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Lord & Taylor to Shut Stores and Cut Jobs
By Tracie Rozhon - The New York Times
July 31, 2003

Lord & Taylor, trying to recapture its aura as department store for the Junior League set, is closing 32 stores, more than one-third of its total nationally, and laying off 3,700 employees. Lord & Taylor, owned by the giant May Department Stores chain, is abandoning whole states — like Florida and Texas — after becoming mired in a losing competition with lower-priced stores like J. C. Penney and Kohl's.

For the past two years, Lord & Taylor has been working to change its most recent image as a shopping-mall retailer with goods constantly on sale.

Even in the malls, the branches have upgraded both the clothes and the selling space, and invited the customers back by staging events in the spirit of the elegant old department stores. The stores, many with characteristic pink marble floors and elegant crystal lamps on the counters, have been instructed to hold art shows and wine tastings.

But the strategy did not work in certain stores, said Sharon Bateman, a spokeswoman for the May Company. "The stores we are divesting are not achieving a satisfactory level of performance."

Lord & Taylor will return to its roots, Ms. Bateman continued, describing them as "the Northeast, stretching in an arc to Detroit, Chicago and St. Louis." Those "core market" stores "are really supporting Lord & Taylor's repositioning to become an upscale fashion retailer," she said.

In the tri-state area, three stores — in Hartford and Meriden, Conn., and Albany — will be closed.

Lord & Taylor will continue to update and restore the shine to its flagship stores in New York and Philadelphia, said Ms. Bateman. Although the stores that are closing made up 38 percent of the chain's locations, they only brought in 19 percent of the revenue. A competitor put yesterday's announcement another way: `'They're getting the dogs out of the kennel."

Yesterday, retail experts reacted positively, as did Wall Street, where May's stock rose $1.01, to $24.46, at the close.

"It's about time," said Allan Elliger, senior managing director for MMG, a retail management consulting group. "A lot of the stores had fallen into an abyss," trying to keep an upscale name in a downscale environment. "They'd become schizophrenic," he said.

Yesterday, Ms. Bateman said May had no target date for the closing of the stores. "Each store is being treated in an individual way," she said. In a press release issued yesterday, May said it would take charges of $380 million to cover the costs of the closings and layoffs.

May Company's stock, like that of many retailers, had been suffering. Same- store sales for the May Company, reported by stores open at least a year, were down 5.9 percent in June and down 7.2 percent for the first five months of the year. But it is difficult to assess what role Lord & Taylor's identity crisis played in the figures; Ms. Bateman said May does not break out the individual store chains. Besides Lord & Taylor, May also owns Filene's in Boston, Hecht's in Washington, Robinsons-May in Los Angeles and Strawbridge's in Philadelphia, along with others — a total of 446 department stores.

Yesterday, employees at all 32 stores were informed of the closings, Ms. Bateman said. But the shoppers interviewed seemed surprised and, for the most part, saddened.

"I'll be bummed," said Tracy Lanier, 40, a sales manager from Cumming, Ga., as she flipped through a rack of women's blazers at the Mall of Georgia's Lord & Taylor's, where the counters were covered with red signs, announcing sales of 40 percent off clothes already reduced 25 to 50 percent.

In Connecticut, others expressed surprise. "You're kidding," said Toni Ellezy, who lives in Columbia, Conn., a few towns east of the Buckland Hills store, in Manchester, which is closing. Ms. Ellezy, like several other shoppers there, said she would not travel to Lord & Taylor's branch in Farmington, Conn., a far tonier location, but one that is at least half an hour away, especially in bad traffic.

At the Crossgates mall in Albany yesterday afternoon, Jacquie Donaldson, 36, of Waterford, a suburb of Albany, let out an anguished "Oh" when she heard the news. She grew up in the Bronx, she said, and often took the subway to Manhattan to shop at Saks Fifth Avenue, Bergdorf Goodman and Lord & Taylor. Lord & Taylor was the only one she found when she resettled in the Albany area in 1990.

Nancy Fraser, 58, of Bethlehem, N.Y., a well-to-do suburb of Albany, said her daughter would be crushed to hear the news: "She'll have a fit." Her daughter lives in Raleigh, N.C., but comes home to shop. `'They'll probably put in a Wal- Mart," Mrs. Fraser said glumly.

Lord & Taylor is one of New York City's oldest department stores, founded in 1826. One of the first to sense the uptown migration, it moved to its present location at the corner of 38th Street and Fifth Avenue in 1914, according to a May spokeswoman. When May bought the Associated Drygoods Corporation in 1986, Lord & Taylor was part of the deal.

In the 1940's and 1950's, the store represented "one of the great names in retailing," said Marvin Traub, who once headed Bloomingdale's, and is now a retail consultant in New York City.

"In the era of expansion, they changed their point of view and dropped their affiliation with the designers, and became a more moderate store," he said. "They still had the Lord & Taylor name, but had lost their uniqueness."

While the analysts and other retail experts were berating Lord & Taylor for its recent past — reducing its prices and diluting its image — and saying they thought that the store closings will help the company's fiscal health, one shopper took another viewpoint.

Betsy Kozarski, 61, a retired teacher shopping in Albany yesterday, said the store "used to be where rich people shopped.

"Now that we can afford Lord & Taylor," she said, "they're going out of business."

AOL Receives SEC Request For Subscription Documents
By Julia Angwin - Staff Reporter - The Wall Street Journal
July 30, 2003

NEW YORK -- AOL Time Warner Inc.'s America Online unit, already under investigation by government authorities for its accounting of advertising transactions, has received a request from the Securities and Exchange Commission to hand over documents relating to its bulk-subscription program.

The Wall Street Journal reported on Friday that America Online's little-known bulk-subscription program generated at least 830,000 subscribers during 2001 and 2002, according to people familiar with the program. That would have accounted for nearly 17% of the company's total subscriber growth of about five million during that period.

But those subscribers weren't as lucrative -- or as active -- as America Online's regular subscribers, who paid around $20 a month for the online service. Companies such as Sears, Roebuck & Co., J.C. Penney & Co. and Target Corp. acquired hundreds of thousands of America Online accounts for little or no cost and offered those subscriptions to their employees for less than $10 a month. It isn't clear how many employees activated or used those accounts.

America Online didn't disclose the size of its bulk sales in its public financial documents, although it did mention bulk sales in its 2001 annual report: "The positive impact of the price increase was partially offset by an increase in certain marketing programs designed to introduce the AOL service to new members ... including the sale of bulk subscriptions at a discounted rate to AOL's strategic partners for distribution to their employees."

AOL executives rarely discussed the program in public. When AOL executive Robert W. Pittman was asked about the unit's declining revenue-per- subscriber in the company's first-quarter earnings conference call with analysts in April 2001, he mentioned bundling arrangements with computer makers, but not the bulk program. Mr. Pittman has since left AOL and didn't respond to a request for comment.

Tuesday, an executive in AOL's legal department sent an e-mail asking employees to retain documents related to the bulk-subscription program. AOL recently received a request from the SEC "to preserve hard copy and electronic documents, e-mail, and computer contents pertaining to bulk subscription arrangements, as well any documents and other materials relating to the company's practices, policies, and procedures for counting subscribers," according to the e-mail.

The SEC declined to comment.

Accounting experts say there are no specific rules governing disclosure of items such as subscriber counts, but companies do have an obligation to disclose any information of concern to investors.

During the height of the Internet boom, analysts and investors kept a close eye on AOL's subscriber and advertising growth as measures of its performance.

The bulk-subscription program was launched in 2000 and quickly grew in 2001, according to people familiar with it. Many of the deals were included in broader marketing arrangements between the companies and America Online. Partners included: Sears, which acquired 185,000 accounts; J.C. Penney, which acquired 250,000 accounts; Target, which acquired 350,000 accounts; UAL Corp.'s United Airlines, which acquired 25,000 accounts; and CompUSA Inc., which acquired 20,000 accounts.

The Wal-Mart Way Becomes Topic a in Business Schools
By Constance L. Hays - New York Times
July 27, 2003

WAL-MART isn't just a place for bargain hunters. It's also one-stop shopping for professors. At universities across the country, interest in Wal-Mart Stores has soared in the last five years, and all sorts of courses address specific questions raised by the company's dominance. It is, increasingly, an example of what to do — and as some professors see it, what not to do.

Just as Wal-Mart, the $244-billion-a-year retailer, has put countless rivals out of business, Wal-Mart, the case study, has shoved aside General Motors, Sears and other companies as the paragon of business prowess.

"It's the awe that General Motors used to have, when people would say, `Not everybody is General Motors,' " said Eugene Fram, a professor of marketing at the Rochester Institute of Techonology. "Now you have to say, `Not everybody is Wal-Mart.' "

Some professors hold up Wal-Mart as an example of how to do things right or to explain important concepts. Professor Fram, for one, uses Wal-Mart to illustrate ideas like "channel commander," a term for the distributor with the most power. And to Uday M. Apte, an associate professor of operations management at Southern Methodist University in Dallas, "no company better illustrates the principle of `cross docking,' " a technique to minimize trucking expenses.

Others turn to Wal-Mart to highlight social problems that may be overlooked in the shopping scramble —issues like the impact of goods that are made abroad and sold cheaply in the United States. "Most of the issues we discuss with Wal-Mart as an example really have broader applications," said David A. Anderson, associate professor of economics at Centre College in Danville, Ky. He leads students on trips to the local Wal-Mart as part of the course.

Some of the scholarly interest is to be expected: no large company escapes scrutiny, and Wal-Mart has often been in the news over everything from its labor practices to its recent decision to extend its antidiscrimination policy to gay employees.

Wal-Mart's rapid growth the last decade has also placed more of its stores closer to academic centers like Boston, so professors who once might have had only a theoretical knowledge of its operations can now see them in action.

This interest in Wal-Mart has even created growth in a subindustry in materials that are useful to students. The retailer has become a best-selling topic for the Harvard Business School, which sells Wal-Mart case studies to business schools around the world. The newest such study, published in March, discusses the company's strategy for so-called neighborhood markets: building smaller stores in some areas to help Wal-Mart capture more grocery business from local chains.

IN crucial aspects of retailing, judging by the words from the lectern, Wal-Mart becomes the company to watch, to study, to emulate. Edward Fox, director of the J. C. Penney Center for Retail Excellence at S.M.U., describes it as the "800-pound gorilla" to the seniors who sign up for the marketing elective he teaches. When it comes to strategy, pricing, the behavior of competitors, the decision making of suppliers, cost structure and promotion, the Wal-Mart name always comes up.

"They make the market," he said.

Perhaps the most specific lesson to emerge from Wal-Mart is obvious, but its impact has been enormous: costs of all kinds must be kept low so products can be sold for less. "If I've learned anything about Wal-Mart, it's that cost is king," said Professor Fox, who began studying it a few years ago. "They have an almost single-minded focus on reducing costs. It's imbued throughout the organization. They are very stingy when they buy for America and distribute products for America."

For Robert Letovsky, associate professor of business at St. Michael's College in Colchester, Vt., Wal-Mart's inventory management, through a network of scanners, computers and at-the-ready suppliers, makes it a textbook example of successful turnover — the retail world's term for goods moving off shelves and into consumers' hands. The faster that process, the more profitable a store.

"When it comes to turnover, you want to hold up somebody who is a paragon of efficiency," he said. "And Wal-Mart is the paragon."

Many students now in college have grown up with Wal-Mart. To them, it is not a distant rural phenomenon, the way it might have been only 10 years ago. It is a place where they shop — for school supplies, household products, groceries, gasoline and incidentals.

TO some, it is more personal than that. Some students have been forced to return to school to gain new skills because their previous businesses were destroyed by Wal-Mart's strength. "We've had several students who had small hardware or apparel stores, and as soon as Wal-Mart would come into a nearby town, it would hurt their business," said Jeffrey E. McGee, chairman of the management department at the University of Texas at Arlington. "That is one of the reasons they are going to the university, to change their career."

Other students have experienced the impact of Wal-Mart in slightly less direct ways. The 40- and 50-year-olds who are returning to school for master's degrees have worked in environments that have been deeply affected by Wal-Mart's practices.

"Their experience at work is higher value, lower cost, every single day," said Gordon Walker, chairman of the department of strategy and entrepreneurship at S.M.U.'s Cox School of Business, who does not include Wal-Mart in his own courses. By his account, he doesn't have to. "They all manage to a spreadsheet," he said. "The amount of control they are forced to respond to is huge. Wal-Mart has contributed to that."

Wal-Mart has tried to become a force within education in its own way. Using some of the money from its vast sales, it has financed retail centers at several large universities, where the company's executives lecture and its recruiters descend to hire new talent. Among the recipients, a spokeswoman said, are Western Michigan University, Texas A&M, the University of Washington and the University of Florida.

Wal-Mart has sponsored retail centers for about nine years, according to Betsy Reithemeyer, director of the Wal-Mart Foundation, which is backed by sales from the stores. Her budget, which covers a variety of grants besides those to retail centers, is $150 million — double the amount three years ago.

The company's profit also flows to education through other avenues. The Walton Family Foundation, controlled by the relatives of Sam Walton, who opened the first Wal-Mart in Rogers, Ark., in 1962, pledged $300 million to the University of Arkansas last year to build up its undergraduate and graduate programs. In 1998, the foundation gave $50 million to rename the business school on the university's main campus in Fayetteville after Mr. Walton, who was commonly known as Mr. Sam.

Retail centers first appeared at colleges in the 1930's and were financed by department-store chains like Gimbel Brothers and Horne's, Professor Fram said. "They all declined in the 1960's, as the department stores started to have less impact," he said. Those retail centers still exist, but Wal-Mart has been more active in financing its centers than many department stores have been with theirs.

Sam Walton might not be happy with all the lessons that professors are taking from his business. Joseph M. Pastore Jr., a professor at the Lubin School of Business of Pace University in White Plains, will use a Wal-Mart case study in a strategy course this fall — and he both praises and questions the Wal-Mart way. He notes that its huge success has come about in part because Mr. Walton ignored traditional thinking and built his stores in rural areas first.

He suggests, though, that the company's spectacular growth may not be sustainable. "Wal-Mart is getting closer to the sun," he said. "They scrapped 20-plus stores for Germany because the courts there forced them to raise prices to avoid preying on small businesses." He also doubts that some of Wal-Mart's cultural hallmarks — like the Saturday-morning chant in which workers shout "Give me a W!" — will translate well everywhere the company wants to go.

"Can you hear people in the Bronx: `I'll give you a W!' " he said.

Other issues for Wal-Mart include unions, which the company has mostly avoided but which are more dominant in urban areas, as well as higher real estate costs, taxes and increased congestion that could cut into its famed efficiency.

Academics are also looking at the negative consequences of Wal-Mart when it comes to considering ethical, environmental and social issues. Professor Anderson of Centre College, a small liberal-arts college founded in 1819, began teaching his environmental economics course three years ago, with Wal-Mart front and center as a symbol of what he calls "the repercussions of buying cheap things."

Shoppers may be drawn to Wal-Mart because of inexpensive products that have been imported from countries like China, Professor Anderson says, where labor and environmental standards are lower than in the United States. But there are larger costs, he tells his students, that are not factored into the price on the tag.

"If we paid the full cost of the gasoline and the plastic and the health costs of pollution, all of these things would be far more expensive," he said.

Professor Anderson also teaches a freshman seminar called "Economics in an Ethical World," in which he discusses the benefits Wal-Mart brings as well as the downside. "It allows poor people to buy food and other necessities," he said. "That's the good thing. The bad thing is that it erodes downtowns and eliminates nicer stores that have better service and pay their workers better." Among the reading assignments is "Nickel and Dimed: On (Not) Getting By in America," part of which details the author Barbara Ehrenreich's stint at Wal- Mart.

About a year ago, James E. Hoopes, a professor of history and business ethics at Babson College in Massachusetts, began looking at what he called the symbolic aspects of Wal-Mart.

The company's approach to commerce contravenes the American dream for some people, he said. "It's a new kind of twist because it does affect the lifestyles of so many of us," he said. "It is an enormous employer, and it is identified with what's happened with America in the last 25 years." Gone are many of the high-paying skilled jobs that the automotive plants once provided; instead, people are punching a cash register at Wal-Mart for half the money, he added.

That perception of reduced opportunity carries over into spending, he says. "People have a sense of being trapped in this marketplace," he said. "You work for these low-wage jobs, and you can have your American dream as long as you buy it at Wal-Mart. So the dream is getting standardized, and downscaled, in a way that hasn't happened before."

FOR Marshall Blonsky, a professor of semiotics at the New School and Parsons School of Design, both in Manhattan, a recent trip to the nation's largest Wal-Mart, in Kansas City, Mo., shed new light on principles that he believes have long existed in retailing and the rest of society. Mr. Blonsky prowled the store's displays of Pop-Tarts, leather armchairs, DVD's and bright blue polyester fabric by the yard, which he said struck him as "America's least common denominators gathered together."

He said he did not think that all of the prices were especially low, given what the consumer received in return; the leather armchairs, made of downmarket pigskin, got his particular notice. He found the store's overall design, from its fluorescent lighting to its warning signs about shoplifting to its plain linoleum floors, conscientiously nonthreatening in its lack of style.

With closed-circuit television streaming product-moving information at shoppers and little help in making purchasing decisions except at the checkout aisles, "it is a heartless experience," he said.

He added: "It proves something I have been trying to teach for years: the indifferent equivalence of everything with everything else, for an audience that has no concern for that difference, and no discernment of quality."

A Bulk-Sales Initiative by AOL May Have Inflated Subscriptions
By Julia Angwin - Staff Reporter -  Wall Street Journal
July 25, 2003

AOL Time Warner Inc.'s America Online unit may have been hyping its subscriber numbers.

The media giant hinted at that this week when Don Logan, the executive who oversees America Online and Time Inc., said one reason for the company's unexpectedly high subscriber losses was the result of "cleaning up the files."

People familiar with the situation say part of the cleanup involves the termination of subscribers generated by a little-known America Online initiative. Starting in 2000, AOL began selling limited-usage online accounts in bulk for as little as $1 to $3 a month to its marketing partners such as Target Corp., J.C. Penney Co. and Sears, Roebuck & Co. A regular limited-usage subscription at that time cost about $10 a month, while a regular subscription was slightly more than $20. The retailers then could offer the online service to their employees for a discount and pocket the difference.

It isn't clear how many of those subscriptions were offered to employees or even activated. And there are no rules governing the reporting of such subscribers.

In total, people familiar with the situation say America Online generated at least 830,000 subscribers through these bulk sales, mostly during 2001 and 2002. That would have accounted for 16.7% of the total subscriber growth, which was just under five million, during that period. Currently, AOL has 25.4 million U.S. subscribers, down from a peak of 26.7 million on Sept. 30, 2002.

The sudden drop in America Online's subscriber numbers -- which many investors tracked carefully when AOL stock was high and which shocked Wall Street this week -- echoes an earlier steep decline in its advertising revenue. America Online has come under fire for using complex deals with vendors and customers to boost ad sales. It now appears that similar tactics were used on the subscriber side.

AOL makes only a brief mention of bulk sales in its 2001 annual report: "The positive impact of the price increase was partially offset by an increase in certain marketing programs designed to introduce the AOL service to new members, including ... the sale of bulk subscriptions at a discounted rate to AOL's strategic partners for distribution to their employees." AOL executives say nearly all bulk subscriber programs have been terminated since then. Sears and Target subscribers, however, have been given an option to continue buying the online service at a discounted price of $14.95 a month.

AOL's massive push for bulk sales in 2001 is yet another sign that the former Internet highflier was struggling to meet Wall Street's expectations after its merger with Time Warner in January 2001. Wall Street was closely watching AOL's online advertising revenue and subscriber growth for signs that the division would continue to grow as quickly as it had during the 1990s.

That rate slowed last year after the Securities and Exchange Commission began investigating America Online's advertising revenue -- some of which included one-time payments, stock sales and "round trip" deals in which money flowed both ways between AOL and the advertiser. Last year, AOL restated $190 million in advertising revenue that was incorrectly booked between 2000 and 2002. The company has also warned it may have to restate at least some portion of another $400 million in ad revenue that the SEC believes was incorrectly accounted for, although AOL so far believes was treated appropriately.

Seeking New Source
According to a former AOL executive, the bulk-sales initiative was launched in 2000 as a way to find new sources of subscribers by targeting corporations that wanted to improve communications with their large base of employees.

AOL executives moved on the project after watching the success of a November 2000 deal in which DaimlerChrysler Corp. and General Motors Corp. agreed to offer America Online to their employees for $3 a month, the former employee says. In that deal, people familiar with the situation say, AOL counted as subscribers only those employees who signed up for the service. Those arrangements are still in effect.

The bulk-sales deals were a bit different, though. In these deals, companies such as UAL Corp.'s United Airlines would buy a bulk quantity of subscriptions for their employees for a rate of as low as $1 to $3 a month per subscriber. That way AOL could report an increase in subscribers during the life of the deal -- usually a year. United had the opportunity to resell these limited- usage subscriptions to its employees, which it did at $8.83 per month.

The existence of these programs wasn't widely known. When asked about the arrangement, J.C. Penney communications executive Rita Trevino Flynn says, "Well, they haven't offered it to me." J.C. Penney acquired 250,000 subscriptions, according to people familiar with the situation.

A J.C. Penney spokeswoman said there was no purchase involved, but confirmed that the company offered discounted AOL subscriptions to its employees. She wouldn't elaborate.

Target bought 350,000 bulk subscriptions in 2001, according to people familiar with the situation. A Target spokeswoman says the company's bulk subscription arrangement with AOL is no longer in effect, but that AOL continues to honor the accounts of Target employees.

Sears spokesman Chris Brathwaite says the bulk discounts were negotiated as part of Sears's marketing partnership with AOL. He says the offer "was communicated [to employees] in various internal channels." People familiar with the situation say Sears bought 185,000 America Online accounts.

Making the Pitch
America Online also pitched these arrangements to Office Depot Inc., McDonald's Corp., Wal-Mart Stores Inc., Kinko's Inc., Home Depot Inc., Hewlett-Packard Co. and Philips Electronics NV, among others, according to people familiar with the deals. It wasn't immediately clear how many of the companies participated.

Of course, the idea of bulk sales isn't new. Magazines and newspapers routinely sell their publications in bulk to hotels or airports that resell the copies to their customers. But the publications routinely disclose such sales, and advertisers consider those sales of lower quality when negotiating ad rates.

In its May filing with the SEC, AOL said 14% -- or 3.7 million -- of its 26.2 million U.S. subscribers were on lower-priced plans, which include the bulk employee programs as well as a host of other promotions. The company said those lower-priced subscribers are paying, on average, $11.13 a month.

People familiar with the situation say nearly all the bulk sales have since been terminated. AOL first acknowledged that it was re-evaluating these programs in May, disclosing in a public filing that its loss of 289,000 U.S. subscribers in the first quarter was due in part to a "reassessment of various marketing programs, including bulk subscription employee programs."

This week, AOL said it purged 380,000 subscribers from its rolls because they weren't paying, or had committed some violation that got them kicked off the service.

During a conference call with investors this week, AOL's Mr. Logan hinted there could be more scrubbing of the subscriber rolls. "More of those things will occur in the early part of the cycle, and it will stabilize over time," Mr. Logan said.

The Struggle in Store for Sears
STREET WISE - By Robert Berner - Business Week Online
July 24 2003

Selling the credit-card division has lifted the stock and bought time for tackling the retailer's biggest woe: Sales that keep on shrinking

With the July 15 sale of Sears Roebuck's credit-card business to Citigroup (C ) for $3 billion, CEO Alan Lacy bought the struggling retailer some much-needed time and wowed Wall Street, which hadn't expected the operation to fetch anywhere near that price. Now, as Lacy focuses on turning around the outfit's ailing retail unit, the extent of investors' patience remains to be seen.

Just two days after the deal was struck, the news out of the venerable retailer's Hoffman Estates (Ill.) headquarters was sobering: Sears (S ) was reporting a 31% decline in second-quarter profits (excluding one-time gains) and lowering guidance for the year. That announcement underscored the hurdles Lacy must overcome, since falling profits at Sears' retail operations were to blame for the decline. "I don't see signs" of a turnaround, says Dreyfus retail analyst Elaine Rees.

Investors are giving Lacy the benefit of the doubt, at least for now. And the Street clearly found much to cheer in the price Lacy received for the credit business, which has struggled with rising charge-offs since last fall. Since the announcement of the Citigroup deal, expected to close by yearend, Sears' stock has risen by 14%, closing at $40 on July 23.

SWEET PLUSES. The $3 billion Citigroup is paying for the credit unit, equal to a little more than 10% of the $29 billion in receivables, nearly double analysts' expectations. In addition, disposing the division will free another $3 billion that Sears had dedicated as a reserve on its balance sheet to cover losses on bad credit-card debt. All told, the sale creates $6 billion in pretax proceeds, or $4.5 billion aftertax.

Making the deal sweeter, Sears estimates it will receive $200 million annually from Citigroup in performance payments for opening new accounts and generating sales paid for with those in-house credit cards. Nor will Citigroup charge Sears for short-term, 0% finance offers. That will save Sears' retail operation approximately $200 million annually, since the credit division now charges the retail unit for those consumer promotions and incentives. Combined, the performance payments and finance savings will net retail operations at least $260 million annually after taxes, predicts Joseph Grabowski, an analyst at Strong Capital Management.

That certainly gives Lacy some room to maneuver, Grabowski adds, even if retail profits continue to be sluggish in 2004. He sees Sears' store business posting net income in 2003 of $630 million, which would be flat with 2002. But even if next year's retail profits don't rise, the performance payments and finance savings would boost Sears' net closer to $900 million. Meanwhile, analysts say it's almost certain that Sears will use the bulk of the $4.5 billion proceeds from the sale to buy back stock.

RECOVERY POSTPONED. Sears spent a mammoth $1 billion on its own shares in the second quarter -- acquiring 11% of those outstanding -- and its board has just authorized another $1 billion buyback. Reducing the number of outstanding shares will put additional lift under the stock and is likely to accelerate earnings-per-share (EPS) growth. Says Grabowski: "I could see Sears' stock trading at $50 in the first couple months of [2004]."

Other analysts are more dubious, questioning why investors would want to reward earnings growth that doesn't stem from increased sales. For each of the past 22 months, same-store sales (those at locations open for at least a year) have declined -- and they have done so despite all efforts to stop the bleeding, such as Sears' acquisition in 2003 of apparel catalog outfit Lands' End. Plus, the retailer has continued pushing back its forecast for when same-store sales will turn positive, with the latest estimate being before yearend.

Further highlighting the importance of reviving sales growth: The performance payments and finance savings will provide a once-only boost to annual earnings, and they'll be built into all comparisons made in subsequent years. In the past, Sears could often count on credit income as a hedge against weak retail profits, as was the case in 2000 and 2001. With that option gone, investors "will be forced to pay more attention to the retail operations," notes Gimme Credit analyst Carol Levenson in a report.

SCANT INFO. Sears hasn't demonstrated much reason for them to be optimistic. It's losing market share in its appliance business, the retailer's biggest generator of sales and profits. Sears has long been the market leader in that category, but home-improvement retailers Lowe's (LOW ) and Home Depot (HD ) are cutting into that lead, thanks to more convenient locations and easier-to-shop stores. In this year's first quarter, according to research outfit Stevenson Co., Sears' appliance market share fell by 3.2 percentage points, to 38.6%, vs. the same period a year ago.

And despite the introduction of the Lands' End label in 400 of Sears' 870 outlets, same-store apparel sales overall are still down. In its second-quarter conference call, Sears said such sales were between 2 percentage points and 4 percentage points better at stores with Lands' End clothing. But with the scant information Sears has provided on Lands' End, it's hard to analyze whether the improvement is due largely to the higher prices being charged for the brand, notes Levenson. However, the conference call did make clear that the higher gross profit margin Sears is earning on Lands' End is being more than offset by the higher expenses associated with selling the brand.

Furthermore, some analysts contend that Sears' sale of its credit business could ultimately hurt retail revenues. That's because its ability to offer credit to consumers has been integral to boosting sales. In 2002, 44% of total sales were on Sears' plastic -- and the figure was even higher for appliances. Richard Church, managing director of hedge fund Shumway Capital Partners, argues that Citigroup will be focusing on its profits rather than driving Sears' sales -- a contention the retailer staunchly denies.

MINDING THE STORE. Rivals Lowe's has echoed Church's argument to major investors, contending that Sears' control of its own credit business was the last major strategic advantage it enjoyed in the appliance business, according to one major institutional investor, who declined to be named. Predicts Church: "It will take some time, but Sears will be hurt by this."

Thomas Bergmann, vice-president for finance at Sears, counters that the Citigroup deal will have the opposite effect. His argument: As one of the nation's largest credit-card companies, Citigroup has greater risk-management skills, a wider selection of credit products to offer, and lower costs of funds. All these factors could indirectly spur sales at Sears.

Whatever the case, CEO Lacy insists that the sale is in Sears' best interests because it will put the emphasis on turning around the retail business, an argument some analysts endorse. It also will make the stock -- which trades at a price-earnings ratio of 7, well below the department-store average of 11 to 12 -- a pure retail play. That also could help lift the multiple.

WATCHING CLOSELY. Lacy is making a big gamble that he can turn around the retail business, a goal that has eluded Sears' management for years. His maneuvers to cut costs in the retail business are running out of steam, no longer able to hold up profits in the face of falling same-store sales. Short term, the aggressive buyback of Sears' shares will certainly increase earnings per share, as will the payments and savings associated with the Citigroup transaction.

But the smart money will be watching the retailer's top line. Excuses are in short supply -- and Lacy has little time left to deliver the goods.

 

Wal-Mart's New Slogan: Union Made?
By Evan Hessel - FORBES.COM
July 23, 2003

CHICAGO - Coming to a Wal-Mart near you: Unions.

Founder Sam Walton built the retailer on the premise that happy employees made for happy customers. The formula worked. Wal-Mart (nyse: WMT - news - people) is the nation's largest retailer, ringing up $244.5 billion in sales last year alone.

But these days, blue-vested Wal-Mart greeters are far from cheerful. They have filed more than three dozen separate lawsuits in 30 states accusing Wal-Mart of violating federal wage-and-hour rules, sex discrimination (see Wal-Mart's Women Troubles) and threatening workers involved in union activities.

Meatcutters at a Jacksonville, Texas, store won the right June 18 to unionize, making them the first employees to collectively bargain in the company's 41- year history. The fight ends a three-year struggle for one of the biggest unions in the nation, the 1.4-million member United Food and Commercial Workers.

The UFCW is strategically attacking Wal-Mart in markets where the retailer is planning to expand: the heavily unionized Northeast, Mid-Atlantic and California, territory where Wal-Mart has already opened 20 new stores this year. Having exhausted sites in small-town America, Wal-Mart is rolling into urbanized areas with plans to open or expand 300 new stores in fiscal 2004. "When you win a union election in one store, you see that domino effect. Soon they're all going to fall," said Leonard Purnell, director of organizing for UFCW Local 1776 in Philadelphia.

Wal-Mart earned $8 billion last year. But the retailer remains hooked on new store openings to help fuel its growth both domestically and internationally. Overall sales have slowed from 12% annual growth in the mid-1990s to the current 10% annual growth. Increasingly, it is looking like some of those new stores will be staffed by union employees.

Not surprisingly, Wal-Mart soft-pedals the labor issue. "Our associates would rather save their hard-earned dollars and talk to their supervisors and managers than pay someone else to do that for them," said Wal-Mart spokeswoman Christie Gallagher.

The retailer says it pays its 1.1 million U.S. workers competitively, treats them fairly and allegations in lawsuits are aberrations. Maybe so, but if recent developments are an indication, Wal-Mart could have some problems dispelling negative public relations.

Hourly workers have filed 40 separate lawsuits alleging store managers systematically forced them to work off the clock, according to Wal-Mart's April quarterly report. On Tuesday, a California judge postponed indefinitely a hearing to decide if 1.5 million women can be added to a lawsuit by seven current and former female Wal-Mart associates alleging that the retailer systematically paid women lower wages and denied them promotions. And in Villa Rica, Ga., Wal-Mart settled a lawsuit alleging store managers spied on employees and threatened them for soliciting for the union in their free time.

In Wal-Mart's home state of Arkansas, the state Supreme Court overturned a lower court's decision in June banning UFCW workers from entering Wal-Mart stores.

The decision gave momentum to UFCW national unionization drive underway in 26 states. More than 200 UFCW members stormed a Saddle Brook, N.J., Wal-Mart in November as part of the UFCW's effort to organize workers in areas where
Wal- Mart is opening stores.

All this is likely to add up to some big numbers for Wal-Mart. Employees at the retailer currently earn an average of $7.50 per hour, which is $2 to $3 less--a whopping 20% to 30%--than unionized counterparts at Target (nyse: TGT - news - people ) and Kmart (nasdaq: KMRT - news - people ). A typical Wal-Mart employee earns $18,000 annually and either isn't eligible for or cannot afford premiums on health or pension benefits.

Wal-Mart's past success has been tied to superior logistics, keeping costs low and driving volume. Wal-Mart doesn't have a lot of headroom to absorb higher wage costs. A typical Wal-Mart does about $53.7 million in sales with an operating margin of about 7.5%, surely not enough to cover a 20% to 30% boost in wages without raising prices. Wal-Mart could always trim staff, but what would that do to its prided customer service?

This might be good news for competitor Target. But it's a bad omen for investors paying 30 times 12-month trailing earnings for the retailer's stock, which closed yesterday at $56.90, up 94 cents.

Fewer Retirees Get Drug Coverage From Employers
By Reed Abelson - New York Times
July 23, 2003

The number of people retiring with health insurance from their employers has dropped significantly since 1996, according to a new study, leaving many recent retirees without coverage for prescription drugs.

The study, which was conducted from interviews of Medicare beneficiaries 65 to 69 years old, appears today on the Web site of Health Affairs, an academic journal.

While the overall percentage of Medicare beneficiaries with employer- sponsored coverage has remained relatively steady, according to the study, the percentage of younger Medicare beneficiaries with coverage fell to 39 percent in 2000 "the most recent information available" from 46 percent in 1996.

The study shows that future decreases in the number of retirees covered under their employers plans is "starting from a base that is lower than most people believe," Bruce Stuart, one of the study's authors, said. Mr. Stuart is the executive director of the Peter Lamy Center on Drug Therapy and Aging at the University of Maryland School of Pharmacy.

The findings, Mr. Stuart said, emphasize the need for a Medicare benefit as well as the importance of structuring the government coverage in a way that helps preserve employer-sponsored coverage.

Many employers are pressing for passage of the legislation, but there is considerable debate in Congress over how to discourage companies from dropping the policies they now offer. Many retirees rely on their employers' coverage to pay for prescription drugs that are not covered under the Medicare program, and there is concern that the Medicare benefit could leave them with coverage that is significantly less generous than what they receive from an employer.

"People are going to be very, very disappointed in what they get," Mr. Stuart said.

The House and Senate, which are now in conference to work out a bill, need to address "the need for strong assurances about retiree health coverage," said John Rother, director for policy and strategy for AARP, which lobbies for older Americans. "We do not want them to just ignore it."

How employers would react to a Medicare prescription-drug benefit is unclear, given that many companies are already cutting their coverage. The Employee Benefit Research Institute, for example, recently released an analysis suggesting that only a fraction, from 2 percent to 9 percent, of current retirees with employer coverage are at risk for losing it solely because of the legislation. As the institute noted, "there have been and currently are powerful forces at work in the marketplace that are shrinking the availability of retiree health benefits regardless of policy changes in Medicare."

"The vast majority of today's retirees and the vast majority of tomorrow's retirees are dependent on Medicare and anything else they can afford to pay for" to provide drug coverage, said Dallas L. Salisbury, an analyst at the institute.

Even fewer male retirees would have had health insurance from an employer if more women had not entered the work force, providing their husbands with coverages, Mr. Stuart said. But many employers are no longer paying for spousal benefits, he said, so such coverage will probably be available only at a high cost to future retirees.

The study also showed that while retirees were able to obtain drug coverage from other sources, like private health plans offering Medicare coverage, fewer individuals are buying policies that offer supplemental coverage. Retirees are probably not going to turn to such policies in the future because of the rising cost, Mr. Stuart said.

Private health plans have also dropped out of the Medicare program in recent years, and there are fewer beneficiaries enrolled in these plans.

"In short, we can expect that greater numbers of new retirees will face the prospect of having no viable source of outpatient prescription drug coverage," the study's authors concluded.

The challenge before Congress is to come up with legislation that does not lead to more companies dropping coverage, Mr. Stuart said. In particular, he pointed to the Senate bill as making it difficult for employers to offer coverage that can be easily combined with the proposed drug benefit.

The Congressional Budget Office, for example, which provided earlier estimates that suggest a more drastic effect on retirees, calculates that the Senate bill will result in more companies dropping coverage than the House version.

Copyright 2003 The New York Times Company

Credit Card Sale Puts Focus on Lacy's Big-box Plan
Sears' New Challenge: Spinning Retail Gold
By Sandra Jones - Crain's Chicago Business
July 21, 2003

When Sears, Roebuck and Co. wraps up the sale of its credit card business to Citigroup Inc. later this year, the shrinking company will be relying solely on its chain of stores for the first time in its 110-year history.

The lucrative credit card business provided cover for Sears' long-troubled store operations for years, enabling the company to generate a steady stream of profits even as store sales stalled and shoppers fled to the likes of Wal-Mart Stores Inc., Home Depot Inc. and Target Corp.

Now, with nowhere left to hide, Sears is pinning its hopes on a new big-box retail format to fuel the growth it so desperately needs to survive. The soon-to-be opened pilot stores, called Sears Grand, copy the formula that Wal-Mart and Target have been using for a decade: sprawling, single-floor stores located in strip centers that feature wide aisles, shopping carts, central checkouts and plenty of convenience items including greeting cards, laundry detergent and bottled soft drinks.

"The critical element that retail investors look for is growth," says Bill Dreher, a retail analyst at Deutsche Bank Securities Inc. in New York, who has a "hold" rating on Sears stock. "And this has been a major element that has been missing from the Sears story."

The Hoffman Estates-based retailer has stagnated at about 870 full-line stores for more than 20 years. Most of the stores are located in malls, whose popularity has waned as "power centers" and superstores flourished.

Wal-Mart, Target, Home Depot, Costco Wholesale Corp. and Lowe's Cos., to name a few, are all adding hundreds of stores a year while Sears is standing still.

Wal-Mart passed Sears in the early 1990s to become the No. 1 U.S. retailer, and now has six times Sears' sales. The Bentonville, Ark.-based company has roughly 3,400 U.S. stores and plans to open about another 250 this year.

Atlanta's Home Depot — which in 1996 was the eighth-largest U.S. retailer, generating only half of then-No. 2 Sears' sales — now ranks as the second- largest in the U.S. It operates more than 1,500 stores — 700 of them opened in the past five years — and plans to add 1,000 stores in the next three years.

And Sears got knocked down another notch earlier this month when the National Retail Federation announced its annual ranking of stores. Minneapolis-based Target overtook Sears as the fourth-largest retailer, pushing Sears to the No. 5 spot. Costco, ranked No. 6, is poised to jump ahead of Sears as soon as next year.

Even upstart Lowe's, a North Carolina-based home improvement chain, has caught up with Sears, with 875 stores and plans to expand to more than 1,300 by 2005.

Ironically, as Sears is preparing to join the big-box boom, Wal-Mart, Target and others, in search of cheap real estate, are starting to move into the malls, taking over space formerly owned by department stores — Wal-Mart on Long Island and in Los Angeles, and Target in California, Connecticut and Maryland, among other locations.

A decade behind its competitors in the big-box game, the Big Store faces big challenges in getting the Sears Grand concept off the ground.

Sears has no experience selling groceries and other convenience items, a business with high distribution costs and low profit margins. And shoppers, already inundated with store choices, need a reason to go to Sears instead of another store, experts say.

"It's going to be very tough to find a niche," says Gary Ruffing, senior director at Southfield, Mich.-based turnaround consulting firm BBK Ltd. who spent much of his career at Troy, Mich.-based Kmart, where he was vice-

president of sales and, earlier, vice-president of store operations. "Wal-Mart has carved out a low-price, in-stock niche. Target has 'tar-jhay' chic. So, where do you go and what do you stand for?"

What to do with the cash
When Sears completes the sale of its credit card unit for about $3 billion in cash to New York-based Citigroup, the retailer will be left with a $31.5- billion business that includes the 870 full-line store chain, generating about $23 billion in sales.

The rest of its revenues will come from 767 dealer-owned hardware stores in small towns, 249 company-owned Sears Hardware and Orchard Supply Hardware stores, 225 National Tire & Battery stores, 20 Great Indoors stores, 38 Sears outlets, product repair services and Lands' End catalog and online sales.

As part of the deal, Sears will get access to another $3 billion in cash freed up by the credit card unit's sale. After paying taxes and fees associated with the sale, Sears will have about $4.5 billion in cash.

Chairman and CEO Alan Lacy has told investors he is considering using that money to pay down debt, buy back stock, help fill the pension shortfall and for "general corporate purposes."

Mr. Lacy has declined to answer questions about the possibility of using the money for acquisitions. But retail experts are talking about Sears possibly deploying the funds to acquire Kmart stores for Sears Grand locations.

Kmart, which emerged from Chapter 11 bankruptcy in May, eliminated its poorest-performing stores as part of its reorganization and is left with about 1,500 stores, mostly in strip malls.

An investment group led by Connecticut multimillionaire — and Kmart Chairman — Edward Lampert owns a 10.13% stake in Sears and more than 50% of Kmart shares.

Grand plans
The first Sears Grand is slated to debut in West Jordan, Utah, in late September, followed by one in north suburban Gurnee next spring. A total of five pilot stores are planned. A Sears spokesman declined to discuss further plans.

The 200,000-square-foot stores will carry the same items as traditional Sears stores — clothing, appliances, electronics, tools — along with the new convenience items such as health and beauty aids, compact disks and plants.

Sears is hoping the convenience products will boost store visits — the number of annual visits by an average shopper — a measure in which Sears lags competitors. Shoppers come to Sears an average of 3.8 times a year, compared with more than 20 times for Wal-Mart, 10 for Target and about nine for Home Depot.

"Customers don't think of Sears stores as exciting, and that's got to change," says Sid Doolittle, founding partner of McMillan/Doolittle LLP, a Chicago-based retail consulting firm. "This is Sears' best hope. It's risky, but they have no choice."

©2003 by Crain Communications Inc.

Cutting the Card
Once Unthinkable, Sale of Credit Unit Ends an Era at Sears
By Sandra Jones - Crain's Chicago Business
July 21, 2003

When Sears, Roebuck and Co. sold its first product on credit in 1911 — a cream separator for skimming the cream from milk — all it required from customers was a letter from their banker stating that they were "reliable."

The Big Store's pioneering consumer credit programs helped build the American middle class by putting "luxury" items like sewing machines, iceboxes and phonographs within reach of almost every household.

Middle-class America, in turn, built Sears into the world's largest retailer, a position it held for most of the 20th century, by buying into the notion (considered downright shameful a century ago) that living on borrowed money is a good thing.

The formula worked for decades — that is, until the late 1970s, when the first of a series of missteps and speed bumps helped bring Sears' credit division to its current crossroads.

Most recently, an ill-conceived foray into a general-purpose Gold MasterCard — which attracted too many high-risk credit holders just as the economy went into a recession — finally prompted Sears to take the stunning step of shedding the highly profitable division. Chairman and CEO Alan Lacy put Sears' 92-year-old credit business up for sale in late March; Citigroup Inc. of New York agreed last week to pay about $3 billion in cash for the division.

The dramatic decision to unload credit means Hoffman Estates-based Sears will sink or swim on the strength of its retail operation alone, an operation that has been losing shoppers to Wal-Mart Stores Inc., Target Corp., Home Depot Inc. and Kohl's Corp. for years.

"The sale of the credit card business is a bad omen," says James Schrager, clinical professor of entrepreneurship and strategy at the University of Chicago's Graduate School of Business. "They've just thrown the engine out of the ship because it weighs too much. Now, they have nothing to drive with."

As early as the 1920s, Sears fell into the trap of juicing sales by extending easy credit to too many people who were unable to pay their bills when the economy turned bad. It happened again in the 1970s and the 1990s and just last year.

The surge in sales masked the trouble at the stores for a while. But, inevitably, the new credit card holders would stop paying their bills, and the company would have to increase its reserves and tighten its lending policy.

Arthur Martinez, who attempted to revive Sears as its chairman and CEO in the 1990s, confesses in his book, "The Hard Road to the Softer Side," that the tug to turn to credit when stores were flagging was a constant temptation.

"Had I gone out to look for more customers, and was credit one of the ways I did it?" writes Mr. Martinez. "Guilty. We were losing customers at a furious rate when I arrived in 1992."

But, relying too heavily on credit was a risky business. Mr. Martinez got into trouble in 1997 when Sears experienced a big spike in credit card delinquencies, a result of a major push to attract new accounts three years earlier. Chargeoffs soared and cut into earnings.

At the same time, Mr. Martinez was saddled with a problem that had been hidden within the credit division for a decade: Sears had been collecting money from credit card customers who had declared personal bankruptcy, a practice forbidden by law without a judge's approval. The retailer wound up paying a $60- million fine and taking a $475-million charge to cover the investigation and restitution to nearly 200,000 debtors.

Sacrosanct unit
Still, Mr. Martinez held onto the business, noting in his memoir that credit and merchandise had "such a deeply placed relationship" that "the two can no longer be separated."

He adds, "We used our credit offerings the way Sears had always used its credit

offerings, as a doorway to the comforts of life for the Great American middle class."

Indeed, the credit business had developed such mythological status inside Sears that cutting it loose from the tradition-bound company had become unthinkable. In 1972, when Sears ruled the American retail landscape, more than half of the households in the U.S. held a Sears credit card. (Troy, Mich.-based Kmart Corp. got rid of its credit card business in 1974, and Arkansas-based Wal-Mart relies on GE Capital Corp. to issue its credit
cards.)

A succession of Sears leaders, starting with Edward Brennan, contemplated shedding the lucrative unit, to no avail. Advisers pushed Mr. Brennan to sell the division in 1979, when rampant inflation was at its peak and Sears was paying more to finance its receivables than it was collecting. But Mr. Brennan refused to budge. Even President Jimmy Carter's campaign to curb Americans' dependence on credit failed to move him.

Instead, Sears pushed to issue more cards. By 1981, credit losses topped $50 million and more than one of every four accounts was delinquent.

Card loyalty
A dyed-in-the-wool Sears man, Mr. Brennan — who was in charge of credit at the time as president of the Sears Merchandise Group — said he "thought ordering half the families in the country to open up their wallets and cut up their Sears cards was tantamount to ordering the burning of the flag," according to Donald R. Katz's account in "The Big Store."

Mr. Brennan's boss, Chairman Edward Telling, agreed. "Nobody would give me or my family a nickel on credit when I was starting out — 'cept Sears," Mr. Telling recounted in Mr. Katz's tale of Sears' decline. "Sears, Roebuck has done more than anyone else to increase the standard of living in America, and we're not about to stop now."  Mr. Brennan declined to comment. Messrs. Telling and Martinez couldn't be reached for comment.

Instead, Sears forged ahead with the launch of its first all-purpose credit card. After much study, the Discover Card debuted in 1986, and was sold six years later, along with a highly profitable credit card processing facility called Sears Payment Systems Inc., as part of Sears' move to shed its financial services businesses. The Discover Card is now owned by New York-based Morgan Stanley Dean Witter & Co.

"Sears got caught up in seeing credit as another line of business," says Ronald Savitt, a retail historian and professor emeritus at the University of Vermont. "But credit is a very different line of business from retail.

"They did make money as they moved into Discover," he continues, "but what that did was get them further and further away from the business they originally started. Top management was spending too much time looking at cash flow from the credit business and not paying enough attention to what was important. Sears used to be a place of fantastic merchants."

In its early years, Sears was reluctant to extend full-scale credit. But, by the time the Great Depression began, Sears discovered it could boost sales by liberalizing its credit policy when shoppers were short of cash.

Birth of a division
In 1930, the retailer sent letters to 500 good, cash-paying customers and offered them credit without investigation. That same year, Sears formed a general credit office to supervise collections. The store advertised credit aggressively for items from shotguns to diamonds and gradually made all of its merchandise available for installment sale: furniture, washing machines, radios, tractors, vacuum cleaners, clothing and even do-it-yourself homes.

By 1935, 16% of the company's total revenues came from credit. After World War II, hundreds of thousands of GIs returned home, got married and set up housekeeping, and Sears credit flourished.

The Big Store launched its first credit card in 1953 (three years after Diners Club introduced the world to plastic). By 1959, credit sales swelled for the first time to half of Sears' total revenues. (In 2002, the card accounted for 44% of sales, a figure that has been falling for years.)

Better yet, the credit card business was a money-maker. As recently as 2001, it accounted for more than two-thirds of Sears' total profits.

"Sears got a little bit drunk on the profits of the credit business over the years and stopped focusing on retail," says Kevin Silverman, an analyst at ABN AMRO Inc. in Chicago. "They just took their eye off the ball because they were making so much money on credit."

Sears would have done well to align itself with Visa or MasterCard early in the game, says the U of C's Mr. Schrager. Instead, Sears made a crucial miscalculation by refusing to accept the general-purpose cards at its stores until 1979 and for catalog orders until 1992.

"They had a moment in the 1960s when they could have parlayed the power of the Sears card into something bigger," says Mr. Schrager. "Instead, they chose to keep their head in the sand and hope Visa and MasterCard would go away. They paid a big price for it."

Plastic competition
Customers with the best credit do most of their credit purchasing on general-purpose cards like Visa or MasterCard because they can accumulate benefits, such as frequent-flier miles, says David Robertson, president of the Nilson Report, a credit card industry newsletter. Sears was losing its best customers to other cards, while receivables on the Sears credit card were dwindling.

Mr. Lacy, fresh from cleaning up Sears' 1997 credit card crisis, attempted to tackle the problem by introducing Sears' own Gold MasterCard in 2000. He moved 25 million of Sears' most credit-worthy customers from the Sears card to the new Sears Gold MasterCard, then signed up another 2 million accounts with an aggressive direct-marketing campaign.

Those new credit card customers turned out to be the most "problematic," Mr. Lacy told investors at a Merrill Lynch retail conference in March.

By last fall, the familiar pattern of rising delinquencies, increased chargeoffs and a wary Wall Street repeated itself. Mr. Lacy found himself under pressure from the increase in bad credit card accounts, constricting access to debt markets and a sinking stock price.

Same-store sales were falling every month, and cash flow had dipped more than $1 billion into the red.

Cautionary tales
Mr. Lacy had only to look to two former Sears rivals — who similarly got their start in Chicago a century ago selling goods through catalogs on credit — to see what happens when a retailer gets sucked into the credit trap. Montgomery Ward & Co. went out of business two years ago, and Downers Grove-based Spiegel Inc. sought Chapter 11 bankruptcy protection earlier this year.

Both retailers got into trouble by extending too much credit to shoppers unable to pay their bills in a desperate attempt to fuel sales.

Perhaps Sears needed a relative newcomer — Mr. Lacy joined Sears' finance department in 1994 after a career at Kraft Foods Inc. and Philip Morris Cos. — to break its addiction to credit.

The balance between credit and retail is a constant dilemma in the industry, says Rodney Evans, professor of marketing at the University of Oklahoma. And it's one that, if poorly managed, can spiral a company quickly into bankruptcy.

"It's pretty clear that merchants and credit guys are almost like oil and water," says Mr. Evans. "The merchant wants the credit card guy to offer terms disproportionately favorable to selling goods. The credit card guy wants to be judged on his financial abilities. At some point, the corporate guy says, 'You can't give this customer credit because he doesn't pay his bills.' "

That's what Mr. Lacy has said. Now, Sears stores will have to make it on their own.

©2003 by Crain Communications Inc.

Final notice: A costly foray into general-purpose cards finally prompted Sears CEO Alan Lacy to put the credit unit up for sale.

Maker of Crib That Killed Boy Settles for $2.6 mil.
By Stephanie Zimmermann - Consumer Reporter - Chicago Sun-Times
July 19, 2003

The manufacturer of a portable crib that collapsed and killed an 8-1/2 month-old boy has agreed to pay $2.6 million to settle a lawsuit with the infant's Antioch family.

Evenflo Co. of Piqua, Ohio, which made the Happy Camper portable crib that asphyxiated Jared Adams in April 1997, agreed to the settlement Thursday, along with Sears, Roebuck and Co., which sold the crib. Under the terms, Sears bears no financial liability, a Sears spokesman said.

Jared's mother, Pamela Adams, said Friday she hopes the settlement raises awareness about problems with the Happy Camper and similar portable cribs, which altogether have killed at least 15 children in the United States.

HOW SAFE ARE YOUR BABY'S PRODUCTS?
Jared was killed when a hinge on the crib's top rail collapsed, trapping his chest in the resulting "V-shaped" rails. He had been placed in the crib for a nap while his grandmother baby-sat, Pamela Adams said.

Adams found out later that the company was aware of two other deaths and many reports of collapses involving its cribs even before Jared was killed.

"They knew [of the danger]. They definitely knew," Adams said.

Two months after Jared's death, Evenflo issued a recall for its Happy Camper, Happy Cabana and Kiddie Camper models, offering free hinge cover kits to prevent future collapses.

Evenflo sold 1.2 million of the cribs between 1989 and 1997.

An attorney for Evenflo said Friday that company officials' "thoughts and prayers" go out to the family and "there is no question that this is a tragedy."

However, attorney Charles Risch maintained that Jared's death could have been prevented if the family had followed the crib's instructions and kept the hinge rotated in the "down" position.

Critics of the crib say the hinge can be manipulated by an infant or toddler and is inherently unsafe.

In response to a rash of deaths in portable cribs in the 1990s, the U.S. Consumer Product Safety Commission worked with manufacturers to develop a new voluntary standard for portable crib design. Since 1998, the standard requires cribs to have automatic-locking center hinges, and since 1999, they are required to withstand 100 pounds of weight.

Still, it took seven years from the first death in a portable crib (in a different model) in 1991 for the automatic-locking standard to take effect in 1998--a lag that angers many consumer advocates, considering that 10 more children died in the intervening years. The CPSC is aware of a total of 15 deaths.

"It just makes me sick to my stomach," said attorney Shawn Kasserman of the Corboy & Demetrio law firm, which represented the families of Jared Adams and Danny Keysar, a 16-month-old boy who was killed in 1998 in a Playskool Travel-Lite portable crib. Danny's parents didn't know that the Travel-Lite crib, at a Lincoln Park day care provider, had previously been recalled in what they said was a halfhearted attempt by the manufacturer.

CPSC spokesman Ken Giles said setting standards took so long because several manufacturers were involved.

Meanwhile, consumer advocates say they worry about the thousands of secondhand portable cribs sold at garage sales or given to friends.

"The manufacturers don't do enough to get the word out," Pamela Adams said. "I really hate to say it, but we're probably going to see another death."

Giles said the government tries to raise awareness about secondhand portable cribs.

"If you have one of these old collapsing cribs, don't pass it on to somebody else," Giles said. "Probably at this point, they should just destroy it."

Sears Tries to Change Its Image to Expand
Associated Press
July 18, 2003

NEW YORK, Jul 18, 2003 (AP Online via COMTEX) -- Angela Powell walked out of the main Sears, Roebuck and Co. store in suburban Atlanta, where she had been looking for clothes and a television set. Not finding anything she wanted, she headed for the auto center.

"Hardware and auto service," she said. "That's what I think of when I think of Sears."

In Columbus, Ohio, Mo Porven had much the same assessment at her local Sears: "I trust them No. 1 for appliances."

That may be Sears' biggest problem as it plans a future solely as a retailer, beset by mounting competition from discounters and other stores. The nation's fifth-largest retailer has to change its image before it can resurrect its business.

On Wednesday, Sears announced that it will shed the last of its non-retail operations by selling its credit card business. A day later, it warned that earnings for the year will be weaker than anticipated because of sagging sales at its stores.

"The real problem is that consumers haven't given Sears permission to sell them fashion," said Harry Bernard, partner at Colton Bernard, an apparel consulting company in San Francisco. He added that Sears "has made attempts in the fashion business, but never stayed with it."

What will it take to reverse 22 consecutive months of sales declines during Sears' restructuring? Acquiring more labels? Snappier advertising? Will a new clothing line lure Hispanics?

"Sears is still trying to figure out what it wants to be," said John Champion, vice president at Kurt Salmon Associates, a retail consulting company. "And they have competitors left and right, snapping at their heels."

Analysts, however, offer kudos to chief executive Alan Lacy, who is spearheading a makeover of Sears merchandise and its stores.

The company said it is seeing positive results from last year's acquisition of Lands' End, with overall apparel sales reported two to four percentage points higher in stores that have the line than in those without it. Lands' End is in 433 stores so far and will be rolled out to the other 400 or so by this fall.

But how much Lands' End can serve as a magnet to draw shoppers remains to be seen.

Meanwhile, Covington - Sears' new store brand that combined eight different labels in hopes of generating $500 million in sales - is still "grossly undermarketed," according to Burt Flickinger, managing partner at the consulting firm Strategic Resource Group in New York. And Champion questions Sears' move to get out of cosmetics, believing the category is an essential offering for women.

To court Hispanic customers, Sears plans to unveil Lucy Pereda, a line of dressy women's clothing bearing the name of the Cuban-born TV lifestyle personality, in 200 stores this fall.

But while it tries to become more of a fashion player, Sears faces new challenges in appliances. While it is the leader in that area, the company's market share has eroded recently because of competitors like Home Depot and Lowe's.

In May, Sears announced a new strategy to fight back by expanding its selection of lower-priced appliances and sprucing up its presentation. The plan won't be fully implemented until the third quarter, but some analysts believe Sears will still need to offer even better prices.

Overall, Flickinger said Sears needs "more theater," given the intensifying retail landscape, particularly in apparel.

Wal-Mart Stores Inc., the world's largest retailer, is fast becoming a player in fashion apparel, with its launch this past week of Levi Strauss & Co.'s new discount brand called Signature. Target Corp. has added names like Liz Lange, Isaac Mizrahi and Mossimo. And J.C. Penney Co., under CEO Allen Questrom, has made its fashions more trendy.

Lacy said Sears will differentiate itself in its fall advertising campaign, though he did not elaborate. And he said the company is always looking to add brands, either national or proprietary.

At least some customers view Sears as a little behind the times.

Said Powell: "I think they should update the women's clothing and make it a little more trendy for plus sizes."

Stan Sobiech of the Columbus, Ohio, suburb of Westerville, who was buying apparel at a Sears there, said the clothes are just "OK."

"Their styles aren't as up as other stores," he said. "If I can find it on clearance, it's fine." ---
Associated Press Writers Daniel Yee in Atlanta and Jonathan Drew in Columbus, Ohio, contributed to this report.

Copyright 2003 Associated Press, All rights reserved

Is Kohl's Coming Unbuttoned?
Slovenly stores and shrewd competition have hurt sales
News: Analysis & Commentary - By Robert Berner in Chicago
Business Week - July 28, 2003
July 18, 2003

Shopping recently at a Kohl's (KSS ) store in Niles, Ill., Kimberly Rellinger can't find any boys' shorts as she digs through a jumble of misplaced items. And she gives up on the shorts idea altogether when she sees the five-person checkout line. Instead, she heads to a nearby Old Navy (GPS ) where she finds what she wants with no wait. "Now I will go there first," says the 36-year-old mother of two boys.

Plenty of Kohl's shoppers seem to be making the same call these days. On July 10, the apparel discounter reported a 2.4% decline in June sales at stores open at least a year. Worse, it warned that for the first time since going public in 1992, second-quarter earnings would decline. In part, the disappointing numbers reflect growing competition from department and specialty-apparel stores. But Kohl's Corp. execs may also have lost their Midas touch: Distracted by a big expansion into California, they have misjudged inventories and relaxed once- tight control of existing operations.

It's quite a reversal for this '90s retail star. Until recently, it seemed the Menomonee Falls (Wis.) chain could do no wrong. Kohl's has posted 35% compounded annual earnings growth over the past five years. It did so with the simplest of strategies: selling casual brands at low prices. By locating its stores in strip centers, Kohl's draws shoppers who find malls inconvenient. Now, having missed sales targets for 7 of the past 9 months, Kohl's heady days may be over. "It's the first crack in the growth story," says Deutsche Bank Securities Inc. analyst Bill Dreher.

Nonsense, says Kohl's CEO R. Lawrence Montgomery. He attributes the weak sales to a sluggish market for apparel, which affects Kohl's more than department- store rivals because clothing makes up a higher percentage of its sales. But, he admits, the competition has "narrowed a little bit."

Indeed, rivals ranging from J.C. Penney (JCP ) and Sears, Roebuck to Federated Department Stores (FD ) Macy's unit have borrowed from Kohl's playbook. Like Kohl's, they made their stores easier to navigate and beefed up casual brands. Most of all, they have cut prices to counter the advantage of Kohl's locations, says Marshall Cohen, chief analyst at market-research firm NPD Group Inc. As a result, Penney, Sears, and Federated all posted better sales results than Kohl's in June. "The consumer is going back to the mall because they can get a better price with a wider variety," Cohen says.

Department stores aren't the only ones playing better defense. Gap (GPS ) Inc.'s Old Navy unit, whose shops are often based in strip centers with Kohl's, has recently shifted from trendy teenage fashion toward clothing that appeals to mothers with children, one of Kohl's targets. On the low end, Kohl's is facing more pressure from Wal-Mart (WMT ) Stores Inc., which is upping the quality of its apparel and adding national brands like Levi's. "Wal-Mart is also after the same middle-level shopper," says Patrick McKeever, an analyst at SunTrust Robinson Humphrey Capital Markets.

Meanwhile, Kohl's expansion into California seems to be distracting management. The chain has opened 28 stores this year in the greater Los Angeles area, where it is encountering fierce resistance from entrenched players such as Mervyn's and Macy's West. Some analysts say the challenging expansion helps explain recent stumbles at Kohl's existing stores. While the retailer has always loaded up on inventory, this year it misjudged demand and wound up having to discount heavily, which dented profits. Shoppers also complain that stores are less well- kept and check-out lines longer than they were.

Most troubling, perhaps, is that sales have slipped at Kohl's most mature outlets. That raises questions about the chain's growth prospects as older stores become a larger percentage of Kohl's locations. Deutsche Bank estimates that same-store sales at outlets five years old or more have declined for the past three years. In June, Kohl's worst-performing stores were in the Midwest, home to the bulk of its older shops. Montgomery blames a weak Midwest economy and lousy weather. If he's wrong, Kohl's days of rapid growth may be behind it.

Billionaire Opens Deep Pockets for
Climate-Theory Research

Lands' End Founder Throws Millions Into Hunt
for Data Showing Cataclysmic Shifts
By Antonio Regalado - Staff Reporter - The Wall Street Journal
July 17, 2003

In May, billionaire Gary Comer and four climate experts boarded his Cessna Caravan and took off in search of a catastrophe. Flying low over southwestern Ontario, the group scanned the ground for boulders left behind by an ancient flood. The deluge, involving 2,000 cubic miles of fresh water from a prehistoric lake nearby, sent temperatures over the North Atlantic plummeting about 12,700 years ago, according to a theory advanced by scientists on the flight.

The cataclysm -- triggered by the melting of glaciers at the close of the last ice age -- poses an urgent question for the present: Could global warming also set off unexpected and extreme climate shifts, such as substantial regional drops in temperature or long droughts?

Some scientists think it's a possibility, and now their research is getting a major boost from Mr. Comer, 75 years old. The founder and former chairman of Lands' End Inc. sold the company to Sears, Roebuck & Co. last year, pocketing just over half the proceeds from the $1.9 billion cash deal. Since witnessing unusual ice conditions on an Arctic cruise, Mr. Comer has started handing out millions of dollars to researchers trying to document so-called abrupt climate change.

The idea is that the Earth's climate can sometimes behave more like a switch than a dial, jumping in a matter of years between dramatically different conditions. At the time of the big flood in Ontario, temperatures in Greenland dropped by 18 degrees Fahrenheit. The flood also probably upset ocean currents and changed rainfall patterns as far away as the Asian monsoon.

Abrupt climate change is a wild card in the divisive debate over the causes of global warming. For many, the chief culprits are so-called greenhouse gases formed by the burning of fossil fuels, such as oil and coal. These gases are thought to be insulating the planet like a blanket, causing temperatures to rise. A United Nations report predicts that average temperatures will increase 2.5 degrees to 10.4 degrees by 2100, throwing Arctic ecosystems into turmoil and threatening coastal communities with rising sea levels as glaciers melt and warming oceans expand. (Russia may hold the key1 to ratification of the Kyoto Protocol, the global-warming treaty, which the U.S. has abandoned.)

While there is broad consensus among scientists that global temperatures are rising because of fossil-fuel use, the extent and consequences of the warming remain uncertain. Such doubts now form the basis of the Bush administration's climate policy, which opposes costly reductions in emissions of carbon dioxide and other greenhouse gases.

For some scientists concerned about the warming, abrupt climate change has become a rallying point. Not only does the theory offer worst-case scenarios, it co-opts one of the arguments favored by skeptics of global warming -- namely that scientists aren't certain about how the climate works.

"What concerns me and a lot of people is that we are provoking a system about which we lack a total understanding," says Wallace S. Broecker, a geochemist at Columbia University who was among the first to outline the abrupt-change theory, in the mid-1980s. A feisty 71-year-old with a reputation for big ideas and for challenging fellow scientists, Dr. Broecker has become Mr. Comer's closest adviser.

Wider Audience
The evidence for sudden climate swings is beginning to find a wider audience. Last January, Robert Gagosian, director of the Woods Hole Oceanographic Institution, on Cape Cod, told the World Economic Forum at its meeting in Davos, Switzerland, that abrupt change could have the perverse effect of lowering temperatures in industrialized parts of the globe. A Senate bill would allocate $60 million to research on ancient ice and mud, and the Bush administration plans to highlight abrupt change in a major new strategic plan for climate-change research, due out this month.

Archaeologists have linked the collapse of several civilizations to large climate changes. A long dry spell may have caused the decline of the Akkadian empire in Mesopotamia around 4,200 years ago. Researchers have unearthed a 180- kilometer-long wall built by a later kingdom to keep out refugees from newly arid regions.

Hollywood is also taking note. News Corp.'s 20th Century Fox is in post- production for "The Day After Tomorrow," a big-budget movie in which global warming sets off a new ice age and Dennis Quaid plays a paleoclimatologist who battles encroaching glaciers. A studio description says the film "revolves around an abrupt climate change that has cataclysmic consequences for the planet."

Critics of such notions -- and there are plenty -- say the yo-yoing of the climate over the millennia simply shows that man's influence may be grossly overestimated. They add that Mr. Comer isn't the first big donor to hand over money to scientists peddling an alarmist message.

"Anyone who studies weather knows that it is variable, but suddenly it is being treated as a boogeyman," says Richard Lindzen, an atmosphere expert at the Massachusetts Institute of Technology. He notes that the biggest shifts, such as the one that occurred 12,700 years ago, happened under ice-age conditions, when mile-thick ice sheets dominated climate processes.

Mr. Comer grew up on the South Side of Chicago, where his father was a railroad conductor, and worked for a time as a copy writer at Young & Rubicam. After quitting to travel to Europe, he decided to turn his hobby of competitive sailing into a business and founded Lands' End. The small mail-order operation grew to employ more than 6,000 people, but battles with his board made the job increasingly unpleasant, Mr. Comer says. A down-to-earth man who drives a six- year-old Lincoln Towncar and plays down his wealth, Mr. Comer concedes that with the gas-guzzling auto, in addition to his fleet of airplanes and boats, his lifestyle is responsible for prodigious amounts of carbon-dioxide emissions. But he doesn't see personal change as the solution.

The former executive brings a degree of political independence to the climate debate. He says he made campaign donations to Bill Bradley and John McCain in the 2000 election, but couldn't bring himself to vote for either of the big-party candidates. He says that prior to his Arctic cruise, he had never given much thought to global warming.

When Mr. Comer steered his 150-foot yacht Turmoil toward the Northwest Passage two summers ago, the crew expected to be blocked by sea ice. Instead, the ship slipped easily through open waters. An experienced Arctic traveler on board said the ice conditions were the mildest he had ever seen. The Turmoil was just the 94th ship to make the transit from the Atlantic to the Pacific through the Arctic islands of Canada since Roald Amundsen first did so in 1905.

"It's obvious something is happening. But no one is really interested in doing anything about it," Mr. Comer said recently over a diner breakfast of bacon and eggs.

After he returned from the Northwest Passage to his home outside Chicago, he typed "global warming" into the Google search engine. A fan of Tom Clancy and Joseph Conrad novels, he had read of 19th-century explorers who died in the passage, and he thought his own trip had been too easy. On the Internet, he found a debate between environmentalists and energy interests -- "one predicting the end of the world and the other saying nothing is happening," he says.

Mr. Comer initially considered launching a Web site of his own to counter the energy industry's arguments, but he decided it would get lost in the noise. Instead, he called the Woods Hole Oceanographic Institution.

"I don't want to go out and tilt at windmills and waste my time, so I have focused on the scientists to help them do their job," he says.

Mr. Comer wanted a splashy news conference, but Woods Hole, the world's largest independent ocean-research center, was more interested in collecting data than in setting off political fireworks. A Woods Hole oceanographer named William Curry came to Chicago and explained to Mr. Comer that researchers weren't sure whether there was actually less ice or if it was being moved elsewhere by wind. Soon the conversation turned to speculation. If the polar ice melted, Dr. Curry said, it could cause abrupt climate change.

The scenario he laid out goes like this: Increasing rainfall and melting ice caused by global warming could lead to a buildup of fresh water in the North Atlantic. That influx could shut down circulating ocean currents that normally draw warm salty water from the tropics along with vast amounts of heat.

Stopping those currents might disrupt the redistribution of heat around the globe. In fact, there is evidence that Atlantic currents may already be under pressure. A few months after the Chicago meeting, British scientists writing in the journal Nature showed that salinity has dropped measurably in the North Atlantic during the past 40 years. The Woods Hole graphics department turned the data into an interactive program that Dr. Curry e-mailed to Mr. Comer.

Shortly afterward, Mr. Comer agreed to give Woods Hole $1 million to seed a program that would place buoys in the Atlantic to monitor changes in salinity, temperatures and ocean currents. According to an internal Woods Hole funding document, Mr. Comer's money came with the proviso that he wanted the research "kicked into high gear."

Paleoclimatic research has exploded in the past several years, thanks to data found in ice cores, tree rings, coral and ocean sediment. The abrupt changes are the most striking feature of that data, but the ocean-currents theory is just one explanation. The atmosphere plays a much bigger role in climate, and many scientists expect tropical air to contain the mechanisms of abrupt change.

Reaching Out
Mr. Comer had been reaching out to other top scientists. He had written to Dr. Broecker at Columbia University, saying he was looking for ways to "make a difference" where he felt the government wasn't. A friend also put Mr. Comer in touch with F. Sherwood Rowland, a professor at the University of California at Irvine, who had shared a Nobel Prize for showing that chlorofluorocarbon gases used in spray bottles and refrigerators could deplete the ozone layer, an important shield against solar radiation. The chemicals were later banned when a huge hole in the ozone layer was detected over the Antarctic.

In May 2002, Dr. Rowland and his wife, Joan, flew to Victoria, British Columbia, for a cruise on the Turmoil. Mr. Comer joined them after closing the sale of his company to Sears. Privately, scientists hope he will provide much more funding than he has. But Mr. Comer, who has also given $40 million for a new children's hospital in Chicago that will bear his name, sees his role as seeding research, not carrying it across the finish line. "The government has really got to step in," he says.

Dr. Rowland and Mr. Comer were chatting on the bridge when the billionaire asked, "If I wanted to put $1 million into climate-change research, what should I do?" Dr. Rowland says he had a quick answer: provide 10 two-year fellowships to newly minted Ph.D.s recruited into climate-change science. "One to work with me, and another nine to other scientists I could pick out."

The program soon rose to $6.9 million for 23 research groups, as Mr. Comer huddled several weeks later with Drs. Rowland and Broecker in New York. They gave $300,000 to an expert developing new ice-dating techniques, and an equal sum to Lonnie Thompson, an Ohio State University researcher known as the "Indiana Jones of paleoclimatology," who scales mountains in Latin America in search of rare tropical glaciers.

Last month, Maine Sen. Susan Collins introduced the Abrupt Climate Change Research Act of 2003, a bill that would give the National Oceanic and Atmospheric Administration $60 million in additional funds to implement a major study of ancient climate records. Sen. Collins, a Republican, has parted ways with the Bush administration by calling for a reduction in greenhouse-gas emissions from power plants to 1990 levels.

The administration has opposed mandating limits, arguing that the economic costs aren't justified by available science. The wait-and-see policy assumes that if warming occurs, it will do so gradually over the next century, leaving time to invent new energy sources or to simply adapt.

That assumption could be wrong. In a 2002 report titled "Abrupt Climate Change: Inevitable Surprises," the National Academy of Sciences in Washington concluded that sudden regional climate shifts could be triggered by human activities.

That possibility is starting to influence policy discussions, which have until now focused largely on the threat of steady warming. This month, the Bush administration is expected to release a major report outlining a new national research strategy for climate change. According to Mr. Bush's science adviser, John Marburger, abrupt climate change is identified as a "priority area" in the report, which he has seen. "It is clearly one of the things that needs to be looked at in the short term," says Dr. Marburger.

Before Mr. Comer set out on the expedition to Ontario in May, he had his Dassault Falcon jet collect Dr. Broecker and other members of the team at Chicago's Midway Airport. They gathered for a day of meetings at his Wisconsin home, and later watched the sunset from a five-story, glass-enclosed tower that soars above the estate.

During the three-day field trip, the group couldn't locate the path of the ancient flood. A chagrined University of Manitoba geologist named James Teller explained that he had predicted the flow using topographical maps, as he had never had enough funds or reason to rent a plane. Now Mr. Comer has sent out invitations for a new expedition in September. He thinks the water went north, into Hudson Bay.

Sears 2Q Earnings Rise 34.9%, Lowers Outlook
Sears 2Q EPS $1.04 - Dow Jones Newswires
(July 17, 03)

HOFFMAN ESTATES, Ill. -- Sears Roebuck & Co.'s (S) second-quarter earnings rose 34.9% and beat company guidance, but the department-store chain trimmed its 2003 outlook, based on expectations of same-store sales for the second half of the year, which are expected to be flat to up in the low single digits from a year ago.

In a press release Thursday, the company said earnings for the second quarter increased to $309 million, or $1.04 a share, from $229 million, or 71 cents a share, a year earlier.

Latest second-quarter earnings included a pretax gain of $93 million, or 20 cents a share, on the sale of previously charged-off credit card accounts, and a pretax charge of $28 million, or 6 cents a share, on severance costs.

Excluding these items, second-quarter earnings were 90 cents a share, below Wall Street's mean estimate of 95 cents a share.

Year-ago results included a pretax charge of $300 million, or 59 cents a share, on an accounting change.

Second-quarter revenue were $10.2 billion, ahead of the Thomson First Call consensus estimate of $10.01 billion and up from $10.14 billion last year.

"We are pleased that sales in core businesses such as lawn and garden, tools and apparel have shown signs of strengthening, especially considering the difficult economic environment," said Chief Executive Alan J. Lacy in a statement.

For full-year 2003, Sears now expects earnings of $4.80 to $5 a share, compared with prior guidance of $4.95 to $5.15 a share. This outlook excludes any effect of the sale of the credit and financial products business.

Wall Street currently expects the company to earn $4.77 a share this year, according to Thomson First Call.

On Tuesday, Citigroup Inc. (C) said it planned to buy Sears' credit-card business for about $3 billion. The deal is worth about $6 billion to Sears, as $3 billion of its own capital that was held on its books against the portfolio will be freed up by the sale.

The credit-card business has been hurt by rising delinquencies, complicating Sears' efforts to revitalize its flagging retail business. Sears said in March it would sell the unit and launched an auction for the assets.

The company has been trying to revamp its stores for years but hasn't yet seen a turnaround. Apparel sales haven't bounced back despite last year's buy of Lands' End, and Sears' share of the applicances market has eroded.

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

Sears said second-quarter operating income in the retail and related services segment fell to $183 million from $300 million, reflecting lower gross margins on full-line store sales due to clearance activity and a highly promotional retail environment.

Retail revenue rose 0.9% to $7.8 billion, as the addition of Lands' End offset lower sales. Same-store sales fell 3.5% for the period.

Sears said sales trends improved during the second quarter, particularly in stores carrying the Lands' End brand, where same-store sales were 2% to 4% better than those stores without the brand.

The company plans to complete the addition of Lands' End to all stores by the end of the year.

Sears expects 2003 retail and related services operating income to be roughly flat year-over-year, assuming same-store sales will be flat to up in the low single digits in the second half of the year.

In the credit and financial products unit, second-quarter operating income rose to $355 million from $243 million, reflecting the year-ago charge of $300 million on an accounting change and the gain in the latest quarter on the sale of previously charged off accounts.

Domestic revenue in the segment fell about 4.2% to $1.27 billion, as a lower yield offset an increase in average receivable balances.

Year-over-year delinquencies rose to 7.41% from 6.87%.

Sears said credit and financial products remain on plan for a mid-single digit decline in operating income in 2003, including the benefit from the sale of charged-off receivables. The company expects lower-than-planned late fees to largely offset this gain.

Copyright 2003 Dow Jones & Company, Inc. All Rights Reserved

Sears 2nd-qtr Profit Up, Outlook Scaled Back
By Emily Kaiser - Reuters
July 17, 2003

CHICAGO, July 17 (Reuters) - Sears, Roebuck and Co. (S) on Thursday reported higher quarterly profit, but scaled back its full-year earnings forecast as it braces for lower income from the credit card division it recently agreed to sell.

The No. 1 U.S. department store chain said while its overall profit was up in the second quarter operating earnings were down 39 percent in its core retail business because it was forced to take big markdowns to clear out excess spring inventory.

The credit card business, which Sears earlier this week agreed to sell to Citigroup Inc. (C) , accounts for a huge chunk of Sears' profits, but record personal bankruptcy rates have forced it to write off more accounts.

"There's not much good news," said Bill Dreher, retail analyst with Deutsche Bank, who rates Sears shares "hold." "The guidance has been pretty significantly reduced."

Shares of Sears slipped to $37.95 in premarket trading on Instinet, from Wednesday's New York Stock Exchange closing price of $38.20.

Sears, the first major U.S. retailer to report results in a quarter marred by weak apparel demand, painted a bleak picture for the sector that has struggled with a rising unemployment, concerns over war in Iraq and uncooperative weather.

Few consumers were tempted to buy swimsuits and shorts with unseasonably cool weather in many parts of the United States, forcing retailers to slash prices -- and profitability.

Sears faces competition from all sides as discounters chip away at its apparel sales and home improvement chains expand home appliance offerings. With the pending sale of the credit card division, which has boosted profits in recent years, Sears is under even greater pressure to revive retail sales.

FORECAST SCALED BACK
The Hoffman Estates, Illinois-based retailer said it earned $309 million, or $1.04 per share, in the second quarter, ended June 28, compared with $229 million, or 71 cents per share, in the same period last year.

Analysts on average were expecting a second-quarter profit of 95 cents per share, according to Reuters Research, a unit of Reuters Group Plc.

The latest quarter includes a pretax gain of $93 million, or 20 cents per share, on the sale of credit card accounts it had previously written off. It also includes a pretax charge of $28 million, or 6 cents per share, for severance costs.

Last year's results include a pretax charge of $300 million, or 59 cents per share, for an accounting change.

The retailer now expects a full-year profit in the range of $4.80 to $5.00 per share, excluding any gain from selling the credit card operations. It had previously forecast earnings in the range of $4.95 to $5.15.

Sears, which has posted 22 straight months of declining sales at stores open at least a year, said comparable-store sales slumped 3.5 percent for the quarter.

The retail division posted operating income of $183 million, down from $300 million a year ago.

It estimated same-store sales would be flat to up in the low-single digits in the second half, in line with previous predictions that sales would turn positive later this year.

Sears said recently acquired apparel line Lands' End boosted revenues, but not enough to make up for declining sales at its retail stores. However, Sears said apparel sales were higher in stores that carry Lands' End clothes.

"The full-line stores are not showing anything close to the growth that would (convince me) that Sears shares deserve anything more than a discount to their peers," Deutsche Bank's Dreher said.

The credit card division posted operating income of $355 million, an increase of $243 million from a year ago, when it recorded the $300 million charge.

The provision for uncollectable credit card accounts was $446 million in the second quarter, down from $693 million in last year's quarter.

Sears Rises 9.2% on Deal,
but Analysts Say Pressure Up Now
by Dave Carpenter - Associated Press - Chicago Sun-Times
July 17, 2003

Sears, Roebuck and Co.'s risky bet on a future without its most profitable business, credit cards, is being applauded by Wall Street and retail experts as a move the revamping retailer needed to make.

A day after Sears announced the sale of the credit unit to Citigroup for $3 billion in cash, its stock jumped $3.22 a share, or 9.2 percent, to $38.20 in heavy trading Wednesday.

It was the market's second big thumbs-up for Sears' shift in strategy--shares rose 13 percent when it announced its intentions in March--and lifted its stock to its highest level since last October. The premium sale price contributed to the latest surge.

But even analysts who like the gamble said it raises pressure on the
department- store giant to improve long-lagging retail sales, particularly in apparel. Otherwise, they said, it could go the way of recent industry casualties Montgomery Ward, Bradlees and Caldor at a time of steep competition and widespread discounting.

"The retail marketplace is brutal," said George Whalin, president of Retail Management Consultants in San Marcos, Calif. "Old companies like Sears, in particular, need to take bold steps or they're not going to survive."

Sears has moved aggressively under chief executive Alan Lacy to try to change its stodgy image and break out of a years-long retail slump, overhauling its merchandise and stores, and acquiring upscale cataloger Lands' End.

But a tough economy hasn't helped his cause--Sears has posted 22 straight months of lower retail sales during the restructuring. And intensifying competition from Wal-Mart and discounters Kohl's and Target has forced Sears to seek more changes.

Long dominant in appliances, the Hoffman Estates-based company has seen its market share in that category erode lately. It also has yet to produce significant evidence of a turnaround in clothing sales despite the rollout of Lands' End and its new Covington line, although the results are still early and inconclusive.

Industry experts said Sears should benefit from being without the distraction of the credit unit at a time it is completing a makeover of its 870 full-line stores, including making them more customer-friendly, going to central checkout stations and adding shopping carts.

The credit-card portfolio, the eighth-largest in the United States, generated 60 percent of the company's operating income last year, or $1.5 billion, with 25 million active accounts.

But the emergence of problems last fall with uncollectable debt and a high delinquency rate slowed its retail restructuring effort while raising new questions about the unit's status. The credit business, dependent on retail, couldn't stand on its own.

Returning the 117-year-old company's sole focus to retail means not only gaining management's undivided attention, analysts said, but getting more resources for the struggling business, which also stands to receive a cash influx from the Citigroup deal's proceeds.

"Sears is a good company but ... it's a lot tougher for them to compete with all the discounters and the specialists," said Chicago-based retail consultant Sid Doolittle. "They're in a fight for their lives and they can't afford to be fooling around with all this other stuff."

Citigroup Agrees to Buy Sears Credit-Card Unit
By Mitchell Pacelle, Robin Sidel, and Amy Merrick
Staff Reporters - The Wall Street Journal
July 16, 2003

Returning to the acquisition trail, Citigroup Inc. said it planned to buy the massive credit-card business of Sears, Roebuck & Co. for about $3 billion, in a bet that it can bring the struggling unit back to health.

The move by the nation's biggest financial-services company to further bulk up its credit-card holdings is likely to be seen as a welcome sign for a U.S. economy that has leaned heavily on consumer spending.

Under the deal, Citigroup will take over Sears' credit and financial-products business, which boasts 25 million active accounts and a credit-card receivables portfolio of $29 billion. Sears said the deal was valued at $6 billion to itself, because $3 billion of its own capital that was held on its books against the portfolio will now be freed up as a result of the sale.

Sears' credit-card operations have been plagued of late by rising delinquencies, threatening the efforts by the Hoffman Estates, Ill., company to revitalize its ailing retail business.

For Citigroup, the deal signals an eagerness to blanket the credit-card market, filling consumers' wallets with cards, whether or not they carry the Citigroup name. In turn, Citigroup will then attempt to cross-sell such cardholders other Citigroup products such as mortgages and consumer loans.

"This acquisition provides us with an opportunity to take a leadership position ... and solidify our current bank-card leadership position," said Sanford I. Weill, Citigroup's chairman and chief executive officer. "We have demonstrated our capability at integrating new businesses over the last few years and to add to our bottom line. This acquisition should be no different."

Sears decided in March to unload the business, which includes both Sears' proprietary card and its MasterCard operations, and launched an auction that attracted wide interest from leading consumer-finance players. Several high- profile prospective bidders, including Bank One Corp., Barclays PLC and J.P. Morgan Chase & Co., dropped out or didn't bid aggressively. Other bidders included British banking titan HSBC Holdings PLC, General Electric Co. and Royal Bank of Scotland Group PLC.

In recent years, Citigroup has been driving hard to increase its credit-card business, which in the second quarter generated profit of $768 million. Recently, however, it has begun backing away from aggressively soliciting new bank-card customers with "teaser" rates, due to industrywide saturation marketing. At the same time, it has intensified efforts to snag new "private- label" business with the nation's retailers, and recently added Home Depot Inc. to its roster of partners.

Private-Label Receivables
Citigroup said the Sears acquisition will make it the nation's largest player in the private-label credit-card business, under which it already runs the credit-card operations of retailers ranging from Amazon.com Inc. to Staples Inc.

The Sears deal will double the size of Citigroup's private-label receivables to $33 billion from $16 billion.

After Citigroup assumes the credit-card business -- taking with it $1.5 billion, or 60%, of Sears's operating income last year -- Sears says it will be better able to focus on its struggling retail operations. "This is a logical progression in our ongoing strategy of focusing on growing our core retail and related-services business," Sears Chief Executive Alan J. Lacy said in a conference call with analysts.

Though Sears has been trying to overhaul its stores for years, it has yet to see a turnaround. It still is waiting for apparel sales to bounce back, despite its purchase of specialty-apparel retailer Lands' End Inc. last year. Its share in appliances has slipped, and it is struggling against discounters such as Kohl's Corp. and Target Corp. that have more convenient locations.

"The long-term outlook for Sears as a merchandising company is very difficult," said Richard Hastings, chief retail economist for Bernard Sands, a New York credit-advisory firm. "Sears needs to transition itself from a conservative company to a retailer that is willing to take chances."

Heavy Markdowns
Sears previously has said it expects to report net income between 85 cents and $1 a share for its second quarter ended June 28, well below the $1.31 a share it earned in the year-earlier quarter. The company plans to report second- quarter earnings Thursday. Sears said it would have to take heavy markdowns to get rid of higher-than-planned inventories, cutting into its profits.

In recent years, even as most department stores have favored co-branding with third-party financial institutions, Sears became one of the few retailers to still control its own credit-card operations.

Terms of the deal call for Citigroup to pay about $3 billion at closing. Sears said it intends to use proceeds of the transaction primarily to retire debt, return cash to Sears shareholders, and for general corporate purposes.

Although the deal will boost Citigroup's credit-card receivables, it will also carry some risk. Under a 10-year marketing-and-servicing alliance, Citigroup will absorb costs associated with Sears's 0% financing program, which Sears said will save it more than $200 million a year.

Sears also said that it expects to receive approximately $200 million in annual performance payments from Citigroup under the 10-year agreement, and that it expects to return $4 billion to $4.5 billion to shareholders as a result of the deal.

When the deal is completed, "substantially all" of the 8,300 employees of the Sears unit will become Citigroup employees, Sears said.

"We have a high degree of confidence," said Citigroup President Robert Willumstad, who is chairman and chief executive of its global consumer group. "We've been at this business for a long time. This is a mature portfolio. We feel very good about understanding the credit risk that's involved here."

No Guarantee of the Good Life for Jubilant Lacy
 By David Greising - Chicago Tribune
July 16, 2003

Alan Lacy says he is getting $6 billion by selling Sears, Roebuck and Co.'s credit card business to Citigroup. Now he's got to prove that his plan for rebuilding Sears' retail business is more than a house of cards.

The real news from the big deal: The giant $35.7 billion retailer now must go it alone, without its credit division.

If this inspires a big "uh-oh," it should. Sears' retailing results have been relentlessly downbeat for nearly a generation. Strong credit card results often were the lone bright light.

Lacy found it distracting to manage both businesses, so he decided to sell one of them. Credit had to be sold because, unlike retail, it was too small to make it on its own.

Analysts said Lacy would be lucky to get even money for the card portfolio. They called optimistic talk at Sears' Hoffman Estates headquarters of a $7 billion sales price a pipe dream.

Nobody would pay good money for credit cards with Sears' retail business in the dumps, they figured. Buyers might boycott the sale entirely.

This, in turn, could put Sears in play as a takeover target. With the mergers game heating up lately and Sears' stock trading around $18 a share last March, shortly before the company announced it was shopping the credit division, a hostile takeover seemed possible.

Lacy's news Tuesday put those doubts to rest.

The 10 percent premium Citigroup paid was bigger than even optimists had estimated. One driver for the high price: Historically low interest rates mean Citigroup can earn a big margin on the difference between what it pays for money and the much higher interest Sears' credit customers pay.

Citigroup was the best buyer Sears could find. As the largest card operator, it can offer Sears' customers more credit options than even Sears could to help drive Sears' retail sales. This could actually help grow Sears' retail business.

Now Lacy has to show he can turn Sears into a successful retailer. This looks to be no easy feat.

Retail sales have been down all year. And although Sears has promised growth in same-stores sales by the second half of this year, that outcome no longer seems as certain.

Sears will refresh its forecast when it announces second-quarter results Thursday. But Lacy didn't sound optimistic when we spoke Tuesday evening.

"Our outlook on the economy is more subdued than it was six months ago," Lacy said.

Still, Lacy notes, Sears' same-store results were better than hard-charging Kohl's in June. The fix-up of Sears' stores is proceeding ahead of schedule. Profitability is improving, thanks to cost cuts and a boost from Lands' End merchandise.

The biggest question for Lacy now will be his decision about what to do with the roughly $4.5 billion in cash he will clear from the card deal. Of the $6 billion that the sale will generate for Sears, about $1.5 billion will go to taxes and transaction costs.

Investors will push to get as much as they can of that $4.5 billion in a big dividend or a stock repurchase plan.

The shareholders deserve a payout--with an emphasis on dividends after the recent dividend tax cut. But Lacy shouldn't overdo it. The reparation of Sears' huge retail franchise will cost plenty, and Lacy must conserve what he can now that he's only got a retailer on which to rely.

Sears' retail business did produce $900 million in cash last year. That sounds like a lot, but it doesn't go as far as needed in a business that still operates 870 stores nationwide. And it's not enough to build out a winning new concept, should the new effort at off-mall retailing, Sears Grand, succeed.

Sure, Citigroup will kick in $400 million of marketing support for credit cards. And Sears will be able to borrow more cheaply once the card sale wipes most of the debt off its balance sheet.

But for Sears to have the flexibility it will need to grow and the cushion it will require for the ups and downs of retailing, Lacy will need to hang on to a big chunk of the proceeds.

It's a big company. Turning it around will cost plenty. And Sears must move with the speed that a couple of billion in cash from the credit card deal could provide.

Lacy was jubilant about his deal. Sears' stock rose to $41 a share in after- hours trading from its close of $34.98 a share.

"I'll probably go home and have a glass of my good Scotch," he said.

If the deal still looks good a year from now, that will be something really worth celebrating.

Copyright © 2003, Chicago Tribune

Sears' Card Sale Could Build Credit
Bill Barnhart - Chicago Tribune - Market Report
July 16, 2003

The deal between Citigroup and Sears Roebuck raises a question: Is this a sale of Sears' consumer credit operations or a thinly disguised merger of the two companies?

For long-suffering Sears shareholders, the answer is critical. Shares have rebounded smartly this year--up nearly 50 percent through Tuesday after losing nearly 50 percent last year.

The future depends in part on whether Sears' proposed deal with Citigroup is seen as a one-off transaction or a long-term, profitable partnership for Sears.

A decade ago, Sears abandoned its "socks and stocks" strategy for selling investments, insurance and real estate along with traditional department store merchandise.

At first blush, Sears seemed to take another giant step back to an exclusive focus on retailing.

"This is a sale of the business," Paul Liska, head of the unit, said in a conference call with analysts.

Wall Street applauded the deal, sending Sears stock up to $41 in after-market trading from $34.98 at the close of Tuesday's regular session.

"Absolutely fantastic news," Goldman Sachs analyst George Strachan, who has an above-average record in tracking Sears, said during the conference call.

"You proved the doubters wrong this time," said Thomas O'Neill of Barclays Capital.

Sears will use the proceeds mostly to pay down debt. Additional proceeds will be available to extend Sears' program of repurchasing its shares and possibly to pay a special dividend to shareholders.

But Sears' officials stressed that the deal doesn't end when it closes. It's a 10-year "strategic relationship" in which Sears will open its doors to Citigroup to sell insurance, savings accounts and investments to Sears' customers--"a full suite of capabilities under the Sears brand name," one official said.

In return for giving Citigroup access to its customers and their financial needs, including zero-percent retail purchase financing, Sears will reap a cash benefit of at least $400 million a year, equal to more than 10 percent of the company's 2002 operating income.

Unlike Sears' previous foray into financial services, the financial-services businesses won't be on its balance sheet.

Standard & Poor's, which cut Sears' credit rating after the announcement, wasn't convinced. The credit rating agency said Sears reaped $1.5 billion in operating income from its credit operation last year--nearly four times as much as the Citigroup deal offers.

Citigroup Buys Sears Credit Division
Banking Giant Pays $3 billion Premium for Unit
By Lorene Yue - Tribune Staff Reporter - Chicago Tribune
July 16, 2003

Sears, Roebuck and Co. is selling its massive credit card division to Citigroup Inc. in a deal that will inject $6 billion into the retailer and allow it to shed a unit whose troubles have roiled top management and dragged its stock to historic lows.

The sale provides Sears with a $3 billion premium on its credit-card portfolio, the nation's 8th largest with 25 million active accounts, and returns an additional $3 billion in invested capital to the company.

Sears said Citigroup will pay $32 billion for its nearly $29 billion credit card operations, according to terms of the deal announced after the markets closed. The two companies have also entered into a 10-year partnership that pays Sears roughly $200 million a year for signing up new cardholders for Citigroup.

By selling the finance arm, Sears is jettisoning a division that has provided more than half of annual profits and helps boost sales by giving customers a way to pay for big-ticket items such as appliances and home electronics. But it also is rid of a division that cost a top executive his job when Sears had to boost its bad debt reserves by $222 million in October to offset rising delinquencies.

"No doubt this sale marks a historical event for the company," said Alan Lacy, Sears' chairman and chief executive officer. "We are building a new Sears and making us a better retailer."

Now the pressure is on for Lacy to prove that the credit-card division was a distraction for the company and that the changes he's made will build up the retail division. Sears' same-store sales have fallen for 22 consecutive months as rivals from Best Buy to Wal-Mart make inroads on its key product lines.

"This is one of those defining moments," said George Whalin, president of Retail Management Consultants in San Marcos, Calif. "He's made significant changes and now's the time to see if they are going to pay off. If it works, he's the hero. If it doesn't, he's gone."

Since stepping into the top spot at Sears in 2000, Lacy has made dramatic changes in the retail operation. He did away with underperforming departments and instituted centralized check-out stations. He pulled back on expansion plans for the Great Indoors, Sears Hardware and National Tire & Battery. He bought Lands' End, a preppy men's and women's sportswear catalog company, and launched in-house label Covington in an effort to punch up the sagging apparel division.

In an interview, Lacy said Sears is off to a good start. Earnings per share last year rose 17 percent, largely due to job cuts and cost cutting.

"We had a record year last year," he said.

Announcement a surprise
Sears shocked investors and analysts in March when it announced it was putting its finance arm on the selling block.

Many industry watchers thought the company was taking a huge risk by concentrating on its less profitable business at a time when most retailers were battling a soft economy.

But Lacy was growing frustrated with running a hybrid retail-financial company that he said analysts couldn't evaluate accurately and that investors didn't understand, a combination that led to "unacceptable" stock prices. Sears' stock fell from nearly $60 a share last summer to $24 a share by the end of the year.

Sears' stock closed Tuesday at $34.98, up 48 cents. In after-hours trading, however, the stock surged to $41.

"I think it's the right thing for them to do," Whalin said of the decision to sell the credit card unit. "Typically when a retailer operates a credit card division, they've done a poor job of it. What tends to happen is that the retail side tends to dictate how to run the card operations."

The majority of the 8,300 employees who worked for the finance division will now report to Citigroup, already the largest issuer of credit cards. The New York financial institution also will take over all facilities associated with credit card services, including nine call centers.

Lacy said there are a number of ways the company could use the money from the sale. That includes paying off debt, buying back stock and paying out dividends to shareholders. Some speculate the funds could help Sears pay for its new off- mall concept called Sears Grand.

Execs happy with selling price
Sears executives said they are pleased with the $3 billion price, which represents a 10 percent premium for the credit card portfolio. The portfolio consists of $18.4 billion in Sears Card receivables and $12.4 billion in MasterCard receivables.

In addition, Sears will save $200 million a year by not having to support its zero-percent financing program.

"It is consistent with what we expected when we started the process," Lacy said. "We've thought all along that we had a good business worth a good price."

Moshe Orenbuch, a research analyst with Specialty Finance in New York, agreed that Sears snagged a good deal.

"Ten percent seems to be on the higher end of roughly what private-label portfolios are being sold," he said. The premise of buying the largest
private- label operation may have provided an extra price incentive.

But other analysts said the deal is below the $4 billion to $7 billion initially suggested by speculators when Sears announced it would sell the unit.

"It was probably the best they can realistically expect given the market and their credit card problems," said Jim Daly, editor of Credit Card Management, a Chicago-based publication.

"A few years ago, premiums were in the high teens and 20 percent range, but they did as best as they could."

Sears Sells Credit Biz to Citigroup
By Sandra Guy - Business Reporter - Chicago Sun Times
July 16, 2003

Sears Roebuck and Co. shocked naysayers Tuesday with a financial hat trick: It announced the sale of its credit-card business to Citigroup for $3 billion--a 10 percent premium. The deal also will free up cash for Sears to reduce its debts and provide it guaranteed yearly income.

"This truly represents a very important milestone in the long and distinguished history of Sears Roebuck," CEO Alan Lacy said of the company that first offered its shoppers credit 90 years ago.

Sears said it will realize $6 billion from the sale of its portfolio, which is valued at about $30 billion. That's because in addition to the $3 billion in cash Citigroup will pay, it will retain $3 billion in capital it had in the card business.

The sale, expected to wrap up by the end of the year, will be invisible to shoppers, who can continue to charge their Sears "blue" card and Sears Gold MasterCards as they always have.

Now comes the hard part--turning around sales at Sears stores after 22 straight months of same-store sales declines in a fiercely competitive industry.

"We still know that our retail business needs to perform better than it currently does," Lacy said in a telephone interview after the announcement.

But Lacy said he is confident that Sears can continue managing its cash flow so it can build more than its previously announced five new stand-alone Sears Grand stores, which will be twice the size of a Sears store inside a mall.

"With the first pilot (Sears Grand) store opening in October, I am optimistic that will be a growing format for us," Lacy said.

For its part, Citigroup sees the chance to expand its Latino customer base, a significant portion of Sears' shoppers. Hispanics are "a key focus of our consumer business marketing efforts," said Robert B. Willumstad, president of Citigroup and CEO of its global consumer group.

Sears shoppers also should see new credit products being sold at the check-out counter or in mailings to their homes. The offerings could include home equity loans, installment loans, and new kinds of credit cards.

Purchase of the portfolio--made up 58 percent of private-label Sears cards and 42 percent of MasterCards--will raise Citigroup's total managed card receivables to nearly $169 billion. The next largest is MBNA's $107 billion portfolio. Sears' credit card business, which had $29 billion in loans, includes 59 million accounts, of which 25 million are active.

The deal must be approved by federal and state regulators.

Sears is taking a two-pronged approach to turning around its retail
business: It has remodeled its mall-based stores and stocked them with Lands' End apparel, and it will start this fall opening the Sears Grand stores, which will sell pop, snack foods, CDs and DVDs, to compete with rivals such as Kohl's, Target and Wal-Mart.

The announcement came after the markets closed. But Wall Street cheered the news of the credit-card deal, driving Sears stock up $6.67, or 19 percent, to $41.65 in after-hours trading. In regular trading, Sears' shares had closed up 48 cents, or 1.4 percent, at $34.98.

Retail analysts had mixed opinions about whether the Hoffman Estates-based retailer has the right strategy for growth. Standard & Poor's cut the retailer's credit rating by one level to BBB, the second-lowest investment grade, in part because Sears will no longer be able to rely on credit-card profits to generate two-thirds of its earnings.

Sears' employees will see mixed results.

Citigroup will hire 100 to 150 new employees to work on the Sears business, perhaps in operations inside Sears' Hoffman Estates headquarters. Citigroup also will take over Sears' 13 call centers nationwide and hire "substantially all" the 8,300 Sears employees who work in the credit and financial products business.

But Sears also sees a chance to cut costs by lopping off jobs tied to the credit business, including legal work, finance, human resources and public relations.

Here's how Sears stands to gain from the deal:

*Sears will receive $400 million in pre-tax profit. Half of that will come in yearly income, based on the company's meeting performance targets such as opening a certain number of credit-card accounts. It will realize the other $200 million because the Sears credit business will no longer exist, and therefore will no longer "charge" the retail operation for the expense of promotions such as zero-percent financing.

*Sears will use after-tax proceeds of about $4.5 billion to pay down debt, issue a special one-time dividend and possibly apply some money toward the company's underfunded pension fund.

Kurt Barnard, president of Barnard's Retail Consulting Group, said he sees hopeful signs in Sears' last two months' of same-store sales, which fell less than 2 percentage points from the year earlier periods.

"Sears has worked very hard at trying to position itself as the mall-based counterpart to the mass-merchandising store," he said. "I believe it will be very successful, much to the chagrin of many of Sears' mall rivals."

But Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York- based retail consulting firm, said the Sears Grand stand-alone concept makes no sense to him.

"It is a diversion of management, time, attention and capital," he said. "It appears mad."

Yet the transaction takes an increasingly troublesome business off Sears' hands.

Profit from Sears' finance unit fell 11 percent in the first quarter because Sears had to set aside more funds to cover unpaid bills. Sears put the business up for sale in March.

Contributing: AP, Bloomberg News

Citigroup to Buy Sears Credit Unit
Retailer to Shift Focus With $3 Billion Sale
By Dina ElBoghdady and Caroline E. Mayer
Washington Post Staff Writers
July 16, 2003

Sears, Roebuck and Co. announced plans yesterday to sell its credit card division to Citigroup Inc., the nation's largest credit card issuer, for about $3 billion to focus on the retail side of its business and attempt to recapture the Middle America shoppers it captivated for most of the past century.

The deal, expected to be completed later this year, would close another chapter for Sears, which for decades used the lure of easy store credit to drive sales in its department stores.

Within the past three years, the retailer has been pushing to cut costs, renovate stores and improve its merchandise. Four months ago, it announced plans to shed the credit card division, which had become a drag on the company's finances and a distraction from its core business.

For Citigroup, the acquisition would further solidify its dominance in the credit card business, giving it more than 100 million active accounts in North America, said industry expert Robert McKinley. Citigroup noted that 60 percent of U.S. households, including a significant chunk of sought-after Hispanic consumers, are Sears customers.

The agreement was announced after the New York Stock Exchange closed. In after- hours trading, Sears shares jumped $6.52, or 19 percent, to $41.50. However, Standard & Poor's Corp. lowered Sears' debt ratings, saying that without the credit card business, Sears would lose an important part of its operating income while relying on a retail business with a "very challenging future." The credit card business generated operating income of about $1.5 billion in 2002, or about 72 percent of Sears' total, factoring in nonrecurring items.

Citigroup shares declined 58 cents, to $46.25, in after-hours trading. Even so, credit card industry experts saw the agreement as a good move for Citigroup. "This clearly is a strong action on the part of Citibank and affirms that it believes the single most important retail credit product is unsecured loans -- that that's where the profits are," said David Robertson, publisher of the Nilson Report, which tracks the consumer credit industry.

During the past three years, Sears aggressively tried to expand its credit card portfolio by converting many Sears credit account holders to Sears Gold MasterCard holders. While the basic Sears card is primarily for Sears purchases, the MasterCard can be used elsewhere and permits balance transfers and cash advances.

Consumers who took advantage of those perks had high default rates, Sears belatedly discovered. So the company needed to raise its bad-debt reserve by $189 million late last year.

Michael J. Silverstein, a senior vice president at Boston Consulting Group, said the sale "allows Sears to monetize an asset that has much more value in someone else's hands."

Under this deal, Citigroup would acquire Sears' credit card portfolio, with receivables valued at about $29 billion, for a 10 percent premium, or about $3 billion. Sears also would keep $3 billion in cash from the portfolio, giving it $6 billion in pretax cash up front.

Sears said it would use the proceeds to retire debt, "return cash to Sears shareholders," and for general corporate purposes. It said it would have approximately $4 billion to $4.5 billion in cash available after the debt repayments.

In addition, Citigroup agreed to pay Sears at least $200 million annually for 10 years for the new accounts and sales on credit that Sears employees are expected to generate. At the same time, Sears said it expects to save $200 million annually as Citigroup takes over the costs associated with Sears' interest-free financing program.

Sears chief executive Alan J. Lacy, who worked in the company's credit and finance units before becoming CEO, described the deal as "a very important milestone."

Under Lacy's tenure, Sears has tried to move away from its traditional everything-under-one-roof approach to better compete against specialty stores and discounters that are siphoning affluent and bargain-hunting customers, respectively.

The "new Sears" is to focus more on the appliances and tools that made it famous, while distancing itself from the "softer side of Sears" strategy launched in 1993.

It scaled back the rollout of the Great Indoors home-remodeling stores. It also dropped certain offerings, such as installed floor coverings, cosmetics, bicycles and custom window treatments. But as some parts of the business were chopped, others grew. Sears rolled out "Tool Territory," a space dedicated to 18,000 tools in 72 brands. Even as Sears cut back on many of its lesser-known apparel brands, it unveiled a brand of classic clothes for women, men and children called Covington, and purchased Lands' End, the catalogue and online clothing retailer.

Sears is even testing a store concept, starting this fall, that would include convenience foods, such as cookies and soda.

© 2003 The Washington Post Company

Sears to Sell Card Portfolio to Citigroup for $3 Billion
By Andrew Ross Sorkin - New York Times
July 16, 2003

Sears, Roebuck & Company agreed yesterday to sell its huge credit card portfolio to Citigroup, abandoning a business that it started to help spur sales during the Depression and that ended up becoming larger than its core retail operation.

Citigroup, the largest credit card issuer in the nation, agreed to pay about $3 billion in cash for the portfolio, which includes Sears private-label cards and co-branded MasterCards.

The sale is a strategic shift for Sears, the nation's original mass marketer, as it repositions itself as a stand-alone retailer without the buffer of the credit card operation that had provided a hedge against the unpredictability of the retail business for so many years.

The credit card business provided about 60 percent of Sears's annual profits, or about $1.5 billion — far more than at any other retailer.

The management of Sears decided to sell the card portfolio, the eighth-largest in the nation with 59 million total accounts and outstanding loan balances of $29 billion, in an effort to appease shareholders who have long had difficulty valuing the company because of its unusual hybrid nature as both a retailer and a credit issuer.

The credit card operation had "become so disproportionate to the size of the company," Alan J. Lacy, chairman and chief executive of Sears, said in an interview. "We will now be a much simpler story to understand."

The deal pays immediate and far-reaching dividends for Sears, which will retain $3 billion of the capital it had invested in the portfolio, valuing the pact at $6 billion. In addition, Sears will receive $200 million a year for 10 years as part of the marketing and servicing alliance with Citigroup.

Also, Sears expects to reap savings of more than $200 million a year as Citigroup absorbs costs associated with the Sears zero-percent financing programs.

Citigroup, which will continue to operate the business under the Sears name much the way it operates the AT&T Universal credit cards it acquired from AT&T in 1999, is taking over a portfolio that is considered highly risky. Last October, Sears said its portfolio would need an additional $222 million to cover uncollectible charges for the third quarter.

"It was their salvation for many years," Robert McKinley, chief executive of CardWeb.com, said of the Sears credit card operation. "But in this recession it has gotten nasty."

Private-label credit portfolios are widely considered the most risky, or "subprime," because of the type of customers that the cards attract. Sears expanded its private-label business by offering MasterCards just at the peak of the economic boom and like other card issuers, suffered as unemployment and personal bankruptcy filings rose.

Still, Citigroup said it was attracted to the portfolio because it can better manage the risk and was expecting the quality of credit to rise. "They are betting that as times go by and the economy gets better, it will be less risky," said David Robertson, publisher of The Nilson Report, an industry newsletter.

"This acquisition provides us with an opportunity to take a leadership position in the private-label segment and solidify our current bank card leadership position," Sanford I. Weill, Citigroup's chairman and chief executive, said in a statement yesterday. "We have demonstrated our capability at integrating new businesses over the last few years and to add to our bottom line. This acquisition should be no different."

The acquisition of the Sears portfolio will make Citigroup the largest private- label credit card issuer in the nation, doubling the size of its private-label outstanding balances, or receivables, to $33 billion. The deal raises Citigroup's total managed card receivables to nearly $169 billion; MBNA, the next largest, has a $107 billion portfolio.

Citigroup is also hoping to leverage its relationship with Sears customers to sell them other financial services products. Citigroup said it had about 20 percent overlap of customers with Sears.

Robert B. Willumstad, president of Citigroup and chairman and chief executive of the Global Consumer Group, said during a conference call that he was particularly interested in using the Sears portfolio to reach the Hispanic market. "Sears is a unique franchise," Mr. Willumstad said, "as 60 percent of U.S. households are Sears customers, including a significant Hispanic customer base a key focus of our consumer business marketing efforts."

As part of the deal, Citigroup will take over Sears' Financial Products business and credit card operations, which have about 8,300 employees.

Store credit departments are not the large operations they once were. Only about two dozen store chains, including Federated Department Stores, still run their own programs. Over the last decade, many others have either moved their credit card operations to financial companies like GE Capital, which issues cards on behalf of Wal-Mart and the Gap, or have begun issuing co-branded cards with Visa or MasterCard.

Sears, which owns Lands' End, said that after-tax proceeds of about $4.5 billion would be used to reduce debt, for general operations and to return cash to Sears shareholders.

Sears' Lacy Counts on Sales Revival After Selling
Credit Unit
Bloomberg - July 16, 2003

July 16 (Bloomberg) -- Sears, Roebuck & Co. Chief Executive Alan Lacy, in selling the retailer's credit-card business, sacrificed a pillar of earnings when it began to threaten a plan to revitalize sales at the 110-year-old department-store chain.

The finance unit, which Hoffman Estates, Illinois-based Sears agreed to sell yesterday to Citigroup Inc. for about $3 billion, accounted for about half of profit before being stung by rising delinquencies. Lacy is depending on the remodeling of aging mall-based stores and the introduction of Lands' End merchandise to halt a 22-month slide in sales.

"We'll be able to increase our focus on our core business," Lacy said in an interview. "Our ongoing business will be profitable and well financed." Whether that's enough to lure back shoppers to the largest U.S. department- store chain remains to be seen, raising doubts among some investors and analysts. Sears and other department- store chains have been losing customers to discounters such as Wal-Mart Stores Inc. and Target Corp. offering a wider selection of goods at lower prices.

"They have to stand on their own two feet as a retailer," said David Abella of Rochdale Investments, which manages about $900 million and sold its Sears shares last year. "It's no slam dunk, they still have to maintain and turn around sales."

Standard & Poor's cut the retailer's credit rating by one level to BBB, the second-lowest investment grade, in part because the sale of the credit unit will mean that Sears will have to rely more on its retailing business.

Performance Payments
Sears, which is exiting consumer finance after more than 90 years, will also free up $3 billion of capital that was tied up in the unit, which had $29 billion in loans. The company will also receive about $200 million in annual payments from Citigroup, which will take over the financing of consumer purchases at Sears, if the company meets targets for opening accounts and increasing credit-card bills.

Most investors embraced the sale, which Sears announced in March after boosting reserves because of rising defaults. The shares rose $6.52, or 19 percent, yesterday to $41.50 in trading after the New York Stock Exchange closed. The stock had tumbled to a 10-year low of $18.50 two-weeks before Sears put the unit up for sale.

State Street Corp., Alliance Capital Management and Barclays Global Investors were some of the biggest buyers of the shares in the first quarter. Also among the beneficiaries of the share gain is ESL Partners LP, the hedge fund managed by Edward Lampert, which increased its stake in Sears to 8.9 percent in the period.

Lands' End
Sears, which started letting customers pay in installments for purchases of pianos, farm tools and encyclopedias in 1911, had increased dependence on credit-card earnings as clothing sales tumbled and sales of its Kenmore washers and Craftsman tools brands are being eroded by chains like Home Depot Inc.

Lacy, who managed the credit business before becoming chief executive, has pinned the turnaround mostly on Lands' End, which was acquired for $1.9 billion in June 2002. Lands' End khakis and fleece blankets, which continue to be sold separately by catalog and over the Internet, will be available in most of Sears' roughly 870 department stores by September.

While the addition of the Lands' End products is expected to boost second- quarter profit, Lacy declined to predict when sales at stores open at least a year will rebound. The company is expected to report Thursday that profit rose to 95 cents a share from 71 cents in the year-earlier quarter, according to analysts surveyed by Thomson Financial.

"It's a little bit different situation in that you have to value the company as a retailer," said Richard Wilk, director of global investments at PanAgora Asset Management, whose $12 billion in assets include Sears shares. "And they've struggled a little bit on that side."

Sears to Sell Credit-Card Unit to Citigroup for $6 Billion
A Wall Street Journal Onlie News Roundup
July 16, 2003

Sears, Roebuck & Co. agreed to sell its huge credit-card business to Citigroup Inc. in a deal in which the retailer will net pretax cash proceeds of approximately $6 billion.

Citigroup will pay about $32 billion for Sears Credit and Financial Products business, representing approximately a 10% premium to Sears $29 billion gross domestic credit-card receivables portfolio. As part of the transaction, Sears and Citigroup will also enter into a long-term marketing and servicing alliance with an initial term of 10 years.

Sears' credit-card business includes 59 million total accounts, of which 25 million are active. This portfolio represents the eighth-largest in the U.S. and includes the largest remaining in-house private label portfolio.

"This acquisition provides us with an opportunity to take a leadership position in the private-label segment and solidify our current bankcard leadership position," Sanford Weill, Citigroup's chairman and chief executive, said in prepared statement Tuesday.

As part of the deal, Citigroup, base in New York, will provide credit and customer-service benefits to Sears's proprietary and Gold MasterCard holders. Sears, based in Hoffman Estates, Ill., expects to receive approximately $200 million in annual performance payments from Citigroup, based on items such as new-account and credit-sales generation activities. In addition, Sears expects to realize annual savings of more than $200 million as Citigroup will absorb costs associated with Sears 0% financing program.

Upon completion of the deal, expected by year's end, substantially all of the approximately 8,300 employees of Sears' Credit and Financial Products business will become employees of Citigroup and Citigroup also will assume ownership of the business' operating facilities.

Sears said in March that it was exploring the sale of the credit-card division in order to focus on its retail operations. Credit cards have been a big part of Sears's business over the years, representing 60%, or $1.5 billion, of the company's annual operating income. But the credit-card unit has been hurt badly by rising delinquencies.

The credit-card operations had $30.8 billion in card receivables at the end of 2002, representing 25 million active accounts. Sears is the nation's third- largest MasterCard issuer, with $12.4 billion in receivables, behind only Citigroup and MBNA Corp., according to industry estimates.

Citigroup, with its big credit-card division, was one of several financial heavyweights known to have been looking at the Sears business.

The deal has been approved by both companies' boards and is subject to customary regulatory review and closing conditions.

Citigroup to Pay $3bn for Sears Credit Card Unit
By Gary Silverman in New York
Financial Times
July 15, 2003

Citigroup said on Tuesday that it would pay about $3bn to buy retailer Sears' credit card portfolio in a deal that testifies to the biggest US bank's determination to lead the consolidation of financial services.

The purchase marks a return to big-time dealmaking for Citigroup's chairman and chief executive, Sandy Weill, after months fending off investigations that raised questions among analysts about his survival.

The Sears card portfolio - eighth-biggest in the US - is a logical target for Mr. Weill, who has been emphasising consumer financial services and likes businesses that benefit from capital and economies of scale.

"This is right down the centre of the plate for us," said Todd Thomson, Citigroup chief financial officer.

Citigroup is the biggest US issuer of bank credit cards. With this deal, it will become the leading power in private label cards, used in a particular store. After the deal, Citigroup will manage card receivables of $169bn - nearly twice as much as the next two banks combined.

Sears put the portfolio up for sale in March. According a person familiar with the talks, interest was also expressed by General Electric, HSBC, Royal Bank of Scotland and Barclays.

Citigroup said it would pay a 10 per cent premium for the Sears assets, now about $29bn. It expects there to be about $30bn in assets when the deal closes, putting the price at about $3bn. Sears will also keep about $3bn of cash in the card business, putting its proceeds at about $6bn.

Sears ran into trouble when it moved beyond its store cards to issue bank cards. Citigroup found that the retailer's loss rates in bank-card accounts obtained through direct mail were three times the industry average.

But Citigroup concluded the problems were isolated. It saw a core of customers with good track records and relationships with Sears.

David Robertson, publisher of The Nilson Report, an industry newsletter, said: "Citigroup paid a very modest premium and now has an opportunity to ride the up cycle."

Citigroup will pay about $200m in annual performance payments to Sears based on the retailer's ability to generate accounts and sales. Sears estimated it would save $200m in costs for zero per cent financing. Citigroup will have lower funding costs because it is a bank.

The Sears portfolio has 59m accounts, 25m active. Of the cards, 58 per cent are private label and will carry the Sears name. Citigroup will gain access to 2,700 retail locations.

Sears was advised by Goldman Sachs.

Sears to Sell Credit and Financial Products Business to Citigroup; Sears To Net $6 Billion in Pre-Tax Cash Proceeds

Companies to Establish 10-Year Strategic Alliance Generating Additional Performance Payments, Cost Savings
Sears News Release
July 15, 2003

HOFFMAN ESTATES, Ill., Jul 15, 2003 /PRNewswire via COMTEX/ -- Sears, Roebuck and Co. (NYSE: S) today announced it has entered into a definitive agreement to sell its entire Credit and Financial Products business to Citigroup (NYSE: C) for approximately $32 billion, representing approximately a 10 percent premium to Sears' $29 billion gross domestic credit card receivables portfolio. As part of the transaction, Sears and Citigroup will also enter into a long-term marketing and servicing alliance with an initial term of 10 years. The transaction has been approved by both companies' boards of directors and is expected to close by year-end 2003, subject to customary regulatory review and closing conditions.

Under the terms of the transaction, at closing Sears will net pre-tax cash proceeds of approximately $6 billion, which represents approximately a $3 billion premium on receivables and approximately $3 billion of Sears' net invested capital.

Strategic Alliance

Under the long-term marketing and servicing alliance, Citigroup will provide credit and customer service benefits to Sears' proprietary and Gold MasterCard holders. As part of the alliance, Sears expects to receive approximately $200 million in annual performance payments from Citigroup based on items such as new account and credit sales generation activities. In addition, Sears expects to realize annual savings of more than $200 million as Citigroup will absorb costs associated with Sears' zero percent financing program.

Upon completion of the transaction, substantially all of the approximately 8,300 employees of Sears' Credit and Financial Products business will become employees of Citigroup and Citigroup also will assume ownership of the business' operating facilities.

"This is a great deal for Sears, its customers and shareholders," said Alan J. Lacy Sears chairman and chief executive officer. "Our customers will enjoy broader credit and financial products opportunities and continued high levels of service, while Sears gains an additional source of profitability and greater financial flexibility. We are delighted to be involved in a strategic alliance with Citigroup. They are a world leader in proprietary, co-branded and general purpose cards, with world class technology, powerful financing capabilities and excellent customer relationship management skills."

Lacy added, "This strategic action will also create significant value for our investors by accelerating progress toward building a Sears that is completely focused on growing our core retail and related services business, further simplifying our organization, strengthening our financial position and returning substantial proceeds to shareholders. With the completion of this transaction, Sears will stand as a focused, well-financed retail leader, with substantial earnings and a strong balance sheet."

Sears' domestic credit card business includes 59 million total accounts, of which 23 million are active. This portfolio represents the eighth largest in the U.S. and includes the largest remaining in-house private label portfolio. Both the Sears proprietary card and Sears MasterCard will continue to be offered through Citigroup and the transition will be transparent to Sears customers.

"The combination of Sears' exceptional distribution channel and customer base and Citigroup's industry leadership position in cards and excellence in customer service will create powerful new growth opportunities for both companies," said Robert B. Willumstad, president of Citigroup and chairman and chief executive officer of Citigroup's Global Consumer Group. "Citigroup looks forward to delivering even higher levels of service to Sears' 59 million credit card customers, capitalizing on new opportunities to expand this portfolio, and leveraging our proven ability to maximize the potential of the card business."

Use of Proceeds

Proceeds from the transaction are intended to be used primarily to retire debt, return cash to Sears shareholders and for general corporate purposes. After retirement of debt, the company expects that approximately $4 billion to $4.5 billion in cash will be available. Following the expected distribution, Sears expects to have approximately $1.5 billion of debt, net of cash reserves held for future paydown of remaining outstanding debt.

Sears to Sell Credit Card Unit to Citigroup in $6 Billion Transaction
Bloomberg - July 15, 2003

July 15 (Bloomberg) -- Citigroup Inc., the world's biggest financial company, agreed to buy Sears, Roebuck and Co.'s credit- card portfolio in a transaction that will give the retailer $6 billion to reduce debt as it focuses on its department stores.

Sears, exiting consumer finance after 90 years, will get $3 billion from Citigroup and an additional $3 billion of capital that was tied up in the unit, which had $29 billion in loans.

The purchase would enable Citigroup Chief Executive Officer Sanford Weill, who oversees the largest credit-card company, to extend his lead in consumer finance over his top rivals MBNA Corp. and Bank One Corp. Lending to individuals contributes more than half of New York-based Citigroup's earnings.

``Citigroup will be better qualified to manage that portfolio than Sears Roebuck,'' said Marshall Front, who recently built a Citigroup stake to 1.2 million shares in the $1.5 billion managed by Front Barnett Associates LLC. Credit cards have ``been a driver of their growth this year. It's a pretty good time to be buying.''

Sears Shares Gain

Sears Chief Executive Officer Alan Lacy had expanded the company's Gold MasterCard program to increase revenue. Most retailers hire other companies to handle credit-card services.

The Hoffman Estates, Illinois-based retailer's shares jumped $4.01, or 11 percent, to $38.99 in after-hours trading at 4:21 p.m. Citigroup shares declined 82 cents to $46.01.

Profit from Sears' finance unit, which accounts for almost two-thirds of earnings, fell 11 percent because Sears had to set aside more funds to cover unpaid bills. Sears put the business up for sale last month. Investor concern about rising credit-card delinquencies sliced about $5 billion in market value from the retailer after it starting increasing reserves in October.

Goldman Sachs Group Inc., the world's third-biggest securities firm by capital, advised Sears. At Citigroup, a team led by David Head at the bank arranged the purchase. The acquisition was earlier reported by CNBC.

Sears started letting customers pay for pianos, encyclopedias and farm tools in installments in 1911. Sears has relied on interest-free financing offers to boost sales of appliances and Craftsman tools.

Sears has relied more heavily on its credit-card unit as it has lost market share to rivals such as Kohl's Corp. and Home Depot Inc.

Sears last year unexpectedly boosted its reserve for unpaid bills after delinquencies surge and fired the unit's former head, Kevin Keleghan.

"This puts the Sears retail turnaround front and center," said John Grund, a partner at First Annapolis Consulting, who runs the firm's retailing practice. "Credit has in many cases provided air cover for a struggling retail business."

Citigroup Growth

For Citigroup, credit cards generated $768 million in profit in the second quarter, a 7 percent decrease from the year-ago period. The business accounted for 18 percent of earnings in the second quarter.

Citigroup had $125.5 billion owing in its global credit card portfolio as of June 30. The bank said it had 99.2 million accounts. Citigroup reported $2.3 billion of its credit card loans were 90 days or more past due as of June 30, or 1.9 percent of the total credit card portfolio.

"Citigroup will be better qualified to manage that portfolio than Sears Roebuck," Front Barnett Associates' Front said.

Moody's Investors Service affirmed Citigroup's Aa1 credit rating, saying the purchase will help Citigroup extend its position as the leading credit card company into private label credit cards.

"This transaction should allow Citigroup to continue to enjoy economies of scale in the credit card industry, and allow it to improve the returns of the Sears Roebuck portfolio through improved risk management," Moody's said in a statement.

Interest rates at a 45-year low and an economic recovery may encourage consumers to use their credit cards, analysts said. Federal Reserve Chairman Alan Greenspan said today the Fed will leave its benchmark interest rate low "as long as needed" to drive growth.

"If the economy is improving as Greenspan says, consumer spending should get better from here, not worse," said Steve Berman, who helps manage $7 billion, including 2.4 million Citigroup shares, for Stein Roe Investment Counsel. "The economy should create jobs."

Citigroup to Buy Sears Credit Card Portfolio
Reuters - July 15, 2003

NEW YORK, July 15 (Reuters) - Citigroup Inc. (C) on Tuesday said it agreed to buy the credit card portfolio of retailer Sears, Roebuck and Co. (S) for $6 billion cash.

Under terms of the deal, Citigroup will acquire both the MasterCard issuing business of Sears and its store label accounts. Citigroup, the world's largest financial services company, will make additional payments and absorb additional costs for 10 years.

Shares of Sears surged after the deal was announced, reaching $39.20 in after hours trade, compared with a close of $34.98 on the New York Stock Exchange. Citigroup shares fell to $45.98 from its close of $46.83 on the NYSE.

The acquisition would expand Citigroup's position in the retailer-based credit card market and for Sears it would remove a business that once accounted for nearly two-thirds of its profits but became a distraction as consumer defaults mounted.

Citigroup will pay Sears $200 million a year over 10 years to meet certain performance objectives, including new account generation. Citigroup will also absorb certain costs totaling an additional $200 million a year.

Hoffman Estates, Illinois-based Sears said it expected the deal to close by the end of 2003. It said it expected to have $4 billion to $4.5 billion in cash and $1.5 billion of cash, net of debt, after the deal.

Marketers, Not Merchants, Join Sears
By Sandra Jones - Crain's Chicago Business
July 14, 2003

Sears, Roebuck and Co. is making a big bet that executives who can sell soft drinks and tacos will know how to attract shoppers to the Big Store's lawn mowers and lingerie.

Lost in the featureless shopping landscape between big-box discount chains and department stores, the shrinking American retail icon is making an uncharacteristic turn to a new cadre of senior managers from the food and consumer package goods industries, recruiting from Kraft Foods Inc., KFC and PepsiCo Inc. Their assignment: Convey to customers, in a simple way, why they should shop at Sears.

If it succeeds, the risky strategy could give Sears the identity it has long needed to win back shoppers from Wal-Mart Stores Inc., Target Corp. and Kohl's

Corp. Chairman and CEO Alan Lacy decided earlier this year to shed Sears' highly profitable credit card operation and stake the company's future on its stores alone. Yet, if Mr. Lacy is unable to keep the branding efforts from overshadowing the basic task of delivering merchandise that consumers want at a price they are willing to pay, the rebranding push could wind up on a long list of failed turnaround efforts at the Hoffman Estates-based company.

"Whether it's chicken or tools, there has to be an understanding of how you communicate with customers," says Kirk Palmer, CEO of Kirk Palmer & Associates, a New York-based retail executive search firm. Until former Saks Fifth Avenue executive Arthur Martinez took the top post at Sears in the 1990s, the company had been run by a cadre of executives who had spent their lives at the Big Store. Even Mr. Martinez, an outsider to Sears' insular culture, filled his executive team with retail veterans.

Going where the talent is

Now, though, Sears has no choice but to go outside the retail industry to find top managers, according to executive recruiters. Many retailers are in trouble, and it's difficult to woo top talent from the few that are thriving.

The consumer products industry, by contrast, is well-stocked with disciplined and creative managers, says James Drury, a Chicago-based recruiter. "Putting investment banking aside, for sheer horsepower, the consumer package goods companies have the strongest talent, pound for pound," he says. Key among Sears' new hires are Mark Cosby, president of full-line stores, who most recently ran Louisville, Ky.-based Yum Brands Inc.'s 5,300-restaurant KFC chain, and Janine Bousquette, a veteran of Cincinnati-based consumer products giant Procter & Gamble Co. and Purchase, N.Y.-based PepsiCo. Both joined Sears late last year.

Mr. Cosby, who has maintained a low profile with Wall Street since taking Sears' No. 2 spot, is pushing a campaign to give more decision-making power to store management in hopes of healing the long-standing rift between corporate headquarters and the field. People who know him describe a likable leader adept at motivating sales people in the field.

Ms. Bousquette is credited with breathing new life into the Pepsi-Cola and Mountain Dew brands. At Sears, one of her first moves was to jettison the "Sears. Where else?" ad campaign, which had been criticized for confusing customers, and replace it with "Sears. Good life. Great price."

Messrs. Lacy and Cosby and Ms. Bousquette were unavailable for comment. A Sears spokesman says the newcomers have "a strong consumer marketing and
brand- building background" and are "very operationally focused" traits that "will certainly enhance the business going forward."

Says Steve Chang, partner in the Chicago office of Prophet, a San Francisco- based brand consulting firm: "That's the fundamental question that everyone has been beating up Sears for: What do they stand for? They've got to get crisper and clearer on that."

Mentored by Miles Sears' transformation into a consumer products company began three years ago when Michael Miles, a member of Sears' board and past chairman, championed Mr. Lacy as CEO. While outsiders disagree over how much influence Mr. Miles wields over Sears' current strategy, no one disputes that the former chairman and CEO of Kraft Inc. and later its parent, Philip Morris Cos. mentored Mr. Lacy when both were at the food giant. A lifelong finance executive, Mr. Lacy spent 14 years at Kraft, the biggest U.S. food maker, and followed Mr. Miles to Philip Morris before moving to Sears in 1994. He's earned a reputation for cutting costs, but has yet to articulate Sears' strategy for growth.

Now, he's counting on his new team of consumer products veterans to reduce

Sears' mission to a sound bite and to infuse the retailer with the customer- focused attitude it lost decades ago. "Alan may not be a great retailer, but he's an astute leader in terms of understanding what Sears has lost and what Sears needs to get back," says Sid Doolittle, founding partner of Chicago-based retail consulting firm McMillan/Doolittle LLP. "I don't know what the results will be, but the chemistry of the whole management team has to come together to get through this crisis of marketshare."

Mr. Lacy has completely overhauled his senior management team since becoming chairman and CEO in late 2000. Among the 16 people on his senior staff, 11 have been at Sears less than three years, and eight of those have joined within the last year.

Among them are Chief Financial Officer Glenn Richter, who spent seven years at PepsiCo and two at Deerfield-based medical equipment maker Dade Behring Holdings Inc.; Paul Liska, president of Sears' credit and financial products,

who wove his way through various Kraft finance jobs for six years and spent three years at Deerfield-based food conglomerate Specialty Foods Corp., and Andrea Zopp, senior vice-president and general counsel, who was a high-profile Cook County prosecutor and former deputy general counsel at Sara Lee Corp.

Recruiting from outside Sears joins a growing contingent of troubled retailing giants going outside their traditionally insular industry in hopes of finding leaders with a fresh perspective.

In 2000, Atlanta's Home Depot Inc. hired as its chairman and CEO Robert Nardelli, a former General Electric Co. executive who ran a business that made generators and turbines for power plants. And last fall, San Francisco-based Gap Inc. recruited former Walt Disney Co. veteran Paul Pressler. Both men are charged with finding new avenues of growth for the maturing chains.

In the end, the rebranding of Sears will work only if the stores look good and

give customers what they want, says Philip Zahn, a credit ratings analyst at Fitch Inc. in Chicago.

"The most important thing is to get interesting merchandise in the stores," he says. "That's the bigger challenge."

Copyright 2003 by Crain Communications Inc.

Sears Tower Likely to Go to its Lender
By Thomas A. Corfman
Tribune Staff Reporter - Chicago Tribune
July 11, 2003

Debt, 9/11 fears shadow landmark

Still struggling for tenants nearly two years after the Sept. 11 terrorist attacks, Sears Tower will be handed over to its lender to prevent the skyscraper's owner from defaulting on its massive mortgage, sources close to the deal said Thursday.

Anxiety over a possible terrorist attack on the world's second-tallest building has dramatically reduced the attractiveness of the 110-story tower to some existing tenants and many prospective ones.

As a result, the tower's market value has dropped, and the building now is unlikely to be worth the value of the outstanding loans when they come due, forcing a likely default by owner Trizec Properties Inc.

Chicago-based Trizec plans to transfer ownership of the tower to lender MetLife Inc., the large New York-based life insurance company, sources said. The two sides are expected to announce the deal sometime in August.

MetLife Inc. has praised Trizec's management of the skyscraper during the 22 months since the destruction of New York's World Trade Center. And as part of the building's return, MetLife is expected to retain Trizec as the manager of the 3.7-million-square-foot tower, sources said.

The cloud of 9/11 continues to shadow the tower, located at 233 S. Wacker Drive. Since the attacks, many tenants have talked openly about their fears that the tallest building on Chicago's skyline will become a terrorist target.

"You can completely forget about Sept. 11, but as soon as you go back into that building, you think about it again," said Alain LeCoque, managing principal of the Chicago office of Newmark & Co. Real Estate Inc., which represents tenants looking for office space.

At the same time, continuing softness in the downtown office market has given current and prospective Sears Tower tenants plenty of alternatives that are cheaper and less worrisome.

High-profile companies that plan to move out of the tower include local offices of the Goldman Sachs & Co. investment bank, Fireman's Fund Insurance Co. and Merrill Lynch & Co., which will keep a small office there.

"It's one of the best buildings in the country, but the reality is that after Sept. 11 people look at the building differently," said Michael O'Hanlon, executive vice president of Northbrook-based Grubb & Ellis Co., a real estate firm. "Over time, that perception will change."

But not in time for Trizec, sources said. The building owner's debt, which totals $760 million, including accrued but unpaid interest, comes due July 2, 2005. In a highly leveraged 1997 deal, Trizec paid $70 million to gain control of the tower, subject to MetLife's mortgage.

In November, Trizec wrote down its initial investment in the tower to $23.6 million. Trizec could lose some or all of its investment, depending on its deal with MetLife.

A MetLife spokeswoman declined to comment Thursday. A Trizec spokesman said the firm also would not discuss the status of the talks, adding: "We continue to work with MetLife to reach a resolution that would be good for both parties, and for our tenants."

Sears Tower is generating enough cash to keep Trizec current with its mortgage payments. Many of the tenants, including some that are leaving, have long-term leases. The building was 89.2 percent leased in the first quarter.

Trizec's problems also reflect its decision to buy the tower with a large amount of debt, or leverage. "Any real estate that you buy with 90 percent leverage, if the market goes up, you're a big winner," said analyst Jim Sullivan of California-based Green Street Advisors Inc., who has pressed Trizec to surrender the tower. "And if the market goes down, you get wiped out pretty quickly."

The nationwide downturn in the office market has hurt Trizec more than many office-building companies because of the Chicago firm's high debt level, about 65 percent of total company value. As a result, Trizec investors are likely to be pleased with the return of the tower.

Handing back the well-known tower would be a setback for Timothy Callahan, who became Trizec's chief executive in August and who has been trying to guide the company toward a revival. Callahan had hoped to persuade MetLife to restructure the loan, which charges interest at rates above current levels.

Trizec had threatened to walk away from the tower, betting that the conservative life insurance company would readily renegotiate the debt rather than take title to the tower, given its uncertain value. But MetLife executives are said to have been unmoved.

Nonetheless, the negotiations have been cordial, as shown by the likelihood that Trizec will continue to manage the building. Earlier this year, Trizec said its annual Sears Tower management fees and leasing commission would range from $2 million to $4 million.

The decision to give up Sears Tower also will be a test of Callahan's leadership. Several top Trizec executives believe the massive building would regain its value before the debt came due. And many Trizec employees who work in the tower have become emotionally attached to the skyscraper since the terrorist attacks.

Though Callahan shared that sentiment, his decision to hand back the building reflects a more dispassionate view of the trophy tower. At a June 4 conference with investors, he hinted at the outcome of the talks with MetLife.

"For us, fundamentally, it comes down to [do] we believe that over time Sears can regain the value it once had?" he said, according to a transcript of the conversation. "It certainly has been hurt as much as any asset that I'm aware of in regards to post-9/11."

Control has changed hands over the years

OCTOBER 1988
On the block Sears Roebuck and Co. announces it will try to sell the tower as part of a restructuring amid profit declines. The asking price tops $1 billion.

JULY 1990
Refinancing In a complicated transaction, Sears obtains two loans on the tower. New York insurer MetLIfe Inc. issues a $600 million first mortgage, while Boston investment firm AEW Capital Management L.P. issues a $215 million second mortgage. The loans are due in 2005.

NOVEMBER 1994
Getting out With unpaid interest mounting, Sears announces it will give up ownership as part of a restructuring of the massive debt. AEW gains control of the property, which is put in a trust, with the title to pass to AEW on Jan. 1, 2003.

DECEMBER 1997
Control shifts A Toronto-based predecessor to Trizec Properties Inc. pays $70 million to AEW for control of the tower. The building is still saddled with more than $700 million in debt.

NOVEMBER 2002
Hints of problems Trizec, which has moved its headquarters to the tower, says it is trying to renegotiate the loans with MetLife. Several months later, transfer of the title is delayed, as Trizec blames documentation delays.

AUGUST 2003
Another shift Trizec and MetLife are expected to announce that ownership of the building will be handed to the insurance company, with the real estate firm continuing as manager.

Sears June Same-Store Sales Fell 1.8%
Dow Jones Newswires
July 10, 2003

HOFFMAN ESTATES, Ill. -- Sears Roebuck & Co.'s (S) June same-store sales fell 1.8%, in line with an analysts' consensus estimate, and the company said it expects July same-store sales to decline in the low single digits.

In a press release Thursday, the department-store chain said total revenue for the four weeks ended July 5 decreased 1.2% to $2.66 billion from $2.7 billion a year earlier.

Sears said June results reflect continued strong performance in lawn and garden, while a stronger promotional stance contributed to improved apparel trends. However, cooler weather across much of the country hurt some hardline sales, such as air conditioners.

For the year to date, same-store sales fell 4.7%, while total sales decreased 3.9% to $10.99 billion from $11.43 billion last year.

New York Stock Exchange-listed shares of Sears closed Wednesday at $24.26, down 64 cents, or 1.8%. The stock hit a 52-week high of $52.05 on July 10, 2002, and a 52-week low of $18.25 on March 17.

Wal-Mart: The Godzilla of Grocers
No. 1 Retailer to Supply 12 Percent of Food in U.S. by 2006
By Garrett Glaser - CNBC
July 10,2003

"With $50 billion a year in grocery sales, by 2006, Wal-Mart is estimated to supply almost 12 percent of all food sold in the U.S. — and the world's largest retailer isn't showing any signs of slowing.

ACCORDING TO ONE retail report, Wal-Mart is the top-rated store for consumers.

Every month, a company called Big Research in suburban Columbus, Ohio surveys 20,000 consumers around the country about their shopping habits. From data gathered last June, the report shows Wal-Mart was the customer favorite. Wal-Mart is the the biggest retailer in the world, and it’s growing even bigger, causing tremendous change along the way. In the supermarket industry, some would say an upheaval. "They're obviously the 800 pound gorilla in the grocery business right now," says Gary Drenik, CEO of Big Research. "They're number one with all consumers 18 and over in our surveys. They’re also number one with women shoppers, number one with incomes under $50,000, and also number one with people over $50,000 and even $75,000."

GROCERY GODZILLA?
Other numbers are even more mind numbing. Consider this: Forty-five percent of women who buy apparel at Wal-Mart also buy their groceries there. Forty-seven percent of men do the same. Forty-two percent of people buying children's wear do the same. And a whopping 80 percent of the people who go in to buy beauty aids and cosmetics are now also shopping Wal-Mart for the majority of their food purchases.

Even with those numbers, there still is a strong disagreement on the significance of Wal-Mart’s growth into groceries. A recent report from Merrill Lynch says, "We continue to believe that new sales and market-share data do not support the bear argument that Wal-Mart is the root of all food retailers’ problems." And Meredith Adler, who follows food and drug retailing for Lehman Brothers, agrees that plenty of people don’t shop only on price. “There is an equation — a value equation that every customer has in their mind that includes a lot of things besides just price." Adler says that within the equation, consumers consider many things, such as how far a store is from their home, the quality of stores’ products, the stores’ assortment and how many things they purchase at the store?

Defamation Suit vs. Sears' CEO Goes Ahead
By Sandra Guy, Business Reporter  - Chicago Sun-Times
July 9, 2003

A judge ruled Tuesday that the ousted head of Sears, Roebuck and Co.'s credit-card division can proceed with a pared-down version of his defamation lawsuit against CEO Alan Lacy.

Kevin Keleghan, whom Lacy blamed last fall for concealing Sears' worsening credit-card delinquencies, accused Lacy of defaming him when Lacy told Wall Street analysts that he had lost confidence in Keleghan.

On Oct. 17, Sears' shares fell to a 12-year low after Lacy announced that Sears would increase its allowance for future uncollectible credit-card debts by $189 million, and would boost by $33 million its charge-offs for uncollectible accounts.

Keleghan, who was president of Sears' credit and financial products when he was fired, cited four statements of Lacy's as defamatory.

Lake County Circuit Court Judge Henry Tonigan on Tuesday dismissed two of the statements from the lawsuit and upheld two others to proceed to a jury trial.

Keleghan also has alleged that the Hoffman Estates-based retailer failed to pay him severance benefits he was promised in an employment contract. That claim is pending, according to a Sears spokesman.

Keleghan's lawyer said Tuesday that the lawsuit was brought "to preserve the integrity and reputation of my client.

"We hope that this matter can be resolved speedily," said Thomas G. DiCianni, partner with Chicago law firm Ancel, Glink, Diamond, Bush, DiCianni & Rolek.

Sears spokesman Chris Brathwaite said the company "is pleased that the judge has thrown out two of the statements in question, and we will continue to vigorously defend against the remaining claims."

A jury trial has been set for January, but that could change if a settlement is reached or the case delayed.

The judge allowed to proceed to trial Lacy's statements that Keleghan "wasn't forthcoming about the issues" involved in the credit-card division's growing delinquent accounts and that Keleghan "had become a barrier" to Lacy's getting accurate information about the credit business.

Sears has since put its credit-card division up for sale, and is expected to announce the buyer later this year.

Sears Dukes It Out with Lowe's
By Parija Bhatnagar, Staff Writer - CNN/MoneyWeb
July 8, 2003

Its 75-year dominance in appliance sales threatened,
Sears shows its harder side. Will it work?

NEW YORK (CNN/Money) - The very first Sears Roebuck & Co. catalog, dating from the 1890s, sold only watches and jewelry.

Thirty years later, the company launched its signature Kenmore brand, a step that helped make it the place for Americans to buy their home appliances.

"Sears needs to protect this business at all costs." Britt Beemer, retail consultant America's Research Group.

Now, more than 75 years after that, Sears' once untouchable dominance in the appliance business is threatened. But the nation's No. 5 retailer -- recently eclipsed by discounter Target, which moved to No. 4 -- is fighting back.

Yes, Sears still is the leader in home appliance sales, with 38.6 percent of the $36 billion market, but that's down from 41 percent in 2001. Home improvement retailer Lowe's (LOW: Research, Estimates) ranks second with 13.8 percent of the market while Home Depot (HD: Research, Estimates) has 5.3 percent, according to Stevenson Group, a Louisville, Ky.-based market research firm.

"Sears is an American institution that's getting beaten up," said Howard Davidowitz, chairman of New York-based national retail consulting firm Davidowitz & Associates Inc. "The company is trying everything it can to stay in business but it's still losing market share everywhere."

Hoffman Estates, Ill.-based Sears (S: up $1.12 to $34.87, Research, Estimates) already has been battling fierce competition from discounters such as Wal-Mart (WMT: Research, Estimates) and Target (TGT: Research, Estimates).

And even though Sears' stock has jumped 81 percent this year, some investors may be starting to question the gains. Short-selling activity recently crept back near its second-highest level of the year. Shorts typically borrow stock and sell it, hoping to buy it back and profit if the stock declines.

Sears revamped in-store appliances display. (Courtesy: Sears) "The company has remodeled its stores several times and is also trying to sell its credit business," Davidowitz said. "But when the smoke clears, it's anyone's guess as to how many more years Sears can go on like this."

Still, while Sears same-store sales fell in May, the 1.9 percent drop was much smaller than Wall Street forecasts for a 5.3 percent decline, due mainly to strength in its home appliance business.

No one sells more home appliances than Sears, which carries the six top brands: its own Kenmore and Kenmore Elite names, as well as Bosch, Frigidaire, General Electric and Maytag.

"Sears gets five times more demand for its home appliances than Lowe's and Home Depot," said Britt Beemer, retail consultant and head of America's Research Group, a Charleston, S.C.-based research firm.

"This is a core product category that generates a lot of profit from sales of products and the extended service warrantees. Sears needs to protect this business at all costs."

With its market share slipping and the home improvement chains getting more aggressive in appliances, Sears recently announced a major overhaul of its appliance business.

The biggest changes include cutting prices and a policy whereby Sears will match a competitor's lower price and give the customer 10 percent of the difference.

The company also hopes to entice shoppers to take home half of the appliances sold on the day of purchase, rather than waiting for delivery, cutting warehousing and financing costs, up from about 30 percent currently. Sears sells 260 models of major appliances in its 870 mall-based stores.

Spokesman Larry Costello said Sears also is testing new floor displays, grouping products together by brand rather than by price.

"We want to make the appliance section easier to shop and match the right appliance with the right customer," he said. "We want to grow our market share."

For its part, Lowe's isn't too worried.

"We're surprised that Sears would elect to compete aggressively on the low- priced end in appliances," said Bruce Ballard, vice president of appliances at Lowe's. "We think it runs counter to what seemingly has brought Sears to the dance. Consumers go to Sears for a mix of products and prices."

Ballard said Lowe's strategy is to boost sales of its mid- to upper-priced appliances, adding that its appliance business is one of its fastest growing product lines. Lowe's carries major appliances in just about all of its 850 stores.

A spokesman for Home Depot said the company is looking to boost its home appliance displays to more than 800 of its stores by year-end. The No. 1 home improvement retailer, with over 1,500 stores nationwide, already sells appliances in about 770 stores.

Davidowitz, however, isn't convinced about Sears' latest efforts.

"Just cutting prices isn't the only issue. Getting to Sears is an inconvenience. Most stores are located in malls as opposed to a Lowe's or Home Depot. It takes 20 minutes to park the car and just get to the store."

"Sears is a shaken-up company, and who knows when it will recover," said Davidowitz. But for appliance shoppers, he said, the latest changes "are wonderful."

Forget 'May I Help You?'
By Shelly Branch - Staff Reporter of The Wall Street Journal
July 8, 2003

Federated Department Stores Makes a Bet
That Efficiency, Convenience Trump Clerks

To Terry Lundgren's chagrin, the robots didn't pan out.

The head of Federated Department Stores Inc. had envisioned the three-foot- high, motion-sensitive humanoids as greeters at the company's revamped stores. Costing roughly $20,000 apiece, they were supposed to say things like "Hello!" and "See you later!" to customers at Macy's, Rich's, Lazarus and other Federated stores. But the drones had too many kinks, becoming the first of several casualties of a $275 million Federated plan, dubbed "Reinvent," to make its department stores more convenient, user-friendly and automated.

The new ideas seem to have one thing in common: Rather than relying on a live sales clerk to clinch a customer sale, they try to win over consumers with amenities like soft-sided shopping carts, beverage vending machines and electronic scanners that reflect the latest sales and markdowns.

That could mean big savings for the stores in the long term and a change from the days when customer coddling by knowledgeable salespeople differentiated department stores from their lower-priced competitors. Once single-destination meccas for clothing, appliances and toys, department stores have ceded precious market share to cheaper, nimbler formats, such as discounters (Target Corp.) and specialty shops (Abercrombie & Fitch Co.). Big chains like Federated account for just 11% of the nation's retail sales, down from about 20% in 1987, according to the NPD Group. On Wall Street, the department-store sector hovers at the bottom of the retail pecking order, with companies such as Federated, Saks Inc. and May Department Stores Co. posting month after month of disappointing sales.

Federated began its most recent bout of soul-searching three years ago, when many other retail sectors, from auto dealers to fast-food merchants, were busy re-evaluating their selling methods. "You don't need a salesperson to sell you a car when you can buy one on eBay," says Federated Vice Chairman Tom Cole. "The store has a burden of changing," he adds. "The feeling was, if we don't change, we'll die."

Federated recruited its best buyers, store managers and vice presidents to come up with new ideas. Using stopwatches, customer surveys and other fact-finding tools, they hit the road, looking not only at their own stores, but at everything from hot new video arcades to Las Vegas's Forum Shops.

They were surprised at what they learned. Upscale shoppers -- not just bargain-hunters -- craved the convenience of fast, in-and-out shopping. Customers no longer complained so much about shortages of sales help, but they were unhappy about jammed aisles and confusing sales and prices.

Nearly a quarter of the respondents in one Federated poll said they visited department stores less than they used to because of the onerous, pay-as-you-go checkout process. "The problem isn't that no one is in our stores," says Mr. Lundgren, who assumed the role of chief executive in February. "We have plenty of traffic. The key is having the right product at the right price point in an environment that's different and easy."

Federated executives say they got a better feel for changing shopper needs in 2001, when the company opened an innovative Lazarus store in Columbus, Ohio. With such features as centrally located checkouts, plasma-screen TVs, price-check stations and even a childcare center, the store was a local hit. It helped give the company confidence in "line-busters" -- anything that might speed customers through the store, thus reducing the number of human interactions required to make a sale.

Federated is now testing holster-style checkout devices that can be toted on the hips of roaming attendants. Mr. Cole expects Federated and other department stores to "gingerly" move to some form of self-checkout in two to three years.

Some of the new bells and whistles grease purchases in subtler ways. Vending machines, once unthinkable in a department-store context, may dissuade thirsty customers from leaving the store -- and taking their wallets elsewhere. Sleek customer-controlled TV monitors make shoppers less eager to get back home to their own sets. Soft-sided shopping carts permit customers to tote numerous goods, sparing the need for a salesperson to "hold" various items.

The retailer's latest initiatives are being introduced one market at a time, to permit the company to examine their strengths and weaknesses in microcosm -- and manage the results accordingly.

One of the biggest lessons came at a Rich's-Macy's at the Town Center mall in Atlanta, where some veteran salesclerks had been reassigned to work at a bank of new, grocery-style checkout stands. Store devotees complained that their old haunt no longer felt like a department store. Federated performed about 100 "customer rescues," telephoning irate shoppers to explain the changes and invite them back. Eventually, customers got used to the change.

One bit of technology has been evicted after failing to earn its keep. Internet kiosks were intended to connect with young consumers. But when Federated discovered that its own employees were surfing the Web more than the shoppers, it decided to remove the computers. Creative store managers have already salvaged the metal-and-wood Internet stations as displays for fast-selling impulse purchases such as cosmetics kits and jewelry. "You get humbled so often by mistakes," says Mr. Cole, but he remains undaunted. "You've got to push forward and say, 'OK, what's next?' "

As Fed Cuts Rates, Retirees Are Forced to Pinch Pennies

With Interest Income Down, Senior Citizens
In a Florida Complex Face Tough Choices
By Kelly Greene, Staff Reporter - The Wall Street Journal
July 7, 2003

CLEARWATER, Fla. -- For Ruth Putnam, an 86-year-old widow in a small retirement community here, the consequences of the Federal Reserve's continuing interest- rate cuts are painfully clear: She's selling her English Rose china collection, piece by piece.

Mrs. Putnam relies on interest income to make ends meet -- and her investments are earning only a fraction of what they did when she retired 24 years ago. So she's selling her treasures to make up some of the difference. "I don't know what else I could do," she says.

Across the country, retirees and older adults are struggling with the dark side of falling interest rates. The Federal Reserve has made 13 cuts in the past 2½ years, chipping its benchmark rate to 1% from 6.5%. While cheap money has helped fuel a housing boom and may yet spur capital spending, the low rates are ravaging interest income from older Americans' investment vehicles of choice -- certificates of deposit, bonds and money-market accounts.

Low interest rates have always been a threat to retirees relying on interest income. But the relentless decline of the past two years, with no uptick in sight, is taking a particularly hard toll on elderly CD and money-market investors. These are the people who tried to do everything conservatively with their money. For the most part, they didn't chase Internet stocks, and they didn't load up on debt. They sacrificed to pay off the mortgage while building nest eggs to leave their kids.

"They've had their plans in place for 40 years, and now, through no fault of their own, they've had the rug pulled out from under them," says Robert Allsbrook, an economist with AmSouth Bancorp, of Birmingham, Ala., who spends much of his time visiting customers in retiree havens such as Clearwater.

After the federal-funds rate was cut by a quarter-point to 1% on June 25, Mr. Allsbrook's phone rang steadily with calls from older investors, many berating him for "letting" the Federal Reserve squeeze their income.

Many residents of this sprawling suburban town, bordered on the east and west by coastal bays, are feeling the pressure these days. According to the 2000 census, Clearwater has the largest proportion of senior citizens -- 21.5% -- in U.S. cities with at least 100,000 people.

Mrs. Putnam's retirement community, founded 37 years ago, is called On Top of the World. Here, 10,000 residents, many of them transplants from the Northeast and Midwest, live in condominiums in three-story buildings with whimsical names such as "South Seas" or "Royal Chateau." A grand arch marks the entrance to the development; behind it lies a grassy mall featuring a giant globe and a column- filled sculpture garden. Activities include golf, bingo and shuffleboard, as well as classes in yoga and art.

The people who live here make up retirement's middle class. Median annual income for people 65 and older in the community's ZIP code is estimated at $29,696 this year, just $209 more than the national number for that age group, according to demographic-research firm Environmental Systems Research Institute Inc., of Redlands, Calif. Most residents cover day-to-day bills through a combination of Social Security checks and interest generated from their plain- vanilla investments. The luckiest have pensions, though the development's many widows sometimes receive a mere sliver of their late husbands' former benefits.

So, with interest rates at a four-decade low, one big piece of income is drying up. The average rate for a one-year CD purchased last week was 1.59%, nearly four points off the average rate in 2000, according to Bankrate.com. The return on some money-market funds approaches zero after subtracting for overhead.

The cuts aren't leaving the residents destitute or starving, but they have been forced to start cutting back once again after a lifetime of scrimping and saving. They can't visit family as often, eat out or go to shows. Department stores now are out of the question for many; some have decided that membership at a new Costco discount retailer down the street is too much of a splurge.

Pat Wheeler, a Clearwater financial planner, got an earful while manning an advice hotline two months ago for a local TV station. The retirees he talked to typically had several hundred thousand dollars in CDs that had been paying 7% interest a few years ago and were now down to 2%, he says. "If you have $200,000, that's $14,000 a year in interest that's gone down to $4,000. It's quite a cut in pay."

Mrs. Putnam says she has had to scrimp "to the point that a lot of my friends think I'm cheap." Twenty-four years ago, she and her husband relocated from New Hampshire, where he managed a country estate and she worked as a hairdresser. They kept most of their money in CDs, then paying 18% interest. They had some exposure to stocks through a mutual fund, which they picked because the fund company was also called Putnam. The investment had grown to $40,000 two years ago, she says, but since then has plummeted by half.

Meanwhile, interest rates started their steady drop. Rates for one-year CDs at the AmSouth branch a few blocks away from her home fell to a mere 0.8% on June 27 from 5.9% in early 2001. On her bank's advice, Mrs. Putnam started converting her CDs several years ago to fixed annuities paying 4.5% interest. That provides a monthly income of $157 -- less than her former CD income, but more than she would be making with CDs at the moment, she says. The cut is making it tougher to cover her $3,000 annual premium for supplemental Medicare insurance. She also could use hearing aids, but they are so expensive -- at least several hundred dollars apiece -- that "it's out of the question."

To continue trips to see her sons in California and Norway, she's selling off collectibles that she and her husband gathered over the years, including watches, rings and porcelain she no longer uses. Mrs. Putnam has continued to eat lunch out every day, which she considers her main social outlet. But she has downgraded from sit-down restaurants overlooking nearby Clearwater Beach, where she would spend $5 "without thinking about it," to Wendy's and Burger King, where she orders something from the 99-cent menu, along with coffee, for $1.59 or $1.63.

Betty Houghton, who lives a mile away, feels she has to stay put in CDs and a money-market account. Seven years ago, she accepted an invitation to a dinner sponsored by an investment adviser and wound up sinking nearly $120,000 -- almost three-quarters of her and her husband's life savings -- into variable annuities that since have lost a third of their value. "I made such a big mistake giving them such a big check," she says.

Now Mrs. Houghton, 76, goes to great lengths to protect the principal in two CDs valued at $20,000 and $7,000, each paying less than 2% at the moment, and a $14,000 money-market account that earns a paltry 0.2%. "It's a terrible time," she says. "We get practically nothing from the money market, but I don't want to do anything risky anymore."

When she volunteers at her church's clothes closet for people in need, part of the church's storefront mission, she sometimes asks for permission to take clothes for herself. Mrs. Houghton has quit going to the beauty parlor and wears a wig instead. Her husband's doctor has started giving them extra free samples of medications: Zocor for high cholesterol and Aricept for her husband's Alzheimer's disease.

She and her husband each receive a small pension. Mrs. Houghton gets $147 a month from her work as a nurse, and her husband gets $69 a month for his 20 years at Singer Co. It would have been more, she says, but Singer's retirement benefits were curtailed after the company became mired in debt and the fund was taken over by the federal Pension Benefit Guaranty Corp.

All together, the couple's Social Security, pension and $60 or so a month in interest income add up to just over $2,000. Off the top, $216 goes toward the premium for a life-insurance policy Mr. Houghton has had since age 59 and Mrs. Houghton is afraid to drop. Another $438 is earmarked for the couple's Medicare HMO, which provides coverage beyond the program's basic plan. Then there's $300 for monthly condominium maintenance fees, $100 toward property taxes and $350 to help their 57-year-old son, who is disabled.

"There are no frills," Mrs. Houghton says. "No going out to dinner, no movies, no new clothes. It's just a way of existing, really." She has considered going back to work, but would need to get her certification renewed to do her most recent job as a diabetes educator. And regular nursing "at my age would kill me." She's trying not to dip into her interest-bearing accounts, but sometimes, when a CD matures, "I have to take out a few thousand dollars. We're having the same basic bills with less income."

And Mrs. Houghton worries about what would happen to her husband, whom she cares for at home, if she dies before he does. "He's failing," she says. "We don't have any life insurance on me, and there's no way we could afford it now."

Joseph Nemeth, an 80-year-old retired electrician who lives a mile east of On Top of the World, says he lost $3,000 in interest income over the past year through his individual retirement account, which he keeps in fixed-income investments. That's money he has counted on in the past to pay his taxes and insurance bills. Now he's digging into principal to pay those bills and cutting back on bimonthly trips to see his eight living children, 13 grandchildren and two great-grandchildren. "When you start pulling money out of savings, you don't buy things you want," he says.

Despite the low rates and specter of chipping away at savings, few retirees so far seem tempted to diversify their investments. When people ask Mr. Allsbrook, the bank economist, for advice, he tells them, "'One alternative would be to buy stocks that pay higher dividends than the interest you're getting on CDs. Have you thought about that?' But they hear the word 'stocks,' and you can see them tense up."

Before Mary Ellen Owen's husband died several years ago, he moved much of their savings into Treasury, municipal, airport and corporate bonds paying 8% to 9% interest. The 83-year-old widow, who lives just south of Clearwater in Belleair Bluffs, remembers him telling her that their money would be safe and secure. She could live off the income, without having to worry about investment strategy.

For some retirees, bonds they bought years ago when interest rates were higher have proved a solid investment. The bonds have appreciated in value as interest rates have fallen, and they've continued to pay their higher returns.

But many bonds, particularly tax-free municipal bonds favored by retirees, can be called, which means the issuer can redeem them before they mature. Issuers frequently call bonds early if interest rates drop, which allows them to issue new bonds at a lower rate. Bond holders sometimes get a small premium on their principal, such as 3%, when bonds are called early, but it hardly makes up for the lost interest income.

With the current rate cuts, the bonds "are getting called right and left," Mrs. Owen says.

In an attempt to stabilize her income, the widow is diversifying a bit into blue-chip stocks that pay dividends. Still, she's nervous about a future with less money, so she's doing without things she's enjoyed since moving here 33 years ago from Richmond, Va. This spring, she scrapped a summer trip to Europe. She has started substituting lunches for dinners at Belleair Country Club, cutting the cost of going out to eat virtually in half.

The daughter of a minister, she has continued giving to First United Methodist Church of Clearwater, where her son Rick Owen serves as treasurer. But she worries about the many retirees who have not. The church has seen a 25% drop in pledges this year, much of that among retirees who say they don't know how much they're going to have to live on, Rick Owen says. "You would like to have cash reserves of two months. We don't have that this year."

The situation is the same at Mrs. Owen's club. Two weeks ago, as she hesitated to spend $37 on a dinner and mystery-theater act, the hostess told her that a lot of members are cutting back on the special events. One of Mrs. Owen's friends recently told her that she's considering dropping her membership altogether.

"I'm not going hungry, but I am uneasy," says Mrs. Owen. "I don't feel that it would be wise to take money, at a point when my income is dropping, and spend it on any pleasures."

Wal-Mart, Searching for Bargains,
Fuels U.S.-China Trade Gap
July 7, 2003

July 7 (Bloomberg) -- Last Nov. 29, the fortunes of Sichuan Changhong Electric Co., an appliance maker with headquarters near China's largest panda bear reserve, soared.

Wal-Mart Stores Inc., the world's biggest retailer, had picked the Chinese company as a color TV supplier for its one-day ``Thanksgiving Blitz'' in the U.S. The event netted Wal-Mart $1.4 billion in sales of home electronics, toys and other products. It helped Changhong double its profit last year to 176 million yuan ($21.3 million).

The decision by Wal-Mart and rivals such as Best Buy Co. and Circuit City Stores Inc. to carry everything from Chinese TVs to textiles to toys also helped fuel the U.S. trade deficit, which last year totaled $103 billion with China, the widest gap between any two nations in history. Wal-Mart is the biggest purchaser of China's goods, buying so much that if the Bentonville, Arkansas- based retailer were a country, its $12 billion in purchases from China would have made it the Asian nation's eighth-largest trading partner last year, ahead of Russia and the U.K.

"The retail landscape in the U.S. is very consolidated, making it much easier and cheaper for Chinese manufacturers to penetrate," worsening the trade deficit, said Paul Gao, a consultant at McKinsey & Co. in Shanghai. For color TVs "the share of a couple of large retail chains is very high, easily over 50- 60 percent of the total market."

Wal-Mart rose from a regional discount store to the world's largest publicly traded company by sales in just two decades. It has led a consolidation in the retail industry that has enabled sales for companies such as Changhong to skyrocket in the U.S., analysts say.

One-way Street
Two discount retailers -- Wal-Mart and Minneapolis-based Target Corp. -- accounted for 48 percent of the $517.9 billion in products the 50 largest U.S. retailers sold in the U.S. last year, according to Bloomberg data.

Wal-Mart alone had $244.5 billion in worldwide sales last year, up 12 percent from 2001. Exxon Mobil Corp., the second- largest U.S. company in sales, had $178.9 billion in 2002 sales. Wal-Mart's trade with China is a one-way street, making it responsible for about 10 percent of the U.S. trade deficit with China. More than four-fifths of the company's sales were in the U.S. last year and 95 percent of the goods it sells in its 26 stores in China are sourced locally.

Wal-Mart's decision to sell Changhong's sets under the Apex Digital brand helped boost Chinese TV exports to the U.S. last year 12-fold over 2001's level to $480 million, leading to a finding by the U.S. International Trade Commission last month that Chinese TV exports hurt U.S. manufacturers.

U.S. Manufacturers Complain
U.S. makers of everything from televisions to coffee tables say the flood of cheap Chinese imports is forcing them to shutter factories and fire workers, some 2 million of whom have lost their jobs in the past two years. U.S. manufacturing contracted in June for the fourth straight month, according to the Institute for Supply Management.

American manufacturers, from textile makers to garlic growers, have filed a series of complaints with the International Trade Commission, a federal agency that gauges the impact of trade on U.S. companies and makes findings that can lead to the imposition of protective tariffs.

"The two most important issues facing manufacturing are health-care costs and China," said Frank Vargo, vice president for international affairs at the National Association of Manufacturers, which represents 14,000 companies in the U.S.

Wage Gap
At the core of China's competitive advantage is a wage gap that allows the country to produce goods more cheaply than in the U.S. It takes the average U.S. factory worker about two weeks to earn the yearly wage of his Chinese counterpart, who makes about $1,000 a year, according to the Bureau of Labor Statistics.

Wal-Mart says it's just giving customers what they want: high- quality, inexpensive goods. The consolidation of the U.S. retail industry has saved consumers about $100 billion because businesses such as Wal-Mart can sell goods at lower margins than can department stores, according to Boston Consulting Group.

"It's no surprise to hear that Chinese exports have grown," spokesman Bill Wertz said in a telephone interview from Bentonville. "It's an indication that they are offering customers what they're looking for."

Wal-Mart has a global procurement center in the southern Chinese city of Shenzhen and opened a second China purchasing center in Shanghai in October, when Wal-Mart President Lee Scott visited the country, meeting then-President Jiang Zemin.

Expanding Network

In addition to buying products from China, the company is expanding its retail network there. Wal-Mart has 26 stores in China and plans to open a 27th in Beijing later this month.

Wal-Mart says U.S. manufacturers can't supply its demand.

"We need suppliers that can respond to the large volumes we require for special promotions,'' Kevin O'Connor, vice president in charge of buying electronics, said at a trade commission hearing in May. ``Our purchase requirements for our annual Thanksgiving blitz far exceeded the capacity of the U.S. producers with proven reliability to meet our volume and lead-time needs."

U.S. manufacturers such as TV maker Five Rivers Electronic Innovations LLC, which assembles sets in Tennessee for South Korea's Samsung Electronics Co. and the Netherlands' Phillips Electronics NV, say they can also meet Wal-Mart's demands for products and can offer low prices.

Surprised at Retailers

Five Rivers, along with two unions, won a ruling by the trade commission last month that may result in the U.S. imposing tariffs as high as 84 percent on Changhong's televisions. Wal-Mart and Sears, Roebuck and Co., which also sells Changhong's televisions, testified against Five Rivers' petition.

"We filed a petition against the Chinese television makers," said Tom Hopson, chief executive officer of Five Rivers, in a telephone interview from Greenville, Tennessee. "I was kind of surprised to see U.S. retailers at the hearing. They were acting like we were filing a suit against them."

Workers at Five Rivers earn an average of about $10 an hour, not including benefits such as medical coverage, Hopson said.

European and Japanese manufacturers don't face the same pressures as U.S. companies because their distribution systems aren't as open or consolidated, analysts say. Paris-based Carrefour SA, the world's second-biggest retailer, posted sales of 58.7 billion euros in Europe last year, about one-third the U.S. sales of Wal-Mart in economies of similar size.

China reported a $5.4 billion trade deficit with Japan and a $2.6 billion shortfall with Germany in the first five months of the year, according to China's customs administration. At the same time, its surplus with the U.S. was $18.4 billion, not including re-exports to the U.S. through Hong Kong.

"Europe is much more protectionist," said Nicholas Lardy, an economist with the Institute for International Economics in Washington. "Europe has had tariffs on Chinese television since 1993. The number of televisions imported from China are teeny."

At Wal-Mart #2357 in Germantown, Maryland, a suburb of Washington, D.C., Chinese-made products are found throughout the store, including a 25-piece hot- pink plastic picnic set for $7.88, the "Critter Plus" guinea pig toy for $3.67, the Navajo-style "Americana Basket" for $6.86 and a Schwinn Sidewinder bike for $99.62.

In the electronics department, salesman Ali Atefat, a 30-year- old Iranian immigrant, one of about 1.3 million Wal-Mart employees worldwide, sells Chinese-made televisions, including a 19-inch Emerson Electric Co. combination TV and videocassette recorder for $267.00. Changhong's televisions, including the 27-inch stereo TV selling for $189.88 on Wal-Mart's Web site, weren't in stock.

"People look for the brands," Atefat said. "They don't care where they're made."

Ready to Take the Credit?
Royal Bank of Scotland May Gamble on Sears Unit
By David Weidner, CBS.MarketWatch.com
July 2, 2003

NEW YORK (CBS.MW) -- Judging by recent signals, Royal Bank of Scotland wants to change its image in America.

With a market capitalization bigger than American Express (AXP: news, chart, profile) and Deutsche Bank (DB: news, chart, profile), the Glasgow-based institution (RBSPF: news, chart, profile) took out full-page advertisements last year in major U.S. newspapers to tout its size in relation to the Citigroups and J.P. Morgans of the world.

But in financial circles, the buying power of Royal Bank of Scotland has been no secret. Its U.S. acquisitions, through Providence, R.I.-based subsidiary Citizens Financial, have made it one of the top five banks in the Northeast.

So it's no surprise that RBS has emerged as a potential front-runner for a major U.S. financial institution. What is a surprise is that the target is the credit-card unit of Sears Roebuck (S: news, chart, profile), a huge portfolio with $31 billion in assets.

RBS, according people familiar with the talks, has moved to the front of a pack that once included General Electric (GE: news, chart, profile), HSBC Holdings (HBC: news, chart, profile) and Citigroup (C: news, chart, profile). Though a deal doesn't appear imminent, several bidders have dropped out or fallen short, those people say.

Bids were due in late May. A deal is expected be announced before the end of September.

If RBS wins, there's certain to be a good amount of head scratching. The bank has no sizeable credit-card presence in the U.S. market and many believe the Sears portfolio -- with a less-than-sterling portfolio -- is a questionable first buy, analysts and bankers say.

The unobvious choice

When Sears announced March 26 that it hired Goldman Sachs to find a buyer, many expected the established players to step forward to kick the tires.

The reason: the Sears portfolio is expected to run a loss rate of 7 percent in the second half of the year. That's about 50 percent higher than the industry average, but it would not be a big issue if a buyer with a substantially bigger portfolio absorbed it.

"It makes more sense for an established card vendor to make the purchase," said James Ragan, an analyst with Crowell Weedon & Co. "They can build market share and cut costs. But it's large enough that it could be a way to enter the market."

The Sears card business has two handicaps, market observers say. First, it doesn't consider an account delinquent for 240 days, compared to the industry norm of 180 days. Second, Sears continues to brace for delinquencies. It took an $102 million charge for reserves against claims in the first quarter.

So why would RBS be interested? Bankers say the bank could be seeking to keep pace with its U.K. rival, HSBC. Last year, HSBC inked a $14 billion deal for another Chicago-based company big in credit cards, Household International. See story.

For that reason, the RBS bid may be most attractive. Sears considered selling its profitable MasterCard piece separately from its store credit cards. But it's believed that the retailer wants a single buyer for the whole unit.

"The MasterCard business (about half of the overall portfolio) is very profitable," Ragan said. "Sears has made it clear it may be willing to sell the portfolios separately. They want to sell it whole. But in the end, they want the best price."

The Sears portfolio is the largest private-label card in the U.S., with $18.4 billion in receivables to go with 25 million accounts. The unit is expected to sell for $6 billion to $7 billion if sold as a whole, analysts say.

An aggressive buyer

Fred Goodwin, RBS chief executive, has earned the nickname "Fred the Impaler" for his tough negotiating style. Of buying banks in the U.S., he said in May that his philosophy boiled down to "shedding everything except the branches and excuse the senior management -- to be polite."

But inasmuch as Goodwin is a well-known buyer, analysts say a U.S. credit-card business would break new ground. Robert Montague, an analyst with Societe Generale in London, said he expected Goodwin to remain focused on the U.S. Northeast.

"A bolt-on addition to their existing New England retail franchise seems to be a more logical next step for them than buying a credit-card portfolio," he said.

That said, Goodwin has been active in consumer-finance and credit-card acquisitions in Europe. London press reports say RBS is bidding for Norisbank, the consumer-finance arm of Germany's HVB Bank.

That would follow a deal last month in which RBS became the third-largest credit-card provider in Germany when it bought the German card and personal- loan business of Spain's Santander Central Hispano (STD: news, chart, profile).

In the U.S., however, RBS seems poised to take on a whole new business. The problem, analysts say, is that RBS will have to do more if it shops at Sears.

"HSBC took over a major company and got scale automatically," Montague said. "It does not make sense for them [RBS] to buy a portfolio of assets in a business in which they do not already have a major presence."

Sears Elects Bax To Board
July 2, 2003

HOFFMAN ESTATES, Ill., July 2 /PRNewswire/ -- The board of directors of Sears, Roebuck and Co. (NYSE: S) today announced the election of William L. Bax, 59, former managing partner of PricewaterhouseCooper's Chicago-area practice, to membership on Sears' board of directors. His election increases the number of Sears directors to 11.

"Bill Bax's broad business knowledge and his depth of experience in accountancy strengthen our board. He will be of tremendous benefit to us," said Sears Chairman and Chief Executive Officer Alan J. Lacy.

Bax led PricewaterhouseCoopers' Chicago-area practice from 1997 until his retirement June 30. A partner in the firm for 26 years, he served on the Price Waterhouse Firm Board for five years. He was involved in setting strategy, including negotiations for the merger of Price Waterhouse practices in the U.S. and Europe and negotiations leading to the merger of Price Waterhouse and Coopers & Lybrand in 1998. Bax had also served as a member of the Price Waterhouse World Firm general council and as Midwest region consumer and industrial products audit practice leader.

As engagement partner in the world's largest accounting firm, Bax had responsibility for some of PricewaterhouseCoopers' most important global clients, including Tribune Company; Baxter International Inc.; Premark International; Kellogg Company; and A.C. Nielsen Company. He is a graduate of DePaul University.

Bax is a member of the Commercial Club of Chicago, the Economic Club of Chicago, and the American Institute of CPAs. He is a director of Big Shoulders Fund, Children's Memorial Hospital and Junior Achievement of Chicago and is a member of the DePaul University board of trustees.

Sears, Roebuck and Co. is a broadline retailer with significant service and credit businesses. In 2002, the company's revenues were more than $41 billion. The company offers its wide range of apparel, home and automotive products and services to families in the U.S. through Sears stores nationwide, including approximately 870 full-line stores. Sears also offers a variety of merchandise and services through its Web sites, sears.com and landsend.com, and a variety of specialty catalogs.

SOURCE Sears, Roebuck and Co.

CONTACT: Linda Brown Blakley of Sears, Roebuck and Co., +1-847-286-8862

Wal-Mart Widens Sales Lead vs. Rivals
By Sandra Guy, Business Reporter - Chicago Sun-Times
July 2, 2003

Wal-Mart Stores widened its sales lead over rival retailers and grocery stores in 2002, according to a list of the Top 100 retailers released Tuesday.

In fact, Wal-Mart's sales of $246.53 billion outpaced its five largest competitors combined.

The Bentonville, Ark.-based retail behemoth has for years outdistanced rivals in technology innovation, but it quietly became the nation's No. 1 grocer three years ago.

"Other than the growth that comes with opening new stores, food has been the growth engine for Wal-Mart," said Rick Gallagher, vice president of the National Retail Federation, a Washington, D.C.-based association that conducts the study.

Behind Wal-Mart is Home Depot, which remained in the No. 2 spot for the second year with $58.25 billion in sales, and Kroger kept its No. 3 spot with $51.76 billion in sales.

Target Corp., the Minneapolis-based parent company of Marshall Field's department stores, moved up to No. 4 with $42.72 billion in sales, pushing past Sears Roebuck and Co., which tallied $41.37 billion.

A significant portion of Target's growth stems from its openings of new Target discount stores, Gallagher said. The company's total store count rose 7 percent last year, to 1,475.

Sears opened only seven stores last year, but Gallagher said he gives the Hoffman Estates-based retailer credit for acquiring the Lands' End apparel company to try to boost sales among more affluent shoppers.

Though department stores continued to languish, sales at deep-discount dollar stores grew by double-digit percentages.

Stores such as Dollar General, Family Dollar and Dollar Tree have benefited from the weak economy, and they appeal to bargain-hunters as well as people on tight incomes, Gallagher said.

Deflation has taken a toll on retailers, however, especially those that sell apparel. The price declines have forced those retailers to sell 105 percent of last year's volume to break even, Gallagher said. "While deflation is tough news for retailers, it is good news for the consumer in the short run," he said.

Target Passes Sears on Top U.S. Retailers List
July 1, 2003

CHICAGO, July 1 (Reuters) - Discounter Target Corp. (TGT) passed century-old department store chain Sears, Roebuck and Co. (S) for the fourth spot on this year's list of the largest U.S. retailers.

The biggest three U.S. retail chains held their positions on the list, released on Tuesday by the National Retail Federation's Stores magazine.

Wal-Mart Stores Inc. (WMT) , the world's largest company by revenues, widened the gap over its rivals with sales greater than its five biggest U.S. competitors combined.

Home improvement chain Home Depot Inc. (HD) held onto the No. 2 spot that it claimed last year, while grocery chain Kroger Co. (KR) remained at third.

Sears slipped to No. 5 after recording a slim 0.9 percent increase in revenues. Department stores have been struggling with falling mall traffic and increasing competition from discounters, which are expanding apparel offerings.

In another sign of trouble among department store chains, Gap Inc. (GPS) , the largest U.S. apparel chain, knocked May Department Stores (MAY) out of the top 20.

Costco Wholesale Corp. (COST) climbed two rungs to No. 6, passing Kmart Holding Corp. (KMRT) , which recently emerged from bankruptcy, and grocery chain Albertson's Inc. (ABS) .

Albertson's came in 7th, with Safeway Inc. (SWY) , J.C. Penney Co. Inc. (JCP) and Kmart rounding out the top 10.

Estate Sale Boasts a Chagall Among its 'knickknacks'
By Steve Warmbir - Staff Reporter - Chicago Sun-Times
June 29, 2003

World traveler Margery Tapley Struthers adored French artist Jean Cocteau.

Struthers, of Northbrook, had more than a dozen ink and colored pencil drawings by the artist, plus ceramic plates.

And that's in addition to the Marc Chagall and Gertrude Abercrombie artworks, the Japanese carved ivory figures, the Inuit art, Seguso glass owl, American copper eagle circa 1820, Georgian mahogany and satinwood barometer and hundreds of other pieces of fine art, jewelry and plain old knickknacks she purchased during many of her 91 years.

Struthers died Jan. 11, but hundreds of visitors to the estate sale Saturday at her Cape Cod-style home got a sense of her eclectic taste and passion for collecting.

"She never got rid of anything," her son John recalled fondly Saturday. "Things came into the home, but nothing ever left."

The first thing John Struthers sold, even before the estate sale, was many of his mother's books.

About 7,200 volumes.

Margery Struthers, one of the first women admitted to graduate school at Yale University in the 1930s, was a voracious reader. She had been around the world twice, had a passion for the art of the cultures she visited and took her last big trip in 1997, to Myanmar.

Why Myanmar?

"She hadn't been there," her son explained.

"She enjoyed whatever culture she was in and wanted to see beauty through its eyes," he said.

Her love of art paired with that of her husband. The late George Struthers was vice president of merchandising at Sears, Roebuck and Co., and helped launch the Vincent Price Collection of fine art for Sears.

The Struthers family had several other works by Chagall and Salvador Dali, which the family is keeping.

The biggest of the big-ticket items at the sale was a Chagall lithograph titled "Pheasant," listing for $8,500. It had not sold Saturday, but there was strong interest, said Chris Coy, co-owner of Coy-Krupp Conducted Sales, which is conducting the estate sale.

Shoppers praised the sale as high quality and wide-ranging.

"I think it's pretty exciting," said Rachelle Brisk, 82, a veteran estate sale visitor who bought a foot stool listed at $20 for $12.

The sale at the Struthers home at 325 Pebblebrook Rd., Northbrook, continues today from 11 a.m. to 4 p.m.

U.S. Is Joining Lawsuit That Says Medco Put Profits Before Patients
By Barbara Martinez Staff Reporter - The Wall Street Journal
June 24, 2003

The Justice Department is joining a lawsuit that alleges Merck & Co.'s Medco pharmacy-benefits subsidiary adopted an "aggressive profits-before-patients policy." Medco's approach resulted in a potentially dangerous lack of oversight in filling prescriptions and increased pharmaceutical costs for the federal government, the suit says.

The department's involvement in the suit, brought by two former Medco pharmacists, doesn't necessarily mean that it believes all the allegations. But it signals that the government investigated the accusations and found at least some of them worth pursuing in court. The government, which also joined a second lawsuit against Medco Monday that made similar allegations, intends to file its own complaint within 90 days. Justice Department investigators have been examining Medco and other pharmacy-benefit managers, or PBMs, for several years, but this is the first time they have indicated that any suit would be filed. PBMs handle prescription-drug-card benefits for millions of employees.

The complaint alleges that after Merck -- one of the world's largest drug companies -- purchased Medco in 1993, the PBM began to make systemic changes in its mail-order prescription-filling system -- disregarding safety and instead promoting higher profits per prescription.

In a statement, Medco said, "We are confident that when all the facts are presented they will show that our business has one focus, providing the highest quality of prescription health care to our clients and members." It added: "We are prepared to present a vigorous defense and believe that we will prevail. We will prove that the allegations" in the complaint "are absolutely untrue or reflect years-old isolated issues that were identified and corrected and in no way and at no time compromise the quality of patient care."

The airing of previously sealed allegations in the suit comes at a difficult time for both Merck and PBMs. Merck plans to spin off Medco as a publicly traded company this year, while PBMs have been angling to get a piece of a Medicare drug benefit currently being debated in Congress. Medco provides drug benefits to more than 60 million Americans, including millions of federal and state employees. Medco's annual revenue totals about $30 billion.

The case could have repercussions on Capitol Hill, too, where PBMs are locked in a fierce lobbying battle, especially with the retail-pharmacy industry, over details of Medicare legislation. The measure would create a drug benefit that PBMs would have a prominent role in providing. Already Monday, the National Community Pharmacists Association, which represents about 25,000 owners of independent drugstores, stepped up its lobbying efforts. The group is pushing for stricter disclosure requirements for PBMs.

In the newly unsealed complaint, which was filed in U.S. District Court in Philadelphia, the two former Medco pharmacists make detailed charges that enormous pressure was placed on employees to falsify orders to meet goals and to disregard complaints by patients and doctors about drug switching or pill shortages.

Daily internal publication of prescription-error rates to help pharmacists measure their own safety standards were eliminated, the suit asserts. Instead, daily loudspeaker messages announced prescription-filling costs, as well as the stock price of parent company Merck, the suit says. Many Medco employees are compensated in part with Merck stock options.

To save money, the suit alleges, Medco reduced licensed pharmacists' role in the filling and supervising of prescription drugs at its mail-order facilities. In addition, the job of calling a physician to discuss a potential drug interaction -- once the job of only pharmacists -- ultimately fell to employees who "seldom have college degrees, and have no prior training in pharmacy services other than limited on-the-job training." And as a result of being pressured to meet quotas on how many doctors to call, employees regularly lied on physician call records to indicate they alerted doctors about problems when they really had not, according to the lawsuit.

The lawsuit was filed under the Federal False Claims Act. In such lawsuits, the plaintiff, often a former employee of a company that does business with the government, alleges that the company has defrauded the government. If the government considers the allegations valid, it joins the complaint, litigates the case and shares any recovery or damages with the person who filed the suit.

Medco has a significant amount of federal government business, providing mail-order prescriptions to millions of federal employees through the Federal Employee's Health Benefit Program.

Many of the allegations in this complaint relate to Medco's mail-order business, where patients mail in a prescription and Medco fills it and sends it back. PBMs such as Medco have been pushing hard to promote their mail-order facilities as a cost-effective alternative to retail stores.

According to the suit, Medco "boasts to its clients nationwide that licensed pharmacists check each mail-order prescription before it is sent out, with as many as three or four quality checks." The suit says such scrutiny only happened prior to Merck's 1993 acquisition of Medco.

After the acquisition, Medco automated more of its prescription-filling capabilities and "significant changes" were instituted that "marked a shift from prudent pharmacy practices" to a "focus on profit maximization," the complaint said.

One of Medco's largest and most technologically advanced mail-order facilities is in Las Vegas, where the two former Medco pharmacists who filed the complaint worked. According to the suit, after Medco upgraded its Las Vegas facility in the mid-1990s, "pharmacists were no longer reading and verifying mailed prescriptions prior to entry into a computer." Instead, upon arrival, the prescriptions were entered by "data-entry clerks with no formal pharmacy training" and who were supervised by nonpharmacist managers.

The suit also alleges that under a special program, touted by Medco as promoting the most cost-effective drugs, Medco called doctors to get them to change their prescriptions because of undisclosed payments to Medco from drug manufacturers. The suit said patient and physician complaints about switching prescriptions were "common" but that "Medco routinely ignores these complaints, including the health risks associated with inappropriate drug switches."

In addition, Medco, like other PBMs, provides "drug utilization reviews" of prescriptions and patients. The process aims to prevent adverse drug interactions, verifies appropriate drug strength, catches drug allergies or duplicate medications.

Until 1995, such calls to physicians to alert them to possible problems were made by pharmacists who could fully explain the situation and suggest alternatives. Subsequently, the suit says, these calls were being made only by "cheaper, non-pharmacist employees." The pharmacist was only brought in at the end of a call, to verify information.

But with workers having quotas of 20 to 25 calls an hour, the pharmacist was handling as many as 100 calls within 60 minutes. As a result of pressures to meet the quotas, the complaint said, employees regularly fabricated records documenting that they called doctors to alert them to potential safety issues, among other matters, when they really hadn't. Sometimes, the suit says, the employees would change prescriptions without the pharmacist's intervention.

In other areas of the mail-order facility, the complaint says, employees "permanently delete, cancel or otherwise falsify prescription orders" to reduce back-order size. As a result, the complaint says, many patients didn't get the medications they needed.

Sears, Dell Unplug In-Store Kiosk Venture
By Betsy Riley - Crain's Chicago Business
June 24, 2003

A high-profile experiment between Sears, Roebuck and Co. and Dell Computer Corp. has ended with Dell shutting down personal-computer sales kiosks in four Sears department stores.

The Texas-based computer maker closed the kiosks in mid-May, just four months after introducing them in Sears. A Sears spokesman said the move was a joint decision.

When the project was rolled out in late January and early February, he said, Sears and Dell agreed to evaluate the progress and by this summer determine whether they should move forward. He declined to provide a reason for the termination of the trial, but published reports have cited poor sales. A Dell spokesman said the tryout had “run its course,” but also declined to elaborate, saying only that Dell had learned from the experience and “made a decision to put our resources elsewhere.”

The kiosks had been placed in a Sears store in Austin, Texas, and three Sears locations in Florida.

At least one retail analyst isn't reading much into the end of the collaboration. Neil Stern, a partner at Chicago-based retail consultant McMillan/Doolittle LLC, said that although the test didn't pan out, it isn't going to hurt Sears because the personal-computer category was one the retailer had been de-emphasizing.

Dell entered into the trial with Sears based on the success of its mall-based computer sales kiosks, which were originally rolled out for the back-to-school season. They were so successful after the first two seasons that Dell kept them open for the holidays and then decided to operate them year-round. In all, Dell— which built a reputation as a direct seller—now has 57 retail kiosks in malls around the country, staffed by Dell employees who can answer technical questions and help customers place orders. The kiosks don't stock equipment; instead Dell customers can order computers and other products online through the kiosk.

Mr. Stern said the Dell kiosks could have helped Sears keep a presence in the home office category without having to stock inventory. But he also said he doesn't think Sears was the problem in the equation.

"Sears is as good a place as any" to sell Dell products, he said.

The Sears spokesman said the department store chain still sells a limited number of computers by such makers as Sony Electronics and Hewlett-Packard Co., but the line is “not a huge strength or emphasis.”

Hoffman Estates-based Sears has been trying numerous tactics to revamp its image and boost sales, recently spending about $800 million to redesign its stores. This month, Sears announced it is going to institute a uniform dress code for its 150,000 sales people, at an estimated cost of $4 million to $5 million (Crain's, June 16).

Dell Computer Pulls Plug On Sales Trial with Sears
DOW JONES NEWSWIRES
June 23, 2003

Dell Computer Corp. ended a high-profile sales trial with Sears, Roebuck & Co., pulling the plug on personal-computer sales kiosks inside Sears stores in Florida and Texas just four months after beginning the effort.

The world's largest PC concern said sales from the four locations didn't justify continuing the effort. "We are able to know pretty quickly whether or not something is working," said a spokesman for Dell, of Round Rock, Texas.

Dell isn't dropping the approach altogether, keeping kiosks at 57 U.S. shopping malls in a consumer-sales expansion that began in 2001, the spokesman said.

Its kiosks at Sears stores drew attention because it had long shunned retailers in favor of direct sales through telephone, mail-order catalogs and the Internet.

Sears, better known for appliances, signed up after Dell was rebuffed in winning in-store kiosks with such consumer-electronics retailers as Best Buy Co., Eden Prairie, Minn.

A Sears spokeswoman was unavailable to comment.

PepsiCo Names Paula Banks SVP, Global Diversity
June 23, 2003

PURCHASE, N.Y., June 23 /PRNewswire-FirstCall/ -- PepsiCo today announced the appointment of Paula Banks as senior vice president, global diversity and organization partnerships. Her new role includes responsibilities previously held by Ronald E. Harrison, who will retire in March after more than four decades with PepsiCo.

Ms. Banks, who will report to Chairman and Chief Executive Officer Steve Reinemund, joins PepsiCo from BP Amoco, the world's second largest transnational oil company.

Since 1999 she has worked at the company's London headquarters as senior vice president, social strategy and policy and as president of the BP Foundation, in which she was charged with building stronger relationships between BP and the communities in which it operates around the world. Previously she worked in Chicago as president of the Amoco Foundation and director of corporate affairs for Amoco.

Earlier she spent 24 years at Sears Roebuck and Co. in a variety of positions including retail management, human resources, external affairs and public relations and served as president of the Sears Roebuck Foundation.

"We believe our high priority on diversity and inclusion will give us a clear strategic advantage in the marketplace," said Steve Reinemund, PepsiCo chairman and chief executive officer. "Paula Banks is an outstanding leader with great insight and experience who is well equipped to advance that effort. I am delighted that she will lead our diversity initiatives, both inside PepsiCo and in the communities where we do business."

Ms. Banks succeeds Ronald Harrison, senior vice president of global diversity and community affairs, who will assume a transitional role as special assistant to the chairman until his retirement in March 2004. Mr. Harrison's ties to PepsiCo go back to 1960, when he joined Levine Pepsi Distributors in New York City as a front-line salesman. Four years later he joined Pepsi-Cola Company and held management positions in sales, marketing and training, including: area vice president for Pepsi-Cola Bottling Co. of New York, division vice president for Pepsi-Cola Company-owned bottling plants in the Northeast and national sales director. He subsequently became vice president of community affairs for PepsiCo and in 2001 was named senior vice president of global diversity. He has been involved in numerous industry and community organizations, including serving as chairman of the International Franchise Association and the Business Consortium Fund.

"Ron Harrison has made an enormous contribution to PepsiCo over more than four decades," said Mr. Reinemund. "While recently he has played a crucial role in shaping the strategic diversity and inclusion efforts being pursued across PepsiCo, he is a proven, versatile leader who has added to our success in many different roles. We owe him a big debt of gratitude and wish him the very best in his retirement."

In her new position, Ms. Banks will lead the next phase of PepsiCo's internal and external efforts to promote diversity and inclusion. In addition to assuming Ron Harrison's responsibilities, which were focused primarily on developing external programs, she will work to further develop various internal programs and establish PepsiCo as a leader in promoting an inclusive work environment. To do this, Ms. Banks will actively work with PepsiCo's division leaders as well as with the marketing, human resources and purchasing groups. She also will work with PepsiCo's ethnic advisory boards to ensure that the company balances the varying interests of a diverse array of employees, customers, partners and consumers.

Sears Roebuck Acceptance Sued By Chicago Law Firm
DOW JONES NEWSWIRES
June 20, 2003

CHICAGO -- A Chicago law firm filed a class action lawsuit against Sears Roebuck Acceptance Corp. on behalf of purchasers of the 7% subordinated notes between June 21, 2002 and Oct. 17, 2002.

The complaint alleges that Sears Acceptance, its parent Sears Inc., and certain Sears officers and directors issued a series of materially false and misleading statements to the market, Much Shelist Feed Denenberg Ament & Rubenstein PC said in a press release Friday.

These alleged misstatements artificially inflated the price of the 7% notes, the law firm said.

The complaint alleges defendants stated that the earnings of Sears, the corporate parent of Sears Acceptance, were growing strongly, driven by Sears' credit and financial products segment, and that Sears would achieve earnings growth of 22% in 2002 from 2001.

In addition, the Securities and Exchange reports filed by both Sears and Sears Acceptance during the class period reported provisions by Sears for uncollectible accounts. Its 2001 annual report represented such reserves were "inadequate," Much Shelist said.

The complaint alleges Sears didn't disclose its risk for uncollectible accounts had increased materially through the class period. In addition, Sears was under- reserving for its uncollecible accounts which inflated its earnings and balance sheet, the law firm said.

A spokesman for Sears wasn't immediately available for comment.

On Oct. 17, Sears reported its 2002 earnings would increase by 15%, rather than the 22% growth it reaffirmed 10 days prior because of a "$222 million increase in the domestic provision for uncollectible accounts."

In addition, earnings for the third quarter dropped 26% from the year-ago period.

The price of the 7% notes fell 8.6% on Oct. 17 to $21.99 from $24.05, the law firm said.

Sears Ties Brand to Hispanic Celebrity
By Lorene Yue, Tribune Staff Reporter - Chicago Tribune
June 19, 2003

Aims at growing consumer group

Sears, Roebuck and Co. is reshaping its apparel division and making a stronger play for minority shoppers by for the first time tying a clothing line to a celebrity.

Over the last year, Sears has shed underperforming clothing lines, launched its Covington label and acquired Lands' End. In September, Sears will introduce women's clothing by Lucy Pereda, who has been dubbed the Hispanic Martha Stewart.

Pereda hosts a popular television show on Galavision and a companion radio program on Unica that focuses on cooking, decorating and entertaining.

"It's part of the repertoire we're doing in merchandising and marketing to respond to Hispanics," said Sara LaPort, Sears' chief of strategy. "Hispanics are a very fast-growing segment of the population and a very strong asset with Sears."

Indeed, Hispanics accounted for nearly half the U.S. population growth in the last two years, according to an estimate the Census Bureau released Wednesday. The nation's largest minority group, Hispanics numbered 38.8 million as of July 2002, an increase of nearly 10 percent since April 2000.

The Hoffman Estates-based firm is among a number of retailers reaching out to the Hispanic community. Kmart Corp. is introducing a line of merchandise branded with pop singer Thalia this year, Hallmark Cards makes Spanish-language greeting cards and Domino's Pizza has created a Spanish version of its Web site.

The Lucy Pereda clothing line will be available at 227 Sears stores where 15 percent of the population within a 10-mile radius is Hispanic.

Partnering with a lifestyle personality such as Pereda gives Sears an opportunity to expand the clothing line into other merchandise categories, similar to the approach Kmart has taken with Martha Stewart. "It's certainly something we'd explore," LaPort said.

While specific details are not available, Corina Taylor, a spokeswoman for Kellwood Co. in St. Louis, said the clothing line will target shoppers at least 25 years old and will have just enough of a colorful flair to appeal to shoppers of all backgrounds.

Kellwood is producing the Lucy Pereda line for Sears.

The retailer also intends to add a junior clothing line for its urban-themed P. Miller brand next month. That line caters to African-American men and children.

The apparel changes come shortly after Sears revamped its home-appliance department to offer a broader selection of lower-priced products and more items that can be carted home the same day.

Now it is re-focusing on its clothing division. For Sears, about $5 billion of total annual revenue comes from apparel. Combined with home-appliance sales, both departments represent about 45 percent of store revenue, which was $23 billion last year at its full-line stores.

Sears is in the midst of a major program to revamp all 870 stores the company has in shopping malls across America. Sears executives are concentrating on strengthening the retail side to supplant the lucrative credit card division, put up for sale in March.

It's not the first time Pereda has worked with Sears. She's been a contributor to the retailer's Spanish-language magazine, which has a distribution of 865,000 copies.

While Sears does not disclose how many of its shoppers are minorities, executives say it is the leader among Hispanic shoppers.

And their numbers are growing. In 2000, Hispanics spent $2.8 billion at Sears. Last year's total was $3.4 billion.

"We're on a multiyear path," LaPort said. "As we move forward with our full- line stores, the multicultural consumer has a very important part."

It's a population segment that retailers cannot afford to overlook, said Yvette Moyo, a Chicago marketing consultant.

"It is the only way these retailers are going to stay in business because the numbers are growing," Moyo said. "For those who continue to discuss whether or not to do it, it's too late."

Copyright © 2003, Chicago Tribune

CBL Adds 30-Year Veteran to Development Team
Business Wire - June 17, 2003

CHATTANOOGA, Tenn., Jun 17, 2003 (BUSINESS WIRE) -- CBL & Associates Properties, Inc. (CBL) today announced that it has hired Charles H. "Chuck" May II as senior vice president of development. Mr. May will focus on regional mall, open-air and lifestyle center developments and acquisition opportunities primarily in the western part of the country.

CBL's President, Stephen Lebovitz, commented, "We are fortunate to have someone with Chuck May's experience in the industry join our executive team. CBL has long been known for its development expertise. Chuck brings a unique perspective from his work with Sears as well as a strong knowledge of all of the major markets nationwide. We expect his experience and leadership to enhance our future growth opportunities."

Mr. May brings more than 30 years of experience in the shopping center industry to CBL. He most recently spent approximately 10 years with Sears' real estate department. Mr. May also spent 20 years with the Homart Development Company, half of which he served as senior attorney and general counsel and the other half in the company's development division. His career accomplishments include his work as attorney and development officer for Homart on the development of more than 70 million square feet of regional shopping center space. As a real estate director for Sears, Mr. May worked on the development of more than 100 Sears retail stores, including the acquisition of 8 Carter Hawley Hale stores and 18 Montgomery Ward stores.

While Mr. May's focus will be on opportunities west of the Mississippi, Ron Fullam, senior vice president of development for the Company, will continue to focus on projects east of the Mississippi. Mr. Lebovitz added, "We have strategically divided the country between these two industry veterans. With their extraordinary experience and credibility, we expect their combined efforts to accelerate our program of new developments and acquisitions."

CBL & Associates Properties, Inc. has 55 enclosed regional malls in its portfolio of 161 properties in 25 states totaling 59.4 million square feet including 2.0 million square feet of non-owned shopping centers managed for third parties. The Company has three projects under construction totaling approximately 2.2 million square feet, including one mall - Coastal Grand - Myrtle Beach, SC, and two community centers plus six mall renovations. In addition to its office in Chattanooga, TN, the Company has a regional office in Boston (Waltham), MA. The Company can be found on the Internet at www.cblproperties.com.

Sears Names Andrea Zopp as  General Counsel
June 16, 2003

HOFFMAN ESTATES, Ill., Jun 16, 2003 /PRNewswire via COMTEX/ -- Sears, Roebuck and Co. (S) has named Andrea L. Zopp to the post of senior vice president and general counsel, effective July 1.

Zopp, 46, most recently served as vice president and deputy general counsel of Sara Lee Corporation since January 2000. There, she developed legal strategy and led senior attorneys at the company's operating divisions and risk management, environmental services and safety groups. At Sears, Zopp will report to Chairman and CEO Alan J. Lacy.

Prior to joining Sara Lee, Zopp was a partner in the litigation department at Sonnenschein Nath & Rosenthal, Chicago, from 1997-2000. Earlier, she was with the Cook County (Ill.) State's Attorney's Office from 1991-1996, serving as First Assistant State's Attorney of Cook County, responsible for all office operations, including management of more than 890 attorneys.

Other career highlights include her work as a partner in the litigation department of McDermott, Will & Emery and a stint as Deputy Chief, Criminal Litigation Division, U.S. Attorney's Office, where she served from 1983-1990.

"Andy has the extensive legal experience that the job of leader of Sears' Law Department demands," Lacy said. "Her depth of knowledge of corporate law, law staff operations and litigation is an important asset to Sears' management team."

Zopp is a 1978 graduate of Harvard University and received her law degree from Harvard in 1981.

Of Lost Dogs, Drawn Straws and Sears Failings

A Columnist from a Cheeky Chicago Upstart Looks Back
By Rance Crain - Advertising Age.com
June 16, 2003

We started Crain's Chicago Business, Ad Age's "cheeky" sibling, in 1978, 25 years ago this month, and, coincidentally, the last time horse racing celebrated a Triple Crown winner, Affirmed. If we were in a horse race ourselves in those early years, we'd have finished out of the money. CCB's premise was rather presumptuous -- that we could dig up news about Chicago companies that eluded The Wall Street Journal and the Chicago newspapers.

Second-city syndrome
Readers didn't know what to make of us. I recall writing a column for CCB in its early days playing off Chicago's second-city syndrome. If CCB was so good, Chicago businesspeople wondered, why didn't we bring it out in New York? Irv Kupcinet, the renowned gossip columnist for the Chicago Sun-Times, asked me at some gathering to confirm the rumor we were about to shut it down. We weren't, and we didn't.

We worked hard to be a serious business newspaper and I guess I didn't help our cause. I wrote a column about my dog running away from home, mortifying the entire staff because I'd sullied the editorial page with such a frivolous subject. The staff drew straws to see who would tell me my column was inappropriate for our struggling paper.

What a bad rap! That column was an early example of the kind of serious journalism you read regularly in the Journal's "Personal Journal" section. In it, I gave very helpful advice on how to find a lost dog. (Tip No. 1: Don't believe the dog pound when it says it doesn't have your pet. Ours was there the whole time but they thought she was a male!) Talk about a dog with a bone: It's taken me 25 years to explain my side of the story. So the CCB staff (some of the '78 group are still with us) should please note that I was doing trailblazing journalism when you unjustly accused me.

Sears report
You can't blame them for being a bit edgy. Ad pages weren't pouring in. The turning point for CCB came at the end of 1978, when we published an extensive report on the contents of internal forward-planning documents from Sears, Roebuck & Co. It created a firestorm and Newsweek called CCB "the cheeky young offshoot of Advertising Age."

What's most interesting to me, 25 years later, is how little about Sears has changed. It's still grappling with what kind of store it wants to be. In the documents we uncovered in 1978, it seemed to have a better notion of what it didn't want to be.

"We are not a fashion store. We are not a store for the whimsical, nor the affluent," Sears wrote then. "We are not a discounter nor an avant-garde department store. We are not, by the standards of the trade press or any other group of bored observers, an exciting store. ... We are not a store that anticipates. We reflect the world of Middle America and all of its desires and concerns and problems and faults ..."

The retailer, 25 years later
I question whether a retailer, or any business for that matter, can get very far by not trying to figure out what its customers are going to want. By not anticipating, Sears allowed retailers such as Wal-Mart, Home Depot and Target to carve out gigantic chunks of its bread-and-butter business. By not anticipating, Sears has become an imitator, and one that has ceased to even reflect its once cozy world of Middle America.

U.S. Panel OKs Probe of TVs from China, Malaysia
June 16, 2003

WASHINGTON, June 16 (Reuters) - A U.S. trade panel cleared the way on Monday for the Bush administration to investigate whether to impose anti-dumping duties of up to 84 percent on color televisions made in China and Malaysia.

The decision could lead to higher prices for U.S. consumers and disrupt business plans of major retailers like Wal-Mart (WMT) , Target (TGT) and Sears (S) .

The U.S. International Trade Commission voted 3-0 there was a reasonable indication that a dramatic surge in television imports from the two countries have materially injured U.S. producers.

The case -- brought by Five Rivers Electronic Innovations, a Greenville, Tennessee, television manufacturer, and two electronics workers unions -- alleges that color television imports from the two countries increased more than 1,100 percent between 2000 and 2002 to 2,656,456 units due to unfair pricing.

They have asked for anti-dumping duties of up to 84 percent on imports from China and up to 46 percent on imports from Malaysia. The ITC vote allows the Commerce Department to continue an investigation into whether dumping has occurred, with its preliminary decision expected on or about Oct. 9.

The case targets 21-inch screen televisions and above. Chinese exporters named in the case include Hisense Electronic Co., Konka Group Co., Sichuan Changhong Electronic Co., Skyworth Electrical Appliances and TCL Holding Co.

Funai, National Panasonic-Matsushita, Philips, Samsung, Sharp and Sony were listed as Malaysian exporters.

Increased competition from China has caused concern across the U.S. manufacturing sector, which has lost more than 2 million jobs in the past two years. The National Association of Manufacturers has warned the record U.S. trade deficit with China could triple to $330 billion in five years if trends continue.

Erik Autor, vice president and international trade counsel for the National Retail Federation, said he was not surprised by the preliminary ITC ruling. "I think the big fight is going to come down to the final determination," he said.

If the Commerce Department finds that dumping has occurred, the ITC must make a final injury determination before duties can go into effect. But importers still would have to post bonds or cash based on Commerce's preliminary dumping estimates.

A typical anti-dumping investigation can take 12 to 18 months from start to finish.

Kmart's Net Loss Narrows, While Sales Drop by 3.2%
A Wall Street Journal Online News Roundup
June 16, 2003

Kmart Corp. posted a sharply narrower loss for its fiscal first quarter, but the report -- the retailer's first since emerging from bankruptcy protection -- showed that reorganization costs continue to be a heavy burden.

The Troy, Mich.-based discount chain reported a net loss of $862 million, or $1.65 a share, compared with a loss of $1.44 billion, or $2.87 a share, a year earlier. The company's fiscal first quarter ended April 30.

The company said its loss before $769 million in reorganization expenses, as well as smaller items for interest, income taxes and discontinued operations, was $32 million, which it compared with a year-earlier loss of $920 million. Last year's fiscal first quarter included a charge of $542 million to cover the cost of store-closing liquidation sales.

In the recent quarter, sales at stores open at least a year fell 3.2%. Overall sales dropped 14% to $6.18 billion, from $7.18 billion a year earlier.

Kmart, which has been struggling financially for more than a year, emerged from Chapter 11 bankruptcy protection in early May, having closed about 600 stores and dismissed about 54,000 workers.

The nation's third-largest discount retailer, though leaner, still faces fierce competition from rivals Wal-Mart Stores Inc. and Target Corp., as it struggles to win back customers who defected after Kmart sought bankruptcy-court protection in January 2002.

Kmart also is continuing to investigate the possibility of legal claims against former officers, including former Chief Executive Charles C. Conaway, for being "grossly negligent" in performing their duties to the company. Claims could range from breach of fiduciary duty to certain bankruptcy-related causes of action, according to court documents. The company didn't comment on the matter Monday.

Julian C. Day, Kmart president and chief operating officer, said in a written statement Monday that the company continues on its path of improvement.

"This management team is very focused on building the financial foundation of the new company. We are strengthening our business by driving profitable sales, identifying opportunities to further improve efficiency and reduce costs, and enhancing the productivity of our assets."

Kmart, which has said it expects to return to profitability in 2004, didn't update its forecast Monday morning.

Having emerged from court protection, Kmart has new borrowing availability of about $1.5 billion on a $2 billion credit facility. As of the end of the first quarter, the company had about $1.23 billion in cash and equivalents.

Shopping for Malls
By Mark Albright - Times Staff Writer - © St. Petersburg Times
June 16, 2003

Two of the biggest owners of malls target a third company for takeover. It's fighting back, but the real story is the changes in how America shops.

For seven months, the nation's clannish shopping mall moguls have been entangled in an ugly, open fight for power.

On the surface, the campaign by Simon Property Group, the nation's biggest operator of regional malls, to take over rival Taubman Centers Inc. has been waged through press releases and lawsuits over arcane issues of corporate governance and proxy votes.

But there's been scant mention of the economics driving this hostile takeover.

To understand what's really behind the mall war, take a walk down the cluttered  con-courses of Tyrone Square Mall in St. Petersburg.

Simon Property has rented just about every available square foot of the halls to 59 kiosk and pushcart vendors. Last year Simon deployed a dozen soft drink machines in the middle of the corridors to snag $1.5-million annually in shoppers' spare change. Then came 14 arcade rides at 50 cents a spin, vibrating massage chairs that cost $1 for three minutes and dozens of vending machines that dispense M&Ms, Disney figurines and $3 rental baby strollers.

Despite all of this, and even though Tyrone Square is almost fully leased, the Simon mall pulled in sales of about $375 a square foot in 2002.

Now cross the bay and visit International Plaza in Tampa, a Taubman property. Last year it generated more than $400 a square foot, or about $30-million more in sales from the same amount of space as Tyrone Square. Yet International Plaza's wide-open corridors have a third as many kiosks and pushcarts, no candy machines, free strollers and a free kids' play area.

It's the same nationally. The Taubman properties are among the industry's top performers. They averaged sales of $456 a square foot in 2002, far more than the $391 at Simon and the $379 at Westfield America's malls. The average for regional malls was $330 a square foot, according to the International Council of Shopping Centers.

With limited opportunities to grow new properties in a nation that's already overmalled, competitors can only envy Taubman's holdings - or try to take them over.

Carving up market share

Simon Property of Indianapolis, with 248 malls and shopping centers, has bid $1.74-billion for Taubman Centers Inc. of Bloomfield Hills, Mich., with its 30 more upscale malls. Westfield America Trust, an Australian mall operator that owns 63 malls in the United States, joined Simon's bid by agreeing to pay for half the $20-a-share offer.

Taubman's founding family, which holds just enough voting shares to control the real estate investment trust, has rejected any deal, saying the company is not for sale.

Simon and Westfield are fighting the Taubman family's control in the courts and through a proxy battle to change the makeup of the Taubman board. The Taubman family is lobbying the Michigan Legislature to write new laws that would strengthen its hand.

Each of the mall companies is controlled by the strong-willed sons of its founders. But there's an extra element of bitterness because Simon and Westfield launched their unwelcome attack while Taubman family patriarch A. Alfred Taubman, 78, was serving a prison sentence for conspiring to rig art prices when he was chairman of Sotheby's auction house.

Although the bidders have had plenty to say about their offer, and about the Taubman family's resistance, they have said little about what they would do with the prize: those 30 regional malls Taubman controls.

Simon and Westfield suggest they might divide the spoils as they did two years ago when they carved up the assets of the Dutch-owned Rodamco NV mall empire. One impediment: Some Taubman properties cannot be sold without the approval of joint venture partners. Also unclear is who's going to assume Taubman's $1.8- billion in debt.

In a retail market like the Tampa Bay area, the implications of a Simon- Westfield takeover of Taubman could be substantial, depending on who would get to run International Plaza.

Some local real estate executives think Simon wants to end up with the mall adjacent to Tampa International Airport. Others think it would go to Westfield.

In addition to Tyrone Square, Simon owns Gulf View Square in Port Richey and Crystal River Mall. Once the Rodamco properties were split up, Westfield emerged from out of the blue as the biggest mall operator in the bay area. It rechristened three malls with a combined $1.2-billion in sales in 2002 as Westfield Shoppingtown Brandon, Westfield Shoppingtown Citrus Park and Westfield Shoppingtown Countryside.

"This takeover is all about buying malls that improve Simon and Westfield's sales productivity, their control of local market (share) and these companies' control over retail tenants," said William McPadden, a senior real estate portfolio manager with John Hancock Financial in Boston.

International Plaza's near neighbor is already in play. WestShore Plaza in Tampa, owned by a fourth company and one of the region's most prosperous malls, is for sale.

Officials at Taubman not only insist they aren't going to be dislodged. They also revealed they plan to be among those bidding for WestShore. So Taubman could end up owning two prime malls, less than a mile apart, that have been prime competitors.

"Our goal is to make this part of Tampa a destination. This business is all about market share," said John Simon, senior vice president of development for Taubman (and no relation to the family that controls the competing chain.) Taubman has built four of the five regional malls that opened in Florida since 2000.

"Peeling off the roof'

Once the icon of American consumerism, the regional mall is not what it used to be.

New ones are harder to develop because there are so many existing malls (1,200). Fewer of today's fastest-growing retail chains want to be in them. More shoppers find malls inconvenient and too pricey.

This year only three new regional malls will open nationally, compared with 15 to 20 a year in the late 1980s. Next year eight are planned.

At the same time, obsolete malls are being leveled and replaced. In the Tampa Bay area, seven regional malls disappeared in the 1990s while three new ones opened to serve a fast-growing population. Pinellas County, which had five regional malls a decade ago, now has two. Despite miles of new suburbs, Hillsborough County has one fewer mall today than it did a decade ago.

The types of retail taking their place reflect changing consumer buying habits.

More new centers are filled with so-called big-box retailers: discount stores, supercenters, warehouse clubs, home improvement centers and oversize bookstores, electronics shops and home decor outlets. There are enough prospects that developers can group them in open-air centers as big as any regional mall for half the cost - and generate far more sales per square foot than a mall.

"We're going back to the shopping centers that were built in the old days," said Jeff Fuqua, vice president of development for Sembler Co., a St. Petersburg developer that is replacing Clearwater Mall with a Costco, SuperTarget, Lowe's and several other big-box stores in an open-air environment. "They are peeling off the roof of enclosed regional malls."

In fact, Simon has no new enclosed malls planned in its $8-billion development pipeline. The traditional mall formula relied on enticing department stores with free rent because they generate traffic that can support specialty retailers that do pay rent.

"Today it's easier to talk department stores into an open-air shopping center than it is to talk big-box retailers into enclosed malls," said Michael McCarty, president of community centers for Simon.

Simon singles out Waterford Lakes east of Orlando as its model for the future. Anchored by a SuperTarget, Best Buy, TJMaxx and a 24-screen theater, the center has 100 stores and restaurants in a landscaped setting surrounding a lake. Many of the stores are regulars from enclosed malls, such as Claire's and Old Navy. "It's going gangbusters," said David Simon, chief executive of Simon Property Group.

JCPenney and Sears Roebuck & Co. each will open smaller prototype stores this fall that fit in such centers. Macy's built one in West Palm Beach two years ago. Burdines is scouting sites for its version.

Some of the new open-air centers are elegant, pedestrian-friendly versions of town squares similar to Old Hyde Park Village in Tampa or BayWalk in St. Petersburg. But most are glorified strip centers, and many mall retailers think it may be only a passing trend.

"If a department store wants to grow today, it still must be in a regional mall," said Michael Lowenkron, director of real estate for JCPenney. "But we intend to be operating in off-mall locations, too."

Simon, which gets 91 percent of its revenue from traditional regional malls, is hardly ignoring its current collection. Tyrone has been expanded three times in 31 years, and Simon has lobbied Burdines to expand its store there.

In acquiring Taubman, Simon and Westfield would be vanquishing one of the most active of a half-dozen competitors that have been trying to elbow in new malls at the expense of existing Simon and Westfield properties.

What happened in Tampa - where International Plaza's arrival sealed the demise of Tampa Bay Center and triggered a $100-million rebuilding of WestShore - is happening in every major market where retailers clamor to be in the center of established shopping districts.

In Miami, Simon is rebuilding its huge Dadeland Mall after Taubman and rival Rouse Co. lined up land for a new upscale rival only 3 miles away. In the end Taubman backed down, but Rouse opened its chic Merrick Park in nearby Coral Gables.

In Richmond, Va., Taubman and Simon are building competing upscale regional shopping centers within miles of each other.

In Orlando, Simon spent more than $100-million adding a wing to Florida Mall to house a Nordstrom and Lord & Taylor as that mall's sixth and seventh anchors. One reason: Taubman and a joint venture partner were building the new Mall of Millenia at a more visible location a few miles away on Interstate 4.

For the most part, however, Simon and Westfield are getting their new malls by acquisition because that's less risky than building from scratch.

"They've become asset managers rather than developers," said John Ingram, vice chairman of the Mills Corp., an Arlington, Va., mall developer. "Wall Street expects higher and higher returns, which is pressuring this industry for more consolidation and greater efficiency. This (Taubman) takeover is all about enhancing Simon and Westfield's sales productivity without holding a true auction for the real estate."

Business or bad blood The Taubman takeover already has been an expensive fight. Simon and Westfield have spent more than $7-million on legal bills. Taubman has run up a $9.8- million tab. And there appears to be no end in sight.

Simon also had to pony up $174-million to buy out its partner in a Las Vegas mall, who took sides with Taubman. The partner exercised his option to sell to Simon, then invested $100-million of the proceeds in Taubman stock. Taubman spent $50-million of the money buying back its own shares, which were taken out of circulation.

Simon made its initial bid for its rival because Taubman's share price was in the tank. The real estate investment trust went public in 1992 at $11.25 a share. Weeks before Simon launched its tender offer last November, Taubman shares traded as low as $12.50.

The Taubman family and friends formed a voting bloc that controls about a third of the voting shares, enough to stop a sale. But holders of about 85 percent of the public shares have agreed to accept the Simon-Westfield tender offer of $20 a share. The Taubmans tried to veto the deal, which led to a court fight.

"We think the shareholders have spoken," said David Simon of Simon Property group. "They think it's a good deal. Unfortunately, this is just a business transaction that has been dramatized as bad blood."

By Taubman's count, Simon and Westfield have 52 percent of the votes but need 66 percent to win.

The Taubmans had been counting on a state law written to protect Michigan companies from hostile takeovers. Instead they were stung when a federal judge ruled the Taubman voting bloc would be considered the outside raiders under the state law. The judge said the family could not vote to reject the takeover offer without the approval of disinterested public shareholders, 85 percent of whom already had tendered their shares.

The problem was the way Taubman got the veto power. When the General Motors Pension Fund gave up its big stake in Taubman in 1998, the family paid $38,000 for voting shares that gave it the veto power that is being questioned. Judge Victoria Roberts ruled Taubman cannot vote the shares to stop shareholders from accepting the tender offer until a majority of them vote to approve that 1998 deal for veto power.

"Simon's legal strategy has been to just throw everything against the wall and see what sticks," said Robert Taubman, Taubman's chairman and chief executive. "The ruling they did get is so extremely wrong, we are confident it will not be upheld on appeal."

Even as it argues the appeal, however, Taubman has been lobbying legislators to rewrite the law.

The mall players

Simon Property Group

Headquarters: Indianapolis

Origins: The combined mall empires of Edward J. DeBartolo Corp. of Youngstown, Ohio, and Indianapolis brothers Herb and Mel Simon. The company enters its second decade as the only retail real estate investment trust in the S&P 500. Mel Simon's son David is chief executive.

What: The nation's biggest mall owner and operator with 248 properties, including Forum Shops at Caesar's Palace in Las Vegas and Mall of America in Bloomington, Minn. Rather than build new enclosed malls, Simon is buying them from others and investing in its most prosperous properties. Simon controls 25 malls in Florida, more than anybody else.

Bay area: Owns Tyrone Square in St. Petersburg, Gulf View Square in Port Richey and Crystal River Mall in Citrus County.

Westfield America

Headquarters: Sydney, Australia.

Origins: After fleeing the Nazis as a youth in Czechoslovakia, Frank Lowy opened a deli in Sydney. Today, he controls 40 percent of the malls in Australia. Since 1994, he has been snapping up malls in the rapidly consolidating American mall industry.

What: Controls 63 malls in the United States and the rights to develop a
mall- size retail space in whatever replaces the World Trade Center in Manhattan. Westfield's four properties in the Southeast are all on Florida's west coast.

Bay area: Owns Westfield Shoppingtowns Brandon, Citrus Park and Countryside. It's the largest collection in the local mall market with combined sales of about $1.2-billion in 2002.

Taubman Centers Inc.

Headquarters: Bloomfield Hills, Mich.

Origins: Started with a $5,000 loan in 1950, Alfred Taubman's real estate empire shifted to mall building in 1973. He later had big stakes in department store chains R.H. Macy & Co. and Woodrow & Lothrop. Retired as chairman of Sotheby's at 78 after being convicted of conspiring to fix prices with rival auction house Christie's. His sons Robert and William run the development company.

What: The publicly traded real estate investment trust owns 62 percent of the family-controlled operating partnership that maintains a portfolio of 30 malls, many of them luxury projects in places such as Beverly Hills, Denver and Phoenix.

Bay area: Operates International Plaza and retains a 26 percent stake in the upscale Tampa mall. Half-owner of the new Mall of Millenia in Orlando. Taubman has opened four malls in Florida since 2000, more than anyone else.

- SOURCES: Company reports, SEC filings

As Health Costs Increase, Workers Must Pay More
By Barbara Martinez - Staff Reporter - The Wall Street Journal
June 16, 2003

Audrey Simms can't afford to get all three of her prescriptions filled each month. So she alternates, sometimes skipping her thyroid medication, at other times forgoing her acid-reflux pills or her hormone treatment.

It's a familiar story for the millions of Americans who lack a prescription- drug benefit. But Ms. Simms, 46 years old, does have that benefit through her Missouri government job. She simply can no longer afford the copayments.

Drugs that used to require copays of $5 and $10 just a few years ago are now costing her as much as $40 each in copays. Ms. Simms, who takes home about $1,230 a month, would have to spend more than $100 for her three prescriptions each month.

"So I decide between the medicine and the food," says Ms. Simms, who works with the mentally ill in St. Louis. "And I have a 12-year-old daughter to feed."

After years of generous health-insurance benefits, American workers increasingly are paying much more for their health-care. Though the consumer price index is beginning to show a slowing in the rate of price increases, overall spending on health care by employers continues to climb as aging Americans use more medical services. Employers, saying they can no longer afford the 12% to 15% annual increases in the cost of providing health benefits, are raising workers' copays, deductibles and monthly premiums.

According to the Bureau of Labor Statistics, Americans' average annual out-of-pocket expenses for health care rose 26% between 1995 and 2001, to $2,182. The Kaiser Family Foundation, a nonpartisan research group based in Menlo Park, Calif., that tracks health-care spending, says that workers' average monthly contribution to premiums for family coverage alone more than tripled to $174 from $52 between 1988 and 2002. Copays for brand-name drugs that have generic equivalents jumped 62% to $26 last year from $16 in 2000, while generics rose to an average of $9 from $8, Kaiser says.

Health plans and employers are also instituting copays for services that never required one. Ms. Simms's employer, the state of Missouri, this year added a $200 copay in some plans for hospital admissions.

The big shift of health-care costs from employers to employees comes at a bad time. Many workers who manage to keep their jobs in the wobbly economy already face wage freezes and wage cuts. An increase in a worker's health-care costs amounts to a pay cut.

But the weak economy also makes it hard for employers to buck the trend. The average total cost to employers of health-care benefits for current employees rose 14.7% in 2002, at a time when general inflation was just 2%, according to New York-based Mercer Human Resource Consulting, which helps employers pick benefits. Since 1997, health-benefit costs per employee have risen 57%. Driving the rise: aging Baby Boomers and increased use of physician services, expensive prescription drugs and diagnostic testing tools, such as MRIs.

The trend is so broadly felt that health-care cost-shifting lies at the heart of many major labor disputes, even prompting strikes recently at places such as General Electric Co., Lockheed Martin Corp. and Hershey Foods Corp.

"We have over 1,000 contracts being negotiated by this union," says Steve Sleigh, director of strategic resources at the International Association of Machinists, which struck Lockheed in April over cost-shifting. "And in every single one, this has become the lightning rod."

The Lockheed union workers were able to force the company back somewhat on the increased cost-shifting. Lockheed wanted to raise prescription-drug copays to as high as 40% of a drug's price, up from the current $5 and $10. Instead, workers will pay $40 on the high end.

Dow Jones & Co., which publishes this newspaper, is currently negotiating with the union that represents the Journal's newsroom staff, among other employees, over the company's proposed changes to its health-care plan. These proposed changes include increasing copays and deductibles, and requiring employees to pay monthly premiums.

American companies began helping workers with basic health care in the 1960s. It was good for morale, fostered loyalty, boosted productivity and burnished the corporate image. Richard Quinn, 59, is director of compensation and benefits at Public Service Enterprise Group, an energy holding company headquartered in Newark, N.J., and has been with the company more than 40 years. He remembers when companies paid only for major events, such as surgery or other hospital costs. Employees generally paid their full doctor and prescription-drug bills.

What employers considered a useful perquisite, employees came to regard as an entitlement. And while employers nervously watched health-benefit costs climb, workers saw their contributions barely changing.

Employers say they needed to close that gap in perception, to show their employees the true cost of health care and correct the mistaken idea that a doctor's visit is only $10 or that drug prices haven't risen as substantially as other goods.

"The same person who will spend three or four dollars a day on cigarettes will yell and scream if their copayment is raised from $5 to $15," says Mr. Quinn.

The move toward higher copays began in the late 1990s, at a time when prescription-drug costs were escalating by more than 14% a year. To make patients more aware of the high cost of their medicines, health plans began tinkering with higher copays and, later, tiered copays that allow patients to pay lower amounts of perhaps $10 for generics, $20 for branded drugs on the health plan's preferred list, and $40 for nonpreferred drugs.

In recent years, health plans have become even more aggressive in raising these copays to force patients to share more of their medical costs and to pick cheaper drugs. Ironically the drug industry itself helped create a climate where patients could make more of their own choices of medicine -- with a blitz of ads taking their pitches directly to consumers.

In a study conducted at the end of last year by the Washington Business Group on Health, which represents nearly 200 major employers from across the country, 80% of the employers said they planned to increase copays or cost sharing in 2003, compared with 65% who answered that way in 2001. In a more recent study, the group found that 57% of employers plan to increase cost sharing for 2004. "That's probably that low because so many increased it in 2003," says Helen Darling, the group's president.

Public Service Enterprise recently raised doctor-office copays for its workers to $15 after keeping them at $5 for a decade. The company is still paying the bulk of the typical $80 doctor's fee.

"I rarely have people say that they can't afford it," Mr. Quinn says. "It's more that they don't see it as their obligation."

One woman warned Mr. Quinn that "she would hold me personally responsible" if her children got sick because the plan does not pay for a $60 Lyme-disease vaccine that she wasn't willing to pay for herself. "I didn't know what to say," says Mr. Quinn. "It was like concern for the children's health didn't include spending any of her own money on such an expense. I'm sure that wasn't the case, but it sounded like that."

Today, health-care costs rank among Americans' top concerns, according to a recent survey by the Kaiser Family Foundation. The study found that 36% of Americans said they were very worried that the amount they pay for health-care services or health insurance will increase. That was more than twice the proportion of people who were very worried about not being able to pay their rent or mortgage, losing money in the stock market, being a victim of a terrorist attack or losing their job.

Ron Meyer, executive director of the Missouri state employees' health plan, is looking at a health-care bill for 113,000 people that has nearly tripled to $260 million this year from $90 million in 1996. People such as Ms. Simms "have some very difficult situations to deal with," he acknowledges. Recently, the state raised doctor-visit copays to $30 from $20.

"Let's face it, a $30 copayment for a doctor's visit, that's getting up there," he says.

But Missouri, operating under budget pressures like many other states, has only so much money that it can spend on employee costs. When it came time to figure out what to do about this year's health benefits, Mr. Meyer says it weighed on him that state employees "have not gotten a pay raise for two years, and this will probably be the third. ... For all practical purposes, you're getting a pay cut."

With the help of a PricewaterhouseCoopers consultant, Sandi Hunt, Mr. Meyer says, "we canvassed a lot of other states to make sure we weren't missing something" that would explain why the increases in Missouri's health-care costs were so dramatic and how they could be brought down.

But there weren't any answers in other states. And there was no relief in shopping around to different insurance carriers in the hope that competition would drive down costs. All health insurers are basically offering the same big price increases.

"It's not as if [Missouri] or any other employer is in a position to say we can change the cost," says Missouri's consultant, Ms. Hunt. "They're not providing health care, they're paying for it."

So Ms. Hunt suggested two plan choices to Missouri to try to soften the rising cost for employees: one plan with a higher monthly premium but lower copays, and another plan with a lower monthly premium but higher copays. The expectation is that relatively healthy employees who don't see a lot of doctors or need a lot of medications will pick the low-premium plan, while others who do use a lot of health-care services might pick the higher-premium plan to take advantage of the lower copays.

A lot of employees switched to the plan with the lower monthly premium, Mr. Meyer says, to save on their monthly costs. But even though she uses a lot of health-care services and medications, Ms. Simms chose the low-premium,
high- copay plan to save on her monthly bills.

She now pays $61 a month, instead of the $123 she paid last year. But her daughter has sickle-cell anemia, landing her in the hospital several times a year, where Ms. Simms now has to cough up a $200 hospital copayment for each admission, capped at $800 for the year.

No matter what Mr. Meyer could do to mitigate some pain, both plans had to reflect an increase in cost sharing from employees. For Missouri government employees in Ms. Simms's salary bracket -- less than $20,000 a year -- the typical family-coverage premium eats up about 20% of their salary.

Though many Americans can afford the premium and copayment increases without serious hardship, there are wide segments of society that are hit hard, such as low-income workers and the elderly. The more than 4.5 million seniors who are in Medicare managed-care plans have seen huge increases in their costs in recent years (see related article1).

About 35% of those seniors now pay a monthly premium of $50 or more, up from only 3.2% of the seniors who paid that much in 1999, according to a survey by the Commonwealth Fund, a research group. Many of those Medicare managed-care plans offer a drug benefit, which is one reason seniors flocked to the plans in the 1990s. However, in 2003, 53% of the seniors in these plans had an annual drug cap of $500 or less, compared with only 11% of seniors with such restrictions in 1999, the Commonwealth Fund found. The fund also found that 82% of the seniors in these plans now make a copayment for hospital admission, compared with only 4.3% in 1999.

In the long run, rising copayments, premiums and deductibles could have a lasting negative effect on U.S. health-care costs. If people like Ms. Simms don't fill medications, they are likely to become sicker and require more expensive care in the future. A yet-to-be-published Rand study of 90,000 people with chronic diseases such as diabetes and hypertension found that a doubling of copays for prescription drugs results in a 10% to 12% reduction in use of medications for these conditions. Merck & Co., the pharmaceutical giant based in Whitehouse Station, N.J., helped fund that study.

Merck's Medco Health Solutions Inc., which provides pharmacy benefits to more than 60 million Americans, found in a separate study that when the proportion of costs that consumers must share rises by 10 percentage points or more, the use of essential pharmaceuticals, such as those for diabetes and heart disease, declines.

A Uniform Look for Sears Clerks
Dress Code of Black and Khaki
By Sandra Jones - Crain's Chicago Business
June 16, 2003

Sears, Roebuck and Co. is preparing to institute a uniform dress code for its sales staff, marking the first time in the Big Store's 110-year history that clerks in departments from lingerie to tires will project a consistent image.

The Hoffman Estates-based retailer is requiring its roughly 150,000 sales people to wear solid black or solid white tops with solid black or solid tan bottoms. The plan — on which Sears will spend an estimated $4 million to $5 million to help outfit its workforce — will be rolled out between June and September to all 870 department stores nationwide.

Currently, sales associates have wide latitude on attire and are identifiable to customers only by a credit card-size Sears name tag. Sears is banking on the new, understated look to bolster its two-year effort to modernize its stores, polish the image of its sales staff and help shoppers locate sales clerks more easily.

The move further distances Sears from its department store heritage and links it more closely to its big-box rivals, which use bright colors and company logos to differentiate sales associates from shoppers.

Arkansas-based Wal-Mart Stores Inc. issues blue vests. Minneapolis' Target Corp. calls for red shirts and khakis. Atlanta-based Home Depot Inc. has its sales staff in bright orange aprons. And Troy, Mich.-based Kmart Corp., which emerged from Chapter 11 reorganization last month, provides red vests and, as of June 1, added black pants to the ensemble.

"Getting people into something that approaches a uniform upgrades the image of the employee and the store," says Jim Neal, principal at Kurt Salmon Associates, an Atlanta-based retail consulting firm. "There are only so many things that (store) management can spend time coaching employees on. If you can simplify the task of how to dress, they can focus on other things."

Sears has a lot of issues
Sears, the nation's fourth-largest retailer, is in the midst of a turnaround campaign. In the past two years, it has poured $800 million into renovating its stores; has shed marginal departments, including cosmetics and floor coverings; added shopping carts and centralized checkout counters, and begun selling Lands' End Inc.'s upscale apparel in its stores. And earlier this year, it put its credit card business up for sale.

"I'm not sure this is going to solve all of Sears' problems," says Maureen Atkinson, a senior partner at J. C. Williams Group, a retail consulting firm in Toronto. "Sears has a lot of issues, as do a lot of department stores. They're in between. They're neither high-service nor low-price, and they are challenged by that."

Indeed, Sears new dress code policy is in some ways just as fuzzy as its identity, which has been watered down as the store straddles the separate worlds of discount and department stores.

Layers of rules
According to employee memos posted on the company's internal Web site: White dresses are acceptable, but not white skirts. Off-white and cream are banned. Tan is allowed, but not stone. (Sears plans to post a chart of permissible tan shades on the site soon.)

Tops have to have a same-color collar. But knit tops without collars are okay for women if used under a collared shirt or black blazer or as part of a twin sweater set.

Employees can buy clothing brands not sold at Sears, but tops can't have any brand logo "larger than one inch." And ties and scarves are allowed, as long as they are black, white or some combination.

Stores will keep black vests and black aprons with the Sears logo on hand as backup, in case an employee arrives at work improperly attired.

Sears looked into simply issuing the black vests and aprons to the salesforce, but decided against the uniform approach after employees, in surveys and focus groups, expressed disapproval of the idea. Another idea considered was to require sales clerks to wear Sears' traditional white and blue. But executives decided that was too "restrictive" and could confuse customers because there are so many shades of blue, according to the memo on the Web site.

In the end, Sears favored the black-white-khaki image — which it began testing earlier this year at stores in suburban West Dundee and Columbus, Ga. — as the most cost-effective way to dress the troops, since most workers already own such clothing, a Sears spokeswoman says.

Sears will give full-time store workers employed as of May 1 three black shirts manufactured by Lands' End, the Dodgeville, Wis.-based catalog retailer that Sears bought last year. Part-time workers will receive two shirts, and all those hired after May 1 will have to purchase their own.

The wardrobe contribution will cost the company an estimated $4 million to $5 million, or about $10 a shirt, according to a person familiar with the plan. Sears declined to comment on the cost.

The company also plans to set up a Lands' End Web site exclusively for employees, where they can buy black, white and tan clothing for work, and is considering providing incentives beyond employees' standard 20% discount to encourage workers to shop at the site.

©2003 by Crain Communications Inc.

Really Big Sears Stores
By Robert Berner - Business Week
June 16, 2003

Does the world need another big box retailer, one that sells appliances, apparel, toys, garden supplies -- and milk? Sears, Roebuck & Co. (S ) thinks so. The struggling retailer, best known for its 870 mall stores, will open a stand-alone store this fall in a suburb of Salt Lake City.

Called Sears Grand, it's one of three stores the company plans to open by next summer that are, well, grandiose in size and selection. Sears is trying to find sites for two more.

In clothing, Sears has been hammered lately by the likes of Kohl's and Target. And Sears' hold on the home-appliance and tools business has started to crack under pressure from Lowe's (LOW ) and Home Depot (HD).

At 210,000 square feet, the new stores will be double the space of a standard Sears. To attract more shoppers, they will carry a wider assortment than Sears' mall stores, from CDs and toys, to a "pantry" section with snacks and beverages.

Sears may find shopping habits hard to change. The same pantry strategy didn't work for Kmart. And even Toys 'R' Us has a hard time against Wal-Mart. What's more, Kohl's, Target, Lowe's, Home Depot, and Wal-Mart plan to open over 700 outlets all told this year. Dreyfus analyst Elaine Rees says that while the move makes sense, "competitive obstacles are great." Sears' big step out of the mall could be too little, too late.

Some Senators Fear Employers Will Drop Retirees' Drug Plans
By Robert Pear - New York Times
June 14, 2003

WASHINGTON, June 13 - Members of Congress said today that a bill to add prescription drug benefits to Medicare would give employers a powerful incentive to curtail the drug coverage that they now provide to retired workers.

The Congressional Budget Office estimated that 37 percent of retired employees with employer-sponsored coverage would lose it under the bill, which the Senate Finance Committee approved on Thursday.

The bill is scheduled to reach the Senate floor next week, after winning the endorsement of the committee, 16 to 5.

"The legislation has tremendous momentum," Senator Max Baucus of Montana, the senior Democrat on the panel, said. "It's going to pass. It's going to be enacted. The president is going to sign it."

Mr. Baucus said that the 37 percent figure was shocking and that he and his colleagues would try to reduce it.

"Some senators," he said, "were a little surprised at the percentage of retirees that would be dropped from employer-sponsored coverage in the event this bill were to pass as written."

The director of the Congressional Budget Office, Douglas J. Holtz-Eakin, said the retirees who would lose coverage accounted for 11 percent of the 40 million Medicare beneficiaries.

Employers have been cutting retirees' health benefits, including medicines, because of soaring costs. Budget experts and members of Congress said employers would be tempted to drop drug coverage for two reasons. Under the Senate bill, they said, Medicare would offer outpatient drug benefits, so some employers might see less reason to do so. More significant, the critics said, is a provision that appears to penalize retirees who receive drug coverage from former employers.

Under the bill, Medicare would cover 90 percent of drug costs after a beneficiary had spent $3,700 "out of pocket," the amount needed, with the new Medicare coverage, to obtain $5,800 worth of medicine. But payments by an insurance plan or a former employer would not be included in that computation.

So a person with drug benefits under an employer's group health plan would find it difficult to qualify for the catastrophic coverage offered under the Senate bill.

Unions oppose that provision. Alan V. Reuther, legislative director of the United Automobile Workers, said that the bill "would make millions of retirees worse off by encouraging companies to drop their prescription drug coverage for senior citizens."

Drug benefits under the bill would be much less comprehensive than those provided by many private employers, Mr. Reuther said.

This issue is one of many likely to arise as people analyze the practical effects of the Medicare changes that Congress is contemplating.

Senator Charles E. Grassley, the Iowa Republican who is chairman of the Finance Committee, said he had tried to give employers incentives to continue drug coverage.

But, Mr. Grassley said: "We have not addressed it enough. So I, for one, want to take a look at it."

At the committee meeting on Thursday, Senator John D. Rockefeller IV, Democrat of West Virginia, offered an amendment to count private insurance payments in determining whether a person had incurred enough drug costs to qualify for catastrophic coverage. The proposal was rejected, 15 to 6.

Bush administration officials said Mr. Rockefeller's proposal would have increased the cost of the Medicare legislation by tens of billions of dollars. The bill, in its current form, would cost $400 billion over 10 years, the budget office said.

E. Neil Trautwein, director of employment policy at the National Association of Manufacturers, said the new drug benefits might displace some employer coverage. But Mr. Trautwein said he did not expect a big reduction in employers' drug coverage for retirees.

Gail E. Shearer, a health policy expert at Consumers Union, criticized the bill for another reason.

"The new drug benefits would be skimpy," Ms. Shearer said. "Most Medicare beneficiaries will find that their out-of-pocket costs will be higher in 2007 than in 2003."

The reason, she said, is that the increase in drug costs and spending in the next four years is highly likely to exceed the value of the new benefits.

Vice President Dick Cheney said today that the bills moving through Congress were "broadly consistent with the president's framework" for revamping Medicare.

"While we still have more work to do," Mr. Cheney said, "we are confident that members on both sides of the aisle and in both chambers will work together to pass strong Medicare bills before the Fourth of July recess."

One provision of the Senate bill would prevent the administration from using a particular cost-control technique that has infuriated many drug companies. Medicare refused recently to pay the full price for a new drug to treat anemia in cancer patients, saying it was "functionally equivalent" to an older drug with a lower price. Amgen, the maker of the new drug, Aranesp, contends that it is more effective than the older drug, Procrit, sold by Johnson & Johnson.

The provision, written by Senator John B. Breaux, Democrat of Louisiana, says the government cannot use that standard to limit or reduce Medicare payments in the future.

Whirlpool Changes Health Plan to Cut Costs
By Karen Jacobs
June 12, 2003

ATLANTA, June 12 (Reuters) - Whirlpool Corp. (WHR) , the largest U.S. home appliance maker, on Thursday said it was changing its U.S. retiree medical plan to cut costs, expanding coverage for workers but requiring them to foot more of the bill.

Whirlpool expects to record a one-time, non-cash gain of $13.5 million, or 19 cents a share, in the second quarter related to the change. The gain will largely be offset by a charge of 14 cents to 17 cents a share for a 2001 recall of some microwave oven hood products, the company said.

The company said 2003 profit would be between $5.90 and $6.10 a share, including the gain and the charge. Analysts on average forecast profit of $5.56 a share, with estimates ranging from $5.00 to $6.10 a share, according to research firm Thomson First Call.

"The company has a big unionized work force," said Eric Bosshard, an analyst with FTN Midwest Research. "A lot of companies are dealing with these same issues."

Whirlpool has also been moving production to lower-cost areas in another effort to lower its expenses.

Shares of Whirlpool rose $1.80, or 2.9 percent, to close at $63.86 on the New York Stock Exchange trading.

Under the new medical plan, the company will contribute to an employee's retiree health care savings account each year beginning at age 40. After retirement, the account will pay 80 percent of the cost of medical insurance, with the employee paying the remaining 20 percent.

Current retirees will have the choice of two new health plans that require contributions and offer more comprehensive coverage, or they can elect to stay in a basic, no-cost plan.

"The real difference is that we don't begin accruing the funds in the account until the employee turns 40, whereas today on our balance sheet we're accumulating those funds for all of our active employees," said Whirlpool spokesman Chris Wyse, adding that the new plans provide better life-time maximum coverage.

The changes apply to the company's 26,000 U.S. employees and require approval of unions representing some of those workers, Benton Harbor, Michigan-based Whirlpool said.

"It looks to me like we're going to be paying more for our health care insurance, both premium and co-pay," said David Jones, acting president of Local 808 of the International Union of Electrical Workers in Evansville, Indiana. The union represents about 2,000 Whirlpool workers.

The company, which makes appliances under the Whirlpool and KitchenAid names, is bringing new products to market but faces challenges.

Bosshard said in a recent research note that Whirlpool is likely struggling with low margins in Europe while its largest retail customer, Sears Roebuck and Co. (S) , faces more market share losses as U.S. home improvement rivals Home Depot Inc. (HD) and Lowe's Cos. (LOW) expand their appliance offerings.

The appliance battle at Sears, which accounts for 20 percent of Whirlpool's sales and about 30 percent of its profit, "will pressure the growth rate" of Whirlpool, Bosshard said. (Additional reporting by Brad Dorfman in Chicago)

New Recipe for Cost Savings:
Replace Highly Paid Workers
By Carlos Tejada and Gary McWilliams, Staff Reporters - The Wall Street Journal
June 11, 2003

In a Tight Market, Employers Are Finding
Job Seekers Willing to Take Lower Salaries

On the morning of Feb. 5, Robert Wood waited outside his Circuit City store with a handful of other employees. They had been told to report for a quick meeting before the store opened. Aware that the company was beset with financial difficulties, Mr. Wood was relieved to see that the others waiting were, like him, among the store's top salesmen.

A seven-year veteran of Circuit City Stores Inc., Mr. Wood was the second highest-paid performer at the Jensen Beach, Fla., store, moving more than $1 million in computers and consumer electronics last year, he says. He earned $54,000 in salary and bonuses, and a place in the President's Club for top salesmen.

At 10 a.m., the store manager ushered the waiting employees inside the store with a smile, saying he wanted to explain the company's new "staffing model." The first salesman went into the manager's office, then exited quickly. Mr. Wood's heart sank as the salesman cleared out his belongings from a locker and was escorted out the door by another manager. When Mr. Wood's turn came, the manager opened a packet with his name preprinted on the cover and slid the dismissal documents to him one by one. The firing took less than five minutes.

"We didn't see that coming," Mr. Wood says.

Neither did the other 3,900 highly paid commissioned salespeople the company laid off that day, which some still call "Bloody Wednesday." In Circuit City stores across the nation, sales personnel waited to hear their fate from managers. Some expected to be told that their commissions would be cut. Others thought they would be told that underperforming staffers would be fired, so they would have to work harder.

Instead, they each sat before a manager who handed them an envelope containing the terms of their dismissal. Mr. Wood and the others were faulted for nothing. They simply made too much money at a time when the company was desperate to economize. Circuit City then hired about 2,100 lower-paid hourly workers to replace Mr. Wood and the others, who had represented 20% of its sales force.

In doing so, the retailer made an increasingly common cost-saving move: swapping expensive labor with lower-paid workers. The approach, which is generally legal, doesn't eliminate the position but rather the high-paid person in it. The technique is especially attractive to service businesses such as retail. Like so many companies today, they face massive pressure to cut their labor costs. But unlike manufacturers, they have jobs that can't easily be automated or shipped overseas.

The workers getting the ax are casualties of a job market changing profoundly as the economy slowly recovers from the excesses of the '90s. As one industry after another struggles with overcapacity and grinds costs down, many jobs are vanishing permanently. A wide swath of workers, from well-educated professionals to young unskilled laborers, find themselves scrambling for employment. Last week unemployment rose to 6.1%, the highest level since 1994.

Administaff Inc., a Houston company that manages payrolls for 5,000 small- to medium-size businesses nationally, noticed last year that its client companies replaced terminated employees with workers paid an average of 3% less. Richard Rawson, the company's chief financial officer, believes many of his clients rushed to cut expensive staff when the economy weakened. When they needed to staff back up quickly, the labor markets had weakened and replacement workers were willing to accept smaller paychecks than their predecessors.

Circuit City's executives realized they could no longer afford to pay big commissions to its sales staff, while its rivals paid less. Ten years ago, Circuit City's $3.27 billion in annual revenue was twice the size of archrival Best Buy Co. But its sales approach -- small stores with limited inventory and a commissioned sales force -- proved unworkable as customers flocked to self- service stores with big inventories. Last year, Best Buy's sales hit $19.6 billion, more than twice Circuit City's $9.5 billion.

To deal with falling prices and an eroding customer base, the company examined its costs. Among its conclusions: high-paid sales help no longer fit the times. "Was it hard? Absolutely," says Jeffrey S. Wells, Circuit City's senior vice president of human resources and training. "Is it difficult for someone not close [to the situation] to understand? Absolutely." The company decided that dismissing higher-paid staff and replacing them with lower-paid workers "was the best thing long-term," says Mr. Wells.

In deciding which employees to keep and which to discard, Circuit City set strict salary caps. Based on average wages for retail workers in different cities, employees surviving the cuts would be those making $14 to $18 an hour, including commissions, or $29,100 to $37,400 a year for full-time work. "It is not the person who earned the most that was always the best," says Mr. Wells. The company says that in its fiscal 2004 it will save $130 million in pretax labor costs as a result of cutting the salesmen and about 200 repair workers.

Before the restructuring, Circuit City treated the top sellers among its more than 10,000 sales personnel well. Top-ranked salesmen, often older, more-established workers with considerable sales abilities, were invited to join the President's Club, making them eligible for prizes such as weekend vacations. Mr. Wood, of Jensen Beach, Fla., was taken aside by a manager shortly after his 1996 hiring and urged to act not as an employee, but as an independent business whose earnings power was unlimited. "I walked out the door at night and clicked my heels," he says.

Mark Combs wasn't expecting the good times to end. A 42-year-old member of the President's Club, Mr. Combs had left behind a 15-year career in printing to sell computers for a Circuit City store in Jacksonville, Fla. Over 2½ years, he built rapport with steady customers and regularly pulled in the equivalent of $20 an hour. In January, his manager approached him about management training. He left the Feb. 5 meeting, severance papers in hand, thinking about the $200,000 house on which he just had put a down payment. "I felt like I really let my family down," he says.

Circuit City announced its move in part to show investors it was serious about cutting costs. But when companies replace employees with lower-paid workers they usually do it far more quietly. During the past two years, US Airways Group Inc., which emerged from bankruptcy-court protection in March, has been pulling its big jets out of midsize cities and replacing them with less-expensive regional service. That meant the airline could change job classifications for baggage handlers, ticket-counter agents and other workers, and cut wages even under a union contract. Since those employees were handling only regional jet traffic, they were paid less, even though they were doing similar work.

Ticket-counter agent Carleton Smith, of St. Louis, learned earlier this year that his pay would drop to $13 an hour from $21 an hour. In February, unwilling to take such a big cut, he left the airline, though he remains on furlough and could be called back to work. "I look at $13 an hour doing this exact same job and I say, 'It's a slap in the face,' "says Mr. Smith, 50, a 17-year employee with US Airways and a predecessor airline. "The airline industry is restructuring its pay structure. It's happening, whether I like it or not."

US Airways spokesman David Castelveter says that the carrier tried to work out transfers for "as many employees as possible" so that they could keep their $21 an hour pay, but that most "were entrenched in their communities, they had children in schools or their spouse was the breadwinner, so they chose to stay in their particular location."

With work scarce, the lower-paid jobs drew plenty of applicants. Until last year, Shannon Spegal, of Lexington, Ky., had managed restaurants. The 38-year-old mother of two girls regularly put in 12-hour days, and if a server or cleaner didn't show up for work she did the job herself. Hoping for an easier schedule, Ms. Spegal responded to US Airways' newspaper advertisement seeking customer-service agents.

She was discouraged by the $8.70-an-hour pay for replacement ticket agents, about half what she made at her restaurant job. "I almost turned around and left," she says. But the better hours and the benefits were attractive, and when US Airways offered her a job, she accepted. She and the other new hires found themselves in the midst of resentful veteran employees. Only about four remained, now making $13 an hour instead of their previous $21. A co-worker confronted Ms. Spegal directly. "She said, 'You're stealing my job.' I was like, 'No, I'm not. The person I replaced, they could have stayed,' " recalls Ms. Spegal.

There's nothing illegal about getting rid of expensive workers and hiring less-costly employees in their place, so workers usually don't raise the practice in employment lawsuits. "Very often, the parties don't end up debating that issue," says Daniel M. Klein, an Atlanta attorney who represents employees in discrimination cases. Though a wave of replacements could disproportionately affect older workers, who tend to be better paid, employees would have to prove the jobs cuts were made for discriminatory reasons to prevail in court.

At Wal-Mart Stores Inc., managers are judged in part on their ability to keep payroll costs at a strict percentage of sales, according to former managers. Some say that puts extra pressure on higher-paid workers to be more productive. "You keep people making $10 an hour to a high standard," putting more pressure on them for small mistakes, says Lyndol Jackson, a Wal-Mart manager until he left for another job in 1998. Often, those workers quit and can be replaced less expensively, adds Mr. Jackson, who lives in Memphis, Tenn.

Former Wal-Mart cashier Dana Mailloux, 33, worked for eight years at a store in Fort Myers, Fla., moving up to $9.15 an hour. Last fall, her manager called her and more than a dozen other longtime employees into his office and told them he had to lay them off because of lack of work. That same day, Ms. Mailloux says, she passed a room with six new hires, red vests in hand, filling out paperwork. Returning to the store that weekend, she says, she saw newly advertised positions listed on a bulletin board. "Basically, I was thrown out like a piece of trash," says Ms. Mailloux.

Wal-Mart spokeswoman Sarah Clark says the company continually lays off and hires workers as sales rise and fall. She says that if "labor adjustments are necessary," the company before making cuts asks for volunteers to take time off and carefully controls hours. "It is ludicrous and contrary to our business model to think the company would benefit from replacing experienced associates with new, lower-paid ones," Ms Clark said in a statement. "It's clear that experienced associates are golden with us." Ms. Clark declined to discuss Ms. Mailloux's dismissal, citing employee privacy.

Once a worker gets pushed out of a job, chances are his or her next position won't pay as much. A 1992 study for the W.E. Upjohn Institute for Employment Research found displaced workers earned an average of about $1,200 a year less than they would have earned if they had stayed in their previous job, even after five years.

Mr. Combs, the former Circuit City salesman from Jacksonville, figured he was on the path to a lower-paying job. But within weeks he found a job at CompUSA Inc., a Circuit City competitor, for a little less than the same pay. He closed on his house in April.

For Gregory S. Fields, a 30-year-old Circuit City salesman from Trumbull, Conn., the job market has been rough. Company-paid health-care benefits for him, his wife and small daughter ran out just a few weeks after his termination. He inquired about a similar job at competitor Best Buy, but nothing was available. A few weeks after his dismissal, he trudged to a local shopping mall to inquire about an opening for a security guard. Told he would make just two-thirds of what he made at Circuit City last year, he turned around and went home. "I can get $9 to $10 an hour, but I'm worth more than that," says Mr. Fields, who had earned as much as $60,000 a year at Circuit City.

Mr. Fields recently sold his cherished 21-foot fishing boat to raise cash, and is "riding out" his unemployment benefits of $300 a week. He is contesting his dismissal, arguing that he shouldn't have been fired while he was on a short- term disability leave because of a car accident. He will resume his job search this month, he says, if tests show his back has improved. "Why get rid of good people who had been there for years and hire new people who had to be trained?" he asks.

Mr. Wood, of Jensen Beach, was prepared. He has learned to be flexible through two decades of corporate upheavals. In the 1980s, he lost his job as national account manager at HealthTex, a children's clothing maker, when it underwent a troubled leveraged buyout. He then went to work as an independent sales representative for a clothing maker, but as the retail business consolidated in the early 1990s, he was once again out on the street. "It's always the same," he says philosophically of his job losses. "It was never because of performance."

For its dismissed sales staffers, Circuit City offered a letter saying they were cut for financial reasons, but no letter of recommendation. Mr. Wood, who had learned to be prepared for the next economic downturn, had kept copies of his sales results. This helped him quickly land a job selling kitchen redesigns for a home-improvement chain.

He expects to earn 21% less than he did at Circuit City. He has put off buying furniture for his house and a used car for his teenage son. He's still angry that his job was eliminated before the company's fiscal year end, depriving him of about $500 in company 401k contributions.

"I'm not happy but I'm not going to crucify them," says Mr. Wood. "I knew my time in Circuit City couldn't go on."

Goodyear Loses Spokesman...O'Leary Joins Sears
Staff Report - Akron Beacon-Journal
June 11, 2003

Tire company names Chuck Sinclair to replace
Robert O'Leary, who is taking position at Sears

The chief spokesman for Goodyear Tire & Rubber Co. is leaving the Akron company to take a job as top communications executive at Sears, Roebuck and Co.

Robert O'Leary, who joined Goodyear in April 2002, will leave next week to become senior vice president of public relations, community and government affairs of Sears, based in Hoffman Estates, Ill.

Goodyear named Chuck Sinclair, 51, to replace O'Leary as senior vice president of global communications, effective June 16.

Sinclair, a Goodyear employee since 1984, was previously vice president for communications and publications for the company's North American Tire division.

He will develop Goodyear's communications strategy and oversee about 125 people in a wide array of programs worldwide, including media relations, financial news, the blimp program, community relations, audiovisual services and internal communications.

O'Leary did not return a telephone call seeking comment. He said through one of his spokesmen that he was not looking to leave Goodyear, but was recruited by Sears and decided to take the job because it will give him additional areas of responsibility.

Sears is one of Goodyear's largest customers. O'Leary previously worked for Mobil, Bacardi, Unisys and IBM.

Sears Names O'Leary Senior VP
Jim Kirk/Media and Marketing Chicago Tribune
June 11, 2003

On the move: Robert O'Leary, senior vice president of global communications at The Goodyear Tire and Rubber Co., joins Sears Roebuck and Co. as senior vice president of public relations, communications and government affairs beginning July 1.

O'Leary, who oversaw external and internal communications, community relations and corporate philanthropy at Goodyear, takes over at Sears for Ron Culp, who left the company earlier this year.

O'Leary Named Sears Senior VP,
Sinclair Succeeds Him at Goodyear
Sinclair to Lead Goodyear Global Communications
June 10, 2003

AKRON, Ohio, Jun 10, 2003 /PRNewswire-FirstCall via COMTEX/ -- Charles L.
(Chuck) Sinclair has been named senior vice president, global communications of The Goodyear Tire & Rubber Company (GT), reporting to president and chief executive officer Robert J. Keegan. Sinclair will be responsible for leading Goodyear's global team of communications professionals in the execution of a communications strategy and providing counsel to senior leadership on issues impacting the company.

Sinclair, 51, previously served as vice president, communications and public relations, for the company's North American Tire division. Sinclair replaces Robert J. O'Leary, who today was named senior vice president, public relations, community and government affairs of Goodyear customer Sears, Roebuck and Company.

"Chuck Sinclair is a highly regarded communications leader in our company and within our industry," said Robert J. Keegan, president and chief operating officer. "He has been an outstanding and trusted communications leader in our North American business and will bring that extensive experience and knowledge to the corporation as we continue to execute the company's turnaround strategy."

"I am very excited about the opportunities that present themselves to our company, and proud to be chosen to lead an excellent team of professional communicators around the globe," Sinclair said. "There is a lot of passion in Goodyear, a passion that I share, and an overall passion that ultimately will serve this company well as it reestablishes itself as the preeminent global tire supplier."

Sinclair joined Goodyear in 1984 as plant public relations manager in Lincoln, Nebraska. He moved to Goodyear's Akron headquarters in 1987, working in a variety of communications assignments. He served as public relations manager in 1989 and 1990 for what is now the Engineered Products division. He was named director of public relations for North American Tire in 1997 and vice president of communications and public relations for the division in March 2002.

An alumnus of the University of Nebraska, Sinclair and his wife Sandy have two grown children and reside in North Canton, Ohio.

Goodyear is the world's largest tire company. Headquartered in Akron, Ohio, the company manufactures tires, engineered rubber products and chemicals in more than 85 facilities in 28 countries. It has marketing operations in almost every country around the world. Goodyear employs about 92,000 people worldwide.

SOURCE The Goodyear Tire & Rubber Company

Tires, Tools on Block at Sears

Orchard, NTB chains could raise $500 mil.
By Sandra Jones and Steven R. Strahler - Crain's Chicago Business
June 9, 2003

Sears, Roebuck and Co. has put its Orchard Supply Hardware and National Tire & Battery chains up for sale in a move that could raise about $500 million, according to people familiar with the matter. The steps come as Chairman and CEO Alan Lacy attempts to shore up the company's balance sheet and free up resources needed for his plan to launch strip-center superstores.

Sears has hired New York-based Citigroup Inc. to seek buyers for National Tire & Battery (NTB) and New York-based Merrill Lynch & Co. to shop Orchard Supply, according to an investment banker familiar with the matter.

Both chains are holdovers from a failed effort by Mr. Lacy's predecessor, Arthur Martinez, to create new sources of growth through a series of "off-the- mall" specialty retailers. Sears bought San Jose, Calif.-based Orchard Supply for $305 million in 1996, and created NTB by combining its Tire America and National Tire Warehouse chains in 1997. But a plan to leverage the Orchard acquisition by converting the existing Sears Hardware chain to the more profitable Orchard Supply format went nowhere, and visions of NTB as an upscale tire retailer fell flat with consumers more concerned about price.

Hoffman Estates-based Sears doesn't break out financial results for the chains, but analysts estimate Orchard Supply generates more than $800 million in annual sales, and figure chain would fetch between $300 million and $400 million in a sale.

Analysts see North Carolina-based hardware giant Lowe's Cos. as a potential buyer. Lowe's officials declined to comment.

NTB, with estimated annual sales of $400 million, might bring $100 million, industry experts say. The chain's history of losses and slumping same-store sales will make it a tougher sell, as Sears has learned in sporadic previous efforts to sell the retailer. Analysts say an investment group is perhaps the most likely acquirer.

Beyond the malls
Sears declined to comment for this story, but the 110-year-old retailer has made no secret of its desire to find a vehicle to expand beyond its 870 full- line department stores, located primarily in malls. Consumers have been straying from malls in growing numbers in recent years, choosing instead to frequent freestanding stores, where they can shop more quickly.

But Mr. Martinez's "off-mall" stores flopped and are hampering Mr. Lacy's efforts to tighten Sears' bloated cost structure. Ditching NTB and Orchard would continue a pruning process that began with Sears' late-1990s divestitures of its Western Auto Supply stores and the now-defunct HomeLife furniture store chain.

"It gets down to trying to do something outside of your core expertise," says Philip Zahn, a retail analyst in Chicago at New York-based credit rating agency Fitch Inc. "Department stores and the credit business are what they've done historically. The other (retail formats) have completely different business dynamics."

Since taking the helm in 2000, Mr. Lacy has made it clear that his vision of off-mall growth differs from Mr. Martinez's. He has halted expansion of his predecessor's pet project, the Great Indoors home furnishings chain, and begun touting a big-box discounter that would compete more directly with Arkansas- based Wal-Mart Stores Inc. and Minneapolis' Target Corp., the two retailers most responsible for the decline of the mid-range department store industry that Sears dominated for generations.

At Sears' annual analysts meeting last fall, Mr. Lacy expressed his frustration that the company has been "stuck" with the same number of stores for the past decade, while competitors such as Atlanta's Home Depot Inc., Wal-Mart and Wisconsin-based Kohl's Corp. are growing by building big-box stores at strip centers.

"There's so much competition in the retail business," says Matthew Spitznagle, an analyst at Chicago's Northern Trust Global Investments, which doubled its Sears holdings to 2.82 million shares in the first quarter. "These mall retailers have to figure out what they can do to regain share."

Mr. Lacy figures that Sears' best shot is with a single big-box store format. The company plans to open five pilot stores, named Sears Grand, in the next few years, with the first slated to open this fall in Salt Lake City and another under construction and set to open next spring at north suburban Gurnee Mills shopping center.

Grand plans
In addition to such Sears standbys as appliances, electronics and clothing, the 200,000-square-foot stores will test a wide assortment of goods, including pantry foods, toys and lawn and garden products.

Launching a nationwide chain of big-box discount stores with the heft to slug it out with Wal-Mart and Target will take money, and Mr. Lacy is doing his best to raise some. Earlier this year, he surprised investors with the announcement that Sears would sell its huge credit card operation, long the source of most of the company's profits. Analysts expect the sale to yield $4 billion to $5 billion.

Though Orchard and NTB will fetch far less than the credit division, selling them clearly fits in with Mr. Lacy's plan to clear the decks for his superstore.

Orchard Supply got its start in 1931 as a farmers' cooperative in the Santa Clara Valley offering supplies to local growers. Last year, the 82 stores — all in California — generated $820 million in sales, up from $813 million in 2001, according to estimates from analysts and Home Channel News, a hardware industry trade publication. Orchard had 61 stores when Sears bought it seven years ago.

Lowe's would be a logical buyer for Orchard Supply, analysts say. The nation's No. 2 home improvement chain is heavily concentrated in the Eastern half of the U.S. and has expressed interest in expanding its foothold in the West, including California, where No. 1 Home Depot has a stronger presence.

More problematic is NTB, which now has 225 stores — Sears closed 53 laggard outlets in 2001 — down from more than 300. Sales at the stores open at least one year fell 4.1% in 2002, according to Sears. Those numbers are unlikely to attract a corporate buyer, say observers, who figure that a sale to a turnaround group is the most likely outcome for NTB.

©2003 by Crain Communications Inc.

Lampert Boosts Sears Holding
Crain's Chicago Business
June 8, 2003

Edward Lampert, the Connecticut investor whose investment group controls Kmart Corp., increased his stake in Sears, Roebuck and Co. to 10.13% in the first quarter, from 8.9% at the end of last year, according to a filing last month with the Securities and Exchange Commission.

The purchases bring Mr. Lampert's ESL Partners L.P. to within 36,000 shares of the Hoffman Estates-based retailer's largest shareholder. State Street Bank & Trust Co. of Boston holds a 10.14% stake in Sears, the majority of which is held on behalf of Sears employees' 401(k) savings plan.

Mr. Lampert, who began increasing his stake in Sears last fall, became chairman of Kmart last month after providing financial backing for the Troy, Mich.-based retailer's Chapter 11 reorganization plan. His significant influence at both companies has prompted speculation that Sears and Kmart could combine at some point in the future.

Spokespeople for Sears and Mr. Lampert declined comment.

Sears May Same-store Sales Fall Less than Expected
Reuters
June 5, 2003

CHICAGO, June 5 (Reuters) - Sears, Roebuck and Co. (S) , the largest U.S. department store chain, said on Thursday that sales at stores open at least a year, or same-store sales, fell 1.9 percent in May, a smaller decline than expected but its 21st consecutive monthly drop.

Total sales for the four weeks ended May 31 fell 1.3 percent to $2.18 billion.

Home appliance sales rose in the mid-single digits on a percentage basis, but home electronics fell in the high teens and apparel fell in the mid-single digits in May, the company said.

The company said last month it expected same-store sales, a key measure of a retailer's performance, to be down by a mid-single digit percentage.

Sears also said it expects June same-store sales to fall by a low-single-digit percentage.

Final Settlement Signed In VisaCheck/MasterMoney Antitrust Trial
DOW JONES NEWSWIRES
June 5, 2003

NEW YORK -- Visa USA Inc. and MasterCard International Inc. signed the formal settlement of a lawsuit that claimed the card companies levied excessive fees on merchants for the right to accept debit cards.

The suit was originally filed in October 1996 by Sears Roebuck & Co. (S), Wal-Mart Stores Inc. (WMT), Limited Brands Inc. (LTD), Safeway Inc. (SWY), Circuit City Stores Inc. (CC) and three trade associations. The lawsuit received class- action status to include more than 5 million merchants alleging that the card associations conducted monopolistic and anticompetitive business practices by requiring retailers to accept their debit-card fees.

The settlement, reached in late April, requires Visa to pay $2.025 billion to the merchants during the next 10 years, while MasterCard will pay $1.025 billion during the same term.

In a press release Thursday, lawyers representing the retailers said Visa and MasterCard have agreed to seek financing to allow for a one-time complete payment to merchants in the next year, rather than 10 payments over the next 10 years.

The specifics of the plan of allocation are scheduled to be submitted to the court on Aug. 18. The parties intend to seek final court approval in late September.

Stewart Quits as Chairwoman, CEO;
Martinez Named Lead Director
By Luisa Beltran & Steve Gelsi, CBS.MarketWatch.com
June 4, 2003

NEW YORK (CBS.MW) - Martha Stewart resigned Wednesday as chairwoman and CEO of the company that bears her name, following her indictment on criminal charges of securities fraud and obstruction of justice in connection with the sale of her ImClone Systems stock.

In a statement issued just hours after Stewart entered a not-guilty plea in a New York courtroom, Martha Steward Living Omnimedia said Stewart will continue to serve as founder and chief creative officer of the company, (MSO: news, chart, profile), as well as a member of MSO's board.

As expected, Sharon Patrick, president and COO of Martha Stewart Living Omnimedia, will assume the CEO position. Jeffrey Ubben, a managing partner of ValueAct Capital Partners LP, which owns 22 percent of MSO's 22 percent Class A shares, will serve as chairman.

Arthur Martinez, the former Sears (S: news, chart, profile) chairman and CEO who had been expected to be named chairman of MSO, was named lead director and will preside over all meetings of the company's board.

"I love this company, its people, and everything it stands for and I am stepping aside as Chairman and CEO because it is the right thing to do," Stewart said in a statement. "This will enable the company to continue to build the confidence and love of its readers, viewers, customers and strategic partners, without the distraction of my personal legal issues."

Patrick has been president and COO of MSO since 1997. Ubben has been a director of MSO since January 2002.

A Stewart spokeswoman could not be reached for comment. A spokeswoman for MSO declined further comment.

An indictment
Stewart's departure was not unexpected. Earlier Wednesday, the homestyle guru faced off against federal prosecutors who have been investigating Stewart's sale of ImClone Systems stock in December 2001.

Sitting stone-faced with a clenched jaw during her arraignment at the federal courthouse in Manhattan, Stewart pleaded not guilty to all charges, which include allegations of obstruction, false statements and securities fraud. She was released on her own recognizance until her next court appearance on June 19.

Her stockbroker, former Merrill Lynch employee Peter Bacanovic, was also indicted. Counts against Bacanovic include perjury, obstruction of justice and false statements.

Stewart, 61, was dressed in a fashionable beige pant suit and chocolate-colored open toed pumps. Throughout the arraignment, she had no conversation or direct eye contact with Bacanovic, her former broker.

Bacanovic, 41, also smartly dressed in a blue suit, white shirt and silver tie, was first to stand up in the crowded courtroom. He pleaded not guilty to all charges against him.

When Judge Miriam Cedarbaum asked Stewart if she was pleading not guilty to all counts, she replied: "I do indeed."

Stewart faces 10 years in jail and a $1 million fine, or twice the gain or loss, if she is convicted of securities fraud. She could receive five years in prison, and $250,000 fine, for each of the four remaining counts against her. Similarly, Bacanovic could receive a maximum five years in jail, plus $250,000 fine, for each of the five counts against him.

Barring Martha
Separately, the Securities and Exchange Commission filed civil, insider-trading charges against Stewart and Bacanovic. The SEC is also seeking to bar Stewart from acting as a director, and limiting her activities as an officer, of any public company.

For the past year, U.S. Attorney James Comey's office has been investigating Stewart over her ImClone stock sale in December 2001.

"This criminal case is about lying -- lying to the FBI, lying to the SEC and lying to investors," Comey said at a press conference in Manhattan. "That is conduct that will not be tolerated by anyone. Martha Stewart is being prosecuted not because of who she is, but because of what she did."

Comey denied that prosecutors were singling out Stewart for persecution. "This case was driven by the facts," Comey said. "We don't have any particular fascination with Martha Stewart."

The alibi
The SEC further alleged that Stewart and Bacanovic "subsequently created an alibi for Stewart's ImClone sales and concealed important facts during SEC and criminal investigations into her trades."

Surrounding by throngs of news media at the courthouse, Stewart rushed to a waiting car after the arraignment and didn't comment. Her attorneys declared in a statement she'd be proven innocent.

"The government is making her the subject of a criminal test case designed to further expand the already unrecognizable boundaries of the federal securities laws," said the statement by lawyers Robert Morvillo and John Tigue.

The case
Stewart allegedly received insider information that prompted her to sell about 4,000 shares of ImClone (IMCLE: news, chart, profile) on Dec. 27, 2001, a day before the public learned that regulators had rejected its application for Erbitux, the company's main cancer drug.

Sam Waksal, the former head of ImClone and friend of Stewart's, has pleaded guilty to lying to the SEC and trying to sell ImClone shares on Dec. 27, 2001. Waksal's sentencing has been set for June 10.

The indictment says Bacanovic, who was also Waksal's stockbroker, found out that Waksal and members of his family were selling or trying to sell all of their ImClone shares held in Merrill Lynch accounts.

Bacanovic, according to court papers, then directed his assistant Douglas Faneuil to tell Stewart that Waksal and his family were selling.

Stewart then sold her ImClone shares, and lied to federal investigators about the reason, claiming she had a standing a "stop-loss" order to sell the shares at a certain price.

"As a client of Merrill Lynch and as a former securities broker, Martha Stewart knew that information regarding the sale and attempted sale of the Waksal shares had been communicated to her in violation of the duties of trust and confidence owed to Merrill Lynch and its clients," the indictment said.

The indictments further claim that Bacanovic and Stewart conspired to obstruct justice when "rather than tell the truth. ... Bacanovic and Stewart would instead fabricate and attempt to deceive investigators with a fictitious explanation for her sale."

The government charges that Stewart altered a phone log detailing a call from Bacanovic and lied to investigators about its content.

Bacanovic was also charged with altering documents in order to cover up his and Stewart's communications regarding ImClone share sales. Specifically, the indictment charges Bacanovic altered a worksheet, "using ink that was blue ballpoint, but was scientifically distinguishable from the ink used elsewhere on the worksheet. Bacanovic added the notation '@60' near the entry for ImClone."

He then passed the worksheet to his Merrill superiors, knowing they would present it as evidence that prosecutors had requested.

As part of a settlement, Faneuil, Bacanovic's assistant, has been barred from association with a broker, dealer or investment adviser.

Surprisingly, federal prosecutors decided not to pursue criminal insider trading charges against Stewart but deferred to the SEC. "Martha Stewart may be famous but there is no reason to treat her any differently," U.S. Attorney Comey said.

As part of its complaint, the SEC is seeking to limit Stewart's role at any public company, said Wayne Carlin, regional director of the SEC's New York office.

Speculation Pushes Sears Stock Higher
By Sandra Guy, Business Reporter - Chicago Sun-Times
June 3, 2003

Shares of Sears, Roebuck and Co. surged as much as 13 percent Monday as investors speculated the retailer had found a buyer for its troubled credit- card business.

The stock rose to $33.74 before slipping back, ending the day up $2, or 6.7 percent, at $31.98.

Shares of rivals Kohl's Corp. and Target Corp. also enjoyed a bounce as blue-chip stocks rose, but Sears' showing was exceptional.

Rumors swirled that five banks have submitted bids for Sears' entire portfolio of about 25 million Sears "blue" card and Gold Mastercard accounts: Citigroup Inc., General Electric, HSBC Holdings PLC, J.P. Morgan and Royal Bank of Scotland Group.

Sears is expected to accept one of the bids in the third quarter, and wrap up the sale by year's end.

The Hoffman Estates-based retailer's credit-card portfolio is the eighth- largest in the country; Sears is the third-largest MasterCard issuer, with $12.4 billion in receivables, and the Sears store card is the nation's largest in-house proprietary card, with $18.4 billion in receivables.

The rumors appeared to end any worries that Sears would have trouble finding a buyer, or that it would be forced to keep its Sears "blue" card.

Sears' stock last year lost half its value, largely because of greater-than- expected losses in its credit-card unit. In addition, the portfolio's value is difficult to determine because Sears writes off accounts after they've been delinquent for 240 days, rather than the more common standard of 180 days, and Sears Gold Mastercard accounts, introduced three years ago, are too new for analysts to know how they will perform.

Sears spokesman Ted McDougal said Monday it is too early to say what will happen to the 170 employees at Sears' headquarters who work in the credit-card unit, or the 8,500 employed in regional operating centers.

"It's totally dependent on the outcome of the process," he said.

Joseph Grabowski, equity analyst at Strong Capital Management, estimated Monday that Sears' stock could soar to $37 if everything falls Sears' way.

If Sears receives a 10 percent premium on the sale of the credit-card business and uses the money to buy back half of its 310 million shares outstanding, it could improve its valuation to $4 a share. (The scenario is based on a bid of $33 billion, minus the credit-card unit's $27 billion in debt, leaving Sears with $6 billion.) At a multiple of eight to 10 times earnings, the stock would be worth $32 to $40, Grabowski said.

If Sears gets book value for the credit-card business ($30 billion), its stock could be worth about $27, according to the same calculation.

Sears Up 5.7%; Speculation Of Favorable Credit-Card Sale
By James Covert - Dow Jones Newswires
June 2, 2003

NEW YORK -- Shares of Sears, Roebuck & Co. (S) jumped as high as 7% Monday on twice the daily volume by midday amid speculation that the company may soon announce the sale of its troubled credit-card unit.

A first round of bids for the Hoffman Estates, Ill., retailer's credit-card portfolio - the eighth-largest in the U.S. - was due late last month, with a deal expected in the third quarter. Likely bidders include Citigroup Inc. (C) and General Electric Co. (GE), according to people familiar with the matter.

Although Sears said in March it hoped the credit-card operations will fetch $6 billion to $7 billion, some Wall Street analysts have estimated it will draw closer to $4 billion. The business also carries about $27 billion in debt.

"I would fall off my chair if anything close to ($6 billion to $7 billion) was offered," said Michael Auriemma, president of Auriemma Consulting Group Inc., of Westbury, N.Y.

The figure represents a premium of about 20% to the value of the unit's outstanding card balances. Auriemma notes that most proprietary card portfolios sell at a premium in the low-single digits, and adds that Sears' MasterCard portfolio continues to be dogged by delinquencies.

"My expectations wouldn't have been that they would get a price that would drive their stock up," Auriemma said of the anticipated spinoff of the credit unit.

Sears said in March that it was exploring the sale of the credit-card division in order to focus on its retail operations. Nonetheless, credit cards have been a big part of Sears' business over the years, representing 60%, or $1.5 billion, of the company's annual operating income.

"I see a questionable long-term outlook for Sears, given where profits have come from," said David Robertson, publisher of the Nilson Report, a credit-card industry newsletter based in Oxnard, Calif. "This is a business that has generated very dependable profits for Sears. The retail division has generated profits only intermittently."

Like Auriemma, Robertson is skeptical that the credit unit would fetch the 20% premium Sears hopes for. "They simply don't generate those kinds of profits, and the growth potential of that business is modest," Robertson said. "20% is the high end of a very profitable, very safe portfolio, and it's yet to be determined whether the Sears MasterCard business has stabilized in terms of chargeoffs."

Nonetheless, the industry is still in consolidation mode. While many observers are skeptical that a buyer would pay a big premium for the Sears operations, Robertson notes that the sheer size of Sears' credit business does present a unique opportunity to big players looking to grow their business. That could push the premium in a sale as high as 13%, Robertson says.

The credit-card operations had $30.8 billion in card receivables at the end of 2002, representing 25 million active accounts. The company's proprietary card is the largest in-house portfolio in the country, with $18.4 billion in receivables. Sears also is the nation's third-largest MasterCard issuer, with $12.4 billion in receivables, behind only Citigroup and MBNA Corp. (KRB), according to industry estimates. Sears said it is looking to sell the entire business, but that it also would consider selling only the MasterCard portfolio.

Shares of Sears on the New York Stock Exchange recently changed hands at $31.68, up $1.78, or 5.7%, on volume of 1