Council blocked the proposed development last year, citing environmental, traffic, labor, public safety and economic concerns.

While Wal-Mart has turned to the ballot in a number of cities and towns to win the right to build its giant emporiums, the Inglewood initiative is significantly different. The proposal would essentially exempt Wal-Mart from all of Inglewood's planning, zoning and environmental regulations, creating a city-within-a-city subject only to its own rules. Wal-Mart has hired an advertising and public relations firm to market the initiative and is spending more than $1 million to support the measure, known as initiative 04-A.

The company is blanketing the community, which is roughly half African-American and half Latino, with mailers and telephone calls and is broadcasting advertisements on television stations with black and Latino audiences.

Company officials say that Wal-Mart adopted this aggressive new tactic only after it became clear that Inglewood officials � backed by allies in organized labor, church groups and community organizations � would never approve the complex. Wal-Mart is strongly anti-union.

"We were told, basically, `Don't waste your time,' " said Peter Kanelos, the Southern California coordinator for Wal-Mart's community affairs division.

"But these groups are not representative of the community," he said. "Organized labor is attempting to bully Wal-Mart and its customers. If organized labor and those elected officials they put into power think they're going to attack Wal-Mart, then they better expect Wal-Mart to fight back."

The project's opponents say that Wal-Mart is the one doing the bullying. They noted that the company paid signature gatherers for the ballot initiative more than it pays its average clerk.

And they say that Inglewood will be a test case. If the initiative succeeds here, they say, it will become a model for Wal-Mart sovereignty across the nation and around the globe.

"This is the first time in the country they've tried to do something this extreme," said Madeline Janis-Aparicio, leader of the Coalition for a Better Inglewood, a group formed to fight the Wal-Mart project. "They are driving a Mack truck through California land use, planning and environmental law and trying to create a Wal-Mart government on this 60-acre site. If they succeed in doing this, it will be their blueprint."

Ms. Janis-Aparicio's coalition expects to spend about $35,000 to oppose the project. The Los Angeles County Federation of Labor will add about $125,000 and provide logistical aid in the form of phone banks and precinct walkers.

They are joined by many of the merchants along Inglewood's downtrodden Market Street, whose store windows display signs reading: "Save Our Community From Wal-Mart. No on 4A."

Wal-Mart, the world's largest retailer, has announced plans to build 40 supercenters in California over the next five years, combining its usual assortment of goods with a full line of groceries. California's grocery workers and supermarket chains are trying to slow or stop the company's expansion. They have enlisted the support of the Southern Christian Leadership Conference, the Nation of Islam and a number of elected officials and community groups opposed to Wal-Mart's employment practices and its impact on local merchants.

Voters in San Marcos, in northern San Diego County, last month rebuffed Wal-Mart's effort to open a second store in the community. But citizens of Contra Costa County, in the San Francisco Bay area, voted by a large margin last month to repeal a council-passed ordinance banning construction of retail behemoths.

Wal-Mart's first California supercenter opened in La Quinta, a desert community about 100 miles east of Los Angeles. Two more are scheduled to open soon in the Palm Springs area.

The groups opposed to the Inglewood development have already gone to state court to try to block the project, but a judge ruled that any legal challenge would have to await the outcome of the April 6 vote. Ms. Janis-Aparicio said that if the measure is approved, the coalition will return to court immediately.

A December opinion from the state attorney general indicates that the opponents may be on solid ground.

The attorney general's letter to the Inglewood City Council states that while the initiative process may be used to adopt land-use and planning measures, the ballot cannot be used to usurp powers granted to elected bodies, like issuing building permits. The attorney general also said the initiative might be in conflict with state laws governing subdivisions and the environment.

The initiative, which can pass by a simple majority vote, includes a provision requiring a two-thirds vote of the public to alter any of the terms of the development project. The attorney general said that provision also appeared to conflict with state law.

Mr. Kanelos, the Wal-Mart official, said that the 71-page initiative spells out the project in minute detail, including building materials, traffic flows, landscaping and even plumbing fixtures. Each of these provisions "meets or exceeds every local and state building and environmental requirement," he said.

All four members of the Inglewood City Council oppose the project, along with the area's congresswoman and state assemblyman. One Inglewood council member, Curren D. Price Jr., who is a lawyer and expert on community development, said he had researched Wal-Mart's plans across the country and had not found a single instance in which the company sought such broad exemption from local control.

"That's what's so offensive," Mr. Price said.

"We're talking about 60 acres and an area covering 17 football fields and they don't want to have any give and take on how this thing rolls out," he said.

The only city official vocally supporting the project is the mayor, Roosevelt F. Dorn. He said the complex would bring more than 1,000 new permanent jobs, add $3 million to $5 million a year to the distressed city's tax base and provide a revenue stream to finance as much as $100 million in new bonds. "We're talking about a new police station, a new community and cultural center, a new park in District 4, upgrades for every park and recreation area in Inglewood," Mr. Dorn said. "As far as I'm concerned, it's a no-brainer."

David Karjanen, research coordinator at the Center on Policy Initiatives, a nonprofit group in San Diego that studies the impact of development on low- and moderate-income families, said he had studied Wal-Mart's efforts to win approval for projects across the nation and found the Inglewood case to be unique in the breadth of the exemption it would win from local land-use planning.

"If this succeeds in Inglewood, it will set a precedent and send a message to developers who have an unpalatable project," Dr. Karjanen said. "It will open the door for others, not just Wal-Mart, and we can expect to see this happen across California and elsewhere."

Why Bob Vila is Wary of Product Placement
By Dan Lippe - Advertising Age
April 05, 2004

An Interview With the Guru of Shelter TV

CHICAGO (AdAge.com) -- It all began with a deteriorating 1860 Victorian, and more than 40 projects later, Bob Vila is marking 25 years rehabbing houses as millions of armchair remodelers look on.

Mr. Vila, who holds degrees in architecture and journalism, first appeared on national TV when This Old House debuted on the Public Broadcasting Service in 1979. He left PBS a decade later and went into syndicated TV with Bob Vila's Home Again. Viacom's King World Productions syndicates the show to more than 200 TV stations. He's also been a spokesman for Sears, Roebuck & Co.'s Craftsman tools for 15 years.

Mr. Vila, 57, estimates there are some 30 shelter-related shows on TV today. He talked to Advertising Age's Dan Lippe about the explosive growth of shelter TV, which at this point ranges from complex renovations -- Mr. Vila's specialty -- to having neighbors remodel a room a la TLC's Trading Spaces.

INTERVIEW

ADVERTISING AGE: Integrated product placement-type advertising seems to be a natural fit for shelter TV. How do you approach that ad tactic?

MR. VILA: I've always felt very strongly that it was bad karma to tell a carpenter what tools to use. ... In the years that I've been producing my own show, I've really looked at it from a journalistic perspective. The approach I've always taken, whether it's a window or a brand of carpet, is is there a reason why it's interesting enough to have it on the show and talk about it.

'Murky area'

My favorite part of it all is when you look at the technology of housing in the last decade. ... These are things that need to be reported on and used. But now we're entering a point where you have placement as a profit center. It turns into kind of a murky area of whether something's going to appear because it's worth reporting on it or because somebody paid to put it on your show.

If you're reporting, you can still put a brand on there and give an impartial judgment of it. Yet the advertising value of the adjacency to the Bob Vila name is something I have to be very guarded about.

[With Bob Vila's Home Again] you will find there exists a relationship beyond the TV show with some of these brands on the [bobvila.com] Web site. However, it's become kind of perfectly acceptable for television companies producing shows to charge people for placement. I'm in a quandary because I have a certain amount of integrity to protect in terms of being an impartial, unbiased expert on XYZ components of housing construction.

'Straight story'

I've got 25 years of being somebody my viewers can depend on to give them a straight story about something, and if I took that approach with anything, then I'd be giving something up that I don't want to give up.

AA: You pretty much started the genre of shelter TV with This Old House. Twenty-five years later, there's a wide variety of home-themed TV shows. Why have such shows become so popular?

MR. VILA: There's an endless curiosity and concern with housing -- you know, food, sex, housing. The fact is that people care passionately about their surroundings, how they work, what they look like and whether they keep them warm.

And then other bright people with bright ideas have discovered how to take that concern and turn it into more than just a learning experience but an entertaining experience by kind of grafting on elements of soap opera and quiz shows. I'm not sure how I feel about that, but they're watching [these shows], aren't they?

Every year when you're cobbling together ideas for next season's programming, you're saying to yourself, "Should I change my course? What can I do to kind of compete with these other shows?" And so far I just have not addressed that. I just basically keep on doing what I've always been doing, which is building and remodeling.

'Getting ratings'

AA: What consistent thread runs through all the shelter shows?

MR. VILA: It's mostly a concern for entertaining and getting ratings. And there's nothing wrong with that. And what's right about it is that it continues to inspire people to look at their surroundings in a different way regardless of which show we're talking about. All of them continue to inspire people to want to improve their surroundings, to want to better the curb appeal of their house as well as the general appeal and function of their interiors.

AA: What's hot in home amenities?

MR. VILA: There is no doubt that people are more and more interested in expansive spaces that combine the kitchen with the living room functions. There isn't a builder/developer worth his salt who wouldn't tell you that's one of the key things I have to put into my offerings, from California back to the East Coast.

I'm hoping we're getting away from the supercompetitive need to have the McMansion with the three-car garage, all this insanity. I think it's going to come back to haunt a lot of people 10 years out. And God knows when the point comes that the yuppies who have bought such a McMansion in the 1990s are becoming empty nesters. ... I'm not sure how many people are going to be standing in line to be the second owners of such houses.

Penney Selling Eckerd for More than $4.5 Billion
By Tom Johnson
April 5, 2004

NEW YORK, April 5 (Reuters) - J.C. Penney Co. (JCP) on Monday said it would
sell its Eckerd drugstore unit to two competitors for more than $4.5 billion, ending a prolonged auction that will leave the department store retailer flush with cash for its core operations.

The transaction calls for Canadian drugstore chain Jean Coutu Group (CA:PJCA) to buy about 1,540 Eckerd stores, mostly in Mid-Atlantic and Northeast states, for about $2.375 billion, Penney said.

CVS Corp. (CVS) , the No. 2 U.S. drugstore chain, will buy the remaining 1,260 stores, mostly in the South and Midwest, along with Eckerd's mail-order Pharmacy Benefit Management unit, for about $2.15 billion.

Penney expects to generate about $3.5 billion in cash proceeds after various
adjustments, taxes and deal costs. Its board will review what to do with the money, including stock and debt buybacks.

The deal ends a six-month auction that started last October when Penney, based in Plano, Texas, hired Credit Suisse First Boston to sell the struggling Eckerd franchise.

Though the 2,800-store Eckerd unit has accounted for nearly half of Penney's sales during the current fiscal year, the franchise was beset in recent quarters by troubles associated with pricing pressure from larger competitors and difficulties managing its inventories.

Analysts said selling the operation would help Penney pay down debt and pump new money into the company's core department store operation. It also would rid the retailer of a major headache. Despite a three-year turnaround effort, Eckerd's operating profit fell nearly 30 percent during the first nine months of fiscal 2003.

Penney's stock has climbed more than 31 percent since the end of January, in part on anticipation of an Eckerd deal.

The deal will more than triple Coutu's annual revenue, to $11 billion, and significantly increase the company's footprint beyond its 330-store Brooks Pharmacy chain in New England.

The stores being purchased by Coutu stretch from Connecticut to South Carolina and garner about $8 billion in annual revenue, sources close to the situation said.

CVS will also significantly expand its geographic reach by adding stores from Arizona to Florida. That Eckerd franchise, which was also coveted by rival Rite Aid Corp. (RAD) , is not as profitable as the northern stores, sources said, but offers greater growth potential because it includes several fast-growing states like Florida and Texas that are popular with retirees.

The stores being purchased by CVS, in conjunction with the high-margin benefits management group, generate about $7 billion in annual sales, sources said.

The auction initially drew interest from three industry players -- Coutu, CVS and No. 3 U.S. drugstore chain Rite Aid -- as well as a number of private equity firms.

All the parties expressed interest in buying the whole Eckerd franchise, but Penney ultimately decided it could obtain more value and avoid antitrust concerns by selling the unit in two pieces, sources said.

The decision to split the business, as well as what several sources cited as Penney's difficulty providing information to the potential buyers, delayed completing the auction from Penney's initial target date of Jan. 31.

Moss Neck Manor Stands as an Elegant Example From an Era Gone With the Wind
By Daniela Deane Washington Post Staff Writer � Washington Post
April 3, 2004

Antebellum Allure

Want to make like you're Scarlett O'Hara and live in an antebellum mansion right here in the Washington area?

If that is your fantasy, you do not have many choices. Even though Virginia was the capital of the Confederacy and it and Maryland were the sites of some of the most important Civil War battles, this region does not have many of the extravagant country homes people associate with the period. And what does exist could cost several million dollars.

Perhaps the best example of a Greek Revival plantation estate � la "Gone with the Wind" that is for sale now is Moss Neck Manor, a sprawling 9,000-square-foot antebellum house on 288 acres near Fredericksburg. It is listed on both the state and national registers of historic places.

Although antebellum literally means "before the war," as in before the Civil War, architectural historians say it loosely encompasses construction from about 1830 to about 1860. Antebellum plantation houses were usually part of agricultural establishments, such as cotton or tobacco farms.

Moss Neck Manor was built in 1853 for the Corbin family, wealthy Virginia landowners who lost all their money in the years after the Civil War. The mansion is on the market for $4.9 million.

The house is 225 feet long, one of the longest homes in the state, and features a columned front veranda reminiscent of Tara. Greek Revival architecture harks back to the classical forms of ancient Greece and Rome. The style's signature is big columns reminiscent of the Parthenon in Athens.

Moss Neck is best known as the Civil War headquarters of Confederate Gen. Thomas J. "Stonewall" Jackson and thousands of his troops during the winter of 1862 to 1863. Jackson entertained Gen. Robert E. Lee at Moss Neck on Christmas Eve 1862. That party was a scene in last year's Civil War movie "Gods and Generals," but filming took place at a re-creation of Moss Neck.

Historians say that Jackson and tens of thousands of his soldiers camped out on the grounds of Moss Neck that winter. The women of the Corbin family lived in the house. Trench lines and gun emplacements from that period are still visible on the rolling hills of the estate, which originally was thousands of acres. Most of the acreage is now farmland owned by others.

The house, which is being marketed by the Fredericksburg office of Weichert Realtors, is largely original and features woodwork, trim, stained glass, doors, door knobs and moldings from the mid-19th century. Floors are the original wide-plank hardwood. The windows are the big, tall, multi-paned ones used in grand homes of that time.

The house was restored five years ago by its current owner, Howard Stahl, a Washington trial lawyer. Stahl bought the house for $875,000 in 1998 from the family of former Sears, Roebuck and Co. chairman Theodore Houser, who revamped it in the 1940s for use as a country retreat.

"The first $150,000 I spent on it was ripping out what he had done to this marvelous piece of architecture," Stahl said. "It had Sears paneling, Sears bathrooms and the fields were overgrown. Now it's virtually identical to what it was in the 1850s."

Stahl says his hobby is restoring historic houses -- he previously restored another Greek Revival home called Berry Hill in Virginia's Halifax County. He estimates that he spent $2.5 million fixing up Moss Neck Manor, including new wiring and a new central air-conditioning system.

Washington architect Thomas Noble of Allan Greenberg, Architect, LLC, who has worked on other historic renovations in the Washington area, said restorations of the kind that Stahl undertook can be both challenging and costly.

"If you're trying to restore a house to its original condition, it can be as expensive as building a new premium custom home," Noble said. "If there are problems that need fixing or rebuilding, it can be even more expensive than building new."

Stahl put Moss Neck under a conservation easement soon after buying it. The agreement, which covers him and all future owners, allows for only three divisions of the grounds, and only under specific conditions.

Under the terms of the easement, the house cannot be torn down or its historic facade altered; inside, room sizes cannot be changed. The bathrooms and kitchen can be remodeled, although their sizes have to stay the same. The home has five bedrooms, 2.5 baths and almost no closets. Armoires were common instead of closets during that period.

Any changes to the house or the grounds must be approved by the Virginia Department of Historic Resources.

Stahl said he bought the house because he just had to have it.

"It was too great of a thing not to buy, too good to just leave there," he said. "It's boring to be a lawyer. I need to have some creative outlet. I love old houses and I love old architecture."

He is selling Moss Neck, he said, because he is not in the country enough to enjoy it. He said he will be "sorry to see it go."

Another antebellum home that is on the market is Springland Farm in the District's Cleveland Park neighborhood.

Springland Farm, built in 1843, is the only surviving, privately owned 19th century country-like estate in the District, according to Washington Fine Properties/Sotheby's, the brokerage that is marketing the property.

Ryan Shepard, collections librarian for the Historical Society of Washington, said it is possible that Springland is the only such surviving estate in the District that was once associated with an agricultural establishment.

Springland Farm, originally a 50-acre estate, was part of a plant nursery in the 19th century. It was built by the daughter and son-in-law of Maj. Gen. John Adlum, a noted figure in early American viticulture, or the cultivation of grapes. It remained in the Adlum family until 1976.

Springland, which now sits on an acre of land in a cul-de-sac with other houses, is on the market for $3.85 million. The red-brick house is on the National Register of Historic Places and the District's inventory of historic sites.

The 5,500-square-foot home's Southern-style veranda is on the back of the house rather than the front because the back was originally the front, said owner Bardyl Tirana, a Washington lawyer.

Springland also cannot be altered without permission. The home is not wholly antebellum: An addition was built in the 1890s.

Tirana said that what he likes about living in a historic house is "the patina of old."

"I like the integrity of it, the feeling that lives have passed here, that happy times were had here before me," he said.

Springland has been on the market and off for several months. Moss Neck has been on the market since the beginning of this year.

Historic homes can be a tough sell, real estate agents say, largely because their layouts often do not appeal to modern buyers. Any modifications are difficult because they must be approved by historical review boards. Maintaining a sprawling 150-year-old-plus house can also be time-consuming and costly.

But for you history buffs out there, if you want an antebellum mansion, there are not many to choose from around here, even though in the era of slavery this area was dotted with cotton and tobacco plantations.

"Fine plantation houses are pretty scarce in Virginia," said Calder Loth, an architectural historian at the Virginia Department of Historic Resources. "There are 50 or less in all of Virginia, if that," he said. There are no official records chronicling the number of such houses, Loth said.

In this region, most of the building that took place during that time was in the cities. Virginia was going through a period of severe economic decline during the antebellum years. The soil was exhausted by two centuries of farming without enough crop rotation or use of fertilizers.

From 1817 to 1829, the value of land in Virginia plummeted to $90 million from $207 million, according to the Virginia Historical Society. At a time when most Virginians' incomes were tied to agriculture, the result was a mass exodus from the state.

"They used to say that Virginia's chief export was brains during that time," said Frances Pollard, director of the library for the Virginia Historical Society. "So many people moved west in search of better land."

The agricultural wealth of that time was concentrated in the deep South, and so antebellum mansions are far more common in Georgia, Mississippi, Alabama and Louisiana, Loth said.

In Maryland, the great tobacco fortunes were made mostly in the late 18th century or early 19th century, said Rodney Little, director of the Maryland Historical Trust.

"Most Maryland families that were going to spend huge wads of money building a house had already done so [by the antebellum period] and they didn't need a second one," Little said. "Families who could afford those kinds of things had already built them."

Little estimated there are fewer than 50 antebellum plantation homes surviving throughout Maryland.

The Washington area is rich with outstanding historic houses, of course, and many are still in use. Entire neighborhoods -- Georgetown, Old Town Alexandria and Capitol Hill, to name a few -- have been declared historic districts.

Federal, Georgian and Victorian architecture are more prevalent here than is the characteristic antebellum style.

But that is not the image many out-of-towners have, particularly when they mentally lump together all the states of the Confederacy.

"People often associate Virginia with that Mississippi plantation look -- the big oak trees, the long driveway and the dripping Spanish moss," Pollard said.

Pollard said that is what Hollywood producers expect when they scout locations in Virginia.

"They often ask for that look here," Pollard said. "But if they want the plantation, the Tara look, they have to either fudge it, or go elsewhere."

Judge Tosses Age Discrimination Suit Against Allstate
DOW JONES NEWSWIRES
April 1, 2004 10:49 p.m.

PHILADELPHIA (AP)--A federal judge has ruled that Allstate Insurance Co. (ALL) did not commit age discrimination in 2000 when it forced thousands of its agents to become private contractors with limited benefits.

In a class action lawsuit, a group of agents had alleged that the 6,400 people affected by the reorganization had a median age of 50 and were the victims of a policy that unfairly targeted older workers.

Allstate said it was simply trying to save $600 million a year and had no plan to rid itself of older workers.

In a pretrial ruling signed Tuesday, U.S. District Judge John P. Fullam said there was no basis for the age discrimination claim "for the simple reason that employees of all ages were treated alike."

"An employer who visits adverse consequences upon all employees, irrespective of age, cannot be held liable for age discrimination," Fullam wrote. "The fact, if it is a fact, that many of the affected employees, or even a majority, are within the protected age group, is irrelevant."

The complaint had been joined by the U.S. Equal Employment Opportunity Commission.

Fullam also dismissed a lawsuit in which the agents had challenged a series of changes the company made to their pension plan in the 1990s. Fullam said the workers had waited to long to bring the complaint.

The judge, however, left standing two other major parts of the case in which the plaintiffs alleged that the company violated labor law and committed a breach of contract by laying them off and then rehiring them as contractors with few retirement benefits on June 30, 2000.

In another plaintiff victory, Fullam said the company was wrong to have forced the agents to either sign a release waiving their right to sue for discrimination. He gave the agents the option of voiding the waivers within the next 90 days, although those that do so would have to repay the company any financial benefits they had been offered for signing.

An attorney for the agents, Michael J. Wilson, said the defeat of the age discrimination claim was not a crippling blow.

"Whether you call it age discrimination, or a breach of contract, or a labor law violation, at the end of the day, the company is still taking away dollars and benefits for these agents," Wilson said.

Michael Trevino, a spokesman for Northbrook, Ill.-based Allstate, praised the dismissal of the age discrimination claim, and said the company believes that the number of agents angered by the reorganization is relatively small.

Sale of Eckerd to CVS, Coutu Appears Close
By David Armstrong - Staff Reporter - The Wall Street Journal
April 1, 2004

J.C. Penney Co.'s efforts to sell its Eckerd drugstore chain are nearly complete, say people familiar with the matter. The unit is expected to fetch around $4.4 billion, these people add, in line with the Plano, Texas, company's own $4.37 billion estimate in a filing this week with the Securities and Exchange Commission.

Former suitors, including Rite Aid Corp., having bowed out, the only bidders left -- CVS Corp. of Woonsocket, R.I., and Canada's Jean Coutu Group Inc. -- are set to split the Eckerd chain's 2,800 stores between them, people close to the deal say, with an announcement expected within the next week. The purchase is expected to be an all-cash transaction.

J.C. Penney's price estimate is 75% more than what it paid for Eckerd in 1996, despite the chain's underperformance since then relative to its biggest competitors.

But even drug-chain underperformers can be hot properties these days: The drugstore business has been outpacing the rest of retailing due to a surge in drug sales and a fast-expanding inventory of nonprescription products. Over the past five years, drugstore revenue grew 35.5%, twice the rate of the overall retail sector.

A wide offering of pricey new medicines, from cholesterol-busters to Viagra, have contributed to the rise in prescription-drug sales nationally to $216.4 billion last year, from $60.1 billion in 1994. The graying of America is another reason for the boom. And the expanded prescription-drug benefit for Medicare is expected to boost sales. "There is long-term visible growth" in the pharmacy business, says Meredith Adler, a retail analyst with Lehman Brothers. "It's all tied to the aging population."

The number of Americans over 65 is expected to rise to 55 million in 2020, up 56% from 2000. In fact, part of the reason for the premium for the Eckerd stores may be their location. Of the 1,200 stores expected to go to CVS, 622 are in Florida, a favorite home of retirees, and 437 are in Texas, a large, fast-growing state. Coutu would get the remaining 1,600 stores located primarily in the Northeast and mid-Atlantic states.

For Coutu, the Eckerd purchase is a chance for it to extend the retailing concept it used at 332 Brooks Pharmacy stores throughout six Northeastern states. Its Eckerd stores -- which will keep the Eckerd name and headquarters -- will focus less on food and other nonpharmacy items, says a person familiar with the matter. The new stores are likely to add pharmacists and extend hours.

The aging population notwithstanding, drugstores face price pressure on their main products, as well as growing competition. Insurers are turning their cost-cutting efforts to prescriptions, and politicians have begun moving against high prices. Meanwhile, supermarkets and other retailers are steadily adding pharmacy counters; Wal-Mart Stores Inc. has 3,000 nationally. Mail-order pharmacies, captured 17.2% of the market last year, up from 12.7% in 1997.

Drugstore chains still claim a hefty 42% of the prescription-drug market. After a consolidation in the early '90s that resulted in the disappearance of many independents, the number of drugstores is now on the rise again, to 55,000 last year from 51,000 in 1997.

Prescription sales remain the main driver of performance -- at CVS, same-store prescription sales rose 8.1% in 2003, while front-end sales rose just 1.2%. But general merchandise has higher margins than prescription drugs.

The result is a supersizing of drugstores, and a wider selection of personal-care products, over-the-counter medicines and alternative therapies. There is also more food and candy, milk and orange juice. Not to mention French cosmetics and small appliances. A spokeswoman for Walgreen Co., the nation's largest pharmacy chain, has likened the new model to a "7-Eleven on steroids."

With the Eckerd buy, CVS may close underperforming or redundant locations; even so, the purchase would catapult it past Walgreen to No. 1 as measured by number of stores. Walgreen, with 4,337 stores and $34.3 billion in sales last year, may still be the top in terms of sales, since its stores are bigger. CVS had sales of $26.6 billion last year.

The purchase would put CVS in an unprecedented head-to-head battle with Walgreen, particularly in Texas and Florida, where CVS had already begun to build stores.

"CVS eventually had to confront Walgreen," says John Ransom, the director of health-care coverage at Raymond James & Associates. "Walgreen decided to position themselves in growth markets 10 years ago. You can't run away from those markets, and CVS senses that sneaking into a market by opening a store or two is not good enough."

CVS, long focused on the Northeast, has begun in recent years to put down roots in other states, such as Arizona, where Walgreen is established. It even moved into Walgreen's backyard of Chicago. CVS has said it would open as many as 250 new or relocated stores this year.

Walgreen is targeting the Carolinas and Georgia -- three states where CVS is a market leader -- for expansion. It plans to open 450 new stores in its fiscal year ending Aug. 31, as part of an overall plan to grow to 7,000 stores by 2010. Both companies are also moving aggressively into Southern California.

Consumers can expect to see more price competition in areas where the two big chains compete directly, as well as new efforts by both to improve service and differentiate themselves.

Walgreen so far has an edge in roomy stores and a wide selection of nonpharmacy goods. In recent years, it has been driving the competition by creating large stand-alone stores, popular for their easy parking and drive-through pharmacies. More than three-quarters of Walgreen stores are now in these locations, compared with just over half of the CVS and Rite Aid stores.

Walgreen also has many more 24-hour stores than CVS and sells a wider variety of products. In Weymouth, Mass., a 24-hour Walgreen stocks many items not found at a neighboring CVS store. Those items include a mix of clothing such as sweatshirts piled high at the front of the store, to sundresses on a rack in the middle, a queen-size airbed and $19.99 guitar-shaped neon lights.

To counter the price breaks offered by discount retailers, drugstores are making deals for exclusive product offerings. CVS executives, for instance, traveled to Europe in search of cosmetic products not found in the U.S.

The company this year rolled an exclusive line of Lumene brand products from the Finnish cosmetics maker Noiro Corp. Lumene "energy cocktail pampering drops" are set up on special displays in prime locations. CVS also heavily promotes the Lumene products in circulars, direct mailings and coupons.

CVS is also experimenting with European-style skin-care centers. The centers are stocked with products from Vichy Laboratories, a unit of French beauty company L'Or�al, and Avene, another French brand. The centers also borrow a page from traditional department-store retailers by using a specially trained "beauty adviser" to help customers.

In Kmart's Leftover Bin:
Nasty Tax Scrape With Towns
By Amy Merrick � Staff Reporter - The Wall Street Journal
March 31, 2004
Retailer Sues 500 Locales In Bankruptcy Court,
Seeking to Cut Bills Not Looking for a Windfall'

CHICAGO -- Nearly a year after it emerged from bankruptcy proceedings, Kmart
is picking a risky fight with some unlikely foes: almost 500 towns, cities and counties the discount-store chain claims overcharged it in property taxes.

In a blitz of legal filings, Kmart has sued local governments from Anchorage to Palm Beach County, Fla. It has had the bankruptcy court issue hundreds of summonses in recent months and demanded swift responses from many small jurisdictions that often lack the funds or expertise to defend themselves in the Chicago proceedings.

Kmart filed for Chapter 11 in 2002 after years of losing customers to Wal-Mart Stores Inc. and Target Corp. Although Kmart Holding Corp. emerged from bankruptcy protection last May, it generally remains on the hook for its unpaid property taxes -- levies on inventory, store fixtures and the like. It is trying to get those bills lowered through the bankruptcy court -- thrusting the claims into an arena concerned foremost with giving the
debtor a fresh star and whose rules often trump state laws.

Government officials are fuming. "Fraud," cried Bibb County, Ga., in a court filing answering the lawsuit. Ventura County, Calif., called the suit a "shotgun" tactic designed to create "either a default judgment or a quick and advantageous forced settlement." Some jurisdictions have banded together to share the costs of fighting back.

By challenging parties in so many locales, Kmart is taking a big risk. While discount retailers normally bend over backward to keep up community relations, Kmart could end up engendering widespread disdain. Should Kmart ultimately prevail, many officials say, they will be forced to either cut back on local services or resort to tax increases.

"If I'm Kmart and I want to keep my doors open, I don't think I'd want to be the reason why poor people's property taxes are increased," says Chris Hughes, the collector for Okaloosa County in Florida.

Kmart says it proves it's a good citizen in lots of ways, such as providing jobs and supporting charities. "What we're asking for is well within our rights under the U.S. bankruptcy code, and we're just asking for a fair valuation of this personal property tax," says Jack Ferry, a Kmart spokesman.

Kmart's lawsuit, which covers 2001 and 2002 and the inventory and other items contained inside much of its national empire of stores and warehouses, seeks a total of only $8.6 million. That's just a little more than the $8 million in "retention loans" Kmart made to Chief Executive Charles C. Conaway and President Mark S. Schwartz, in the year before it filed for Chapter 11. Both were ousted as Kmart filed for reorganization in January 2002. (Company creditors are trying to get that money back, too.)

Kmart's largest dispute is with Detroit, near Kmart headquarters in Troy, Mich. The retailer wants the Motor City to cut its 2001 taxes by $627,064.02. But other claims are tiny: Kmart alleged Grayson County, Texas, overcharged it $145.84.

Behind the lawsuits is a disagreement over how to assess the value of the company's inventory and other goods. The local governments use a simple method that has been around for decades. Kmart has paid for a study that uses a more-complex method and that comes up with a much lower value. (The dispute does not involve real-estate taxes, which frequently are the responsibility of local landlords.)

For many smaller communities, the claims can have a big impact -- and with their payments from Kmart held up since last year, many are worried about making ends meet. In Manteno, Ill., the school superintendent says he may have to lay off teachers. In Navarro County, Texas, the local auditor has had to cut funding for janitor uniforms and jail food. In Cherokee County, Ga., a member of the board of assessors wonders when the county will be able to beef up security at the courthouse.

Other companies have challenged tax assessments in bankruptcy court. But as the biggest retailer ever to seek bankruptcy protection, Kmart has lodged an unusually large protest in some places that already feel aggrieved by the retailer. While in Chapter 11, the company closed 600 of its 2,114 stores and a distribution center, throwing more than 50,000 employees out of work.

While many of the localities it is seeking tax adjustments from are struggling, Kmart, as of January, had $2.1 billion in cash.

"We're not looking for a windfall," says Joseph Harrison, a Floresville, Texas, lawyer specializing in property-tax issues who was retained by Kmart. The company simply wants the bankruptcy judge to uphold what Kmart believes are the correct taxation procedures, he says.

In its dispute with Navarro County, Texas, Kmart claimed the county overcharged it by several hundred thousand dollars. The fight came after the retailer closed a giant store and a distribution center there, wiping out 500 jobs, or 8% of the county work force.

Partly because Kmart postponed paying the county and the city of Corsicana more than $1 million in taxes, the county faced a $600,000 budget gap last spring. The county cut all its employee salaries by 7.5%, saving $300,000. The sheriff's office, which normally needs to replace five vehicles a year, got none. County Auditor Paula Tullos even worked with the jail dietitian to trim rations: less beef, and sandwiches instead of hot lunches.

"It leaves a bitter taste in your mouth when, in the worst times, they don't really care about the communities they're in," says Daryl Schliem, chief executive of the Corsicana/Navarro County chamber of commerce. The county eventually settled with Kmart.

Some towns and counties argue that Kmart is trying to wear down their resistance or cause them to accidentally default by pressing on three fronts. In some states, the retailer is protesting assessments before local appeals boards. In federal bankruptcy court it has filed numerous objections to property-tax claims. And it is pushing its lawsuit against the local governments over the tax assessments.

About 150 defendants have decided the cost of fighting is too high. The government of Athens-Clarke County, Ga., voted to accept a settlement of $57,776.40, about 70% of what it believed Kmart owed. "We wanted to ensure we got something," says Mayor Heidi Davison.

The retailer cites a clause of the federal bankruptcy code, Section 505, that allows a U.S. bankruptcy judge to intervene in tax cases. States typically handle tax disputes through their appeals boards. This month the U.S. Supreme Court heard oral arguments in another case, Tennessee Student Assistance Corp. v. Hood, involving similar issues about state rights in federal bankruptcy court. Its outcome could affect the Kmart matter.

Some local governments are asking U.S. Bankruptcy Judge Jack B. Schmetterer
to toss out Kmart's case, arguing that the retailer had access to a clear
assessment-appeal process under state laws. They also argue that they used
the same methods for determining Kmart's property values that they did for all other taxpayers, and so they dispute the company's claim that those values have been overstated by 30% to 40% in many cases.

In a January hearing in Chicago, Judge Schmetterer took Kmart to task for failing to explain how it calculated its discount requests. "Counsel, your pleadings are sparse, are they not?" he sternly asked Kmart's lawyers. With about 20 lawyers for the governments forming a horseshoe around him, the judge said: "I know some of you have come some distance, and I appreciate you being here." The Kmart lawyers promised to add more detail to their case.

In addition to retaining Mr. Harrison, the specialist on property-tax issues, Kmart uses tax consultants such as Houston-based Burr Wolff, a 175-employee firm that bills itself as "America's state and local tax-reduction experts." By contrast, very few of the taxing authorities have even one full-time lawyer on staff.

But it is the very fact that tax officials are overburdened that makes Kmart think it has a case. Too busy to do otherwise, Mr. Harrison says, many towns use the quickest method to assess the value of a company's property and inventory to determine the tax: Take the original price of a piece of equipment or collection of inventory and simply subtract the depreciation amount based on a table.

Mr. Harrison says Burr Wolff used a more complicated method and came up with
a lower number than the localities in many instances. Its method takes into
account market data, estimating the price if the inventory were sold to another company and examining the company's overall financial health, among other matters.

Hardest hit in these dueling assessments may be school districts, which rely heavily on property taxes. In Manteno, Ill., schools receive 60% of the county tax proceeds. Kmart has a large distribution center there, making it the biggest local taxpayer at 6% of the property-tax base. The county set the market value of the inventory and other items held in the distribution center at $36 million. Kmart's reckoning: $25 million. That change would cost the schools $165,366, or 4.5% of the education fund, says Michael E. Smith, district superintendent.

The schools already face a deficit of $873,595 this year, as enrollment has ballooned. In some grades, more than 30 students crowd into classrooms that held 22 to 25 children a few years ago. More students are sharing each computer. At a recent meeting, building administrators handed Mr. Smith a 52-item list of overdue repairs.

A Kmart victory would force the district to cut four teachers, or the equivalent of their salaries, from other expenses, Mr. Smith says.

In Florida, 41 counties have united behind John K. Clark, the tax collector for Palm Beach County, and Brian Hanlon, the attorney for his office. Since Mr. Hanlon was hired in 1994, the two have made it their mission to block companies from reducing their taxes in bankruptcy court. "The bankruptcy code is like the Bible," Mr. Clark says. "There are a lot of different interpretations."

Even before Kmart filed its lawsuit, Mr. Hanlon had been trying to get Kmart to pay $3.5 million in property taxes that the Florida counties claimed. When Kmart filed its lawsuit and Mr. Clark and his fellow tax collectors began receiving their summonses, he wrote a letter to the other counties, offering to pick up the tab for defending the group.

At first some of the smaller counties wanted to settle, but Mr. Clark worked the phones until all but one agreed to resist as a group, he says. "In the past, especially small counties that don't have representation, they roll over and play dead -- and they get chopped up," he says.

He estimates spending $5,000 to $6,000 so far in the fight against Kmart's effort to lower its taxes. "They're playing dirty and trying to weasel out!" says the tax collector.

In the past few months, Mr. Hanlon has filed lengthy motions. Among other things, he contends Florida has "sovereign immunity," meaning a federal court has no jurisdiction over state tax collection. Kmart argues that by filing a claim in bankruptcy court, Florida gave up its right to sovereign immunity.

One recent day at their West Palm Beach office, Mr. Hanlon and his team searched for documents in six large cabinets stuffed with dozens of files. One paralegal keeps track of hundreds of objections from Kmart and prods other Florida counties for information. Another keeps up with an electronic docket of the lawsuit -- the case already includes more than 1,600 filings -- helps with legal research and deciphers bankruptcy court procedures.

As the case drags on, Mr. Hanlon is helping the opposition unite. After the January hearing, lawyers for governments in California, Texas, North Carolina and Georgia introduced themselves to Mr. Hanlon. One of them was Lawrence O. Anderson, who has begun to follow Mr. Hanlon's lead. Representing Cherokee County, a collection of fast-growing suburbs outside Atlanta, he is calling other counties to ask if they want to work together.Neighboring Cobb County has signed on.

In Cherokee County, Darrell Caudill, a member of the board of tax assessors, echoes the feeling in many places that Kmart is trying to freeload. He can think of plenty of uses for the $70,000 in question there: At the top of his list is filling the sheriff's request to hire more courthouse security. But, he adds, "I'm sure all those trucks Kmart had bringing in all those goods, they created some potholes on the roads."

BARGAIN HUNTING

Some communities Kmart has sued and the amount by which the company wants its taxes reduced.

Place	Proposed Reduction
Anchorage, Alaska	$ 99,218.89
Detroit, Mich.	627,064.02
Garden City, Mich.	3,627.11
Grayson County, Texas	145.84
Wisconsin Rapids, Wis.	3,996.29

Source: Kmart lawsuit

Sears Canada to Get Out of Auto-repair Service
By Dana Flavelle � Business Reporter - Toronto Star
March 31, 2004

About 150 jobs likely to be lost

Profit shortfall precedes closing

Sears Canada says it's getting out of the car-repair business, a move that will affect 775 employees.

The country's third-largest retailer also confirmed yesterday it has quietly laid off nearly 100 head office employees in recent months.

Sears Canada said it would close 13 of its 49 auto service centres and license out the remainder on a geographic basis to third-party specialists, who are likely to rehire most of the employees.

The moves follow a disappointing fourth quarter that saw Sears' profit cut by a third while sales remained flat compared to the year-earlier period.

Active Green & Ross will pick up the business in Ontario, President Tire gets Quebec and Atlantic Canada, while Kal Tire gets the West. Financial terms were not disclosed.

The car-repair specialists will operate the service centres under their own
names but continue to accept Sears credit cards and honour Sears warranties, the retailer said. The converted stores will also continue to carry two exclusive Sears brands � Diehard batteries and Roadrunner tires.

As well, Active Green & Ross plans to reopen three auto centres Sears had closed last year, adding 40 jobs.

But at least 150 Sears employees are expected to be out of a job once the transition is completed.

The moves reflect changes in the auto-service business, the retailer said.

"In recent years, there has been significant change in the automotive aftermarket industry in Canada," said Brent Hollister, president and chief operating officer, Sears Canada. "That change requires sophisticated equipment and capital investment."

Seven of the 13 service centres that are closing are attached to Sears stores and will be converted to additional warehouse and retail space, the retailer said. Sears owns or leases the other 36 premises.

Yesterday's announcement follows quieter moves made in recent months to trim overhead.

Earlier this month, the retailer cut 40 to 45 jobs from its merchandising group, or nearly 10 per cent of its Jarvis St. head office staff. The group buys for the stores.

In February, Sears laid off 40 to 45 people, or nearly 10 per cent, of its information technology staff, which supply computer services to the retailer. They operate out of separate quarters in Don Mills.

Sears spokesperson Vince Power said the cuts were made after those departments reviewed their operations.

Altogether, Sears employs about 48,000 people across Canada.

The cuts come amid speculation the retailer's U.S. parent company could make a bid for the remaining 46 per cent of Sears it doesn't already own.

Sears Roebuck & Co. chief executive Alan Lacy said last week he wouldn't rule out the possibility.

"There could be circumstances that would be attractive for us to buy out the other shares," Lacy told a retail analysts conference in New York.

Sears Roebuck recently sold its credit card division for net proceeds of $4.1 billion (U.S.), which it plans to use to expand its business.

The retailer operates 870 stores in the United States, while the Canadian unit operates 123 full-service stores.

However, some analysts have said it doesn't make sense for Sears Roebuck to invest in the Canadian business because it's less profitable than the one it just sold.

Sears Canada's share price, which has climbed 20 per cent since this time last year, closed down 8 cents (Canadian) at $17.90 on the Toronto Stock Exchange yesterday.

Big Disadvantage for Sears in Apparel, Electronics: Analyst
By Sandra Guy � Business Reporter
Chicago Sun-Times
March 31, 2004

Sears Roebuck and Co. is at a "severe competitive disadvantage" with other retailers in selling clothes and electronics, and even its strongest products are under pressure, said one Wall Street analyst who downgraded Sears' stock on Tuesday.

George Strachan, an analyst with Goldman Sachs, reduced his rating on the stock to "underperform" from "in-line" after he concluded that Sears' sales in February and other worrisome signs may portend weak results for the rest of the year.

A Sears spokesman said the Hoffman Estates-based retailer has laid a solid foundation for growth by overhauling its stores and its purpose in the past three years. Sears must rely solely on its retail businesses now that it has sold its credit-card business.

"We have been very frank in saying we've done a lot of work and we have work to do," said Sears spokesman Chris Brathwaite.

Sears' same-store sales increased 1.1 percent in February, but similar retailers posted a composite gain of 7 percent, Goldman Sachs' Strachan wrote in a note to investors.

Sears' comparable-store sales were negative in 2001, 2002 and 2003 as gross sales per square foot in Sears department stores dropped during those three years by more than 6 percent, to $180.

While sales dropped, prices rose, the analyst said.

Sears was the only mid-priced department store to raise its clothing prices over a six-year period ending in 2004, according to a Goldman Sachs survey that also looked at Sears' rivals JC Penney and Kohl's.

Though Sears is building new stand-alone stores called "Sears Grand" that aim to compete with Wal-Mart and Target, Strachan said Sears Grand cannot make a dent in the company's results for a long time.

The Sears spokesman said no one believed that the Sears Grand prototype stores -- two have opened so far, including one in Gurnee -- would have an immediate impact on sales.

Sears plans to build five Sears Grand stores as pilots, testing different formats to figure out which works best.

The analyst also questioned Sears' reliance on Lands' End apparel to lure higher-income shoppers into its clothing aisles, including shoppers who normally visit Sears only to buy tools, appliances and lawn-and-garden items.

"Recent store visits have raised the question whether shoppers will buy a pair of full-priced Lands' End shorts for boys at $24.50, for example, when a very similar Covington (also a Sears brand) pair is promoted at $7.98 six feet away," Strachan wrote.

The Sears spokesman said Lands' End is proving itself.

"Lands' End is performing to our expectations," the spokesman said. "It grew by 20 percent last year, to $400 million in sales."

Sears is working to make its apparel lines more fashionable, the spokesman said. It will introduce later this year the "ALine" brand of women's sportswear, casual business attire and handbags, and the Structure menswear brand, designed for men ages 20 to 35.

Yet Sears' traditionally strong showing in tools, electronics, small electric appliances and lawn-and-garden equipment is under siege from faster-growing retailers such as Home Depot, Lowe's and Best Buy, according to the Goldman Sachs report.

The Sears spokesman countered that the company continues to try to update its offerings. Later this year, Sears will start selling a wider assortment of DVDs and will feature flat-screen and plasma TV sets in a more prominent display.

Nevertheless, Strachan said one way Sears might improve its financial flexibility is to sell some of its other assets, such as Sears Canada, hardware operations and real estate.

Analyst Weighs in on Sears Grand
By Kelly Quigley - Crain�s Chicago Business
March 30, 2004

Latest solution to same old problems no quick fix

Sears Roebuck and Co. isn't likely to see its latest retail remedy�the new Sears Grand concept�pay off in the near term, leaving the chain's fortunes tied to its struggling mall-based department stores, a Goldman Sachs analyst says.

�For years Sears� dream has been to turn itself into an off-the-mall powerhouse competing more successfully against discount and other formats,� wrote analyst George Strachan in a research note Tuesday. �Regardless of whether Sears Grand succeeds, the format is unlikely to have a material impact on company results for some time.�

Mr. Strachan also cut his rating on Sears to �underperform� from �in-line.� The first local Sears Grand opened in Gurnee last week, following the debut of the concept near Salt Lake City last fall. The big-box stores offer a broader array of brands and merchandise such as food, plants and DVDs. The pilot locations are said to be considering adding pharmacies, as well (Crain's, March 29).

The standalone store concept is designed to compete with big-box retailers like Target Corp. and Wal-Mart Stores Inc., which have stolen Sears� market share.

But Sears won't reap any benefit from the strategy in the near term. �For now, with about 870 legacy stores, Sears� fortunes are securely tied to the mall,� where sales have been weaker than other department store chains, Mr. Strachan said in his report. He couldn�t be reached for further comment.

Earlier this month Sears Chairman and CEO Alan Lacy acknowledged tough competition from off-mall retailers, and forecast weak 2004 growth as Sears continues to revamp stores and improve merchandise selection.

�We�ve done a lot of work so far and we have a lot of work to go,� a spokesman said Tuesday.

Sears Canada to Exit Auto Center Business
FORBES.COM
March 30, 2004

TORONTO, March 30 (Reuters) - Sears Canada <SCC.TO> said on Tuesday it will exit the auto center business in May and license most of the facilities to three auto service and tire providers.

The Toronto-based retailer said Kal Tire, President Tire and Active Green & Ross will begin operating 36 of its 49 auto centers in Canada. The remaining 13 will be closed.

Sears Canada, majority-owned by Sears, Roebuck and Co. (nyse: S - news - people), said the companies will be better equipped to deal with what it called "significant change in the automotive aftermarket industry in Canada" in recent years.

How Lucent's Retiree Programs Cost It Zero,
Even Yielded Profit
by Ellen E. Schultz and Theo Francis - Staff Reporters - The Wall Street Journal
March 29, 2004

Trusts Paid the Tab -- Till Now; Facing Need to Use Cash,
Company Imposes Cuts A Handy Tool for Downsizing

Henry Schacht, Lucent Technologies Inc.'s former chief executive and still a director, met with retirees in 10 states last fall to explain why Lucent was cutting their medical and life-insurance benefits.

In Buckhead, Ga., the retirees, some propped on canes and walkers, tottered into a meeting at the Sheraton hotel. Then, according to a handout from Mr. Schacht's presentation, he explained the burden Lucent faced from growing medical costs and rising numbers of retirees. There are now five retirees for every U.S. worker, the handout said. "Unfortunately, the numbers just don't work."

Many retirees say they resigned themselves to that conclusion. A high ratio of retirees and older workers, they figured, must be a burden that forced the company to cut benefits if it hoped to be competitive.

But an examination of Lucent's government filings shows that having a disproportionately high number of retirees hasn't been a problem for Lucent. In the first place, thanks to three benefit and pension funds that Lucent was born with when spun off from AT&T Corp. eight years ago, the big provider of telecom gear never had to dig into its own pocket to pay benefits for U.S. retirees. The funds paid every cent, both of pensions and of retirees' health care.

In addition, Lucent has been able to use assets in these funds to help it pay for repeated rounds of downsizing.

Moreover, the benefit plans -- thanks to accounting rules -- have fed Lucent hundreds of millions of dollars of income. And through a separate accounting maneuver, the cuts that Lucent made in the benefit plans last fall will contribute hundreds of millions of dollars more in income over future years.

In short, in most years the pension and retiree benefit plans have enhanced Lucent's earnings, not burdened them. But now that the surplus in the biggest fund is essentially gone, Lucent is faced with using some of its own cash to pay retiree benefits, and it is cutting those benefits.

The Lucent story is a case study of the often-bewildering world of retiree benefits. Contrary to a common perception, having a high ratio of retirees to employees doesn't necessarily raise a company's benefits burden. Lucent also shows the sundry ways companies can actually profit from their retiree plans, both to relieve demands on their cash and to produce new income that burnishes the bottom line.

For many retirees, the impact is painful. "This is like getting an enormous pay cut -- in retirement," says Howard O'Neil, 90 years old, who began work in 1939 for Lucent predecessor Western Electric in the radar group, and then was a pricing specialist for AT&T Technologies. "We're going to have a really tough time this year," says the Wall, N.J., resident, now faced with paying for Medicare "part B" coverage and dental benefits that Lucent used to cover for him and his wife, Mabel, 79. Their total increase is $183 a month.

Lucent also eliminated a death benefit it had told Mr. O'Neil he would have. The benefit was to equal his $16,600 pay in his last year, 1973, and he intended it for his burial costs. "They punish you for being old," Mr. O'Neil says.

Lucent says it adopted many techniques that other big companies also use to manage pension and benefit plans. But it makes a distinction. Most companies imposing cuts "are doing it to improve their performances or to better insulate themselves" from health-care inflation, Mr. Schacht says in an interview. "We're in an entirely different position. We can't generate the cash." Lucent's revenue is down radically from four years ago after two spinoffs and a brutal slump in demand for telecom equipment and services.

Lucent says that until now, it has never spent any cash from operations on benefits for U.S. retirees, because the trusts always paid for this. Now that Lucent can't rely on the trusts to pay all the benefits, Mr. Schacht says the company has no choice but to cut them. He says the company must commit its resources to improving the business and describes the cuts as necessary to keep Lucent strong enough to pay any benefits at all.

Cutting retiree benefits was "the least-worst of bad alternatives," he says. "We spent eight months trying to figure out how not to do" what the company ended up doing.

Lucent began life in 1996 when AT&T put together several divisions, including Western Electric and Network Systems, and spun them off as a new company. It made and sold telecom equipment, including many of the computers and switches that undergird the Internet and the U.S. telephone system. It also housed the storied Bell Laboratories, the research center that developed technologies as diverse as transistors, lasers and fax machines. Based in Murray Hill, N.J., Lucent started off with 100,000 retirees, ex-employees of these AT&T divisions.

They came with a dowry. AT&T transferred to the new company a $29.8 billion pension fund plus two special trusts to pay retiree benefits, containing $3.7 billion. Counting the estimated cost of paying all the retiree benefits to everybody entitled to them, the new company had retiree liabilities of $28.7 billion. And it had $33.5 billion in assets to pay them.

Lucent focused on growth: acquiring companies, hiring people, borrowing heavily and generally operating as if the roaring telecom market of the time would continue. It didn't. When the bubble burst in 2000, Lucent deflated too. Demand for telecom products and services went into a steep fall, exacerbated in Lucent's case by its habit of financing customers' purchases.

Accounting issues accompanied the financial troubles. Lucent disclosed in late 2000 it had improperly recognized $679 million in revenue. As recently as early this month, a federal grand jury was continuing to look into Lucent's business practices. Also this month, Lucent said the Securities and Exchange Commission will fine it $25 million for lack of cooperation after a 2003 preliminary SEC settlement, which didn't require penalties or further restatements.

Retirees Multiply

After the telecom bust, Lucent began downsizing through spinoffs of business units, layoffs and early-retirement offers. A U.S. labor force that had been 118,000 in 1999 stands at 22,000 today.

As its work force shrank, its retiree population grew. In the U.S. by last fall, retirees numbered 127,000.

One might think this would increase Lucent's pension obligation. Not so. The company had the same pension obligation to employees while they were still on the payroll as it did after they left. Having a higher ratio of retirees to active workers doesn't make a company's pension obligation worse.

That's because companies that offer pensions must fund them. They're expected to set aside enough money in a pension plan to meet all obligations to current and future retirees. As employees retire, the liability the company carries for those employees actually begins to decline, because the people are no longer building up new pension benefits.

Before the telecom bubble burst and stock market turned down, Lucent's pension plan was more than well-funded: It had a giant surplus. Its assets reached $45.3 billion at the peak, with a surplus of about $19 billion.

Pension Income

Besides the effortless payment of pensions, that rich pension plan provided a valuable resource for the company itself. First, it generated pension income. When expected returns on the assets in a pension fund exceed current costs, the difference counts as company income. While this isn't spendable money, it fattens the reported profits that drive stock prices.

In Lucent's first full year, ended Sept. 30, 1997, its earnings included $329 million of pension income. The figure more than tripled in fiscal 2000. After that, Lucent ran huge annual net losses, but most were narrowed by hundreds of millions of dollars in pension-fund income.

An exception was fiscal 2001, when the pension fund generated a billion-dollar accounting loss, thanks in part to the company's restructuring. In addition, accounting expense for other retiree programs, particularly health care, has lowered corporate income. But even after subtracting those factors, the net result was $929 million added to Lucent's bottom line over its eight-year history as a result of its benefit plans.

The pension plan also served the company as a kind of piggy bank. From 1999 to 2001, Lucent withdrew about $1 billion from pension-plan assets to pay for retirees' health care. This is perfectly legal, although companies that do it face certain restrictions if they later try to cut those health benefits.

Severance Aid

Lucent also used its pension fund for severance. For example, in 2001, to induce older employees to take early retirement, Lucent offered them beefed-up pensions. Doing so raised Lucent's pension liability by $1.95 billion, which was a big part of the reason the plan hurt rather than helped earnings that year. But offering bigger pensions let Lucent shed workers at minimum cash cost. It "was a better way to finance because we didn't have the cash," Mr. Schacht says. "It is still far better ... than if we would have just had to fire" people.

In its medical trust funds for retirees, Lucent found another useful downsizing tool. The company encouraged older employees to leave by offering them accelerated health coverage in retirement.

In 2001, Lucent offered retiree health coverage to a pool of managers who weren't yet eligible for the benefit. About 8,500 managers accepted the deal and left. "We were encouraged to take it to get the medical benefits," says Mark McGill, 48, a former sales director in Denver. Together, the pension plan and the retiree health plan limited the cost to Lucent of a radical downsizing.

But wouldn't the resulting higher number of retirees boost Lucent's health-care burden? Actually, the total bill for medical benefits didn't grow appreciably. Rather, Lucent had shifted a chunk of medical costs from the employee side of the ledger to the retiree side.

In fiscal 2003, Lucent spent about $1.11 billion on health care. This was in the same neighborhood as the $1.06 billion it spent in 1999, when its payroll was at its peak. Between the two years, the sums Lucent spent on health care for employees shrank (because there were fewer), while the amounts spent for retirees grew (because there were more).

The figures: In fiscal 1999, $517 million for employees and $539 million for retirees. In fiscal 2003, $850 million for retirees and $264 million for employees.

In terms of health care, moving a population from active to retired even has some advantages. Once employees became retirees, Lucent no longer had to pay for their health-care benefits with cash earned in its business. Now, it could pay the benefits out of assets in the pension plan and special trusts.

Cost Limits

What's more, although Lucent was exposed to health-care inflation for employees, it faced far less such exposure for retirees. For 28,000 of its managers, Lucent has ceilings on what it will ever pay toward their retirement health benefits in a year: $7,850 for a family, and $1,700 for single retirees over 65.

A spokesman for Lucent confirms that it spends roughly the same overall for medical coverage as in 1999 -- but more for retirees now and less for employees. He says that switch wasn't a strategy but just a byproduct of restructuring. In any case, Mr. Schacht says, the bill is much tougher on a company with only $8 billion-plus of annual revenue, versus the $38 billion-plus Lucent had in 1999.

Meanwhile, any cuts Lucent makes in its retirees' benefits bring it accounting gains. The cuts lower a liability recorded earlier. That generates an accounting gain, which adds to the company's income.

For example, in 1999, Lucent eliminated -- for people who had retired after 1983 -- a longstanding benefit: discounted long-distance phone rates. In lieu of this, Lucent raised their pensions $25 a month. The move, combined with other changes, lessened the retiree-benefit obligation on Lucent's books by $359 million. That produced an accounting gain, which helped Lucent's bottom line in subsequent years.

The new Medicare prescription-drug law also lets companies' retiree plans throw off still more corporate income. Under the law, those that provide drug coverage for retirees will get federal subsidies for preserving coverage instead of dumping their retirees on the Medicare program. Lucent estimates its eventual total amount of subsidies at roughly $500 million in today's dollars. This will reduce the company's liability and generate an accounting gain of that size. It will be gradually parceled out into income over about a decade.

A New Situation

Although Lucent's retirees long cost the company zero cash from its operations, Lucent says this is changing. Companies must have 25% surpluses in their pension funds to use fund assets to pay retirees' health benefits. Lucent's pension plan remains in good shape but the former huge surplus is gone. Stock-market losses are the main reason. Lucent says about 10% of the pension-fund decline is due to transferring money out to pay for retiree health care.

Lucent's two trusts for U.S. retirees' health care are also less flush. They total $2.3 billion, down 37% since Lucent's founding, after payment of benefits and losses during the bear market. Lucent says the trust for management retirees' health care is tapped out. The company expects the one for union employees to run out within two years. Lucent confirms it never put any cash into the trusts while it was prospering in the late 1990s.

The fiscal year that began Oct. 1 will be the first time Lucent must dip into its own cash from operations to pay part of the retiree-health-care tab. It estimates it will have to use $240 million of its cash for this purpose this year -- equal to about 2.7% of revenue -- and $300 million annually in 2005 and 2006.

Lucent says it can't afford this. The company has been profitable for the past two quarters and projects a profitable year. Still, executives say Lucent remains cash-flow negative -- using cash faster than taking it in.

Lucent had $4.3 billion in cash as of Dec. 31. But it says it must commit its cash to securing its future, by spending on such things as sales efforts and research and development. It also must pay competitive compensation, Mr. Schacht adds, "because that's what it's going to take to continue to attract and retain the talent required to build this company back to where we want to go."

Walt Ehmer, 67, retired chief executive of Lucent Technologies Denmark, argues that Lucent "can accomplish both goals: to take care of Lucent and the retirees. They talk about the cost of retiree benefits, but they continue to pay all these executive bonuses." Lucent paid $300 million in bonuses at the end of 2003. Mr. Schacht says that bonuses, too, are important to retaining top people.

Early-Retirement Offer

Last September, as Lucent faced the need to spend cash on retiree health benefits for the first time, the company chose to cut them. It eliminated Medicare "part B" and dental coverage, death benefits, and spousal benefits for management retirees who made more than $87,700 a year. The effect was to rescind some of the health coverage Lucent had offered people in 2001 to get them to retire early.

Jon Wallace was one who took Lucent's offer that year and left. The offer meant that Mr. Wallace, an engineer, stood to receive $6,700 a year in retiree medical coverage. Changes Lucent made in September cut this to $3,532.

His share of premiums, formerly about $1,800 a year, is now more than $6,900. With a daughter just finishing college, Mr. Wallace, 56, figures he has traded tuition payments for a higher insurance bill. Mr. Wallace says he doubts Lucent's "simplistic story" about why it had to cut benefits but also says that "I don't want Lucent to go out of business," noting that he holds 15,000 shares of Lucent and its spinoffs "in my poor, beat-up 401(k)."

Mr. Schacht says employees who took the early-retirement option in 2001 had been warned that the company could change those benefits at any time.

Cutting the retiree coverage gave Lucent a tidy financial payoff, even though it hadn't been using its own cash for the benefits. The cuts reduced its balance-sheet liability for retiree benefits by $1.1 billion, or 11.7%. This generated a $1 billion-plus pool of accounting gains that will bolster income over several years.

The benefit cut was a last resort, Mr. Schacht says. "It's not for any other reason than we don't have the cash, and won't have the cash." He discourages any thought of restoring the cuts later, saying, "We're not going to be able to grow our way out of it."

Mr. Wallace asked about that as well, at a retiree meeting last fall in Naperville, Ill. He says Mr. Schacht demurred, saying only that the company would "review" conditions in the future.

"I just looked around the room -- a lot of folks there were in their 70s and 80s -- and I thought, 'In 10 years, they're going to be gone,' " Mr. Wallace says. He says he had gone to the meeting sympathetic to Lucent, willing to hear more and understand its decisions. "But I lost the illusion that they would do the right thing. The handwriting was on the wall: that we should expect more cuts. I came away from the meeting tightening my belt."

A Lesson From Wal-Mart
By Peter J. Solomon - WASHINGTON POST
March 28, 2004

Recent news reports indicate that federal regulators have refrained from pursuing monopsony antitrust action against Wal-Mart for putting the squeeze on its suppliers because of the price benefits to consumers.

If those agencies, in particular the Federal Trade Commission, want to be consistent and also act in the buying public's long-term interest, they need to be equally hands-off as those suppliers and other retailers increasingly consolidate in response to the Wal-Mart challenge. The FTC should move immediately to modernize the historical, and now outdated, definition of "markets" that it uses in evaluating corporate mergers.

As the regulators recognize, Wal-Mart's pricing practices have had a positive influence on the economy. They have helped dampen inflationary pressures and improved Americans' standard of living by lowering prices, forcing competitors to lower theirs also, and requiring efficiencies from direct suppliers of products as well as, in turn, their suppliers.

Wal-Mart is changing marketplaces -- not simply the marketplace for buying and selling goods to consumers but the corporate marketplace -- by creating mergers, acquisitions, sales and liquidations among competitive retailers and domestic manufacturers. In category after category, Wal-Mart is fast becoming the leading competitor.

Take toys. Wal-Mart does 20 percent of the retail toy business. KB Toys, the fifth-largest toy retailer, has filed for bankruptcy, citing Wal-Mart's practice of "discounting toy prices sharply."

Or food. Wal-Mart now sells 14 percent of all groceries in the United States, making it the nation's second-largest supermarket. That share is expected to reach 20 percent by 2008. Largely as a result of that growth, the public value of pure supermarket companies has declined by 50 percent over the last three years, while the general market has risen.

To meet the Wal-Mart challenge, consolidation is an imperative for both competitors and suppliers. Size can provide retailers with the product offerings and price flexibility to help keep customers from migrating to Wal-Mart. It can also allow suppliers to drive their manufacturing and logistics costs down and give them more countervailing negotiating power.

The size of Wal-Mart relative to its competitors and suppliers is so vast that the principal strategic question for every American retailer and consumer goods manufacturer is: "What's my relationship to Wal-Mart?" After a firm's management answers this question, it can decide how to answer other strategic questions. For many companies, that will mean getting to a size not attainable by internal growth, which will inevitably lead them to consolidation.

There is no reason to believe that the Wal-Mart economic juggernaut -- with $250 billion of sales (larger than the next five retailers combined) and $240 billion of market equity -- will slow down. The FTC needs to update its historical, now largely anachronistic definition of "markets" to reflect more accurately Wal-Mart's dominant position and allow others to join forces to compete.

If the FTC acts too aggressively against future mergers, there ultimately will be fewer competitors, not more, and weaker competition, not stronger. Eventually, Wal-Mart's everyday low prices may not need to be so low.

The need to change its definition of "markets" to account for Wal-Mart should have been apparent to the FTC in 1997, when it blocked the proposed merger between Staples and Office Depot (on whose board of directors I have served for 14 years). The FTC ruled that the two "category killer" superstores made up their own "relative market" despite the fact that at the time Wal-Mart alone probably sold more disposable paper office products than Staples, Office Depot and Office Max combined. Seven years later, the FTC still has not broadened its criteria in the face of the radically altered marketplace.

The last dominant retailer to have such influence was Sears, Roebuck and Co. in the late 1920s, when its explosive growth ignited a wave of consolidation in the retail business. Locally based department stores merged to create Federated Department Stores, Allied Stores and Associated Dry Goods and emerged as powerful competitors.

Wal-Mart's success is stimulating countervailing forces. In evaluating the inevitable flood of mergers to come, regulators should avoid unwittingly handicapping the emerging competition.

The writer is founder and chairman of Peter J. Solomon Co., an investment banking advisory firm.

Customer Disservice: These Days, Consumers May as Well Keep Their Complaint To Themselves
By Caroline E. Mayer
Washington Post Staff Writer - WASHINGTON POST
March 28, 2004

When Mary Culnan's three-year-old Kenmore washing machine broke in February, it took three appointments before a Sears repairman showed up. Before he even examined the machine, he blamed the problem on Culnan, telling her that she had not only used the wrong detergent but also the wrong cycle. The permanent press setting, he said, could have burned out the machine's contacts. "I have no idea what that means," said Culnan, a Boston area professor. The repairman finally traced the problem to a defective circuit board, which fixed things -- for a while.

When Scott Rozett bought a family cell phone plan last June, the salesman assured him he could make and receive calls in San Francisco at no extra charge. But in November, one month after the Idaho resident visited the Bay area, he received a $160 bill for roaming charges. When he called AT&T Wireless to protest, a customer service representative told him the company was not responsible for promises made by a salesman.

When an error in Manon Matchett's Sprint PCS bill caused her service to be disconnected in December, she spent three days trying to get it restored. She called at least twice a day, she says, and each time was transferred from one department to another as she tried to get credit for payments that had never been posted to her account. She talked to at least nine people, but "no one could make a definitive decision," said Matchett, an office manager in the District. Nor could she ever reach a manager, even in the middle of the day. "I was told no managers were available. It was pure hell," Matchett said.

Forget voice-mail hell. As Culnan, Rozett and Matchett have discovered, customer service has deteriorated into a new kind of purgatory, one in which companies pass the buck, frequently from one corporate division to another. Or customer service representatives pin the blame on other companies. Or even, worse, they fault their customers.

"Customer service is getting worse; it's not getting better," said John Tschohl, a Minneapolis customer service consultant. Certain industries are more unsatisfactory than others, he added, singling out cell phone companies as bottom-of-the-barrel bad. But, he added, customer service has gone south in all kinds of industries.

There is no historical measurement to show if and how customer service may have declined over the past few years, but consultants and academics say there is abundant anecdotal evidence.

A current snapshot of consumer satisfaction by the University of Michigan Business School reveals a large group of unhappy campers. In its most recent American Customer Satisfaction Index, the average score for the specific issue of complaint handling is 57 (out of 100) for the 40 industries tracked by the index. "No one does a particularly good job in handling complaints," said David VanAmburg, managing director of the index, which measures consumer satisfaction with goods and services. There is one exception,
though: supermarkets, which had a customer satisfaction score of 76 for the way they take care of complaints. The lowest score was recorded by local telephone firms (the index didn't measure wireless phone service).

Even more disturbing, VanAmburg said, is that a closer look at 17 industries with enough data to measure satisfaction in great detail showed that 14 -- or 82 percent -- field complaints in such a way that they are driving customers away.

But wait a minute. Wasn't it only a few years ago that Americans were seeing in practically every ad, every TV commercial that the customer was number one, that "service is our middle name?" Didn't Nordstrom, the upscale department store with a mythic service reputation, have every retailer quaking in his Ferragamos?

That was then, and this is now, say those whose job it is to pay attention to the passing parade. Service was a fine buzzword when the economy was soaring; came the downturn and customer service came close to getting squeezed out of the corporate budget. "It's a frustration," said customer service consultant Tschohl, "because corporate America is not spending any money to train its staff."

Some industries, of course, have long been notorious for frustrating complaint handling. Almost anyone who has had problems with a computer has a story about endless runarounds, with the computer company blaming the software while the software firm faults the hardware.

But that finger-pointing seems to have spread to other fields. Consider Katie Kannler's struggle to get a new stacked washer/dryer delivered to her Arlington townhouse in February. It arrived on the scheduled delivery date but was defective -- the dryer handle was missing. The delivery man promised to call her within three days to set up a new delivery date. On the fourth day, after no call, Kannler called Home Depot where she had bought the appliance. Home Depot said it had nothing to do with delivery; she needed to call GE, which delivers all the appliances Home Depot sells. GE, however, said it wasn't responsible because Kannler ordered a Maytag. But Maytag referred her back to GE.

"I spent all afternoon on the phone, and no one would tell me what was going on," said Kannler, who finally went back to Home Depot to talk to the store manager. She could only talk to a salesman, who gave her another number to call -- the local delivery firm -- before her problem was resolved.

The entire process was more disgusting than the dirty laundry that piled up during the wait, she said. "Someone needed to take responsibility and just say, 'Sorry.' That would have made me feel a lot better, but everyone kept saying, 'It's not my fault,' " Kannler said.

Home Depot spokesman Jerry Shields said that it sounded as though the company "dropped the ball, and we don't want that to happen."

A new machine was finally delivered, but it was so noisy that Kannler called in a Maytag repairman. His conclusion: It was improperly installed. But, he said, it was up to the deliveryman to reinstall it. A GE repairman showed up last weekend and fixed "something that had not been tightened down properly" during installation, GE spokeswoman Kim Freeman wrote in an e-mail. "While we feel badly that these consumers had a difficult experience -- it is the exception, not the rule," she wrote.

On Friday, Kannler reported the machine was still not working properly. A Maytag repairman has scheduled yet another visit.

Why has customer service gone downhill?

Claes Fornell, director of the University of Michigan's National Quality Research Center, which computes the customer satisfaction index, blames the "productivity trap." With companies looking to do more with less labor, or lower labor costs, customer service is one of the areas that suffer. Firms trim employees and/or training. Or they hire outside firms, often with foreign call centers, to handle consumer complaints. "It may be cheaper but [it's] not necessarily better," Fornell said.

A now-retired customer service relations manager at a multinational consumer-product company said the cost pressures on his operations were constant. "I had to do gymnastics to prove why" customer service was in the company's best interest, said the manager, who did not want to be identified because he didn't want to blemish his former employer. Unlike the way things work with other departments, the cost savings or projected sales figures for customer service were hard to prove, "so we were constantly being challenged. I had to arm-wrestle with anyone I could to get extra funds."

At some firms, the economy has required sharp cutbacks, in all departments. At Levi Strauss & Co., which lost $349 million in 2003, all departments have been asked to trim their budgets. For the customer service department, which has had a Colorado telemarketing firm answer its calls for the past six years, that has meant cutting in half its call center hours, and answering calls a little less quickly; instead of 7 seconds, it may take 20 seconds before a caller reaches an operator. The company is also trying to use the Internet to provide more answers to frequently asked questions, or offer the answers as recorded messages, in hopes of reducing its call volume by 20 percent.

Michael J. Budde, president of Advanced Data-Comm Inc., with six call centers, all in the United States, hears constantly about cost issues from his clients, particularly as they consider taking their business offshore, where costs can be cut by another 20 to 30 percent. To meet the competition, Budde's firm often agrees to try to end a call as quickly as possible. "If the average call is three and a half minutes, and you can cut it back to 3 and a quarter minutes, you can shave 10 cents off the call, which would quickly add up in a busy call center," Budde said.

But several consultants say it's not just the companies that are at fault for the decline in customer service. Like many customer service representatives, these experts blame the consumers.

"We've allowed it because we've become tolerant of mediocrity," said Ron Rosenberg, head of Quality Talk, a North Carolina training and consulting firm that sponsors driveyounuts.com, a Web site where consumers can post complaints and compliments as well as seek advice. "If you have a car that's supposed to be ready at 2 p.m. and it's not, then you need to do something to make it right," Rosenberg said. But most people don't, he said. They will sit around, usually patiently, until it's ready. "People will accept bad service and inconvenience."

If the experience is bad enough, consumers may take their business elsewhere, but most never tell a company's executives why they left. Some are venting on Internet sites such as complaints.com, planetfeedback.com and thesqueakywheel.com. But for the most part, "very few companies hear anything from consumers, so they just think they're hot stuff," Tschohl said.

Ronald C. Goodstein, a professor at Georgetown University's McDonough School of Business, said that research has shown that 40 percent of customers leave firms because of poor service. "That's the number one reason, far and away, why people switch brands -- and most never even tell a company," he said.

Goodstein faults the call centers, where employees are more often rewarded for the number of calls they handle than for whether they satisfied a customer. What's more, the employees have no stake in the company they are representing. A sure sign of problems, Goodstein said, is when a customer service agent refers to the company as "they," not "we." That recently happened to Goodstein when he called Verizon about an error on his telephone bill. Twice agents referred to Verizon as "they." He hung up and called again until he reached a representative who apologized and said, "We shouldn't have done that," Goodstein recalled.

Scott M. Broetzmann, president of the Alexandria firm Care Measurement & Consulting, has found in his customer surveys that more than half of the consumers who have complaints have to call more than three times before a problem is resolved. Broetzmann calls this "ping-ponging" -- and says the more calls a consumer has to make, the more dissatisfied he or she becomes.

Broetzmann and other customer service consultants like to use the word "empowerment" a lot. That's what they say is missing at the call centers as companies demand tighter adherence to the company-supplied script, giving employees little flexibility to solve a problem, particularly an unusual one. "These agents are handling 100 calls a day; to some degree they are desensitized to the standard complaints, and when someone deviates they are not very good at recovery," Broetzmann said.

That's what one District resident discovered when she tried to get Pepco's attention regarding her January bill for $5,909 for her one-bedroom apartment in Dupont Circle. The resident, who agreed to speak on the condition she not be named, said her bill usually runs around $60, so she figured Pepco would quickly realize there was a mistake in the bill or the meter reading. But the first Pepco agent contacted instead asked at what temperature the apartment's thermostat was set. There was also a discussion about insulation. Even when the agent acknowledged there might have been a meter-reading error, the resident was asked to make a partial payment on the bill.

Pepco spokesman Robert Dobkin said initial questions about thermostat settings and insulation are standard for complaints about high bills. Agents are supposed to use good judgment and are not required to follow a script. However, he said, "sometimes mistakes are made."

Ron Zemke, head of Performance Research Associates Inc., a Minneapolis customer service consulting firm, said that as customer service operations run on increasingly tight budgets, many agents are told, "Don't buy complaints." Translation: Don't spend money to fix problems.

And increasingly, many systems are making it difficult, if not impossible, for consumers to talk to supervisors -- a step many advocates urge consumers to take if they can't get their issues resolved.

"Agents are under tremendous pressure not to give you access to the second level," said John Goodman, head of the Arlington customer satisfaction consulting firm TARP.

"There may not be a real supervisor there; there may just be a team leader who's only slightly more equal," Goodman said. Or, firms may not want to tie up the supervisors, using them only for "people going ballistic, threatening to sue or go to the public service commission. So agents just tell customers there isn't a supervisor; in many cases it's a lie," Goodman said.

Steve Newman of Arlington tried to talk to a supervisor when he was not satisfied with the way AT&T Wireless agents dealt with his complaint that the company failed to credit his December payment, even though he had the canceled check in hand. He ended up talking to "Mary," Newman recalled. "When I asked Mary to transfer me to a supervisor, she told me that supervisors do not speak to customers."

"What do supervisors do?" Newman responded.

"Supervisors supervise," said Mary.

When Newman pressed her again, he said Mary told him: "I'm not going to tell you again -- you're not going to talk to a supervisor."

Newman asked for Mary's last name or employee number, at which point Mary hung up, Newman said.

AT&T Wireless spokesman Mark Siegel said Mary misspoke. "You always have recourse to talk to a supervisor."

As for Rozett, Siegel said the customer service agent misspoke when he said the company was not responsible for the salesman's promises. "That representative was in error," said Siegel. Rozett is now considering a class-action lawsuit against AT&T.

Meanwhile, Sprint PCS spokeswoman Jennifer Walsh said Matchett's treatment is not what the company strives for. Its goal, she said, is "one and done" -- to get problems resolved in a single call.

Culnan, the woman with the Kenmore washer, heard from Sears two weeks ago, after The Washington Post called the company to ask about her experience. "The man agreed they need to do better on many fronts," Culnan said.

That phone call took place before her machine broke again. The repairman came on Thursday and told her "the real problem is the timer." Culnan says she feels as though she's in the movie "Groundhog Day," in which Bill Murray's character wakes up to the same terrible day over and over again. For, once again, she's waiting for the repairman, this time to install another new part.

The Most Underrated CEO Ever
By Hank Gilman - FORTUNE
April 5, 2004 edition
(Mar. 28, 04)

The 2004 Fortune 500

The legendary Sam Walton got the credit, but it was David Glass who turned Wal-Mart into the world's largest company. In an exclusive interview, Glass talks about the early days, the boom years, and how China will keep the mega-merchant going strong.

Though Sam Walton died more than a decade ago, his spirit and legacy still loom large, both at the company he founded and in the popular imagination. But lost in the Wal-Mart lore is one of the great CEO success stories of recent times: the 12-year run of former chief David Glass.

Compared with his larger-than-life friend and mentor, Glass is low-key, without any outward evidence of ego or of the charisma of his predecessor. But what he has achieved blows away anything taught in Harvard case studies.

During Glass's tenure�from February 1988 to January 2000�the retailer's sales rose more than tenfold, to $165 billion; earnings soared to $5.4 billion from $628 million, and its stock price, adjusted for splits, moved from $3.42 a share to $55. The number of stores more than tripled to almost 4,000, and the number of employees rose to 1.1 million from 183,000.

Glass also spearheaded Wal-Mart's overseas expansion and launched the supercenter concept, the massive merchandise-grocery combos that fueled Wal-Mart's growth at a time Wall Street had doubts about the company's long-term prospects and even about Glass himself.

For the 50th issue of the FORTUNE 500, deputy managing editor Hank Gilman met with Glass, 68, in his modest, ten-by-ten-foot office at the company's Bentonville, Ark., headquarters. Though he now owns the Kansas City Royals baseball team, Glass is still active at the 42-year-old chain, inspecting stores (he checked out a local Wal-Mart garden department during our visit), serving as chairman of the executive committee and an advisor to CEO Lee Scott and other members of the management team.

In the wide-ranging interview, Glass discussed everything from his early days at Wal-Mart to becoming a target of critics and expansion into China. Edited excerpts:

A few years back FORTUNE's Carol Loomis described you as "one of the great unsung achievers of American business." Does that sum it up pretty well?

Whatever has happened here at Wal-Mart, which is what I'm sure people are basing those opinions on, has been done by all the people here. It's a joint effort. It's all of us together, and I just happened to be at the right place at the right time. That's it.

A lot of outsiders assume it must have been hard to follow Sam Walton. How did you manage your career in the shadow of a charismatic leader?

Most people have enough ego that they want to distinguish themselves from a charismatic leader, and that's what creates the problem. I've never had much ego, and I'm not worried about things like that. I'm more interested in the satisfaction that we are doing the right things and we're getting it done, and being a part of it. I like being part of a winning team. I don't have to be the winning team.

Let's talk about the early days. [Glass was hired in 1976.] What was so special about Sam? The company?

This company was completely different from any I had been around. Mostly because of Sam and the charisma and the drive he had. He had this desire to improve that I've not seen. I can count on one hand the people I've known who got up every morning and really tried to improve something�either in their business or in their lives.

Sam worked at it seven days a week. The company was more intense than any I'd been around. We had to be. We were 4%, 5% the size of Kmart. Sam was doing some things, even when I came, that were foreign to me. He shared total financial information with everyone in every store, in every community.

Sam felt we were all partners, and he wanted to share everything. And he was absolutely right. He believed that everyone should be an entrepreneur. If you ran the toy department in a store in Harrison, Ark., you'd have all your financial information. So you're just like the toy entrepreneur of Harrison: You know what your sales are, what your margins are, what your inventory is.

And then we had another philosophy where we had grass-roots meetings in every store. And there was an absolute belief that the best ideas ever at Wal-Mart came from the bottom up. Ideas would come up from those meetings and be implemented companywide. The door greeter, for example, was the idea of a hourly associate in Louisiana.

Lost in the lore of Sam Walton is that this company was doing things operationally that gave it an enormous advantage then and now. For example, you were among the first to buy directly from manufacturers and pass on the savings. How did that evolve?

Discount chains like Kmart and Korvette bought from wholesalers, and that was a big benefit [to the merchant]. The wholesaler came in, wrote the order for you, and when the merchandise arrived, he'd come in and put it on the shelves for you, and that was great. We never considered that here because there were no wholesalers available for us. So from the beginning we had to be self-sufficient. I wish that had been a conscious decision because it would have been brilliant.

Speaking of those competitors�did you see the flaws that you would later exploit? I know you shared information with other small retailers.

We had a research group in which six of the regional discount chains would come together. One of the first meetings I attended was in October 1976 in Arkansas. You had all the senior officers, and they'd go out to your stores and critique them. There were a few of us who spent more time in our competitors' stores than they did�looking at what they were doing, copying, and trying to improve on everything we copied.

Kmart was better than any of us. But it did so well that one of its executives said in the latter part of the '70s that the only way they were vulnerable was if they changed from what they were doing. So they just decreed that no one could change anything. They sat for about five years running stores, but did not change a thing. All of us copied everything they were doing and improved upon it. [Kmart] woke up five years down the road, looked around, and saw there were retailers better than they were. They just never caught up.

If you could name a few decisions that you and Sam made over the years that were crucial to the company's growth, what would they be?

The way we involve the people, because that creates the culture. If you're talking about the strategy and how you operate the stores�the early commitment to technology has to be a major driver in the success of this business. With growth that doubles your size every other year, you can't control it without technology. Distribution and logistics had to be another area, because we have the most efficient distribution logistics system. And we do things others can't do. And, then, perhaps the supercenter�it's probably the most powerful retail vehicle on the street today.

The story is that Sam had to be persuaded to invest heavily in technology. Did you do the persuading?

I did. Sam wasn't sure about technology. He used to take computer reports and copy them all by hand onto his spreadsheets. Retail is about zillions of transactions. And because we were in small towns, we had to know a lot more about what was selling. And you could only call each store so many times per day. But then came satellite technology in 1986. It really turned things loose for us because you could talk to all your stores at the same time, as many times as you wanted. So we tied everything together�stores and vendors�with one big network.

One of the greatest management tools ever has to be Wal-Mart's Saturday-morning meeting, where companywide decisions can be executed in an instant. How does it work?

The idea of it is very simple. Nothing very constructive happens in the office. Everybody else had gone to regional offices�Sears, Kmart, everybody�but we decided to send everybody from Bentonville out to the stores Monday through Thursday and bring them back Thursday night. On Friday morning we'd have our merchandise meetings. But on Saturday morning we'd have the sales for the week. And we'd have all the other information from people who'd been out in the field. They're telling us what the competitors are doing, and we get reports from people in the regions who had been traveling through the week. So we decide then what corrective action we want to take. And before noon on Saturday the regional manager was required to be hooked up by phone with all his district managers, giving them direction as to what we were going to do or change. By noon on Saturday we had all our corrections in place. Our competitors for the most part got their sales results on Monday for the week prior. Now, they're ten days behind, and we've already made the corrections.

The supercenter [there are 1,504 now] provided a massive boost in growth. I remember an early experiment that didn't quite go the way you wanted. I've always been a proponent of one-stop shopping. And I had done this before when I was with a grocery chain [before Wal-Mart]. It made a lot of profit, but we didn't roll it out because it was a little ahead of its time. But by the mid-1980s I knew the time was right. I went to the opening in Garland, Texas, and you must have had 50,000 people show up that day. But [the original stores] were overdesigned and large, and they weren't efficient. Too much of an investment up front. So we scaled them back.

Sam's Club, which you oversaw, was another spinoff of the discount store. What was behind that?

When we hit the '80s, we were well over a billion dollars and rolling. The investment community, which influences all of us, whether we acknowledge it or not, got to saying, 'Everybody has to have an alternate strategy. What are you going to do when you run out of locations for discount stores?' We'd gotten to know Sol Price [of Price Club, now called Costco], so I had the responsibility of creating Sam's. It complemented the Wal-Mart store: We can put them side by side; they get different customers. Sam's was also more of a metro strategy than what we were doing in Wal-Mart.

There was a time, around 1995-96, when some stock analysts started to doubt the company. The supercenters were low-margin, they said. Your 100th quarter in fiscal 1995 was, in fact, your first down-quarter ever. What happened?

We just had too much on our plate at the time. But I became convinced that if we were going to grow this thing in the future, we had to have an international operation. So we bought Woolworth in Canada. And we had a joint venture going in Mexico. We also bought Pace [wholesale clubs] from Kmart, and we were doing several other things. We were managing all of it, but when you were fighting the battle on multiple fronts, you lost some of your focus. But we turned it around quickly. We got through that in about six months.

Did Sam Walton's passing in 1992 affect the company and the way you ran it?

I had an advantage. Sam and I had been together long enough and thought enough alike that people were very accustomed to both of us. They missed him, but they weren't uncomfortable with me. And because he and I had pretty much agreed on the basic philosophy of the company and where we were headed, I didn't need to make big changes. I think maybe one of the best things we did is that rather than creating something different from Sam, we just took his basic philosophy and continued to use it. And today you can't go to meetings at Wal-Mart where you don't hear someone talking about what Sam felt about this or how his thoughts were about that or what he did.

One thing that changed after you became CEO�and after Sam passed on�was the public's perception of the company. Wal-Mart went from being the plucky underdog to becoming the neighborhood bully. The Dateline NBC piece in late 1992 was the turning point, when they accused Wal-Mart of, among other things, selling foreign goods under the made in the u.s.a. banner.

Until Sam died, we were kind of everybody's hero. We were pretty naive. We ignored PR, and we ignored government relations, and we figured that if we ran our business, all that would take care of itself. And then the Dateline thing came along, and that really changed things. We got blindsided. Jane Pauley had written a letter to Sam before he died saying, "Hey, look, the country's just a big mess, and we need a feel-good story of some kind. Would you consider doing this?" And Sam didn't much want to do it, and he wasn't in any shape to do it. [After Walton died] our PR guy convinced me that I should go ahead and do it�that Sam was gone, and it would be good for the associates. So I did the interview, and they asked me questions about things I knew nothing about. The interview itself wasn't nearly as bad as the way they edited it. I was pretty irritated for a little bit, but it didn't make any difference at all to the customers. In fact, business went up.

How does the company handle those questions now?

I think we've begun to realize now that it comes with the territory. If you look at the whole thing, some of it we bring on ourselves. For example, we just had a wage-and-hour lawsuit [in Oregon]. The way it wound up, it was just a fraction of what they [alleged]. But you could find that somebody wasn't given a lunch hour, or something like that. If you have a sex-discrimination suit, you could probably�in 3,000 stores�find a woman who was passed over for promotion who might have had a case to be promoted. There's no way you're ever going to get it all right all the time. If your intentions are to do it all right, all the time, then you can live with it. But then you get to the point where you start having to defend yourself and push back on some of the stuff�the things that are absolutely not true. If you just let [the media] put them out there, you run the risk of people accepting it as truth.

Part of your legacy is your successor Lee Scott and the aggressive expansion overseas. Let's talk about Lee first. What did you see in him back in 1979?

The first thing I saw in him was "capacity"�how much you can grow in the job. That was one of my biggest challenges because you double in size every year, and you outgrow people constantly. You double the size of the job, and they can't do it. They're good people, so you find another place to put them and put someone else in their slot. Lee had a lot of capacity. He was also a generalist, and in those days all of us [had to be] generalists. Did you hear the story about how I met Lee? He came in demanding that we pay a $9,000 [freight] bill, which I told him I wouldn't pay. We didn't owe that doggone bill. But I was impressed that he handled himself very well, was sincere, and was committed to doing the right job for his company. So I asked him before he left the office if he'd consider working for Wal-Mart. He told me, "Why would I work for a company that can't pay a $9,000 bill?" I didn't have a good answer.

And I'm told he still feels he's owed the money. But he did eventually join the company. When did you know he had the stuff to run Wal-Mart?

In the mid-1990s I put him in charge of merchandising. We always had this cross-pollination thing, and I took him out of transportation. He did an outstanding job, and I knew then that he would make an exceptional CEO. Lee also had the benefit of being here in the early days. He saw it go together a brick at a time. You don't understand how large that is.

By the time Lee took the helm, you had already expanded Wal-Mart internationally. You have said that the big challenge for American business is doing business globally. How so?

Other countries are much more sophisticated in doing business worldwide than Americans are. We're pretty spoiled and expect everyone to speak our language. We don't travel as easily as other people do. So if it weren't for the fact that we have all this money to invest, we would be at a disadvantage. And I think Americans are naive about how to go about it.

Even Wal-Mart has had problems doing business in places like Germany. Why?

Well, the laws make it difficult�there are laws regulating store hours for example. But for the most part, all our problems in Germany were self-inflicted. We bought one company, which was successful for us but too small. So we bought a company that wasn't a good company, forced a combination of the two, and then moved the home office. We just made one mistake after another and are recovering from it now.

China seems to be a different story. Why is it such a great market for you? I was just there, and in the last ten years we've built a great organization. They are as excited about their business as anywhere I've ever been in Wal-Mart. They've embraced Western culture as they've gotten exposed to it. But here you have a country of 1.3 billion people and there's not a lot of organized competition. There are a lot more people now in China who have money. Their workforce is extremely bright. Over time, if China stays the course, it will become a major world power. And in that case, we're in on the ground floor. We have 35 stores now, and I think the government is going to let us ramp up.

What's China's advantage over, say, Europe?

If you look at Europe, it's difficult to green-field or grow a company of much size. But you can build an enormous-sized company in China if you make some fairly aggressive assumptions about what's going to happen to it. It's the one place in the world where you could replicate Wal-Mart's success in the U.S.

Costco's Dilemma: Be Kind To Its Workers,
or Wall Street?
By Ann Zimmerman - Staff Reporter - The Wall Street Journal
March 26, 2004

When it comes to workers, companies can be accused of not paying enough -- or paying too much.

Wal-Mart Stores Inc.'s parsimonious approach to employee compensation has made the world's largest retailer a frequent target of labor unions and even Democratic presidential candidate John Kerry, who has accused the Bentonville, Ark., chain of failing to offer its employees affordable health-care coverage.

In contrast, rival Costco Wholesale Corp. often is held up as a retailer that does it right, paying well and offering generous benefits.

But Costco's kind-hearted philosophy toward its 100,000 cashiers, shelf-stockers and other workers is drawing criticism from Wall Street. Some analysts and investors contend that the Issaquah, Wash., warehouse-club operator actually is too good to employees, with Costco shareholders suffering as a result.

"From the perspective of investors, Costco's benefits are overly generous," says Bill Dreher, retailing analyst with Deutsche Bank Securities Inc. "Public companies need to care for shareholders first. Costco runs its business like it is a private company."

Costco appears to pay a penalty for its largesse to workers. The company's shares trade at about 20 times projected per-share earnings for 2004, compared with about 24 for Wal-Mart. Mr. Dreher says the unusually high wages and benefits contribute to investor concerns that profit margins at Costco aren't as high as they should be.

Costco, which opened its first store in 1983 and now has 432 locations, disputes the contention that it takes care of workers at the expense of investors. "The last thing I want people to believe is that I don't care about the shareholder," says Jim Sinegal, Costco's president and chief executive since 1993, who owns about 3.2 million Costco shares valued at $118 million based on yesterday's price of $36.96, up 52 cents, in 4 p.m. Nasdaq Stock Market trading. "But I happen to believe that in order to reward the shareholder in the long term, you have to please your customers and workers."

Worker pay, benefits and job quality have been hot topics in the retail industry. While employees in many fields are worried about generally stagnant job growth and spiraling health-care costs, already-meager retail wages also are threatened by retail-pricing pressure, partly fueled by Wal-Mart's growing dominance in toys, electronics, groceries and other categories. Grocery workers in California recently waged a brutal four-month strike to protest health-care cuts that large supermarket chains were imposing to stay competitive with Wal-Mart.

Hourly retail pay grew only 1% in the 12 months ended last month, according to the Bureau of Labor Statistics, compared with a 1.7% gain for private-sector jobs overall.

Wal-Mart last year added 99,000 jobs in the U.S., making it the country's biggest job creator, and nearly all those positions pay by the hour. And since Costco and Wal-Mart's larger Sam's Club warehouse chain increasingly are competing head-to-head on everything from turkeys to tires, the companies have to pay close attention to each other.

Wal-Mart spokeswoman Mona Williams says the company's "entire package of wages, benefits and career opportunities is at least as good as that offered by Costco," including bonuses, company-paid life insurance and a discounted Wal-Mart stock-purchase program. Sam's Club has a "cost advantage" over Costco, she adds, because it can "leverage efficiencies" from Wal-Mart in areas such as merchandise sourcing and logistics, keeping basic membership fees a third cheaper than Costco's.

Costco has won a reputation for having the best benefits in retail, a sector where labor costs account for about 80% of a typical company's total expenses. Costco pays starting employees at least $10 an hour, and with regular raises a full-time hourly worker can make $40,000 annually within 3� years. Cashiers are paid $10.50 to $17.50 an hour.

Wal-Mart doesn't disclose its wage rates, since they vary by location. According to a recent study funded by Wal-Mart, cashiers at its Supercenters in Las Vegas were paid $7.65 to $11.45 an hour. Supercenters are Wal-Mart's discount grocery and general-merchandise stores.

Costco also pays 92% of its employees' health-insurance premiums, much higher than the 80% average at large U.S. companies. Wal-Mart pays two-thirds of health-benefit costs for its workers. Costco's health plan offers a broader range of care than Wal-Mart's does, and part-time Costco workers qualify for coverage in six months, compared with two years for Wal-Mart part-timers.

"From day one, we've run the company with the philosophy that if we pay better than average, provide a salary people can live on, have a positive environment and good benefits, we'll be able to hire better people, they'll stay longer and be more efficient," says Richard Galanti, Costco's chief financial officer.

Costco has several advantages over Wal-Mart that help it extend such unusually generous pay and benefits. Costco has a more-upscale reputation than Sam's Club, helping it attract shoppers with higher incomes. The average Costco store rings up $115 million in annual sales, almost double the Sam's Club average. And Costco, which charges $45 to $100 for yearly memberships, doesn't spend any money on advertising.

Costco says its higher pay boosts loyalty: Its employee turnover rate is 24% a year. Wal-Mart's overall employee turnover rate is 50%, about in line with the retail-industry average. Wal-Mart doesn't break out turnover rates at Sam's Club. High turnover creates added expense for retailers because new workers have to be trained and are not as efficient.

Some critics still aren't convinced that lower turnover is worth what it costs Costco in higher wages and benefits. "Their benefits are amazing, but shareholders get frustrated from a stock perspective," says Emme Kozloff, a retail analyst at Sanford C. Bernstein LLC.

Surging health-care costs have forced Costco to make more aggressive moves to control expenses. Moreover, Costco last year raised employees' contribution to about 8% of their health-care costs, up from 4.5%. It was the company's first rise in employee health premiums in eight years. Mr. Sinegal, the Costco CEO, said the company held off from boosting premiums for as long it could, and didn't give in until after it had lowered its earnings forecast twice last year.

Costco also is looking to employees for ideas that could improve efficiency. One suggestion that Costco implemented at stores was to install pneumatic tubes at check-out areas to speed the movement of cash to a store's back office.

Mr. Galanti says company officials want to boost Costco's pretax income closer to 4% of sales, compared with 3% now and 5% at Wal-Mart, without cutting pay. In its fiscal second quarter ended Feb. 15, Costco's net income rose 25% to $226.8 million, or 48 cents a share. Revenue rose 14% to $11.55 billion.

Some longtime Costco fans say the company should stick to its generous wages and benefits. "Happy employees make for happy customers, which in the long run is ultimately reflected in the share price," says John Bowen, an investment manager in Coronado, Calif., who has held Costco shares for eight years.

Comparing some workplace statistics from Costco and Wal-Mart

	Costco	Wal-Mart
Employees covered by company health insurance	82%	48%
Insurance-enrollment waiting periods (Full-time)	6 mos.	2 yrs.
Insurance-enrollment waiting periods (Part-time)	6 mos.	2 yrs.
Portion of health-care premium paid by company	92%	66.60%
Employees who work part-time	43%	30%
Annual worker turnover rate	24%	50%

Wal-Mart Opens for Business In Tough Market: Washington
By Jeanne Cummings - Staff Reporter - The Wall Street Journal
March 24, 2004

Famously Apolitical Retailer Plunges Into Lobbying
and Becomes Top Donor

A Big Defeat on Banking

WASHINGTON -- China's entry into the World Trade Organization was essentially a done deal in the late 1990s when Wal-Mart Stores Inc. executives discovered a problem: U.S. negotiators had agreed to a 30-store limit on foreign retailers operating in China, an insufficient figure for the ambitious Arkansas retailer.

Worse, executives at Wal-Mart headquarters in Bentonville, Ark., realized they couldn't do anything about it because they didn't know the right people in Washington. The company spent literally nothing on lobbying. "We weren't there," says Wal-Mart Senior Vice President Jay Allen, throwing up his hands.

The incident brought home a lesson that had been nagging at Wal-Mart for years. After decades of explosive growth, the retailer couldn't continue to expand its empire without abandoning founder Sam Walton's policy of shunning politics. So, in 1998, the retailer hired its first lobbyist -- a retired Air Force lieutenant general -- and set out to transform itself from a company without a Washington presence to one that could bend public policy to suit its business needs.

As it tried to flex its political muscles, Wal-Mart got a painful education in the ways of Washington. It has endured setbacks, most recently at the hands of community bankers who dashed Wal-Mart's plans to expand into lending. Still, the retailer is beginning to notch significant wins on global-trade issues and shows signs it may emerge as a political powerhouse. Since the WTO deal was struck, Wal-Mart has negotiated with Chinese government officials to increase its store count there to 35, with plans for more. It is also building up a state and local government lobbying shop in the U.S. assigned to clear any roadblocks to new domestic store openings.

In Washington, Wal-Mart has five lobbyists on its payroll, and a bench of hired guns led by Thomas Hale Boggs Jr., one of Capitol Hill's best-known lawyer-lobbyists. The company's political action committee was the biggest corporate donor to federal parties and candidates in 2003, with more than $1 million in contributions -- up from $182,000 during the 1997-98 election cycle, according to Federal Election Commission disclosure reports. Wal-Mart's PAC ranks as the second-largest in Washington, according to the Center for Responsive Politics, a nonpartisan organization that tracks political giving.

"It's hard to go to a fund-raiser in Washington for a member of the [House] Financial Services Committee without running into one or two or three Wal-Mart lobbyists," says Ron Ence, a lobbyist for community bankers.

Unlike most corporations, which contribute to both parties in rough proportion to Congress's partisan split, about 85% of Wal-Mart's checks go to Republicans. And recently Mr. Allen was named a "Pioneer" by the Bush campaign, meaning he has raised at least $100,000 by getting friends and colleagues to make contributions of up to $2,000 each.

The partisan giving is a nod to Wal-Mart's hostile relationship with organized labor and its dependence on free-trade agreements. Wal-Mart defends its lopsided support, saying it's supporting pro-business candidates. But sometimes it can get personal. Several Democratic presidential candidates -- including presumed nominee Sen. John Kerry -- have criticized Wal-Mart's labor practices. At the company's managers meeting in Kansas City in January, Wal-Mart executives showed footage of former Democratic presidential candidates Howard Dean and Richard Gephardt criticizing the company's health benefits. Managers booed and hissed.

The footage, says Mr. Allen, shows that Wal-Mart "had become an issue in the presidential campaign, and we needed to engage at this level" by donating to candidates who share the company's priorities.

Wal-Mart's pivot toward politics coincided with its rise to become the nation's largest retailer, one with enough market clout to drive down consumer prices, bust through trade barriers and force competitors to demand cost-saving concessions from labor unions.

Legal Challenges

But its growth introduced challenges that couldn't be solved without government help. The company, once celebrated as an entrepreneurial success story, typified by the late Mr. Walton's down-home style, found itself fighting off legal challenges from unions, workers' lawyers and federal investigators.

Throughout the same period, friendly lawmakers warned Wal-Mart executives to guard against the fate that had befallen Microsoft Corp. The technology giant's courtship of Washington didn't start until the Justice Department had filed an antitrust lawsuit -- leading to years of costly litigation and damage control. So Wal-Mart executives directed Mr. Allen to hire the company's first full-time lobbyist. The trick: finding someone who would remain true to Wal-Mart's practical, no-frills culture, says Mr. Allen.

Norm Lezy was an Air Force lieutenant general with Pentagon lobbying experience when he got a call from Wal-Mart. An old Air Force buddy working for the retailer recommended him. Headed for retirement, Mr. Lezy says he wasn't interested but agreed to be interviewed to spare his friend embarrassment.

"What's the first thing you'd do if you got the job?" Mr. Allen asked him. Mr. Lezy replied: "I'd like to drive around with a Wal-Mart truck driver." Bentonville executives were sold. They put on a hard press, and Mr. Lezy was won over.

Not long after, a man with silvery, shoulder-length hair and a striking resemblance to Buffalo Bill showed up at Mr. Lezy's cubicle in Bentonville. "I wanted you to see me before you got into my rig," said Carl Mayes, then a 17-year Wal-Mart truck driver, according to Mr. Lezy.

The next morning, the two climbed into Mr. Mayes's rig to deliver 80,000 pounds of Wal Mart's Ol' Roy Dog Food to six stores in four states. Over the miles, Mr. Lezy learned about the company's rise, old timers' reverence for Mr. Walton -- known as "Mr. Sam" -- and how drivers serve as executives' eyes and ears by talking to customers.

Mr. Lezy headed to Washington in March 1999, and set up shop in a small borrowed office at the Retail Industry Leaders Association. At the time, lawmakers were hammering out a complex bill on banking, a business Wal-Mart was keen to explore. Customers wanted the convenience of in-store banks, and company officials figured Wal-Mart could save millions of dollars in credit-card transaction fees alone. Three months after Mr. Lezy arrived, Bentonville executives asked federal regulators for permission to buy a small thrift in Broken Arrow, Okla. They saw it as the first step in creating a national banking chain in their stories.

Small bankers pleaded with Congress to spare them the fate of mom-and-pop hardware and variety stores, which, they said, were strangled by Wal-Mart. "It totally moved the ball into our court," recalls Bill McQuillan, president and chief executive of City National Bank of Greeley, Neb., who testified on behalf of the community bankers.

Lawmakers inserted a clause in the banking bill barring retailers from buying thrifts. It was retroactive to May 4, 1999, and killed Wal-Mart's thrift application. (Another blow came this month, when the House passed a bill that would make it hard for a retailer to expand into banking through the purchase of an industrial-loan company.)

Mr. Lezy figured he was about to be fired when he got a call from David Glass, then Wal-Mart's chief executive. But Mr. Glass gave Mr. Lezy a pep talk and said he was committed to Wal-Mart's Washington experiment.

Congressional allies rushed to offer advice, including Trent Lott, then Senate majority leader. Mr. Lott arrived in Bentonville in late 1999 with a simple message, according to a congressman who attended the meeting: Increase your profile and open your wallet.

So Wal-Mart executives set out to beef up their political action committee
-- an account made up of voluntary employee contributions that executives use to make political donations. (Federal law prohibits direct corporate contributions to party committees and candidates.) At an August 2000 meeting attended by thousands of Wal-Mart managers, buckets were passed around for donations, as well as forms authorizing automatic paycheck deductions for the PAC.

For some employees, the pressure to contribute became a point of contention. "With my district manager sitting 3 inches over my shoulder, you think I didn't sign up?" recalls Jon Lehman, a Wal-Mart manager who quit in November 2001 and is now working with union organizers to enlist Wal-Mart workers. Current Wal-Mart employees, who asked not to be named, also report feeling pressured to give to the PAC.

Mr. Allen says Wal-Mart doesn't force workers to give to a PAC; such an action would be illegal. "I regret" that employees felt pressured, says Mr. Allen. "That is not the intent at all."

Wal-Mart managers boosted PAC contributions to $703,500 in the 1999-2000 election cycle from $230,800 in 1997-98. When Sen. Lott issued a call for help for Republican candidates in the late summer of 2002, Wal-Mart's PAC donated $50,000 in September and $101,000 a month later -- mostly to Republicans. "They came through, and people knew it," recalls a former Republican senatorial aide.

Product Placement

The support brought its own rewards -- including free publicity. In November 2002 the Bush administration proposed the removal of all tariffs on manufactured goods imported to the U.S. by 2015. U.S. Trade Representative Robert Zoellick stood on a stage before the news media with two identical baskets of baby goods, prominently marked as having come from Wal-Mart. The one without tariffs was $32 cheaper.

Wal-Mart's PAC today has swelled to nearly $1.5 million, according to its March 2004 report. Nearly 19% of the company's more than 60,000 domestic managers contribute, most through payroll deductions that average $8.60 a month, says Mr. Allen.

Labor problems have deepened Wal-Mart's involvement in politics. In the late 1990s, the United Food and Commercial Workers International Union stepped up efforts to organize Wal-Mart workers. It helped employees file a series of complaints about the company's overtime, health-care and other policies with the National Labor Relations Board. Dozens of class-action lawsuits were filed on behalf of workers.

Wal-Mart responded by pouring millions of dollars into the U.S. Chamber of Commerce's Institute for Legal Reform, which presses for limits on awards in class-action suits. It also backed then-Sen. Tim Hutchinson, an Arkansas Republican, when he introduced legislation to bar unions from soliciting outside retail stores. Wal-Mart says the legislation was intended to clear room for charitable groups making solicitations, not to restrict labor activity. But labor's congressional allies decried the "Wal-Mart" bill, which was soundly defeated. In the fall of 2002, labor-backed Democrat Mark L. Pryor defeated Mr. Hutchinson.

The company's labor problems reached a peak late last year, when Immigration and Customs Enforcement agents raided several stores, rounding up more than 200 undocumented workers hired by Wal-Mart subcontractors to clean the stores. Wal-Mart hired Martin J. Weinstein, a former federal prosecutor, to conduct an internal audit. Mr. Lezy took advantage of Wal-Mart's improved access in Washington, dispatching a lobbyist to Congress and the White House to describe Mr. Weinstein's conclusions, which laid the blame on the subcontractors. Wal-Mart also urged policy makers to make immigration reform a bigger part of the national debate.

A grand jury is still investigating the immigration case.

In 2003, Mr. Lezy began paving the way for his retirement. His heir
apparent: Erik Winborn, a former Air Force colonel he'd met at the Pentagon and hired at Wal-Mart in 2000. At Mr. Lezy's urging, Mr. Winborn took his own trip with a Wal-Mart driver -- and wound up stuck on the highway in a blizzard.

Mr. Winborn's emergence as Wal-Mart's chief lobbyist wasn't much easier than Mr. Lezy's. During last year's debate over legislation to add a prescription-drug benefit to Medicare, Congress wanted to encourage seniors to use mail-order prescriptions to control costs. Wal-Mart saw mail orders as a threat to its in-store pharmacy business, and mobilized thousands of pharmacists to deluge Capitol Hill with letters and telephone calls urging Congress to restrict mail-order prescriptions for Medicare patients.

Lawmakers rejected Wal-Mart's appeal and passed the bill. But they also offered Wal-Mart an olive branch, directing the Federal Trade Commission to study potential conflicts of interest within mail-order companies.

At the same time, Wal-Mart was winning some big global battles. In 2002, the retailer hired Angela Marshall Hofmann, a Democratic trade expert, who promptly used her connections to get Wal-Mart a seat on a Department of Commerce advisory committee on the retail industry.

As a committee member, Ms. Hofmann last September traveled to Cancun, Mexico, to track talks on the Central American Free Trade Agreement, which is designed to boost trade by eliminating tariffs between the U.S. and Guatemala, El Salvador, Costa Rica, Nicaragua and Honduras. Many jeans, polo shirts, and other clothing sold in the U.S. are stitched together in the region.

In the CAFTA agreement, Ms. Hofmann and her allies won language allowing Central American manufacturers to use some less-expensive cloth, including denim, from Mexico. That means those manufacturers can send duty-free products into the U.S. market even though they are produced in part with Mexican materials, which would otherwise have been excluded from the pact. U.S. textile mills will lose business, and retailers such as Wal-Mart will get cheaper wholesale products to sell.

Over lunch in a cafeteria-style restaurant a good distance from Washington's K Street lobbying corridor, Mr. Allen feels Wal-Mart is making progress but still sees room for improvement. He'd like to extend the company's network in Washington's political and regulatory circles, including leveling out its lopsided campaign contributions, so the next time its "enemies and critics" come calling, the company has even more allies.

Sears' Grand Opening
By Becky Yerak, Tribune staff reporter - Chicago Tribune
March 24, 2004

Retailer seeks to revitalize sales with rollout of off-mall store format

Stocking everything from Cracker Jack to Craftsman tools, the second Sears Grand store opens Wednesday in Gurnee and aims to improve upon the new retail format the company launched last fall in Utah.

A Citibank branch, a bigger grocery section and a mattress department are among the new offerings in the 201,000-square-foot store, whose big-box neighbors include Wal-Mart, Target and Kohl's.

Sears, Roebuck and Co. will have five such stores by the end of 2005, and with sales shriveling in recent years at its nearly 900 mall-based department stores, the Hoffman Estates-based retailer hopes the concept will breathe new life into its business.

But some retail experts think it might be too little too late, and suggest that instead of trying to get a new idea off the ground, Sears would be better off focusing its energy on luring disaffected shoppers back into its existing mall-based stores. They point out that five Grand stores are but a speck on the map, with rivals like Home Depot Inc. opening nearly 200 stores a year.

"What is one or two or five Sears Grand stores? It's certifiable: Food, consumables--it takes gargantuan amounts of management time to do a new format," said Howard Davidowitz, chairman of New York-based retail consulting firm Davidowitz & Associates. "Sears has one chance to survive: Make its core business work because its core business is so big."

And Sears has said profits at the first Sears Grand haven't been up to snuff. In fact, some retail observers think Sears Grand might end up like the Great Indoors, a Sears home-improvement chain well-received by consumers but unprofitable to the point that Sears scaled back its expansion.

But the company is sanguine about its rollout of Sears Grand, which by the company's estimation has 80 percent overlap with its department stores.

"It's the Sears you know and the Sears you don't know," Teresa Byrd, general merchandise manager for Sears' off-mall stores, said Tuesday, echoing an advertising pitch for the store.

"It's a different mix of products," she said, conceding that many of the new categories don't have fat profit margins. But "we're very confident we'll be able to make our margin goals."

Byrd estimated that about one-third of the Gurnee store's space is dedicated to such new product lines as health and beauty, household cleaning and grocery items, including milk, frozen foods and soda.

"If you were to add in toys and seasonal products that we don't carry in the other stores, it's a higher number than" 7,000 square feet, said Byrd.

A tough retail landscape

Sears has been among the department store chains ground underfoot in a retail landscape that increasingly favors off-mall merchants. Typically, Sears Grand stores will be freestanding, although, technically, the new Sears Grand is attached to the Gurnee Mills mall.

Asked about the chance that all full-line stores will be converted to Sears Grands, spokeswoman Kathleen Connolly said such a conversion is not in the cards, particularly since business is looking up at the traditional mall-based stores.

"This is a way for us to grow off-mall," Connolly said.

But Sears' traditional stores might borrow ideas from Sears Grand. Take the latter's price identifier.

Dotting the store are scanners enabling shoppers to check the price of unmarked goods. Part of the system includes a telephone that consumers may use to summon help in a particular department. If an employee doesn't show up in 30 seconds, a second page is sounded--louder, and with more feeling.

"Then you can see them flock. No one wants that second page," Byrd said. "We're averaging responding to a customer in less than 45 seconds."

Said Connolly: "This is the first example of something we did in Grand and then moved into the full-line stores."

The Gurnee store lacks the nursery that the 210,000-square-foot Utah store has, and that store also stocks dresses, while the apparel in the Gurnee store is more casual. But the Gurnee store has a bank and a larger food department.

Food products also sold

"We had such success with it [food] that we realized we needed to give it a little more space," Byrd said, noting that soda, milk and snacks are among the products doing "extremely well."

"We want to keep customers from having to stop at the grocery on their way home, so we provide the things that can get them through the evening meal and take care of the kids' lunches the next day, replace some paper products, dog food," she said.

Unlike the full-line stores, Sears Grand stores also have one-hour photo service, shopping carts with coffee-cup holders and a year-round toy department.

Sears Grand stores also have an expanded assortment of baby accessories, and the baby department is stocked with 99-cent animal crackers, a product traditional Sears stores don't carry.

"It's to let them know we have snacks," Byrd said.

Sears Looks to 'Grand' New Start
By Doris Hajewski - Milwaukee Journal Sentinel
March 23, 2004

Retailer launches superstore effort

Gurnee, Ill. - Sears Grand opens today at Gurnee Mills, and the massive Craftsman-meets-cornflakes concept store may represent the future for the venerable retail chain.

With most of its stores at regional malls and suffering from sagging sales, Sears is going off-mall in an effort to compete with mass retailers such as Target and Wal-Mart, as well as Menomonee Falls-based Kohl's department stores.

The first Sears Grand store opened last September in a suburb of Salt Lake City. Others are coming in Las Vegas; Rancho Cucamonga, a Los Angeles suburb; and Austin, Texas.

The Grand stores offer everything sold in traditional Sears stores, plus items found at big discount chains - shampoo, toothpaste, magazines, school supplies, pet food and a pantry. The food products mainly are non-perishables such as soda, juices, snack foods, as well as peanut butter, cereal, and canned goods.

A small cooler /freezer area offers staples, including milk at $2.09 a gallon, eggs for $1.65 a dozen, and orange juice, $3.33 for a half-gallon of Tropicana.

"This is an area of growth for us," said Jerry Post, Sears executive vice president of off-mall strategies.

Growth potential

With few new regional malls being built, fresh opportunities for Sears to grow lie at busy intersections in the suburbs, where Target, Wal-Mart and Kohl's are building stores.

Like those competitors, Sears Grand sprawls over a single floor and, at 201,000 square feet, is much larger than most other big-box competitors. Typical Target stores average 126,000 square feet, Greatland stores are 145,000 square feet and SuperTarget stores are 175,000 square feet.

Merchandise is arranged in a grid, like a Target store. An 18-foot wide main aisle runs the length of the store, and it's the only one where merchandise will be displayed on carts.

Moms with small children are the target customer for Sears Grand, and the goal is to keep the aisles clear for easy passage by carts and strollers, marketing director Julie Krueger said.

Shoppers will get a map at the entrance, and have a choice of using shopping carts, including the traditional supermarket style, a riding cart for disabled patrons, or a mini-car cart with steering wheels for families with young children.

The store also includes an auto service center, auto accessories for cleaning and do-it-yourself maintenance, a Citibank branch, an optical center, portrait studio, one-hour photo processing, and cafe and bakery. Customers also can get blinds cut, buy tools and book home improvements such as kitchen cabinet refacing.

In total, the Sears Grand store has 40% more merchandise items than a traditional Sears department store, Post said. Each of the five Sears Grand stores includes a feature that the company is testing.

In West Jordan, Utah, for example, the store has an open warehouse-style ceiling. The Gurnee store has a traditional dropped ceiling. West Jordan has a live-plant nursery; Gurnee does not.

"I think it's viable," retail analyst David Cumberland of Robert W. Baird & Co. said of the new Sears concept. "The new part of the merchandise is what will be the most challenging part of the mix."

Sears has not announced plans for the Sears Grand format beyond 2005. Once the five stores are up and running, the company will evaluate them, decide what works best and develop a prototype, said Kathleen M. Connolly, director of public relations and communications.

Local real estate sources last week said Sears is looking at sites for Sears Grand stores in the Milwaukee area, but Connolly declined to comment on any such plans. Sears real estate executives are continually reviewing sites around the country, she said.

Sears operates 870 department stores in the United States. About 500 of them average 180,000 square feet, while the others are smaller.

Over the past year, the company has focused on improving the apparel offerings for both men and women, while eliminating many poor-selling labels.

Sears Grand carries the same merchandise, with more emphasis on casual clothing.

Customer response in Utah has been good, Connolly said, with the store performing above sales expectations. Profits, however, aren't as high as the company would like, in part because new merchandise lines are being sold at lower margins. Sourcing costs are high, because Sears is ordering a low volume to serve just the test stores, Post said.

"It's a great experiment to see if Sears can survive in the future," said Britt Beemer, a consultant who heads America's Research Group in Charleston, S.C. "The mall strategy is a limiting strategy."

Post said it would be wrong to assume that the Sears Grand test means that Sears wants to abandon its mall strategy.

"We're not sure if we want to get rid of them," Post said. "This is not an either /or proposition."

Wal-Mart Stays At Top Of Fortune 500 List
DOW JONES NEWSWIRES
March 21, 2004

NEW YORK (AP)--A tail wind of improving economic conditions blew many major companies to record revenues in 2003, but none was able to knock Wal-Mart Stores Inc. (WMT) off the top of the Fortune 500 list.

With sales of almost $259 billion, the late Sam Walton's global chain of general stores topped the list of the nation's largest publicly traded companies for the third straight year. There was some predictable shuffling among the rest of the top 10.

Fortune's annual ranking, to be published in the magazine's April 5 edition, is based on the companies' sales figures as reported in financial statements for 2003.

Jittery geopolitics kept the price of oil high, helping Exxon Mobil Corp.
(XOM) to post $213 billion in revenue. The 17% jump leapfrogged the oil company past General Motors Corp. (GM) into the No. 2 spot.

In terms of profits, Exxon Mobil was first with $21.5 billion in earnings. Wal-Mart, which has the lower profit margins of the retailing industry, had $9.05 billion in earnings.

Carmakers GM and Ford Motor Co. (F) came in third and fourth respectively, with revenues of $196 billion and $164 billion. General Electric Co. (GE), the provider of everything from jet engines to sit-coms, remained at No. 5 with revenue of $134 billion.

Both Ford and GE held their spots from 2002.

ChevronTexaco Corp. (CVX) moved up a spot to No. 6, while another refiner, ConocoPhillips (COP), jumped five spots to No. 7. Banking powerhouse Citigroup Inc. (C) was eighth, followed by International Business Machines Corp. (IBM) and insurer American International Group, Inc. (AIG).

As a group, the 500 companies bounced back from two years of profit declines, posting combined earnings of almost $446 billion on sales totaling $7.5 trillion.

"Making the accomplishment even sweeter was the fact that few observers had expected it," wrote Fortune's Janice Revell.

Profits grew in 34 of the 39 industries that Fortune tracks. And only 37 of the 500 companies disappointed shareholders with negative returns, which the magazine calculated by adding the change in a company's stock price to its dividend income.

Fortune credited barely-there interest rates, fewer accounting scandals, tax cuts and increased government spending as helping to power the blue-chip boom. And although the war in Iraq kept oil prices high all year, the quick end to major fighting gave companies confidence, according to Fortune.

Among the 11 debutantes on the list, the most notable newcomer was Medco Health Solutions (MHS), a prescription benefits manager that was spun off from drug giant Merck & Co. Inc. (MRK) last year. With revenue of $34 billion, it premiered at No. 41, but its initial public offering helped bump its former parent Merck to the 83rd spot from 17th last year.

The magazine noted that big pharmaceutical companies as a whole took a beating in 2003 because of expiring patents, competition from generic drugs and a backlash against expensive medicine. Schering-Plough Corp. (SGP), for example, dropped to 247th on the list from 187th as revenue fell from $10.2 billion to $8.3 billion.

On the upside, the Federal Reserve Bank's decision to keep interest rates low boosted homebuilders. Centex Corp. (CTX), Lennar Corp. (LEN) and D.R. Horton Inc. (DHI) all moved up considerably in the rankings.

Conspicuously absent was mortgage giant Freddie Mac (FRE), No. 32 on the 2002 list. That is because its most recent financial statements were unavailable because of an accounting scandal.

One impressive jump was made by investor Warren Buffett's Berkshire Hathaway Inc. (BRKA). The rallying stock market helped the Omaha-based holding company jump from 28th place to 14th with revenue of $64 billion.

This year marks the 50th time Fortune has published its annual rankings. A look at the original 500 reveals some familiar names - in 1955, General Motors was No. 1, General Electric No. 4, Chrysler No. 6 and DuPont Co. (DD) No. 10.

The No. 2 company was Standard Oil Co. of New Jersey. And another piece of John D. Rockefeller's former empire, Standard Oil Co. of New York, or Socony, was No. 9. These two were predecessors of Exxon-Mobil, today's No. 2.

Others were muscled out as manufacturing's dominance in the U.S. economy dwindled. United States Steel Corp. (X), which was No. 3 in 1955, is now 209th.

Sears Grand Taking on Discounters
By Kim Mikus - Daily Herald Business Writer
March 23, 2004

Shoppers can catch their first glimpse of the new Sears Grand store Wednesday when it opens to the public.

The 201,000-square-foot store, an addition to Gurnee Mills, is the first to open in Illinois and just the second in the nation. A grand opening is set for April 3.

It's Sears latest effort to find new retailing approaches as sales falter at its mall-based department stores.

Inside shoppers will find bright, wide aisles and large bi-lingual color-coded signs directing them to departments featuring a huge mix of merchandise from Lands' End jeans to breakfast cereal to appliances.

"We have the microwave and the popcorn that you pop inside," said Store Manager Jeff East, pointing to a display coupling the two items.

It's the merchandise mix that Sears Grand hopes will set it apart from competitors, which include Wal-Mart, Home Depot and J.C. Penney.

"We think we stand alone," East said, asking, "Where else can you buy a refrigerator and the milk to go in it?"

Retail experts say Hoffman Estates-based Sears, Roebuck and Co. is hoping the concept will help it take on discounters.

"Sears Grand is an extremely bold strategy to try to gain market share from Wal-Mart," said John Melaniphy III, retail consultant with Melaniphy & Associates.

Shoppers will spot some similarities between the two stores. For example, "greeters," which have become a staple at Wal-Mart, will be at the entrances at Sears Grand.

There are also differences. Sears has no merchandise in the aisles to hinder shopping carts. The exception is an 18-foot-wide boulevard area in the heart of the store highlighting specials and seasonal items.

The nation's oldest retail chain launched the first Sears Grand last September in West Jordan, Utah.

"Early signs for that store are promising," Melaniphy said.

Other pilots are set to open on July 31 in Las Vegas, Oct. 31 in Rancho Cucamunga, Calif., and in 2005 in Austin, Texas.

Gurnee Mills is the only mall location.

The company, which already has 870 full-line stores located mostly in malls, is leaning toward non-mall locations for the new concept for convenience factors. Studies show that time-starved shoppers prefer to pull up to a store, run in and run out.

The Gurnee Mills store has outside entrances, providing shoppers easy access. And retailers are finding the mall, which draws nearly 24 million people a year, too attractive to pass up. Kohl's and Circuit City, traditionally not found in malls, recently moved into Gurnee Mills.

"I was told Circuit City's sales nearly doubled when they moved in there," Melaniphy said.

The demographics also are attractive to Sears. The new store caters to the young, growing family, East said. Sears Grand is going after the shopper between the ages of 25 and 54 with an income between $30,000 and $80,000.

Shopping carts in the shape of cars are designed to appeal to moms with young children. Cup holders are an amenity on all carts.

The store has 14 registers in a centralized checkout area. Price scanners throughout the store can be used to check items lacking a price tag. The scanners include a phone for shoppers needing additional assistance.

Sears Grand wants shoppers to finish everything on their "to do" list in one stop.

The store provides nearly a dozen bays for automotive repair, a portrait studio, a key-cutting center, groceries, greeting cards, music, window blind cutting and even one-hour photo processing. It also has pet food, books, magazines, DVDs, CDs and a bakery.

Many of these items no longer are in Sears mall stores.

"Sears has eliminated reasons to visit its stores. This is the store that replaces all that stuff," said former Montgomery Ward executive Sid Doolittle, now a partner at Chicago's McMillan/Doolittle Retail Consultants.

He approves of the new concept, adding that it should have been done 10 years ago.

While competitively-priced groceries and greeting cards are an asset, the real money for Sears is still the big ticket items, like the refrigerators and gas grills, Doolittle said.

Sears won't make money on the gallon of skim milk competitively priced at $2.09. He added that stores that carry limited "convenience" items don't expect to see profits there. These items often just generate traffic.

"I think Sears Grand as a whole will be acceptable with customers," he said.

Sears Roebuck CEO Realizes $2.2M from Options Exercise
Dow Jones Newswire
March 22, 2004

WASHINGTON -- Sears Roebuck & Co. (S) said Monday that Chairman and Chief Executive Alan J. Lacy realized a value of $2.2 million in the year ended Jan. 3, from the exercise of 75,479 stock options, according to a definitive proxy filed with the Securities and Exchange Commission.

As of Jan. 3, the company said Lacy had 451,324 exercisable stock options valued at $3.3 million and 942,448 unexerciseable stock options valued at $12.7 million.

Shares of Sears recently traded at $43.29 a share, down 11 cents.

Sears also said it granted Lacy 264,146 stock options during the year, compared with no stock options in the previous year.

Assuming the company's stock appreciates 5% annually from the grant date to expiration, the value of 230,000 of the total options is $3.1 million, according to the filing. The 230,000 stock options have an exercise price of $21.64 a share and expire Feb. 13, 2013.

The filing said the value of 25,267 options is $831,379 under the same assumptions. It said these options were granted according to a reload feature and have an exercise price of $52.32 a share and expire Dec. 29, 2006.

Sears said the remaining 8,879 stock options have a value of $292,153 and were also granted according to a reload feature. The options have an exercise price of $52.32 a share and expire Jan. 31, 2007.

Sears also said in its definitive proxy that CEO Lacy received a bonus of $897,813, down from his bonus of $1.8 million in the previous fiscal year, which ended Dec. 28, 2002.

The company said Lacy's salary grew slightly to $1.02 million from $996,875 in the year-ago period.

The filing said Lacy received "other annual compensation" of $76,251, compared with $64,975 in the previous year. The $76,251 amount includes tax reimbursement payments or above-market interest on deferred compensation and $49,812 for Lacy's use of corporate aircraft.

Sears said Lacy received "all other compensation" of $44,313, compared with $7,700 in the prior year. The $44,313 amount includes premiums received by Lacy as a result of the equity exchanges of portions of his annual bonus and long-term incentive payments, according to the filing.

Also, Sears said Senior Vice President and Chief Financial Officer Glenn R. Richter received a $1.2 million restricted stock award in the year ended Jan. 3, compared with no award in the previous year.

The company said it granted Richter 40,000 stock options, compared with no options in the prior year.

Assuming Sears' stock appreciates 5% annually from the grant date of the options to the options expiration date, the value of the options is $544,371. The options have an exercise price of $21.64 a share and expire Feb. 13, 2013.

Sears said Richter's bonus dropped to $380,150 for the year ended Jan. 3 from $456,667 in the previous year, while his salary increased to $486,982 from $405,964.

The company said Richter received "all other compensation" of $8,400, up from $7,700 in the year-ago period. The $8,400 amount represent the company's matching contributions under its 401(k) savings plan and under its nonqualified supplemental 401(k) savings plan.

Sears said two shareholders have proposed that that company declassify its board and have all directors elected annually by shareholders. The company's board is currently divided into three classes.

The filing said that at Sept. 5, 2003, shareholder New England Mfg. Corp. Employees' Profit Sharing Plan and Trust owned 100 common shares of Sears and that shareholder Martin Glotzer owned 10 common shares.

Elsewhere in the definitive proxy, shareholder Emil Rossi has proposed that Sears' board increase shareholder voting rights and submit the adoption, maintenance or extension of any poison pill to a shareholder vote as a separate ballot item as soon as practicable.

Also, the company said once the proposal is adopted, any dilution or removal of the proposal is requested to be submitted to a shareholder vote as a separate ballot item at the earliest possible shareholder election.

Under the proposal, Sears directors have the flexibility of discretion accordingly in scheduling the earliest shareholder vote and in responding to shareholder votes, the filing said.

At Nov. 18, 2003, Rossi owned 3,287 shares of Sears.

Sears said its board recommends that shareholders vote against the declassification of its board and the poison pill proposal.

Shareholders on record at the close of business March 15 may vote on the proposals and other matters at Sears' annual shareholder meeting scheduled for May 13 in Hoffman Estates, Ill.

Sears Says More Appliance Share Loss Possible
By Karen Jacobs - Reuters
March 19, 2004

NEW YORK Sears, Roebuck and Co. said it could lose more market share in appliances, a category in which it is the No. 1 U.S. retailer, as it faces competition from home improvement chains Home Depot Inc. and Lowe's Cos. Inc.

"Until we're in a position to grow our store base more rapidly, it is possible that we in fact do have some continued market share losses," Chief Executive Alan Lacy told the Reuters Consumer Products and Retail Summit Friday.

Sears saw its dominant market share in appliances decline for the first time in 2002, and industry figures now put it at about 38 percent. By contrast, Lowe's and Home Depot have picked up market share as they added stores across the United States.

Lowe's is the second-largest appliance retailer and Home Depot is now third, having moved ahead of Best Buy Co. Inc.

Lacy said Sears faced competition from big-box retailers in off-mall locations. "Customers aren't going to drive by a Home Depot, Lowe's, Best Buy, Target, Wal-Mart, Kohl's, et cetera, as often as they maybe used to, to get to the mall to shop us," Lacy said. "Those boxes are relatively good choices in many categories."

Despite being outnumbered by the home improvement chains, Lacy said the strength of Sears' customer and in-home service, and the breadth of its brands would help the retailer maintain its top position.

The retailer has added a wider assortment of appliances that customers can take home on the day of purchase, and it has raised employees' pay in hopes of attracting and retaining knowledgeable staff.

At the summit, held at Reuters U.S. headquarters in New York, Lacy said Sears was looking to address the consumer move to off-mall shopping partly by adding Sears Grand stores -- big-box standalone stores that offer a wider variety of goods. But he acknowledged that Sears would likely face competition for store sites from other retailers.

Lacy said Lowe's and Home Depot have gained share by adding stores and serving buyers who are not overly concerned about appliance brands or service.

He said moves that Sears took last year to revamp its appliance offerings were paying off, including expanding next-day delivery and stocking more lower-priced appliances.

"Since these changes, we've seen mid-single-digit growth in unit volume in our business," Lacy said. But Kenmore, the retailer's proprietary appliance brand, lost market share last year as Sears increased focus on national brands, he said.

On Thursday, Best Buy CEO Brad Anderson told the summit his company had no plans to exit the appliance business as its market share comes under pressure. But he said Best Buy had not yet decided to devote more resources to improving its appliance operations.

"We've got stores that look like that if we deployed what we learned, we'd do much better in the appliance business, but it would take a lot of energy to move into that space," Anderson said. "At this point I can't tell you we've made the decision to do that."

Sears Says Canada Not Fit for Sears Grand Concept
By Franco Pingue - Reuters
March 19, 2004

NEW YORK, - Sears, Roebuck and Co. (nyse: S - news - people) has no plans to launch its stand-alone store concept in Canada because the population there is not concentrated enough to support the format, Sears' chief executive said on Friday.

The company, which owns about 55 percent of Sears Canada <SCC.TO>, said the new Sears Grand stores requires densely populated areas that Canada lacks outside of the the Toronto area.

The Grand stores sell items like health and beauty products, food, and toys, as well as the company's traditional prdoucts such such as home appliances and apparel.

"The idea of off-mall growth is as important in Canada as it is in the U.S., but it's likely to take a different form of format than Sears Grand given the nature of the marketplace in Canada," Chief Executive Alan Lacy said at the Reuters Consumer Products and Retail Summit.

"As you get into the smaller communities you just don't have the trade density to support that type of format."

Sears Grand, which opened in the United States last year and plans to have four more locations by late 2005, is an attempt by Sears, Roebuck to lure back customers that have been lured away by competitors like Wal-Mart Stores Inc. (nyse: WMT - news - people).

In Canada, Sears has about 123 department stores.

Toronto-based Sears Canada <SCC.TO> is coming off two years of total sales declines and three years of comparable-store sales declines amid tough retail conditions and heightened competition.

Shares of the Toronto-based retailer have fallen 21 percent in the past four months on the Toronto Stock Exchange, and some industry analysts have said Sears, Roebuck could jump in and take on a larger ownership.

Lacy did not rule out the possibility that Sears Roebuck could buy the remaining 45 percent stake of Sears Canada, but would not elaborate on any possible decision.

"There could be circumstances that would be attractive for us to buy our the other shares," said Lacy.

Sears CEO Sees Expansion in 2005
Brad Dorfman and Emily Kaiser - Reuters
March 19, 2004

NEW YORK (Reuters) - Sears, Roebuck and Co. will begin expanding in 2005 after two stagnant decades, and it expects sustainable sales growth in the coming years, Chairman and Chief Executive Alan Lacy said Friday.

The largest U.S. department store chain's sales at stores open at least a year could grow in the low-to-mid-single digits in the future, but 2004 growth will likely be weaker as Sears continues to revamp stores and improve merchandise selection, Lacy said at the Reuters Consumer Products and Retail Summit.

"Given our mall location we would think comparable sales growth of low- to mid-single-digit is our ball park," he said.

But in 2004, the company expects sales at stores open at least a year -- a key measure of retail performance known as same-store sales -- to be flat to up by mid-single digits.

Sears struggled through nearly two years of declining same-store sales before finally showing a gain in August 2003. Apparel sales have dragged on overall results despite exclusive brands like Lands' End, as Sears tries to off competitors ranging from discounters to mall-based apparel chains.

At the same time, home improvement and electronics stores have eroded Sears' dominant position in home appliances and entertainment.

Sears recorded a scant 1.1 percent same-store sales increase in February, a month in which many retailers posted better-than-expected results.

"In February specifically we were slow in transitioning the floor from the fall assortment to the spring assortment," Lacy said at the summit, which was held at Reuters U.S. headquarters in New York. "We were not as well positioned as we should have been."

GOING OFF-MALL

One problem for Sears is competition from stores like Home Depot Inc. and Lowe's Cos. Inc. that are expanding rapidly and putting more stores closer to customers.

"Our principle issue is the fact that they are opening stores more rapidly than we are," Lacy said.

Sears tries to counter this with brands consumers know, like Craftsman tools and Kenmore appliances. But Lacy said the greater convenience of a competitor's store may still draw customers away from Sears.

For Sears, the next step is opening more stores and expanding existing ones to offer a wider selection of merchandise. The company's department store base has hovered around 870 for the past 20 years, Lacy said.

He declined to give specifics on store opening plans, but said a handful of the new Sears Grand stores, an off-the-mall format, would open in 2005 and a more significant number in 2006 and 2007.

The first Sears Grand opened near Salt Lake City last fall, and the second one is to open near Chicago next month. The big-box stores offer merchandise such as food, plants and DVDs alongside Sears' usual array of appliances, hardware and clothing.

Sears is also considering standalone Lands' End stores in some upscale shopping centers but has no firm plans yet, Lacy said.

At the existing stores, Lacy said consumer electronics were among the best-selling items, and more room is being made for high-end goods such as plasma televisions.

He said stores would stop carrying personal computers -- although they will still be available online -- to make more room for pricey televisions and a new line of DVD movies.

Sears CEO Sees More Issues in 2004
Reuters
March 19, 2004

Sears, Roebuck and Co. (nyse: S - news - people) Chairman and Chief Executive Alan Lacy on Friday said the company's same-store sales could grow in the low-to-mid-single digits in the future, but it still has some things to work through in 2004.

"Given our mall location we would think comparable sales growth of low- to mid-single-digit is our ball park," Lacy said at the Reuters Consumer Products and Retail Summit.

But in 2004, the largest U.S. department store retailer, whose apparel sales have dragged on overall results despite brands like Lands' End, expects sales at stores open at least a year -- a key measure of retail performance known as same-store sales -- to be flat to up by mid-single digits.

Sears struggled through nearly two years of declining same-store sales at least a year before finally showing a gain in August 2003.

The retailer recorded a scant 1.1 percent increase in February, a month in which many retailers posted better-than-expected results.

One problem Sears has is competition from off-the-mall stores like Home Depot Inc. (nyse: HD - news - people) and Lowe's Cos. Inc. (nyse: LOW - news
- people) that are expanding rapidly and putting more stores closer to customers.

"Our principle issue is the fact that they are opening stores more rapidly than we are," Lacy said.

Sears is experimenting with an off-the-mall format, Sears Grand, which carries traditional Sears merchandise and a deeper assortment of home fashions and home maintenance products.

The first Sears Grand opened in 2003 in Utah. A second will open near Chicago this year and other stores will open by 2005.

Sears, N.J. Settle 2002 Fraud Suit
By Mitch Lipka - Inquirer Trenton Bureau - Philadelphia Inquirer
March 18, 2004

The deal omitted many original allegations
in the state's case, which covered auto centers.

TRENTON - Two years ago, the State of New Jersey went after Sears, Roebuck & Co. with legal guns blazing, unleashing a hail of rhetoric alleging that the company had defrauded consumers at its auto centers statewide.

Yesterday, New Jersey officials announced that the state had settled the case for $625,000 with no mention of most of the accusations made when the wide-ranging lawsuit was announced in October 2002.

The only complaint the settlement addressed was that some Sears customers between 1997 and 2000 were charged for four-wheel alignments after getting only two-wheel alignments. A total of 12,544 consumers identified by the state will receive $10 checks from Sears by April 2 for what Attorney General Peter Harvey called "ill-gotten gains."

Sears will pay an additional $500,000 that the state Division of Consumer Affairs will use for unspecified "initiatives."

Neither the state nor Sears wanted to talk about what happened to all the other allegations.

"The settlement resolves the entire case," said Genene Morris, spokeswoman for the Division of Consumer Affairs. "The case is now closed."

But Sears spokesman Chris Brathwaite said the rhetoric two years ago and even yesterday might have been a bit much.

"I'm a little disappointed in that the attorney general talks about 'ill-gotten gains' when some folks were undercharged," he said.

Before the state approached the company, Sears had already changed the billing policies that led to the overcharges, Braithwaite said. In some cases, he said, customers were charged too little.

Brathwaite said he did not want to elaborate on the difference between the initial bluster and yesterday's announcement.

The company admitted no wrongdoing but agreed to pay the state for its investigation and legal expenses.

New Jersey Settles Sears Suit
Associated Press
March 18, 2004

Sears Roebuck and Co. will pay more than $625,000 to settle allegations that it ran auto centers that defrauded some customers who paid to have four-wheel alignment services done on their vehicles, the state Attorney General's office announced yesterday.

Sears made no admission of wrongdoing, according to company spokesman Chris Brathwaite.

The settlement comes more than a year after New Jersey officials filed suit against the Hoffman Estates, Ill.-based company, alleging that it had charged for four- wheel alignments on vehicles that did not allow for rear-wheel adjustments.

"Through its practices, Sears charged consumers for a service they did not
-- and could not -- receive," state Attorney General Peter C. Harvey said in a statement. "The agreement requires Sears to refund to New Jerseyans its ill-gotten gains."

As part of the agreement, the company will pay more than $125,000 to consumers who purchased a four-wheel alignments from Sears auto centers between Jan. 1, 1997 and Oct. 1, 2000 that they did not need, state officials said. That will amount to a $10 payment for each customer -- the price difference between a four- wheel and two-wheel alignment.

"Most people lack the technical expertise necessary to know what kind of services can and cannot be performed on their vehicles," said Reni Erdos, director of the state Division of Consumer Affairs. "As a result, consumers brought their vehicles to a place they trusted. Unfortunately, we allege, Sears used that trust against consumers."

Brathwaite said there may have been some customer confusion under the old policy. However, the company had voluntarily simplified its pricing for wheel alignment services before New Jersey filed suit, he said.

"We had already taken steps to correct that before they had come to us with their concerns," Brathwaite said Wednesday.

Sears has been provided a list of the more than 12,000 affected drivers along with their addresses. State officials said the company will make direct payments to those affected by April 2.

How Cuts in Retiree Benefits Fatten Companies' Bottom Lines
By Ellen E. Schultz and Theo Francis - Staff Reporters - The Wall Street Journal
March 16, 2004 - Page 1

Trimming a Health-Care Plan Creates Accounting Gains,
Under Some Arcane Rules A Shield Against Rising Costs

The loud message comes from one company after another: Surging health-care costs for retired workers are creating a giant burden. So companies have been cutting health benefits for their retirees or requiring them to contribute more of the cost.

Time for a reality check: In fact, no matter how high health-care costs go, well over half of large American corporations face only limited impact from the increases when it comes to their retirees. They have established ceilings on how much they will ever spend per retiree for health care. If health costs go above the caps, it's the retiree, not the company, who's responsible.

Yet numerous companies are cutting retirees' health benefits anyway. One possible factor: When companies cut these benefits, they create instant income. This isn't just the savings that come from not spending as much. Rather, thanks to complex accounting rules, the very act of cutting retirees' future health-care benefits lets companies reduce a liability and generate an immediate accounting gain.

In some cases it flows straight to the bottom line. More often it sits on the books like a cookie jar, from which a company takes a piece each year that helps it meet its earnings targets.

The art of minimizing retiree-benefit costs while creating income is arcane and poorly understood by the public -- and by the retirees. Here's a field guide to seven techniques.

Hitting the Ceiling
Big companies began in the early 1990s to set ceilings on how much they would ever spend for retiree health care, regardless of what happened to medical costs in general. ConocoPhillips, Delta Air Lines and Coca-Cola Enterprises Inc. are among the many that did so. A cap can be a fixed annual amount per retiree, a per-retiree average or, less commonly, a fixed sum for a group. In any case, once it's reached, a company is largely insulated from future medical-cost increases for those retirees.

The fate of retirees can be very different. When Robert Eggleston retired from International Business Machines Corp. 12 years ago, he was paying $40 a month toward health-care premiums for himself and his wife, LaRue, with IBM paying the rest. In 1993, IBM set ceilings on its own health-care spending for retirees. For those on Medicare, which provides basic hospital and doctor-visit coverage, the cap was $3,000 or $3,500, depending on when they retired. For those younger than 65, the cap was $7,000 or $7,500. Spending hit the caps for the older retirees in 2001, the company says, pushing future health-cost increases onto retirees' shoulders.

Mr. Eggleston, 66 years old, has seen his premiums jump more to $365 a month for the couple. Deductibles and copayments for drugs and doctor visits added $663 a month last year. "It just eats up all the pension," which is $850 a month, Mrs. Eggleston says. Her husband has brain cancer. Though he gets free supplies of a tumor-fighting drug through a program for low-income families, he has cashed in his 401(k) account, and he and LaRue have taken out a second mortgage on their Lake Dallas, Texas, home.

IBM retirees as a group saw their health-care premiums rise nearly 29% in 2003, on the heels of a 67%-plus increase in 2002. For IBM, with its caps in place, spending on retiree health care declined nearly 5%, after a drop of 18% the year before.

IBM confirms that retirees' spending has risen as its own has fallen. It describes the retirees' increased cost in 2003 as not very dramatic, averaging $158 a year, or $13.15 a month, for each of the 190,000 retirees and dependents who participate in the plan. IBM says its costs are down because more retirees are older and eligible for Medicare, so the company's contribution is lower. It says that this year it established a "zero premium" plan for retirees, although this plan carries deductibles double those of other plans.

Caps Plus Cuts
Just because companies have shelter from retiree health-cost inflation doesn't mean they can't also cut their retirees' health benefits.

In January last year, Aetna Inc. said it would phase out health-care benefits for workers who retire starting this year. "Health-care costs have increased," says a spokesman for the company. Yet federal filings show Aetna's spending on its retirees' health benefits had not been rising substantially, thanks to ceilings Aetna imposed a decade ago. From 1998 through 2002, its annual spending for retiree health benefits ranged between $35 million and $39 million.

Aetna says it made the January 2002 benefit cut to strengthen its business. "Wherever it makes sense, we've been trying to reduce expenses in order to be competitive," says its spokesman, adding that Aetna's overall benefits remain "very competitive." Aetna recorded losses early this decade but has turned around, reporting fourth-quarter profits double those of a year earlier.

Aetna's spending on health benefits for 12,000 retirees did rise the following year, 2003, to $44.2 million. A company spokesman said it was unclear why.

Profits From Cuts
For many big U.S. companies, cutting benefits doesn't merely relieve them of future spending. More important, though less visible, is the instant income the cuts can create. It's all because of an accounting rule adopted nearly 14 years ago.

The rule said an employer that provided a retiree health benefit had to estimate what it would cost to pay that benefit over the lives of the retirees. The total became a liability. It created a big obligation on the balance sheet. But at a time when legions of companies were taking this hit, it was generally ignored by securities analysts. There was even some advantage to putting a jaw-dropping obligation on the books: Employers could point to it as a reason that, to survive, they needed to slash benefit levels.

But when a company now changes one of the assumptions that went into that liability, it gets to reduce the liability. In accounting, reducing a liability generates a gain. Voil�: income.

As an accounting credit, this isn't money that can be spent. But it looks the same in the bottom line -- which affects the stock and often management's pay incentives.

Just setting a spending cap typically brings an accounting gain, because it reduces the amount the company expects to pay out over time for the benefits. A company that goes further and cuts the benefit structure reaps more paper gains. It may sound strange that a company can get income from cutting benefits it hasn't paid and may never pay, but that's how it works.

These sums can bump earnings up significantly. Caterpillar Inc. in 2002 added $75 million to income -- 9.4% of pretax earnings -- with the accounting gain it got from boosting the health-care premiums its retirees had to pay and making other changes to retiree benefits. The move will lift pretax earnings about $45 million a year for several more years. Caterpillar confirms the information but says it didn't cut benefits to boost earnings; rather, it did it to help retirees -- by keeping the plan more affordable for the company. "The best way to protect the health care for the long term was to make some of these changes now," says a spokeswoman.

Cuts Redux
Gradually, the pools of accounting gains generated by early rounds of benefit cuts and caps run out. When that happens, companies sometimes cut further, replenishing the pool.

International Paper Co. capped its spending soon after it adopted the retiree health-care liability required by the accounting rule, Financial Accounting Standard 106, in 1991. This cap reversed much of the liability. It generated a pool of accounting gains that trickled into the company's financial statements -- to the tune of $17.7 million a year -- until 2000.

Then the stockpile was used up. International Paper again cut benefits in 2000, 2001 and 2002, primarily by capping the benefits of retirees of newly acquired companies. This generated a new batch of accounting gains. They have added a total of $65 million to International Paper's income so far.

A company spokeswoman confirms the figures, noting that they reflect standard accounting practices. She says the company "simply made plan design changes as part of our focus on controlling our costs while maintaining a competitive benefits program."

New Formulas
When a company's liability for retiree health care soars, it's usually just because of some change in the assumptions that went into the liability formula -- a change the company itself made.

Most commonly, it involves interest rates. Liability calculations assume a particular rate at which the assets used to pay benefits will grow. A lower rate leads to a higher liability. Think of it this way: If the return on the money you set aside for an obligation is going to be lower, you have to set more money aside.

For instance, UAL Corp.'s liability for retirees' health care surged more than $1 billion in 2002. Reason: The airline had lowered the rate used in its liability calculation -- known as the discount rate -- to 6.75% from 7.50%. Companies have considerable latitude in picking the interest rate they use and deciding when to make a change, though rates were certainly declining when UAL made its change.

A shift could be in store. If interest rates rise from current historic lows, billions of dollars in corporate liabilities for retiree health care will vanish.

Also feeding into this murky mix is a company's estimate of health-cost inflation. As with the interest rate, companies have wide leeway to change their assumptions about health-cost trends -- giving their liability figure either a bump up or a push down. For example, in 2002, Motorola Inc. boosted its assumption of annual health-care inflation to 12% from 6%. This was a key reason its liability for retiree health care jumped by $122 million.

Rather than focusing on health-care liability, which companies have so much latitude to adjust, shareholders might want to look at what a company actually spends year-to-year for retiree medical benefits. At Bank of America Corp., for example, the liability for retiree health benefits rose by $69 million, to $1.1 billion, in 2003. But federal filings show that what the bank actually spent for these benefits in 2003 declined to $63 million from $84 million the year before, a 25% drop. Retirees' portion rose 27% to $62 million.

Contrary to conventional wisdom, it isn't uncommon for companies to report declines in their actual spending on retiree health care. Those whose filings reveal lower "benefits paid" last year include Altria Group Inc. (down 5%, to $246 million); R.J. Reynolds Tobacco Holdings Inc. (down 11%, to $63 million); Clorox Co. (a 33% fall, to $4 million); Ball Corp. (down 21%, to $8 million), and Black & Decker Corp. (down 28%, to $13 million).

This "benefits paid" figure still doesn't tell whether a company is spending more or less per retiree. The total might be up simply because there were more retirees, perhaps because the company had layoffs or did an acquisition.

But it's still a better measure of the burden of health care than one other number that companies report: their "expense" for retirees' health care. This is essentially an accounting measure of how much a benefit plan pushes corporate income up or down, driven largely by changes in liability.

Dropout Roulette
When employers cap or cut retiree medical programs, the companies don't benefit just by spending less and reaping accounting gains. They also can benefit from a spiral of dropouts.

As retirees see their out-of-pocket costs rising, some of the healthier retirees quit the company program. Their good health lets them buy cheaper coverage elsewhere. But their departures concentrate the remaining pool with sicker people, costs go up, more dropouts ensue, and the pool gets more concentrated again, in what the industry sometimes calls a death spiral.

Each dropout reduces a company's immediate outlays, since it no longer has to pay even a capped benefit for that person. Dropouts also generate accounting gains for the company, since the concern gets to reverse the liability it had booked for covering those retirees for life.

A company in this situation -- with its own expenses capped -- has little incentive to negotiate the lowest possible prices with medical providers. In fact, it has an incentive not to: Rising expenses not only won't hurt the company but will tend to drive more retirees from the program.

At Sears Roebuck & Co., thousands of retirees have dropped out of a retiree health-benefit plan in recent years, at a time when retirees' share of costs was going up. While no one is saying Sears sought this dropout spiral, the dropouts follow a series of caps Sears established in the 1990s to limit its own expenses. The number of retirees taking part in its health plan has fallen 18% since 2000, to 51,500. Sears has 115,000 retirees in all. It can't say how many are eligible.

Sears says that while cost may prompt some retirees to drop out of the health plan, a more significant factor is that older retirees are dying and fewer people are eligible. Benefits Vice President Liz Rossman says Sears works hard to keep its plan affordable for retirees.

Sears has fed $383 million into earnings since 1997 from accounting gains that arose when the company capped its spending and retirees dropped the increasingly costly coverage.

In January, Sears announced it was further tightening the cap on its spending on retirees' health care, and also eliminating future retiree health benefits for most current employees. Sears says the steps will make it more competitive but declines to say how much they will generate in accounting gains.

What makes such moves different from other accounting quirks is that retirees end up paying the price. In Jeannette, Pa., in early January, about 100 retirees of GenCorp Inc., formerly called General Tire & Rubber, met in a union hall to discuss the latest rise in their health-care premiums. The new cost of coverage for a couple was $568 a month. For most, this exceeded their company pensions. Because of the higher cost, many of the retirees at the meeting, whose ages hovered around 80, said they were dropping their employer's coverage.

Mabel Kramer began working at the company in 1944 making gas masks for World War II soldiers, and met her husband there. Now a widow, she collects a pension of $179 a month based on his 34 years with the company. Her GenCorp retiree medical benefits cost her $284 a month, consuming the pension and part of her $810 Social Security check. "If they raise it any more, I'll drop it," says Mrs. Kramer, 78. "It's enough to make you sick."

Others don't dare drop it. Edward Peksa, who spent 24 years in GenCorp's tennis-ball department, said he needs the coverage to help pay for five drugs his wife, Anna, takes for arthritis, hypertension and thyroid and cholesterol problems. The couple's premium more than erases his GenCorp pension of $320 a month. To make ends meet, Mr. Peksa, 75, works 30 hours a week as a greeter at Wal-Mart Stores.

These retirees were paying nothing for their health-care coverage until 2000, when the company began charging them. Their premiums have risen steadily since then. GenCorp says the reason is the ceilings it placed in 1995 and 1997 on its own spending on retirees' health care.

GenCorp's spending on the retiree health-care benefit has fallen over the past six years, its filings to the Securities and Exchange Commission show. It paid $30 million for the benefit in 1997 but just $25 million in 2003, according to its annual report. The liability on its books for retiree health care is down 40% since 1995.

Among the reasons is that no one hired since the mid-1990s will get the retiree benefit, GenCorp says. It adds that the liability also shrinks as retirees die or drop out of the health-care plan because they have "other options or coverage available, or possibly because they can't afford it any more."

Medicare Checks
Medicare's new prescription-drug benefit is giving companies a whole new source of accounting-generated income that boosts their earnings.

And some employers may get federal subsidies even after transferring costs to their retirees.

Congress was worried that if Medicare paid for prescription drugs, companies would cut retiree health-care benefits even faster than they already were. So when it passed a Medicare drug benefit last year, Congress added subsidies for companies that retain retiree drug coverage. The U.S. will reimburse employers for 28% of the cost of retiree prescription-drug spending over $250, up to a subsidy of $1,330 per retiree per year.

This means companies can reduce the liability they're carrying on their books for drug coverage. They won't get the subsidy until 2006. But accounting rules let them estimate how big a subsidy they'll get over the lives of current and future retirees and deduct this figure from their liability right now -- and start dropping immediate accounting gains to their bottom lines.

General Motors Corp. estimates the Medicare prescription-drug plan will cut $4 billion from its liability for retiree health care. Other companies' estimated cuts include $1.3 billion at Verizon Communications Inc., $572 million at BellSouth Corp., $415 million at AMR Corp., $450 million at U.S. Steel Corp., and $280 million at UAL. All of these will boost the companies' income.

The new Medicare law means some companies can get federal subsidies (and thus fresh accounting gains and earnings) even if they shift part of the cost of their retiree drug coverage to the retirees themselves. That's because the way the law is written, the subsidy is based on the whole cost of a company's retiree drug program -- including the part retirees have to pay for.

TRICKLE-DOWN EFFECT
Companies often reap accounting gains, and therefore earnings, when they cut retirees' health-care benefits or cap their own spending on these benefits. Here are the steps as taken at International Paper Co.

1991
Records $405 million balance-sheet liability at year-end for then-current program of health coverage for retirees.

1992
Caps what company will pay per retiree per year in the future. This step reduces the obligation and creates a $133 million pool of accounting gains that will trickle into income over time. Company adds $18 million of this to 1992 income.

1993-1999
Adds $17.7 million from this pool of gains to earnings each year, exhausting the pool.

2000-2002
Makes various benefit changes, including imposing caps for plans at newly acquired companies, thus reducing liability again and replenishing pool of accounting gains.

2000-2003
Adds $65 million to earnings from new pool.

Whirlpool Corp. picked up $13.5 million in earnings, or 19 cents a share, in last year's second quarter from accounting gains, after imposing both caps and cuts in health care for its retirees. This gain more than offset charges of 16 cents a share primarily for a recall of microwave-oven products. Whirlpool then just beat consensus estimates of $1.31 in second-quarter earnings. Whirlpool confirms the information but says it didn't cut retiree benefits to help it meet earnings targets.

Home Depot's CEO Led a Revolution, But Left Some Behind
By Carol Hymowitz - The Wall Street Journal
March 16, 2004

When Bob Nardelli became CEO at Home Depot in December 2000, he was a stranger in a foreign land. Just six days earlier, he had lost a fierce competition to become chief executive at General Electric, where he had worked for 30 years and his father had worked before him. "What more could I have done?" he asked his then-boss, former GE Chairman and CEO Jack Welch on learning that the top job was going to Jeffrey Immelt.

"You've done more than I ever would have dreamt," is the response Mr. Welch recalls giving.

Mr. Nardelli had spent his career running lighting and power-generation plants, and was steeped in GE's culture of highly structured management. "GE is in my DNA," he says.

At Home Depot, the No. 1 home-improvement retail chain in the U.S., he was entering a culture known for its unstructured, entrepreneurial character and independent-minded managers.

Mr. Nardelli's journey shows that no matter how large the company, leaders are still the glue that holds operations together, fostering unity and wielding the power to turn around a corporate culture at lightning speed. But it also shows how revolution from the top down comes at a price.

Mr. Nardelli was convinced that Home Depot would benefit from his disciplined approach; and he had the board's backing. Sales growth at the chain had slackened and same-store sales were in decline as rival Lowe's Cos. chipped away at market share. The new CEO blamed Home Depot's loose structure and lack of centralized procedures. "The company's co-founders used to tell store managers to ignore messages from headquarters and do what they each thought best," says Mr. Nardelli, who often works 80-hour weeks. "They had been in start-up mode for 22 years."

He was appalled to find the company didn't even have the technology to allow him to send an e-mail message to managers nationwide. "Every store was a separate fiefdom, and corporate headquarters was called the store support center," he says. "The message to headquarters was: Stay out of the way."

He quickly attacked this "cowboy culture" by launching management processes used at GE. Among these: centralized purchasing to increase negotiating clout with suppliers, tightened control of inventory, standardized store displays, and hiring and performance measures. Employees who never had to account for much to headquarters suddenly had to record reams of data.

Some of his orders backfired, at least initially. When managers were told to increase their "inventory velocity," or the speed with which products flow through stores, some simply cut back on orders. As a result, some customers couldn't find the merchandise they wanted at certain stores and voiced complaints.

Employees unaccustomed to being told how to do their jobs were unhappy, and some quit. "It was time to infuse some different thinking in the company, but his 'do it my way' style undercut the sense of ownership employees had," says a longtime human-resource manager who left Home Depot for a job at another Atlanta company, taking along several employees. "It was revolution, not evolution."

Robert Oxley, executive vice president of the International Solid Surface Fabricators Association, whose members make some products for Home Depot, says that in the past, problems used to be handled quickly by local managers. "Now," he says, "the Home Depot person is more likely to say, 'You have to do it this way.' "

As the first outsider to lead Home Depot, which traditionally promoted from within, Mr. Nardelli knew he was distrusted. "But being an outsider, I had the advantage of not having to stick with the past," he says.

He brought in new corporate executives and managers -- including a cadre of former military personnel used to hierarchy and discipline -- and started leadership-training programs. Last year, Home Depot added about 30,000 employees to its payroll, making it the nation's largest job creator.

The process controls Mr. Nardelli initiated soon reached the bottom line. The company also was helped by the booming real-estate market that fueled sales of home-improvement products. "There's no sweeter place to be in retail these days," Mr. Nardelli acknowledges.

In fiscal 2003, Home Depot's earnings per share grew 21% to a record $1.88, while sales rose 11% to $64.8 billion. With a strong balance sheet that includes $2.9 billion in cash, the company expects to invest heavily in store modernization this year, continue to buy new technology and open new stores to bring its total to 1,882.

Critics complain the changes have damped innovation. But Mr. Nardelli rebuts that, pointing to the chain's fast-growing "we'll do it for you" business for customers who don't have time or talent to do their own home improvements.

Meanwhile, Mr. Nardelli believes he has become a retail connoisseur. "I can walk though a store and know within five minutes if it is operating successfully," he says. "It's all about whether store associates look you in the eye and say hello, whether they have an energy in their step, whether the shelves are full, the lights are bright, the place is clean."

Sears Chooses CSC for IT Outsourcing
By Ann Bednarz - Network World Fusion
March 12, 2004

Sears, Roebuck and Co. is turning over a big chunk of its IT operations to Computer Sciences Corp. The $41 billion retailer announced Thursday that it's entering into negotiations with CSC for an IT outsourcing contract expected to be worth $200 million per year for up to 10 years.

Once negotiations are complete, CSC will provide Sears with IT infrastructure services to support the Hoffman Estates, Ill., retailer's voice and data networks and Web sites. The deal - which Sears expects to finalize in the second quarter - will cover desktops, servers and systems. Sears will retain responsibility for technology standards, architecture and service policies.

Sears CIO Gerald Kelly reportedly told attendees at the National Retail Federation show in January that Sears was evaluating five service providers for its outsourcing contract: Affiliated Computer Services, CSC, Electronic Data Systems, HP and IBM.

CSC ultimately won out because Sears believes the infrastructure service provider's offerings "�will heighten the stability and reliability of Sears' technical infrastructure and will provide a platform for future improvements at a lower cost," Kelly said Thursday in a statement announcing the deal. "And, very importantly, CSC will also provide fair and equitable treatment for our associates."

Today about 260 IT personnel manage the portion of Sears' technical infrastructure that is to be outsourced. Sears expects that CSC will hire substantially all of the affected associates, the retailer said.

Group to Buy Sears Tower for $835 million
Sears Tower has N.Y. buyer
By Thomas A. Corfman - Tribune staff reporter - Chicago Tribune
March 12, 2004

A New York investment group has a deal to acquire Sears Tower for more than $835 million, a remarkable comeback for a skyscraper that has been tarnished by fears of a terrorist attack.

The group includes two Manhattan real estate entrepreneurs, Jeffrey Feil and Joseph Chetrit, both of whom have separately made Chicago real estate acquisitions in recent years, though none as prestigious or as risky as the nation's tallest building.

MetLife Inc., the longtime lender on the 110-story building that gained control of it in August, said Thursday that it had a contract to sell the tower but did not identify the buyer or disclose the price.

The New York-based insurer declined to comment further. Stephen Lividitis, managing director in the Chicago office of real estate investment bank Eastdil Realty Co., which is handling the sale for MetLife, also declined to comment.

Sources familiar with the transaction confirmed, however, that the price was more than $835 million, a huge figure in light of the uncertainty that has swirled around the 3.5 million-square-foot building. Anxiety over a possible attack on Sears Tower reduced its attractiveness to some tenants and many prospective ones, though in recent months several key existing tenants have signed long-term lease renewal agreements.

"People outside of Chicago view the Sears Tower as a great real estate asset and one of the premier buildings in the world, whereas people in Chicago don't have that perception of it," said James Hanson, a managing director with Chicago-based real estate firm Jones Lang LaSalle Inc., which is not involved in the deal.

MetLife took over ownership in August after Chicago-based Trizec Properties Inc. surrendered control of the building to avoid assuming $766 million of mortgage debt that would have come due next year.

Feil, chief executive of the Feil Organization, and Chetrit, whose company is called Chetrit Group LLC, could not be reached for comment.

In 2002, Chetrit purchased three downtown Chicago office buildings totaling 1.6 million square feet for roughly $118 million. The buildings are 1 N. Dearborn St., 1 N. LaSalle St. and 360 N. Michigan Ave.

That same year, a Feil-led group acquired two office buildings from MetLife in a $258 million deal, including 10 S. LaSalle St. in Chicago. The other building is in Manhattan.

The identity of the other members of the investment group buying Sears Tower could not be confirmed, but the previous Feil group included brothers Joe, Ralph and Avi Nakash; Lloyd Goldman; and Stanley Chera.

Joe Nakash is chairman of New York-based apparel manufacturer Jordache Enterprises Inc., which he owns with his brothers. Goldman and Chera were among the investors who purchased the World Trade Center shortly before it was destroyed on Sept. 11, 2001.

Sears Tower would be Feil's fourth acquisition in the Chicago area. Last year, he purchased 645 N. Michigan Ave., an 11-story office building with strong first-floor retailing, for $51.5 million. And earlier this year he bought the west suburban North Riverside Park Mall for $107 million.

The aggressive bid by Feil and Chetrit short-circuits what had been expected to be an elaborate bidding process. Two weeks ago Eastdil formally launched the marketing by sending out financial information to nearly 100 potential buyers. Originally, the first round of bids was not scheduled to be submitted until mid-April, sources said.

A sale of MetLife's entire ownership interest is also a surprise. In November, when the company disclosed plans to test the market, it ruled out a complete sale because of doubts that investor demand would be strong enough for such a massive deal. But earlier this year MetLife abandoned plans for a joint venture deal or a refinancing.

The company said Thursday that the transaction, expected to close during the second quarter, would result in an after-tax gain of $90 million. MetLife will not provide the buyers with a loan as part of the transaction, though the company has used that strategy in other deals.

While the New York buyers of Sears Tower may have a more optimistic view of the trophy's potential value, two more mundane real estate finance factors may be playing a larger role.

Although the buyers have not yet completed their financing, they expect to obtain a first mortgage of at least $600 million, or more than 70 percent of the value, sources said.

Many institutional investors typically prefer to borrow no more than 65 percent. Real estate investment trusts such as Trizec like to borrow an even lower percentage.

And the loan, which is expected to be resold on the commercial mortgage-backed securities market, is projected to charge 5.25 percent interest, sources said.

Said real estate investment expert Hanson: "Anybody who is going to use a high degree of leverage in an acquisition is going to have an advantage, given how low interest rates are, and also how aggressive lenders are just to put money out."

G.M. Says Costs for Retiree Care Top $60 Billion
By Danny Hakim - New York Times
March 12, 2004

DETROIT, March 11 - General Motors said on Thursday that its future health care obligation for retirees rose last year to $63.4 billion, from $57 billion in 2002. If not for the effects of the new Medicare legislation signed in December by President Bush, the obligation would have been $67.5 billion.

The figures were disclosed in the company's annual report, which was released on Thursday. Many domestic manufacturers say that soaring health care costs have become their chief competitive burden.

The domestic auto industry also showed signs of life on Thursday, with Ford Motor and the Chrysler Group reinstating contributions to their employees'
401(k) plans. Ford also said it would begin paying bonuses for the first time in three years to its top 6,200 managers worldwide.

Ford and Chrysler suspended the 401(k) contributions two years ago after posting losses in 2001 and 2002. G.M. remained profitable in those years, and reduced such payments but did not eliminate them.

G.M., the largest automaker in the world, also has the largest health care obligation among the Big Three. In the first quarter of 2004, the company put $5 billion into a tax-free trust that it uses to finance future retiree health care, compared with $3.3 billion to the trust in all of 2002, G.M. said on Thursday. The company also expects to spend $5.1 billion to meet this year's health care claims for workers and retirees, up from $4.8 billion last year.

"Health care is obviously an important issue for G.M., as well as any company that's doing business in the United States today," a company spokesman, Jerry Dubrowski, said. "A lot of our competition overseas doesn't have the same health care burdens as G.M. because their governments are funding their health care systems."

G.M. is the largest private provider of health care benefits in the United States and the largest private purchaser of well-known brand-name drugs like Viagra and Lipitor. It pays benefits for 1.2 million workers, retirees and family members in the United States. The company says its health care costs are about $1,400 for each vehicle sold in the United States, more than the cost of steel .

Health care is a significant competitive advantage for automakers based in Germany and Japan, like BMW and Toyota, because those companies have nationalized health care systems in their home markets. Though most foreign-based automakers assemble some of their vehicles in the United States, their American operations have few retirees, who account for the bulk of the Big Three's health care costs.

William Clay Ford Jr., the chairman and chief executive of Ford, called health care costs "our biggest single issue" in an interview last year. "Employers in this country, and particularly manufacturing employers, can't compete internationally with this burden around our collective necks," he added.

Mr. Ford's company returned to profitability last year, posting a net profit of $495 million, after losing $6.4 billion combined in 2001 and 2002.

As a result, in its employees' 401(k) plan, Ford will match 60 cents on the dollar, up to 5 percent of base salary, effective July 1. In 2001, it matched 60 cents up to 10 percent.

"Two years ago, we began a long-term effort to renew competitiveness and profitability for our company," Mr. Ford said on Thursday in a letter to salaried employees. "Thanks to your efforts, we made solid progress and began moving in the right direction in 2002. That progress continued last year."

Chrysler, a division of the German automaker DaimlerChrysler, was not profitable last year and most likely will not pay executive bonuses this year, a spokesman said.

But the Chrysler division, based in the Detroit area, will bring back 401(k) contributions as of April 1, matching 50 cents on the dollar up to 6 percent of base salary. The last time it made a contribution, in 2001, it was 60 cents on the dollar, up to 8 percent, with a cap of $80,000.

Sears Tower to Be Sold
Purchase Price for 110-story Building Unknown
By Kelly Quigley - Crain's Chicago Business Online
March 11, 2004

One of Chicago's signature Loop high-rises is about to get new ownership. New York-based MetLife Inc. on Thursday said it has signed a contract to sell Sears Tower to an unidentified buyer.

In a news release, MetLife said it expects to gain about $90 million from the deal, but did not disclose the actual sale price. The company expects the sale to close in the second quarter.

MetLife last fall began preliminary discussions with brokers to explore its options regarding the 110-story office tower, including a possible sale (ChicagoBusiness.com, Nov. 11, 2003).

MetLife took control of the building last August, by buying out Trizec Properties Inc.'s interest in the property for $9 million. The deal released Trizec from the burden of $766 million in anticipated mortgage payments on the building.

Chicago-based Trizec continues to lease and manage the tower. Spokesmen from MetLife and Trizec were uncertain whether Trizec will be retained by the new owner.

"We haven't met with the buyer to discuss the management of the property going forward," a Trizec spokesman said. "But we would like to, and we expect that we will probably do so in the next few weeks."

He said the buyer's identity also is unknown to Trizec. MetLife "is honoring their confidentiality agreement, and we respect that."

The Sears Tower has struggled to retain tenants in the wake of the Sept. 11, 2001, terrorist attacks. Last year, to entice existing tenants to stay put, Trizec offered low rents and big concessions more in line with a Class B building (Crain�s, Oct. 27).

In recent months, the tower has managed to retain some big tenants, including Chubb Group and Bank of America Corp. MetLife said the high-rise is about 90% leased.

The sale would end MetLife's long-standing investment in Sears Tower, which began in 1990.

Sears Has Cut Almost 8,000 Jobs Since Oct. 2001
By Sandra Guy - Business Reporter - Chicago Sun-Times
March 11, 2004

Sears, Roebuck and Co. has cut nearly 8,000 jobs at its stores, field offices and headquarters since its store restructuring program started 2-1/2 years ago.

Sears CEO Alan Lacy unveiled the restructuring program in October 2001, when he announced that 4,900 people would lose their jobs in the first phase of the program.

The effort is aimed at making Sears department stores more closely resemble discount stores, with wider aisles, shopping carts and more self-service departments.

Of the total number of jobs eliminated so far, 5,950 were axed between Oct. 24, 2001, and Dec. 28, 2002, according to Sears' annual report, which the retailer filed Wednesday with the U.S. Securities and Exchange Commission.

Employees hurt by the cuts included those in stores, field operations and at the retailer's Hoffman Estates headquarters.

The other 1,980 jobs axed were mostly store sales positions that were no longer needed after Sears jettisoned product lines such as cosmetics, installed floor coverings and custom window treatments.

Omitted from the job-cut figures were Sears employees who worked for the company's credit-card business and its National Tire & Battery division, both of which Sears sold last year.

Sears now employs 201,000, compared with 241,000 at this time last year and 275,000 in 2002.

Sears also disclosed that it has paid $119 million in connection with the July 2001 shutdown of the HomeLife furniture stores.

Sears founded HomeLife in the 1980s but sold the furniture unit in November 1998 to Citicorp Venture Capital for $100 million after the growth it had hoped for failed to materialize. Sears retained a 19 percent stake in HomeLife. HomeLife closed its 133 stores in 26 states, including 14 inside Sears department stores, after a loan failed to revive the struggling chain.

Turnover Contagious at Sears . . .
Top-level Execs also Departing