Breaking News
May 2004 - June 2004

Sears to Buy Stores From Kmart, Wal-Mart
Associated Press
June 30, 2004

Sears, Roebuck and Co. agreed to acquire up to 54 stores from Kmart Corp. and seven stores from Wal-Mart Stores Inc. for a combined price of about $620 million in cash.

The company said it plans to convert those locations into Sears department stores by the fourth quarter of 2005 in an effort to grow the retail chain outside of shopping malls, where Sears traditionally has been based.

The Kmart stores are located primarily in large, urban areas with household demographics similar to Sears' markets, while the Wal-Mart stores are situated in mid-size markets.

Sears said it will fund the transaction using available cash, and expects to spend $200 million to re-model the stores. The acquisitions are expected to benefit earnings beginning in 2006.

Retail Experts Laud Sears for Kmart, Wal-Mart Deals
By Suzann D. Silverman, Editor-in-Chief
Commercial Property News
June 30, 2004

Retail real estate experts responded favorably to Sears, Roebuck & Co.'s announcement today it agreed to acquire 54 Kmarts and seven Wal-Mart stores. In a larger sense, it indicates a turnaround for Sears and an intention to go head to head with Wal-Mart--something Kmart was not able to do but Sears may be able to manage.

At the property level, it means use of space that may otherwise have sat vacant. Sears would not reveal the location of the stores and whether or not they are already vacant and Kmart did not return calls, but any Kmarts being sold off would likely otherwise have sat vacant, reasoned Merrie Frankel, vice president & senior credit officer at Moody's Investors Service.

The fact that Sears bought the stores further indicates they are of a size usable for other purposes, Frankel added. That was a concern when Kmart first began closing down stores in large quantities, since retail real estate owners feared they might otherwise sit vacant for years. Sears has revealed the stores it is buying average 110,000 gross square feet and 84,000 selling square feet, compared to an average of 90,000 selling square feet for its current full-line stores. It has also said they are in solid locations.

"If I am an owner of properties with Kmarts in it and Sears is coming in, I'd be thrilled," observed Greg Maloney, president & CEO of Jones Lang LaSalle Retail. While he generally deals with tenants, including Sears, that are in regional malls, he does not see Sears necessarily vacating mall stores because it is taking over a Kmart location nearby. Some will be retrofitted into the new Sears Grand format, while others may not compete with the mall stores similar to the way retailers locate in lifestyle centers between mall locations, he noted.

Kmart Stock up More than 350%
By Susan Tompor - Free Press Columnist - Detroit Free Press
June 30, 2004

It's hard to say what has more shock value. Is it the fact that Kmart Holding Corp.'s stock, the stock that was issued after the retailer emerged from bankruptcy, has risen as much as 392 percent in a little more than a year between May 2003 and Friday?

Or the fact that a Wall Street analyst now says Kmart could go even higher and hit $85 a share?

Kmart closed at $68.22 a share Tuesday, down $3.41 a share for the day - up more than 354 percent since May 2, 2003. Shares of retailers fell Tuesday after competitor Target Corp. warned investors that June sales are tracking below plans.

Now remember, this isn't the same Kmart stock that lost some $6.6 billion in market value after the company filed for Chapter 11 bankruptcy protection in January 2002. Those 502 million old shares traded as high as $13.16 in 2001.

When the company was reorganized last year, the old stock became worthless, and about 90 million new shares were issued in the new entity, Kmart Holding. The stock has pretty much been rising ever since. On paper, Kmart's market value Tuesday was $6.1 billion, not far from its pre-bankruptcy high.

But before anyone loses his or her head - and possibly wallet - over Kmart's amazing year, let's listen to some words of warning. We are talking about a real estate play by big money wheelers and dealers here and not the notion that Kmart is on the verge of conquering Wal-Mart or Target.

"It's New York money following Eddie Lampert," said Trip Bosart, senior managing director for McDonald Financial Group in Birmingham. "Merchandising, in my opinion, is clearly secondary."

Edward Lampert, who is worth more than $1 billion, runs ESL Investments Inc., a private investment group in Connecticut. He owns 52.6 percent of Kmart's common stock and is chairman of Kmart Holding.

Some big traders are betting that Kmart could make lots of money selling stores, instead of, say, pajamas, paint and potato chips.

Another hot June rumor: Traders have been buzzing about the possibility that Kmart could sell some of its stores to Sears, Roebuck and Co. That rumor is fueled by the fact that Lampert also is the single largest shareholder of Sears.

Kmart is not commenting on any of the real estate rumors.

"Kmart is not your usual retail story. Kmart is the riskiest stock that we are currently recommending," wrote Gary Balter, a retail analyst for UBS Investment Research in New York.

Balter is the guy who forecasts $85 a share. He issued that report Friday. Balter was not available for an interview and does not usually talk to reporters.

Oh, sure, Balter's report mentions that Kmart has reported some encouraging trends at its retail operations, including the appointment last week of three executives who will focus on customer service.

But Balter stresses that Kmart is a "long-term investment vehicle, and not a profit-sustaining firm, in our view." He says investors need to focus on cash and real estate and not entirely on retailing. UBS makes a market in Kmart securities. Kmart is not a UBS client, and UBS does not own Kmart shares.

In another development, Balter seemed pleased that Kmart bought a strip shopping mall in Indiana. Kmart has apparently made no public announcement about such acquisitions, but Balter notes in his report that Kmart has been buying properties at the same time it is disposing of stores. "We believe that Kmart might potentially sell these at a profit in the future, generating more cash than originally anticipated," he wrote.

The real estate spin got greater life earlier this month when the Troy-based retailer said it plans to sell up to 24 stores to Home Depot Inc. for $365 million. That's more than $15 million per store. So far, Kmart has named three locations to sell in Pennsylvania, Illinois and Connecticut. Others will follow.

Kmart's stock was trading around $44 a share in mid-May. It closed at about $55 a share the day before the Home Depot deal was announced June 4. And it's been flying higher ever since.

In the second quarter through Tuesday, Kmart stock gained about 65 percent and will likely be the top-performing Michigan-based stock during the three-month period that ends today.

It was the second-best Michigan stock during the first quarter.

The theory holds that, if Kmart sold more stores, it could raise even more cash, a few optimists say maybe as much as $1 billion. Kmart is already sitting on $2.2 billion in cash and cash equivalents.

Dan Thelen, portfolio manger for Loomis, Sayles & Co. in Bloomfield Hills, doesn't buy the notion that the company could raise as much as $1 billion by selling stores. But he does see more value in a real estate play.

And Thelen said the Home Depot deal shows that Kmart management may be more willing to sell more stores.

Loomis, Sayles owned about 250,000 Kmart shares as of March. It began buying shares last fall.

Ed Eberle, president of Seizert Capital Partners in Bloomfield Hills, does not own Kmart stock, but his firm has done some research and can see where the stock could hit $85 or $90 a share, if the real estate story plays out well.

"It's a pure math game. It's a break-up value of the assets," Eberle said.

The key word in my book is game.

It's a game filled with plenty of risks, too many risks for most everyday investors.

Social Issues Tug Wal-Mart in Differing Directions
By Constance L. Hays - New York Times.com
June 30, 2004

A fter a judge's ruling, announced last week, gave class-action status to a federal sex-discrimination lawsuit against Wal-Mart Stores, the company's management broadcast a two-part message to its one million employees over the television monitors that hang from store ceilings.

First, employees were told that the ruling means "that there was no finding of guilt and it was all about the class, but that we even disagree with that and are going to appeal it,'' said Jay Allen, a company spokesman. Then there was a second part: "When this is all over with, this company is going to be a better company for it."

Lately, it's been hard to tell what kind of company Wal-Mart plans to become. On one hand, it bans certain magazines from its stores, vigorously fights matters ranging from shareholder proposals to federal lawsuits, and justifies strategies by quoting its long-dead founder in the obsolete manner of Chinese quoting Chairman Mao.

On the other hand, in the last year, Wal-Mart created an office of diversity, announced that it would protect gay workers from workplace discrimination, and pledged to promote women in the same proportion that they apply for management jobs, promising to penalize senior executives if that does not come to pass.

"They make an appropriate move, and we feel we would like to remain involved," said Julie Goodridge, president of Northstar Asset Management in Boston, a money manager emphasizing social responsibility that owns 6,455 Wal-Mart shares and has contemplated selling them. She praised the company for taking action like its nondiscrimination policy toward gay employees. Other moves, like banning magazine titles, "make me feel like, 'what am I, out of my mind?' " Mrs. Goodridge said.

The seesawing suggests that Wal-Mart's prolonged transition from Samuel L. Walton's personal project to giant global corporation has reached a critical stage. Since 1992, the year Mr. Walton - known as Mr. Sam - died, Wal-Mart has had to make its way without the founder and visionary who turned a single five-and-dime into a retailing megalith.

The company has grown rapidly, and the pressure on it, like the sex-discrimination lawsuit that was certified to include as many as 1.6 million female Wal-Mart workers, is the most intense it has ever been.

Mr. Allen said there was no internal struggle over direction at the company, which is based in Bentonville, Ark., but he added that certain areas within Wal-Mart had been designated lately for improvement. Essentially, he said, Wal-Mart's focus is on its customers, its stores and its workers; after all, meetings invariably begin with the latest sales reports.

"But as the company grew so fast, what happened was the things that weren't seen as being essential on a daily basis didn't get the priority they deserved," Mr. Allen said in a telephone interview. He listed human resources, legal affairs and government relations, as well as compliance with labor laws, among the areas that "deserved attention" and did not get it.

"But they're getting it now,'' he said.

Wal-Mart's culture has long emphasized cost-cutting as well as serving the customer - two concepts that may be at odds. "As an example, we have these legendary systems," Mr. Allen said, referring to the company's information technology. "But the priority was the stores and helping the merchants. There wasn't as much attention given to the human resources end of it."

However, at the shareholder meeting, Wal-Mart's chief executive, H. Lee Scott Jr., announced that new computer programs would ensure that cashiers take their breaks or their machines will be automatically shut down. Another program will prevent store managers from scheduling teenage workers in excess of limits set by local labor laws.

Some experts say Wal-Mart seems more eager to embrace change than in the past, and may have no other choice. "Their identity is broadening, and in a sense they are caught in an identity stretch,'' said Stephen A. Greyser, a corporate identity expert at the Harvard Business School. "They communicate those small-town values. What happens with the passage of time, when they are everywhere, some other ideas come across.''

Wal-Mart's culture is among the most tightly controlled in the nation. Managers are sent to training sessions at places like the Walton Institute, described tersely on a company Web site as a place that "teaches our culture," where they role play and hear lectures by senior management. At mandatory meetings held once a week, store employees are taught concepts from a "culture topic index" kept by managers, according to the judge's decision in the sex-discrimination lawsuit.

Then there are the daily renditions of the Wal-Mart cheer, which begins, "Give me a W," and requires a shouted response from all. Inside the company, the wisdom of Mr. Sam is regularly quoted by senior executives.

"If Mr. Sam were here," Kevin Turner, the youthful president of the Sam's Club warehouse stores, told the audience at the shareholder meeting, "he'd tell us: As long as we take care of our customers and we take care of our associates, they'll take care of us."

But with the rapid growth has come many new hires, whose perspectives are less steeped in Wal-Mart tradition and perhaps less likely to spout the sayings of Mr. Sam. The culture has come under attack for being hostile to women; documents filed by the plaintiffs in the discrimination lawsuit cite incidents like the hiring of a stripper to perform at a store meeting to celebrate the manager's birthday, and referring to female employees as little "Janie Q's" and "girls."

The company has staged a spirited defense against the discrimination lawsuit, but "you have to wonder whether they aren't now huddling and thinking whether there is something to be gained by settling," said James Hoopes, a professor of corporate ethics at Babson College in Wellesley, Mass.

Coleman Peterson, who retired as executive vice president in charge of Wal-Mart's "people division'' in April after 10 years with the company, warned board members as early as 1999 that Wal-Mart was not in step with other retailers and major companies in its promotion of women.

"We are behind the rest of the world," he said, according to court documents filed by plaintiffs in the sex-discrimination lawsuit that received class-action status earlier this month. By 2001, he had advised the company's senior management that Wal-Mart was behind both the Fortune 500 companies and general merchandisers in the development of women into corporate officers, other documents state. Mr. Peterson had been hired from the May Department Stores in St. Louis.

He remains a believer in the Wal-Mart Way. "The Wal-Mart culture is as consistent today as it was when Sam was alive," Mr. Peterson, president and chief executive of Hollis Enterprises, a Bentonville consulting company that counts Wal-Mart among its clients, said in a telephone interview. "The difference is that because of our size, and the agendas in many cases of those external to Wal-Mart, there are more third-party players who are developing opinions about us." He added: "In truth, our business is not run any differently today than it was 15 years ago. In terms of our values and our philosophies, that really hasn't changed."

At some companies, settlement talks to end a discrimination lawsuit might have been held from the outset, to avert nasty publicity at the very least. But at Wal-Mart, the thinking appears to have been that Wal-Mart was right and the plaintiffs were wrong.

This was despite periodic reports from people like Mr. Peterson, on the inside, as well as from others, including Sister Barbara Aires, the director of corporate responsibility for the Sisters of Charity of Saint Elizabeth, a Roman Catholic order in Convent Station, N.J., that owns Wal-Mart shares. Since 1990 or so, Sister Aires said in an interview, she has been meeting with Wal-Mart executives to alert them to the importance of having sound policies toward workers, including women, all over the world. The order's proposals, seeking better information about Wal-Mart's pay structure and promotion of women and minorities, have become an annual fixture at the shareholder meeting.

"They have made massive efforts in their minds to attend to issues they believe they now have to address," Sister Aires said. "Part of it came because of the discussions we were having, and part of it because they knew there was going to be litigation."

She added: "It's been clear to us that the present leadership team at Wal-Mart recognizes that it cannot go on as it did in its first few decades, and that it is now a global company that sees and understands somewhat more clearly the expectations of stakeholders.''

Mr. Allen said the company was being held to "a different standard because of our size and visibility and success.''

"It seems that they are being sort of dragged, reluctantly, into this new and more modern type of era," said Greg Kinczewski, general counsel for the Marco Consulting Group, which presented a shareholder proposal this year that would require that the company's chairman be an outside director.

The culture, to be sure, is powerful. Mr. Peterson, who initially found it a bit much, says it remains part of his life even though he no longer works at the company. "The very first time I did the Wal-Mart cheer, I felt a little foolish," he said. "But now, every so often, on a day when I am feeling blue, I stand up and say, 'Give me a W.' "

Sears Selects Manugistics' Solutions to Optimize Demand and Replenishment Planning
News Release Business Wire - Online
June 29, 2004

Manugistics Group, Inc. (NASDAQ:MANU), a leading global provider of demand and supply chain solutions, today announced that Sears, Roebuck and Co.
(NYSE:S) has selected Manugistics' demand planning and replenishment planning solutions as an integral part of Sears' effort to re-engineer its core merchant processes and tools.

Manugistics' solutions will enable Sears to forecast at the store level for its 870 full-line stores and improve forecast accuracy and store-level replenishment across all categories of products. For each Sears store, the solutions will provide a unique time-phased inventory plan that considers predicted demand at the store, promotions, seasonality, lead-time variability, allocations, and incoming stock across the network. The system will also look at supply and demand across the network and generate allocation and replenishment recommendations for planners and alert them to potential problems.

"These solutions will help us continue to have the products our customers want in the stores when they want them, providing the superior shopping experience they expect from Sears," said Steve Poplawski, Vice President, Merchant Operations. "At the same time, all of the efficiencies that flow from increased forecast accuracy will help us meet our goals of increasing sales and reducing operating costs."

A key component of the Manugistics solution is the promotional planning capability, which is seamlessly integrated with the demand and inventory planning processes. The solution will help improve customer service levels through the improvement of in-stock positions for planned promotions.

"Manugistics is delighted to be part of Sears' vision to develop a truly leading-edge merchandising operation," said Jeremy Coote, President, Manugistics. "This will be one of the largest implementations of a planning system of its kind outside of the Federal government. We believe that the unparalleled flexibility and scalability offered by our retail solutions are well-suited to a project of such magnitude."

About Manugistics Inc.

Manugistics is a leading global provider of demand and supply chain management solutions. Today, more than 1,200 clients trust Manugistics to help them drive profitable growth, unlock the value of their existing IT investments, and ensure the security and integrity of their global supply chains. Its clients include industry leaders such as AT&T, BMW, Boeing, Brown & Williamson, Cingular, Circuit City, Coca-Cola Bottling, Continental Airlines, Diageo, DuPont, Harley-Davidson, John Deere, McCormick, Nestle, Nissan, RadioShack, Sanmina-SCI, and Unilever.

Analysts Not Sold on Sears Grand
Crain's Chicago Business Online
June 28, 2004

Kinder, gentler shopping experience carries higher costs

(Reuters) - A shopper-friendly crop of big-box stores is sprouting up in U.S. suburbs, featuring wider aisles and colorful signs, in contrast to the ''stack-'em-high, sell-'em-cheap'' model perfected by Wal-Mart. Retailers-faced with declining traffic at traditional shopping malls and unrelenting competition from Wal-Mart Stores Inc.-are in a race to open their own version of the kinder and gentler new big-box store as they strive to win back customers who defected to lower-priced chains .

"The big boxes were located in suburbia for convenience and car access," said Thom McKay, a retail consultant with architecture firm RTKL in Baltimore, Maryland. "Everyone has realized what an impoverished shopping experience they all are." Sears, Roebuck and Co. calls the 18-foot-wide center aisle of its new Sears Grand superstore in this far-north Chicago suburb of Gurnee a "boulevard," and credits an improved shopping experience for better-than-expected sales.

About 90 miles north, in Fond du Lac, Wisconsin, Toys R Us Inc.'s prototype Geoffrey store has an activity center where employees help youngsters with new art projects every day, giving frazzled parents a break.

Still, analysts aren't completely sold on these concepts, which tend to have higher operating costs than the no-frills megastores that continue to flourish in suburbia. The new stores are getting rave reviews for looks, but the question is whether they can generate equally handsome profits.

``It's simply too early to tell'' whether the stores will make much money, said Craig Johnson, president of consulting firm Customer Growth Partners in New Canaan, Connecticut.

Johnson said retailers want to keep quiet about that for now because it can take several years before stores reach their full profit potential. But if companies are expanding, that's a good clue that management is happy with profits, he said.

Two Sears Grand locations will open in the next few weeks, with plans for a handful more by next year. The retailer declined to comment on profits, however, but it is counting on the new format to expand its store base for the first time in two decades.

J.C. Penney Co. said in April it would add seven new off-mall stores this year, and could open as many as 100 over the next few years.

MEET THE NEW NEIGHBORS

Going off-mall often means moving next door to Wal-Mart, which has flooded the rural and suburban markets with more than 3,000 discount stores.

Wal-Mart can afford to scrimp on cosmetic upgrades like pretty signage because customers shop there for low prices rather than aesthetics, analysts say, but other retailers are hard-pressed to compete.

``You have to find ways ... to position yourself differently from Wal-Mart,'' said Madison Riley, retail strategist with consulting firm Kurt Salmon Associates. ``It's very difficult for anybody to beat those guys on price.''

A Kurt Salmon survey found some 58 percent of consumers prefer to shop in big stores to save time, yet 45 percent feel that stores today are simply too big and difficult to navigate. Four in 10 said it's hard to find what they want in megastores because of the vast merchandise selection.

The Sears Grand store in Gurnee is as big as a Wal-Mart supercenter and sells everything from milk to plasma televisions in a 200,000-square-foot, one-story format. But Sears has tried to make it look more inviting than the typical warehouse superstore.

When they walk through the door, customers can see all the way to the back of the store, and large, colorful signs point shoppers toward home appliances, electronics, clothing or food.

Unlike the typical ``impoverished'' megastore-where cardboard boxes are stacked to the ceiling -- Sears Grand has cases tucked away in corners or on low shelves.

The stores target suburban moms, age 25 to 45, with income ''only slightly higher'' than the traditional Sears stores, said Teresa Byrd, Sears Grand general merchandise manager.

That meshes with another trend in Kurt Salmon's survey. Riley said many retailers were trying to stock better quality merchandise in hopes of getting into higher price points-which also moves them out of the Wal-Mart bull's-eye.

Sears says initial sales at Sears Grand are 30 percent better than expected. There has been industry talk of plans for adding hundreds of Sears Grand stores, but the company has not confirmed any plans for expansion on that scale.

Still, looks aren't everything-analysts are quick to point out that Sears also has a handful of Great Indoors home decorating stores that look nice but are costly to operate and are yet to generate a profit.

Sears announced last August that it would close three Great Indoors stores and tighten its supply channels and inventory in hopes of making the chain profitable.

 

A Rollback For Wal-Mart
Christian Science Monitor
June 25, 2004

Like Microsoft in the 1990s, retail colossus Wal-Mart has a polarizing effect on people. They tend to either love it for its low, low prices, or loathe it for its size and business practices. In the courtroom and city council room, it's under attack. But these look to be mere skirmishes in light of Tuesday's decision by a federal judge to allow a class-action suit over alleged pay and promotion disparity to go forward. The suit, the largest class action ever in a civil case, could affect 1.6 million present and former female Wal-Mart employees, potentially costing the world's largest retailer billions of dollars in damages.

But some aspects of the case don't fit the exploited-worker vs. corporate-villain view that many hold of Wal-Mart.

For instance, statistics gathered on behalf of the six women who brought the suit show that 65 percent of Wal-Mart's hourly employees are female, compared with only 33 percent of the management. This could indicate promotion discrimination, but other factors could also be at play.

Working mothers, for example, may not find it's worth trading the dependable schedule and pay of hourly wages for the unpredictable and unpaid overtime required of managers. Indeed, Wal-Mart says its female employees have shown little interest in managerial jobs. Sears, Roebuck & Co. beat a sex-discrimination suit in 1986 with just this argument.

On the other hand, it's hard to take seriously Wal-Mart's claim that absent a centralized personnel policy, it's not responsible for decisions made in individual stores. Corporate culture also counts, as the judge wrote in his ruling.

Where the plaintiffs appear on firmest ground is their claim of pay discrimination. They presented a study showing that last year, Wal-Mart's female employees earned 5 percent less than male counterparts with inferior education, experience, and job reviews. Such statistical analysis holds up routinely in court because it is not subject to the same kind of individual evaluation that a promotion might be.

Like most class-action discrimination cases, this one is likely to be settled out of court. That could still mean a sizable settlement, but also a change in Wal-Mart's personnel practices, if warranted. Apparently, the retailer already has recognized the need to correct its course, adding a director of diversity, for instance, and restructuring pay scales.
 

Brought to You By . . . Sears Reality Show
By Leon Lazaroff - Tribune National Correspondent - Chicago Tribune
June 25, 2004

Brought to you by . . .
30-second TV spots may have lost some punch, so advertisers want new ways to sell products. Now companies can buy a whole show, and networks face mounting criticism for it.

NEW YORK -- With its eye on The Learning Channel's popular "Trading Spaces" reality show, ABC television approached Sears, Roebuck and Co. in the summer of 2003 with an enticing proposal.

Rather than just inserting a few products into the new show "Extreme Makeover: Home Edition," ABC was eager to follow an emerging model for advertising known as "branded entertainment."

"This was a case of working with an advertiser, understanding their needs, and then seeing whether that fit with a program we were looking to do," said Dan Longest, ABC's senior vice president for integrated marketing and promotion. "As a network, we're not in the business of just selling product placements. With Sears and `Home Edition,' we're selling their brand but we're also extending our own."

Because corporate advertisers have become increasingly unsure that 30-second commercials reach an audience large enough to warrant their high prices, companies now seek a consistent and recognizable presence in the shows themselves.

During the recent television advertising sales period known as the "upfronts," more advertisers were interested in the kind of deals formed by Sears, Longest said.

Jump-started on cable TV by programs such as "Sex in the City," branded entertainment shaped Coca-Cola's sweeping involvement in Fox television network's "American Idol" and Ford Motor Co.'s "24," just two of the growing number of prime-time examples.

"Advertisers want to be in on the front end figuring out how best to integrate their product into programming," said Laura Caracciolo-Davis, Chicago-based director of Starcom Entertainment, a division of Publicis Groupe. "At the same time, the networks are getting smarter about owning the space between the commercials. They want to commoditize product placements."

Even Nielsen Media Research has begun tracking product placements. In a study that began in September, Nielsen reports that about 101 programs per month shown during prime time on network television contained at least one product placement.

ABC and Sears agreed the Hoffman Estates-based retailer would not only include its products in the hands of the show's host and main characters, but that "Home Edition" would become the center of one of its larger print, radio, online and in-store marketing campaigns.

"This is what we call disrupting viewers in a positive way, and the convergence of our brand with a makeover show for deserving people has really worked for us," said Sears spokesman Ted McDougal.

About the time that Sears was talking to ABC, TLC was negotiating with Home Depot about weaving its stores, salespeople and products into the script and scenery of "Trading Spaces."

John Costello, a marketing executive at Home Depot, said the home improvement show provided the perfect opportunity to feature the store's products in their intended environment.

"We want to reinforce the 30-second commercial, not replace it," Costello said. "That involves using a broad range of advertising in order to reach our customers in a variety of environments."

Home Depot not only buys 30-second spots on "Trading Spaces," but features personalities from the show in print and radio ads, holds in-store events with those personalities and has a contest to win a home makeover.

For ABC, which has struggled to find a blockbuster reality show, "Home Edition" has become one of the network's few prime-time bright spots.

"It's not enough to just stick your product in the background and hope people see it," said Rich Stoddart, a marketing communications manager for Ford.

"When we do branded entertainment, the goal is to amplify that content experience, find ways to integrate our brand in ways people care about, in what they do themselves," he said.

Not everyone is thrilled with the evolution of product placements into branded entertainment.

Gary Ruskin, director of Commercial Alert, argues that just as the Federal Trade Commission requires marketers to post the word "advertisement" on print ads, corporate television sponsors should be required to do the same.

Commercial Alert successfully forced Internet search engines two years ago to reveal when they were inserting an advertisement into their search results. Last year, Ruskin's group, based in Portland, Ore., petitioned the FTC and the Federal Communications Commission to require product placement disclosure at the beginning of a program rather than at the end.

"Viewers have the right to know when something is no longer just entertainment but an attempt to persuade them to buy something," Ruskin said.

Product placement, in its most basic form, has been around since the earliest days of TV. In the 1940s and '50s, General Electric and Phillip Morris sponsored programs in exchange for giving their products a high profile within the show. For at least 20 years, soap operas and the film industry used placements to generate additional revenue. Only in recent years have placements made their way onto prime-time shows.

"The networks have fertile ground here because they are looking for new sources of revenue and, in some cases, new advertisers," said Patti Ganguzza, chief executive of AIM Productions Inc., a New York product placement group that represents Kraft Foods Inc., Unilever and the Snapple Beverage Group, among others.

Though producers talk often about the importance of "organic" integration and "respecting the viewer," producers and corporate advertisers have to watch that they don't go too far.

Earlier this spring, the MindShare division of England's WPP Group announced a deal to work with ABC to develop comedies and dramas with advertisers in mind.

Kmart recently signed a deal with the WB network, which is partially owned by Tribune Co., whereby characters on various shows will wear the retailer's clothing. Kmart plans to feature those same characters as part of a national ad campaign.

"If we push the line, that alienates viewers and raises legal questions," said Starcom's Caracciolo-Davis.

"We're still on the learning curve with branded entertainment, but one thing's for sure, it's too late for it to go back into the closet."

Sears Pondering Tie with New Ad Agency
By Jim Kirk - Chicago Tribune - Business Beat
June 25, 2004

Reality TV product placements and home TV remodeling spokesmen--like Ty Pennington of "Trading Spaces"--are all the rage at Sears, Roebuck and Co. these days.

But in Sears' reality, pressure is building on marketing executives, if not all the top executives at the Hoffman Estates-based company, to get more customers back into its stores--fast.

And product placements and Pennington may not be enough.

So, Janine Bousquette, chief marketing officer for the struggling retailer, has ordered up another significant change for the all-important fall advertising campaign, sources report.

And while there's nothing new with Sears' longtime agencies Ogilvy & Mather and Young & Rubicam going after assignments, there is talk that Bousquette has held at least one discussion with New York-based agency BBDO as well.

Whether that means the agency is really involved in working on the campaign is unclear.

Still, contact with an agency outside of its roster would be a significant shift for Sears, which prides itself on its loyalty to marketing partners.

But Bousquette is facing what could be a do-or-die situation in the third and fourth quarters--the crucial selling period for all retailers.

Sales at Sears continue to be lousy, especially in apparel. May sales were down 3.7 percent, at a time when most retailers saw some increase. And Sears debt was downgraded this week by Fitch Rating, which cited "weak operating performance and growing competitive pressures."

That ads up to angst in the boardroom, where Sears Chief Executive Alan Lacy needs some good news quick.

So if Bousquette is talking to BBDO, an agency she worked with when she was with PepsiCo, it's likely a sign that things are getting desperate at company headquarters.

Bousquette came in to the retailer in 2002 and immediately dumped the company's "Sears. Where Else?" campaign. She brought back the more pointed "Great life. Great price" tag line.

No changes to the line are expected at this time. A Sears spokesman said that the company doesn't comment on its coming marketing programs.

Robert F. Maxwell, Retired Sears Lawyer, Dies at 82
Philadelphia Inquirer
June 25, 2004

Robert F. Maxwell, 82, of Rosemont, a lawyer, died of a stroke Monday at Bryn Mawr Hospital.

Mr. Maxwell grew up in Mount Airy and graduated from Germantown High School. He earned a bachelor's degree from the University of Pennsylvania.

During World War II, he was a translator for the State Department and then served in the Army. In 1944, he was a decoder aboard the flagship USS Biscayne during Allied landings in Italy and France.

After his discharge, he earned a law degree from Penn and practiced in Philadelphia for seven years. In 1956, he joined the legal department at Atlantic Richfield in Philadelphia, where he met Ada MacFarland. They married in 1958. After serving as Atlantic's legal counsel in Brazil, he was deputy regional counsel for the Small Business Administration. In 1970, he joined Sears' legal department. Two years later, he successfully argued before the U.S. Supreme Court a case for Sears involving the right of a seller to seize unpaid merchandise. He retired from Sears in 1987 and continued to practice law from his home.

A gifted writer, as a teenager Mr. Maxwell won an essay contest sponsored by the Franklin Institute and later won awards from the American Bar Association for essays. He was a Mason and a member of the Sons of the American Revolution; his ancestor John Steele fought in the Battle of Brandywine.

In addition to his wife, he is survived by son Robert M.; a sister; and two grandchildren.

A memorial service will be held at 11 a.m. today at the Episcopal Church of the Redeemer, 250 Pennswood Rd., Bryn Mawr.

Memorial donations may be made to Radnor Memorial Library, 114 W. Wayne Ave., Wayne, Pa. 19087.

Sears to Add 30 Appliance Outlets
By Becky Yerak - Tribune Staff Reporter - Chicago Tribune
June 24, 2004

Home Depot, other chains take market share

Worried that home-improvement chains are stealing market share, Sears, Roebuck and Co. will expand the number of its appliance and electronics outlet stores over the next two years by nearly 70 percent.

Calling it a quick and inexpensive way to plug holes in its lineup, the largely mall-based retailer plans to open as many as 17 outlet stores this year and another 13 in 2005 in strip shopping centers across the country.

Hoffman Estates-based Sears, whose 870 traditional department stores are losing business to more conveniently located rivals, currently has 45 outlets selling overstocked, discontinued and returned electronics, appliances and home and garden products at discounts of up to 50 percent.

The addition of another 30 outlets comes as Sears faces greater pressure to open new stores in a retail industry building few malls. While Home Depot Inc. and Lowe's Cos. opened a total of 250 big-box stores in 2003 and are making appliances a staple, Sears opened only about two dozen stores, and most were independently owned franchises in smaller markets.

The new stores will be called Sears Appliance Outlet. The existing stores, now called Sears Outlet, likely will be renamed. Sears has local outlet stores in Elgin, Melrose Park, Crestwood and Darien.

The outlet store expansion is Sears' latest effort to make its bread-and-butter products more accessible to shoppers.

In early 2004, the company announced plans to add appliances by year's end to all 163 of its free-standing Sears Hardware stores. Last year, in its 870 mall stores, Sears started stocking more lower-priced white goods.

"We want to expand our position in the appliance value segment by positioning the outlet channel as a viable alternative to home centers," said Karen Peters, Sears' director of outlet stores.

Sears is the nation's biggest appliance seller, with 2003 sales up 3.7 percent. But sales increases at Lowe's and Home Depot reached the double digits last year.

In addition, Sears, once a top 10 player in the electronics industry, now ranks 11th, with 2003 sales slipping 8 percent, according to industry publication Twice (This Week in Consumer Electronics).

Through the new locations, Sears hopes to stem the erosion in electronics as well as appliance sales.

Low-cost format is expandable
Stores will be "about 25,000 to 35,000 square feet in strip-center-type locations, and we typically sign a five-year lease so it allows us to expand pretty quickly with a relatively low-cost format," Peters said.

A former Sears executive who asked not to be named said it could be a sign that the company is having problems selling clearance goods in its mall stores, which average about 91,000 square feet.

Sears disputes that notion. It says it merely wants to appeal to shoppers willing to buy scratched or dented washing machines or stoves that were returned because the customer didn't like the color.

Sears also denied more appliances are being returned, which would feed the need for more outlets.

"I wouldn't say we're getting a lot more" returned merchandise, Peters said. Asked where the additional inventory will come from, she said, "we'll also do special purchases with some vendors to supplement our inventory."

Sears said its outlet stores appeal to rental property owners and cost-conscious first-time home buyers. "Our customers are willing to drive about 19 miles to get to us," Peters noted.

One retail expert believes that the new stores could appeal to the classic outlet-mall shopper: an upper middle class consumer wanting premium brands at a bargain, real or perceived.

Jim Robisch, senior partner for Indianapolis retail consultant Farnsworth Group, said he has seen appliances at Sears outlets that were priced higher than a Best Buy and only a shade below Sears' full-line stores.

But "maybe malls are no longer attracting the market they want for their markdowns," said Robisch, also a former research director for the National Retail Hardware Association.

Outlets have unique appeal

"It might be an above-average value shopper that doesn't shop malls or doesn't shop Sears in malls, so by going to strip centers and putting out an outlet sign," Sears might succeed in luring new customers, he said.

The former Sears executive believes outlet stores should be reserved for catalogers and manufacturers. While Sears faces pressure to open stores, "most retailers prefer to clear slow sellers in-house," he said. "It generates traffic."

Steve Smith, Twice editor in chief, said the key to Sears' outlet expansion is putting enough distance between the specialty format and mall stores.

"If they don't cannibalize the existing store base, they'll pick up sales," he said.

In another appliance move, Sears announced Wednesday the acquisition of a San Diego supplier of high-end appliances and designer fixtures to the contractor industry. The company, Standards of Excellence, has six California showrooms.

Sears to Acquire High-End Appliance Distributor
By Jordan Robertson - San Diego Union Tribune
June 24, 2004

Sears, Roebuck and Co. said yesterday it has agreed to acquire San Diego-based Standards of Excellence, a distributor of high-end kitchen and plumbing appliances.

With showrooms in El Cajon, San Diego, San Marcos and three other locations, Standards of Excellence sells such items as $20,000 carved granite bathtubs, $2,000 crystal sinks, and metal and stainless steel kitchen ranges that approach $30,000.

Owner Roger Kuske, who will stay on as president and general manager, said the company had been doing "very well" financially but was seeking to add an installation arm so it wouldn't have to hire outside installers for its jobs.

The company also encountered trouble recruiting workers for its seven shipping facilities, he said.

"We've grown the business over 10 years from 20 employees to 144, and we hope to continue at that pace," he said. "Without Sears, however, we could not do that."

Sears is seeking to bolster a sales channel that focuses on premium brand appliances for contractors and custom home builders, said Larry Costello, a company spokesman.

The company estimates that the contract business represents 20 percent of all appliance sales in the United States, Costello said, and Sears wanted to take advantage of the building boom in San Diego.

"The housing market has been very strong, the luxury home building market has been very strong, and the company matches up very well with (Sears') vision, mission and values," Costello said. "This is part of our strategy to maintain our position as the No. 1 appliance retailer."

Sears is acquiring Standards of Excellence through FBA Holdings, a Sears subsidiary that also operates appliance showroom chains in Northern California and southern Florida.

Started in 1976 with the El Cajon showroom, Standards of Excellence had already been sold twice in the past - once in 1982 to a plumbing supply company and then again in 1994 to Kuske, who has been running the business since the first sale.

Terms of the deal were not disclosed.

Sears to Buy Top-End Appliance Dealer to Boost Luxury Sales
Bloomberg News - Dallas News.com
June 23, 2004

Sears, Roebuck & Co., the largest U.S. department-store company, agreed to buy California appliance dealer Standards of Excellence to boost sales in the luxury home market.

Terms weren't disclosed. San Diego-based Standards of Excellence supplies premium appliances, designer fixtures and decorative hardware through six Southern California showrooms, Sears said in a statement.

The acquisition will expand Sears's reach in California as it competes with companies such as Home Depot Inc. in offering upscale kitchen fixtures such as Viking ranges. Sears, which owns The Great Indoors home-furnishings chain, has been pushing appliances and home improvement items, as well as installation services, as clothing sales decline.

"These businesses are all a part of one strategy, which is to continue being the top retailer of appliances in the country," said Beryl Buley, who oversees Hoffman Estates, Illinois-based Sears's hardware and dealer stores.

Sears, which sells Kenmore refrigerators and washing machines, has set aside an area in more than 100 of its 870 U.S. department stores to showcase appliances that would be used by custom builders and contractors, Buley said.

Sears also operates 1,100 U.S. specialty stores.

Founded in 1976, privately held Standards of Excellence also operates under the name Central Wholesale Appliance Inc. and has showrooms in San Diego, El Cajon, Huntington Beach, Murrieta, Palm Desert and San Marcos, California.

Wal-Mart Sex-Bias Suit Given Class-Action Status
By Steven Greenhouse and Constance L. Hays - The New York Times
June 23, 2004

A federal judge ruled yesterday that a lawsuit that accuses Wal-Mart Stores Inc. of discriminating against women can proceed as a class action covering about 1.6 million current and former employees, making it by far the largest workplace-bias lawsuit in United States history.

The lawsuit, brought in 2001 by six women, accuses Wal-Mart of systematically paying women less than men and offering women fewer opportunities for promotion. The lawsuit stated that while 65 percent of Wal-Mart's hourly employees are women, only 33 percent of Wal-Mart's managers are.

While not ruling on the merits of the lawsuit, the judge, Martin J. Jenkins of the United States District Court in San Francisco, wrote that the case was "historic in nature, dwarfing other employment discrimination cases that came before it."

Wal-Mart said it would appeal the class-action certification, arguing that the company did not discriminate and that decisions about raises and promotion were made by individual stores, not at the corporate level.

As the world's largest retailer, Wal-Mart has become the target of dozens of lawsuits regarding off-the-clock work and other employment practices. Indeed, because of its huge size, the company has become a lightning rod for criticism. Famed for its low prices, it has become one of the biggest sellers of products from detergent to DVD's. Wal-Mart's power helps consumers as the company pushes manufacturers and suppliers to reduce prices on many items. But Wal-Mart's influence is at times more far reaching: entertainment companies, for example, say they edit music albums and movies to suit Wal-Mart's conservative sensibilities.

Such controversies, however, pale compared with the potential the job- discrimination lawsuit has to hurt the company's image and bottom line. Shares of Wal-Mart fell 1.6 percent yesterday in trading on the New York Stock Exchange.

Worried that this case would anger and perhaps chase away many women shoppers, Wal-Mart has spent millions of dollars on television spots showing how well it treats women. And this month it announced that it would increase wages and improve some workplace practices at the corporate and store level.

The lawyers who brought the case say their goal is nothing less than to press Wal-Mart to change the way it treats its more than 700,000 employees who are women. These lawyers say they will not settle the case unless Wal-Mart makes ironclad pledges to treat women better and agrees to a substantial settlement, larger than any previous settlement in a job-discrimination case.

"This is the largest civil rights class action ever certified," said Brad Seligman, executive director of the Impact Fund, a nonprofit group that is the lead counsel for the women. "We hope to fundamentally change Wal-Mart since Wal-Mart is the industry leader. We think changing Wal-Mart for the better is going to help change everybody for the better."

Until early last year, Wal-Mart's stores generally did not post openings for managerial trainees, the plaintiffs noted, asserting that male managers often tapped other men for the management track.

Stephanie Odle, an assistant store manager in Riverside, Calif., said in an interview that she was shocked to learn that a male assistant manager at the store was making $60,000 a year, $23,000 more than she was earning. She said, "When I went to the district manager, he first goes, `Stephanie, that assistant manager has a family and two children to support.' I told him, `I'm a single mother and I have a 6-month-old child to support.' "

The ruling could include nearly every woman who has worked at Wal-Mart since December 1998. With more than 1.2 million employees in the United States, Wal-Mart employs more women and more workers than any other American company. It is difficult to estimate exactly how many plaintiffs will be in the class, because some women may choose not to participate.

"Let's keep in mind that today's ruling has absolutely nothing to do with the merits of the case," said Mona Williams, Wal-Mart's vice president for communications. "Judge Jenkins is simply saying he thinks it meets the legal requirements necessary to move forward as a class action. We strongly disagree with his decision and will seek an appeal."

Lawyers for Wal-Mart, which has 3,586 stores across the United States, had asserted that a class action was inappropriate on the grounds that Wal-Mart does not have centralized employment policies and that individual store and district managers, rather than headquarters, make decisions on pay and promotions.

They had also urged the judge to deny class certification, arguing that the class would be too large and unwieldy to handle in a single case.

In rejecting this argument, Judge Jenkins wrote, "Insulating our nation's largest companies from allegations that they have engaged in a pattern and practice of gender or racial discrimination - simply because they are large - would seriously undermine" the civil rights laws.

With such a large class, any settlement by Wal-Mart could ultimately cost the company billions of dollars, even if individual awards are small, analysts and industry experts said.

"It does have huge financial implications for them," said Emme P. Kozloff, a retail analyst with Sanford C. Bernstein, who reduced her price target for Wal-Mart's stock by 20 percent as a result.

Miranda O. McGowan, a professor of employment-discrimination law at the University of Minnesota Law School, said Wal-Mart might have been able to settle the case for a much lower amount before Judge Jenkins issued his ruling.

"At this point, it becomes an extremely expensive case for Wal-Mart to settle," she said.

Wal-Mart, even as it revolutionized the retail business, allowed other aspects of its business to stay rooted to an old-fashioned, small-town business culture - the legacy of its founder, Sam Walton. Company memorandums submitted as part of the case show that compared with other retailers, Wal-Mart lagged in the promotion of women. Women also complained of a culture that did not take them seriously and included trips to strip clubs for managers and clients.

One expert for the plaintiffs found that at 20 large retail competitors, 57 percent of the managers were women, compared with 33 percent at Wal-Mart.

No trial date has been set for the case. The next procedural step is for the two sides to meet with Judge Jenkins on July 28 to discuss future steps, including reopening discovery. The lawyers for the plaintiffs would like more information about Wal-Mart's pay and promotion policies.

Certification may also enable the plaintiffs to demand additional documents from Wal-Mart. Their disclosure in open court would provide fresh detail about the inner workings of a company that has long been among the country's most secretive.

To make the case about large pay disparities, an expert hired by the plaintiffs, Richard Drogin, an emeritus statistics professor at California State University, Hayward, found that full-time women hourly employees working at least 45 weeks at Wal-Mart earned about $1,150, or 6.2 percent, less a year, than men in similar jobs. He found that women store managers made $89,290 a year on average, $16,400 less than men store managers.

Another expert for the plaintiffs, William T. Bielby, a sociology professor at the University of California, Santa Barbara, found that women make up 89.5 percent of Wal-Mart's cashiers and 79 percent of its department heads, an hourly nonmanagerial position. He also found that women make up 37.6 percent of assistant store managers and 15.5 percent of store managers.

Judge Jenkins, who took nine months to issue the ruling, wrote, "Plaintiffs present largely uncontested descriptive statistics which show that women working at Wal-Mart stores are paid less than men in every region, that pay disparities exist in most job categories, that the salary gap widens over time, that women take longer to enter management positions, and that the higher one looks in the organization the lower the percentage of women."

Wal-Mart has criticized the plaintiff's experts, saying they misinterpreted the data, and Wal-Mart officials say that women represent a low percentage of managers partly because women have shown little interest in management positions.

Judge Jenkins allowed a class action on the plaintiffs' equal-pay claims and their claims for punitive damages and for corrective action regarding promotions.

But, in a victory for Wal-Mart, he rejected the request of plaintiffs for class action for all the women regarding claims for lost pay over discrimination in promotions. He said he would allow class action on lost pay only for those women who had demonstrated interest in promotions.

The decision deals another blow to Wal-Mart's efforts to portray itself as a good employer. In a case in Oregon, the company was found to have forced 400 workers to work off the clock, and lawsuits making similar accusations are pending in 31 states. Wal-Mart was also the target of a raid last year in which federal agents arrested 250 illegal immigrants who were hired, by subcontractors, to clean hundreds of Wal-Mart stores.

Criticism of its labor practices, especially its anti-union stance and relatively low wages, has fueled local opposition to plans to build stores in some areas.

In April, a plan to build a store in Inglewood, Calif., was defeated in a referendum, with the help of labor unions, while public opposition has stalled or wrecked other plans for new stores in New Orleans, Chicago and Dallas.

Wal-Mart's directors and shareholders have been keenly aware of such pressures on the company. At the company's annual meeting this month, a series of executives denounced what they called negative publicity about Wal-Mart's working conditions and urged employees to spread encouraging stories in their communities.

More important, the company also announced then a new job- classification and pay structure, which company officials said was intended in part to ensure fairness in pay and promotions. Wal-Mart's chief executive, H. Lee Scott Jr., said senior managers, including himself, would lose 7.5 percent of their bonuses next year if women were not promoted in direct proportion to the numbers that apply for management jobs.

Ms. Williams, the Wal-Mart spokeswoman, said yesterday, "While we cannot comment on the specifics of the litigation, we can say we continue to evaluate our employment practices."

Joseph Sellers, a lawyer for the plaintiffs, said any settlement would have to include internal changes at Wal-Mart. "Our clients got into this seeking to change the way they do business," he said. "We would never settle for just money."

Noting that this year was the 50th anniversary of the Brown v. Board of Education decision, Judge Jenkins wrote in his ruling, "This anniversary serves as a reminder of the importance of the courts in addressing the denial of equal treatment under the law whenever and by whomever it occurs."

The case, Betty Dukes v. Wal-Mart Stores, the judge wrote, should be certified as a nationwide class action because the plaintiffs have shown that there are significant common legal and factual issues concerning Wal-Mart's suspected discriminatory practices, including gender stereotyping and a culture of corporate uniformity.

As issues that might be examined in the class action, the judge pointed to Wal-Mart's highly centralized management style, statistical evidence of discrimination and anecdotal evidence of discrimination from 114 current and former women Wal-Mart employees.

The judge cited a declaration by one woman that a store manager told her: "Men are here to make a career and women aren't. Retail is for housewives who just need to earn extra money."

He cited a second woman who said that when she sought a job in the hardware department, a male manager told her: "We need you in toys. You're a girl, why do you want to be in hardware?"

Ex-Exide Chief Loses Appeal for Wire Fraud
By Greg Stohr - Bloomberg News - Detroit News
June 22, 2004

Former Exide Corp. Chief Executive Officer Arthur M. Hawkins failed to persuade the U.S. Supreme Court to overturn his wire fraud conviction stemming from the sale of defective Sears DieHard batteries.

The nation's highest court, in a one-line order issued in Washington, refused to consider Hawkins's argument that prosecutors pressed the wire fraud count in the wrong U.S. court. Prosecutors say Hawkins and other Exide officials made defective batteries for Sears, Roebuck and Co., then bribed a Sears buyer so that Exide could retain the manufacturing contract.

Hawkins, convicted in East St. Louis, Illinois, of both wire fraud and conspiracy, was sentenced to 10 years in prison and ordered to pay a $1 million fine. His Supreme Court appeal sought to overturn the wire fraud conviction, which accounted for half his prison sentence.

Hawkins argued that the alleged $10,000 bribe, transferred electronically from a bank in Philadelphia to a bank outside Chicago, had no connection to the Southern District of Illinois, where the charges were filed.

The Chicago-based 7th U.S. Circuit Court of Appeals upheld Hawkins's conviction last year, saying the defective batteries were advertised and sold in that judicial district. Exide, now Exide Technologies, is based in Lawrenceville, N.J.

Wal-Mart Faces Class Action In Sex-Discrimination Case
By Ann Zimmerman - Staff Reporter
Wall Street Journal - on line
June 21, 2004

A federal judge in San Francisco ruled that a gender-discrimination lawsuit against Wal-Mart Stores Inc. could move forward as a class action, allowing the lawsuit to apply to as many as 1.6 million current and former female employees who worked for the company since Dec. 26, 1998.

The move makes the case the largest civil-rights action ever brought against a private employer in the U.S.

The original suit, filed in June 2001 by six former and current female employees, charged that the Bentonville, Ark., retailer systematically denies women workers equal pay and opportunities for promotion. Wal-Mart, America's biggest private employer, with 1.3 million employees, said it plans to appeal the decision.

Federal Judge Martin J. Jenkins rejected the retailer's argument that the enormous class size made the case too unwieldy. In addition, Wal-Mart had argued that most hiring and promotion decisions were made at the store level, and thus, there wasn't any pattern of corporate discrimination.

The judge, however, found the plaintiffs had enough evidence that the company had common pay and hiring practices across the country, raising the "inference that Wal-Mart engages in discriminatory practices in compensation and promotion that affect all plaintiffs in a common manner." The decision affects who can participate in the case, but isn't an indicator of the outcome.

Judge Jenkins also ruled that the class can pursue an award of punitive damages in addition to back pay for wage differences and lost earnings to those who were actually denied promotions.

Joe Sellers, co-counsel for the plaintiffs and a lawyer with the Washington, D.C., firm of Cohen, Milstein, Hausfeld & Toll, called the ruling "a terrific recognition of the plight of women at Wal-Mart." "It is an unprecedented opportunity to pursue their claims together," he said.

Wal-Mart, however, noted that the certification is just a first step and the case has a long way to go. "Let's keep in mind that today's ruling has absolutely nothing to do with the merits of the case," said Wal-Mart spokeswoman Mona Williams. "Judge Jenkins is simply saying he thinks it meets the legal requirements necessary to move forward as a class action. We strongly disagree with his decision and will appeal."

Wal-Mart has 10 days to ask the U.S. Ninth Circuit Court of Appeals to review the case. If the review is denied, lawyers for plaintiffs say they hope to get a trial set within the year.

However, most cases of this size and complexity are settled out of court -- and for huge sums. Home Depot Inc., for example, agreed to pay $104 million in 1997 to settle a class action on behalf of 25,000 women who claimed they were denied promotions because they were female. Coca-Cola Co. in 2000 and Texaco Inc., now a part of ChevronTexaco Corp., in 1996 each paid well more than $100 million to settle race-discrimination cases.

Wal-Mart, which racked up $9.05 billion in profit on $256.33 billion in sales in the year ended Jan. 31, has the financial wherewithal to deal with a potentially large jury verdict or settlement, observers says. More troubling are Wal-Mart's persistent image problems. The world's largest retailer is facing a host of labor-related problems and has become a target of unions and activists, who portray it as a penny-pinching corporate giant that puts profits ahead of workers.

More than 30 lawsuits filed against Wal-Mart allege it failed to pay workers overtime, and a federal grand jury is investigating whether the company knowingly used contractors who hired illegal immigrants to clean its stores.

The company recently has taken steps to change its employment practices, creating a director of diversity and a compliance team. In January, it instituted its first company-wide electronic system to allow employees to apply for management training. It also has restructured pay scales. At the company's annual meeting in early June, Chief Executive Lee Scott also announced that executives will forfeit a percentage of their bonuses if they fail to meet specific employment diversity goals.

Still, Wal-Mart fiercely denied that it has engaged in a pattern of discrimination against women. In a two-hour class-certification hearing last September, Wal-Mart argued that each member's case is unique and that it is entitled to individual hearings regarding each class member's claims. The company said this process would entail at least 13 years of testimony and it argued that such testimony was the only way it could receive "due process."

Wal-Mart also argued that most of its employment decisions are made on the store level and don't amount to any pattern of corporate discrimination that would merit class-action status for the lawsuit.

The plaintiffs in the case claim sheer numbers prove their point: About two-thirds of Wal-Mart's hourly employees are women, though they make up only a little more than a third of all its salaried managers. Just 14% of the top managers at its 3,000 stores are female. The plaintiffs, women from several states who mostly held hourly jobs, also contend that women earn 5% to 15% less than their male counterparts in the same jobs, differences that can't be explained by seniority or performance reviews. The plaintiffs' statistical studies also show that the average proportion of women in managerial positions at the country's 20 largest retailers is some 20 percentage points higher than at Wal-Mart, according to data filed with the U.S. Department of Labor.

Although Wal-Mart has provided its own statistics that attempt to show that women are paid fairly and they don't apply for promotions as readily as males do, the judge was unconvinced, noting that the plaintiffs' statistical presentation was "largely uncontested."

Judge Jenkins also rejected Wal-Mart's argument that the case is too large to try, noting that this year is the 50th anniversary of the Brown v. Board of Education case, "which services as a reminder of the importance of the courts in addressing the denial of equal treatment under the law wherever and by whomever it occurs."

Sears Strives to Keep Pace with Retail Rivals
By Becky Yerak - Staff Reporter - Chicago Tribune
June 21, 2004

Housing market bolsters demand

Appliance sales rose 10 percent nationwide in 2003 thanks in part to a strong U.S. housing market, but Sears, Roebuck and Co. failed to keep pace with the growth as its rivals opened hundreds of new stores.

The Hoffman Estates-based department store chain is the top U.S. seller of appliances and logged a 3.7 percent rise in sales of washers, refrigerators and other white goods.

But sales at competitors Lowe's Cos. and Home Depot Inc. climbed 17.4 percent and 23.6 percent, respectively, according to industry publication TWICE (This Week in Consumer Electronics) in its 2003 list of the top 100 appliance sellers.

That Sears carved out a nearly 4 percent sales increase while the number of its stores largely stagnated speaks partly to the healthy housing market, as well as favorable demographic trends.

In fact, for more than a decade, U.S. shipments of major home appliances have risen nearly every year and show no signs of tapering off. That has encouraged many retailers to bulk up their appliance departments. About 28.8 million washers, dryers, dishwashers, refrigerators, freezers and ranges were shipped in 1993, a number that's forecast to grow to 45.3 million in 2005, according to the Association of Home Appliance Manufacturers in Washington, D.C.

"More people are investing in their homes," said Steve Smith, editor in chief of TWICE. "The large bubble of the population is still Baby Boomers and slightly younger, and they have the willingness and the cash."

Sears, the only retailer to carry the top-selling Kenmore line as well as the five other leading brands, says it's no accident that its sales are up. But it is still working to regain ground lost to its competitors.

Sears is expanding its appliance departments at the rate of 180 stores a year between 2003 and 2005.

In 2003, it also added more lower-priced products in all of its brands, and still introduced new offerings in its higher-end Kenmore Elite line.

Among other things, Sears also credits its higher 2003 appliance sales with its improved "price match program"--vowing to charge the same as rivals not only for the exact models but also for comparable items.

Finally, it launched a customer service program in 2003 in which it contacts every appliance buyer to gauge their shopping experience.

Strategies to add sales

To remain king, the tinkering continues in 2004.

By year end, appliances will be added to all 163 freestanding Sears Hardware stores.

It's also testing an appliance "megafloor" concept in 2004 in four upscale
markets: Fox Valley Mall in Aurora; Altamonte Springs, Fla.; Escondido, Calif.; and Asheville, N.C.

"The purpose is to expand the floor space devoted to appliances, particularly higher-end brands," said Tina Settecase, general merchandise manager for Sears' home-appliance business. "Three brands will be featured in kitchen vignettes and will give more of a `showroom' feeling to the sales floor."

Sears also has begun carving out a spot on the sales floor devoted to already boxed "take it home today" merchandise.

New product introductions continue, including a Kenmore Elite refrigerator that includes a Procter & Gamble PUR water-filtration system. Sears also unveiled an energy-efficient line that includes a washing machine selling for $429.

New players join the field

But Lowe's and Home Depot are putting heat on Sears.

The home-improvement duo opened a total of 250 stores in 2003, and their combined sales of $5.5 billion nearly match Sears' $5.6 billion.

On top of that, Home Depot--an appliance player for only three years--has expanded its white-goods department, doubling the assortment of products it carries to about 125.

"That's the single biggest thing that has propelled our increase," said Bob Baird, global product merchant for appliances for the Atlanta-based chain.

Home Depot also is devoting more advertising dollars to its appliances.

"It's one of the key growth categories for the company," Baird said.

Besides Sears, four other Illinois appliance chains made TWICE's top 100: Abt Electronics & Appliance of Glenview; Grants Appliance of Joliet; Plass Appliances & Furniture of Bloomingdale; and Sam's Best Brands Plus of Springfield.

Abt ranked 22nd, with sales up 40 percent, to $70 million, at its 350,000-square-foot store.

President Mike Abt said sales at his store--a third bigger than a Wal-Mart Supercenter--gain about 10 percent a year.

"It seems like people are buying upscale products, like Vikings and Wolf ovens" and more stainless-steel products, Abt said. "People are buying more than they need."

- - -

Appliance sales up 10% in 2003
Sears was the leading appliance seller, but its pace of growth was slow compared with rivals.
SHIPMENTS OF MAJOR APPLIANCES (1993-2005)
*2003-2004 Forecasts

Top Appliance Sellers, 2003

Note: Forecasts are a median of participating companies' forecasts
Source: TWICE (This Week In Consumer Electronics), Association of Home Appliance Manufacturers

 

Sears Los Angeles Catalog Plant to be Developed
By Roger Vincent - Staff Writer - Los Angeles Times
June 19, 2004

A developer plans to turn a mostly vacant Sears warehouse
into shops and apartments.

First floor, linens. Ninth floor, home sweet home?

Sears, Roebuck & Co.'s long-shuttered Boyle Heights distribution center, one of the largest buildings completed in Los Angeles during the 1920s, may wind up as the centerpiece of a proposed 23-acre retail and residential project.

Developer MJW Investments hopes to start work next year on a renovation of the nine-story, 1.8-million-square-foot building at Olympic Boulevard and Soto Street and the vast parking lot surrounding it.

The project, which could cost as much as $350 million, is an ambitious attempt to build a pedestrian-oriented shopping and residential district.

The goal, developers say, is for it to resemble a city center and not a mall.

"It will be more like Westwood than it is like the Grove," said Pasadena architect Stefanos Polyziodes, the developer's lead design consultant. While the Grove, a popular outdoor shopping center in the Fairfax district, is mostly walled off from the street, "Westwood is the quintessential open town center."

Preliminary plans include 480 condominiums, 180 apartments and 750,000 square feet of stores and restaurants laid out on streets that would pass through the property. The hulking Sears building would house stores including Sears on the first floor. The next two floors would include commercial space and possibly a charter school and parking.

The remaining floors would have apartments facing the downtown skyline and more parking. On the roof would be a garden, tennis courts, a swimming pool and other amenities for tenants.

The building was one of nine mail-order fulfillment centers that Sears built between 1910 and the onset of the Great Depression. Its nearest counterpart, in Seattle, has been converted to a retail, office, warehouse and manufacturing center. The Sears warehouse in Boston also has been transformed into a commercial center.

The Boyle Heights building, completed in phases starting in 1927, attracted more than 100,000 curious visitors in its first month of operation, The Times reported that year. That didn't include shoppers at the company department store on the first floor.

Sears employees filled mail orders by roller skating around the 200,000-square-foot floors - about the size of a big-box store such as Costco today - picking up items and dropping them onto corkscrew slides for distribution by truck or rail, said Tim Meier of MJW Investments.

The store on the first floor is still in operation, but the catalog center closed in 1992 and the property was sold as part of a cost-cutting program. That left a hole in Boyle Heights, where the Sears complex employed 1,000 workers at the time it closed.

The Sears sign atop a 14-story tower above the building was a beacon for Eastsiders returning home on area freeways, said Ken Bernstein of the Los Angeles Conservancy.

"The Sears building with its Art Deco tower is clearly one of the dominant visual icons of the Eastside," he said.

MJW President Mark Weinstein said his great-grandparents and grandparents lived in Boyle Heights and took him to Sears as a child. He hopes to enhance the neighborhood with a center where residents can shop, eat and perhaps watch a movie.

The more than 1 million residents within a five-mile radius of the site have few retail options beyond small neighborhood shops, according to a study by the city's Community Redevelopment Agency. Residents leave the area to spend millions of dollars annually.

Retail tenants other than Sears haven't been inked because the project has yet to receive city approval. MJW officials have been meeting with neighborhood representatives to garner support for their plans.

MJW has acquired most of the site from Arizona-based Univest and has the final parcel in escrow, Weinstein said.

With the Sears site acquisition, MJW owns more than 5 million square feet of real estate, including apartments, shopping centers, industrial properties and self-storage buildings. Its largest project is Santee Court, a collection of nine office buildings on Los Angeles Street that are being converted to apartments and condominiums.

Is Kmart Chief Out to Make a Killing?
By Tenisha Mercer - The Detroit News
June 18, 2004
Lampert is more interested in chain's cash,
land holdings than retailing, analysts say

TROY - The stock is soaring, profits are back and billionaire dealmaker Edward S. Lampert is getting even richer. But what will be left of Kmart Holding Corp. when it's all over?

There is growing consensus that Lampert, Kmart's chairman and majority shareholder, is more focused on capitalizing on the retailers' valuable land holdings and stockpiling cash than on hammering out a long-term survival plan.

Earlier this month, Kmart sold 24 stores to Home Depot for about $365 million. Another Lampert investment, Sears, Roebuck & Co., is widely expected to be the next company to purchase Kmart stores or invest in the company.

It's a familiar pattern to those who have watched Lampert make millions of dollars by investing in established but financially ailing companies, such as AutoZone, AutoNation, Payless Shoes and Sears.

"His business is investing in companies and splitting them up and selling them," said George Whalin, president of Retail Management Consultants in San Marcos, Calif. "That's been his pattern over the years. Lampert bought Kmart at the right time. He buys low and sells high, and (his) plan is certainly not to build a long-term retail business."

Analyst Howard Davidowitz compared Lampert to a young Warren Buffett, who made investors wealthy by turning Berkshire Hathaway into an investment firm.

"Lampert is brilliant. He's doing exactly what he should do - making money for Kmart shareholders. The problem is that when he gets done, there won't be any more Kmart."

Kmart representatives did not return calls for comment.

Lampert has garnered kudos from the investment community by slashing Kmart's inventory, eliminating slow-selling merchandise and spiffing up stores. He has assembled an experienced management team of former executives from the Gap, Banana Republic, Carrefour and Home Shopping Network. Kmart also has cut hours for thousands of employees, sharply reducing its full-time work force.

Profits have returned even as sales have fallen. Last month, Kmart - which operates 1,511 stores and has 158,000 employees - posted its second consecutive profitable quarter in three years, earning $93 million for the first quarter that ended April 28.

Employees say they have felt the brunt of Lampert's bottom-line focus.

"They are putting money over everything," said Janet Daniels, who works at the Kmart store in Brighton. In February, Daniels' job as a department manager was cut into a 15-hours-a-week position as a store associate. "It's let's cut corners and see where we can save the most money," she said.

Lampert says he's simply trying to maximize Kmart's value.

"We are looking to focus on getting the right value for this company," he said, in a rare public appearance, during Kmart's annual meeting last month in Troy. "We make money like any other shareholder .... if the value of the company increases over time."

He doesn't apologize, however, for taking advantage of Kmart's land holdings.

"Our hope is that we will get to the point where the value of the business is greater than the value of the real estate," he said, "but if people approach us (about selling), we will consider it."

Davidowitz, chairman of Davidowitz & Associates, a New York investment firm, said Lampert's strategy is clear. "They are going out of the retail business and into the investment business."

Next on Lampert's list may be Kmart's struggling grocery store business.

The Troy-based chain opened its first Super Kmart, which combines general merchandise with food, in the mid-1990s but has failed to carve out a niche in the competitive arena. Kmart has never seriously challenged Wal-Mart Stores Inc., which operates 1,559 supercenters in the United States to Kmart's 60.

"The food industry is so competitive that you are either in it or you are not," said Jeff Green of retail consulting firm Jeff Green Partners in Mill Valley, Calif. Green advised Kmart on where to build Super Kmarts in the mid-1990s.

Discussions about Super Kmart were conspicuously absent during the company's annual meeting in Troy late last month.

Richard King, who was general merchandise manager of food and consumables, left the company in mid-2003 after joining the company in 2002. And the retailer has trumpeted apparel as opposed to groceries as key to rebuilding and regaining customers.

Lampert, whose Greenwich, Conn.-based private equity and hedge fund firm ESL Investments Inc., owns 52.6 percent of Kmart's shares, has refused to comment about whether he plans to sell Kmart. New York-based Third Avenue Management LLC owns 4.6 percent of Kmart shares.

One of the wealthiest men in America, Lampert is a secretive, low-key dealmaker who carefully avoids the limelight. With a net worth of $1.5 billion, he ranks No. 140 on Forbes' list of the 400 wealthiest people in America.

His style tends to be hands-on. Sometimes he joins the board of directors. Other times, he offers suggestions about how the business should be run. If that doesn't work, he pushes his agenda through accusatory SEC filings, shareholder proposals and hostile takeover bids.

While almost all of his investments have made money, Kmart could become his most lucrative deal yet. In exchange for helping bankroll Kmart out of bankruptcy, Lampert was added to the company's financial institutions committee in September 2002. Lampert has invested more than $100 million of his own money into Kmart, but has already made nearly $2 billion in profits on paper so far.

No matter what Lampert's future plans are for Kmart, his influence can't be denied, said Gary Ruffing, a former Kmart executive.

"Kmart was broke and what Lampert is doing is taking all those broken pieces and fixing them," said Ruffing, who is now a retail analyst at BBK Ltd in Southfield. "He has done a fantastic job of bringing financial responsibility to the company. He has certainly positioned it to be a stronger company, whatever may exist in the future."

Sears Grand Sales 30% Above Expectations,
Chief Exec Says
By Becky Yerak - Tribune staff reporter - Chicago Tribune - online
June 17, 2004

Sales at Sears, Roebuck and Co.'s newest store format are 30 percent higher than expected, and even usual trouble spots such as clothing and home-and-bath departments are doing well, the retailer's top executive said Wednesday.

Chief Executive Officer Alan Lacy, speaking at a Wall Street analysts meeting in New York, publicly quantified the sales performance of the free-standing store format for the first time.

"Top-performing businesses include apparel, home fashions, home entertainment and toys," Lacy said of Sears Grand's results.

Early customer satisfaction scores at Sears Grand also exceed those of rival retailers in the neighborhood, he said.

Lacy also updated analysts on some of the proprietary clothing brands in all Sears stores. Clothing sales have been down for three straight months at Sears as the public clamors for trendier clothing, a lineup where Sears has holes.

Lands' End, which Sears bought in June 2002, will exceed $2 billion in sales in 2004, Lacy said. The preppy clothing line did about $2 billion in sales in 2003.

Sears conceded earlier this year that the line had some supply problems that prevented Lands' End merchandise from arriving in stores on a timely basis. On the bright side, more than 70 percent of the Lands' End merchandise in the store is bought at full price, Lacy said.

Meanwhile, Sears' Covington apparel line has seen sales rise by high single digits this year. And Apostrophe, Sears' trendiest line, has seen sales increase by more than 40 percent year over year, Lacy said.

Hoffman Estates-based Sears said earlier this year that sales at its two Sears Grand stores--which peddle everything from appliances to milk to better compete against discounters--have been more robust than expected, but did not disclose how much better.

The first Sears Grand opened last year in a suburb of Salt Lake City and the second opened earlier this year in Gurnee.

While rivals Wal-Mart Stores Inc., Lowe's Cos. and Home Depot Inc. have opened hundreds of new stores a year, Sears' store base has largely stagnated. It consists chiefly of about 870 locations in traditional malls.

At the company's annual shareholder meeting in May, Lacy touted Sears Grand as the "principal store-growth vehicle for the foreseeable future."

He didn't, however, elaborate on how many stores are under consideration. Only five have been announced so far.

But Bill White, general manager of Sears' traditional stores, told Sears retirees on May 12 that there's the potential for up to 500 Sears Grand locations.

And in April, another high-level executive said hundreds of Sears Grand locations are under consideration.

"Some 200 to 300 potential Sears Grand locations have been identified," Tina Settecase, general merchandise manager for Sears home appliances, said in a speech to the Association of Home Appliance Manufacturers in Washington, D.C.

Last week, shares of both Sears and Kmart Holding Corp. had a one-day surge on speculation that Kmart might sell some stores to Sears.

Kmart recently announced a deal to sell up to 24 stores to Home Depot for about $365 million. But to make a purchase like that pay off, Sears needs to get Sears Grand right.

"The expense structure is still not right," Lacy said in February. "The store operates differently than a full-line store, so we're learning."

Pension Systems Strain Europe
By John W. Miller - Dow Jones Newswires
The Wall Street Journal - Online
June 17, 2004

Early-Retirement Culture Has Become a Public-Policy Headache

BRUSSELS -- Joel Crevecoeur can't wait to turn 60 years old. "That's the day I stop working," he says, as he lines up a pool shot and nails the eight ball. "I'll also get the pension I've been working for my whole life."

Like many Europeans, the 44-year-old financial analyst for Bank Degroof, a Brussels investment bank, yearns for, believes in and says he deserves a comfortable postcareer life. "Americans can work until they're 85," he says. "In Europe, retirement is a sacred right."

It also has become a public-policy headache. With the population aging fast, Europe's culture of retirement by 60 -- and often even 55 -- is a big economic liability.

Baby-boom retirement is bankrupting pension and health systems and curbing European competitiveness. Governments and economists recognize and are trying to solve the problem, but political obstacles and deep-seated cultural preferences stand in the way.

Right now there are four workers for every retiree in Europe. By 2050, if current trends continue, there will be two per retiree. In order to maintain the current level of pensions, public expenditure will need to rise by as much as 10 percentage points of gross domestic product, according to Kieran McMorrow, a European Commission economist and co-author of the book "The Economic and Financial Market Consequences of Global Aging."

Because of the increased spending and the loss of potentially productive working hours, Mr. McMorrow estimates average European Union GDP -- the total value of goods and services produced -- will be a mere 1.25% in the next few decades. But if everyone in the EU worked until 65, growth could be a full percentage point higher.

European citizens' embrace of the welfare state makes the issue more important there than in the U.S. Pensions make up an average of 21% of EU public spending, compared with only 4.8% for Social Security in the U.S. Politicians have been calling for overhauls for a decade, but the situation has acquired a sense of urgency only in recent years, with budget deficits widening as growth slows and the population ages.

Governments across Europe know pension and health-care changes are essential to their long-term economic future, but they fear vindictive voters. In Sunday's elections for the European Parliament, citizens punished governments for their stabs at changing the status quo. French and German administrations took a beating for tinkering with workweeks and retirement ages, respectively. That scenario haunts the plans of countries such as Italy, where government would like to raise the minimum retirement age to 60 from 57.

What drives Europeans to retire early? The easy answers are that pension systems are too generous and that rigid labor markets make finding a job hard. In Belgium, people who retire at age 60 can collect as much as 80% of their employment income. Many Belgians eagerly claim their pensions rather than keep working. Those who want to work find part-time jobs on the black market.

Another important, less-discussed part of the problem is cultural. Early retirement has become to French, Germans and Italians what leaving home for college at 18 is to Americans: not mandated by law, but something you are just supposed to do when you get to that age. In the U.S., economists say most 60-year-olds believe they still should be working; Europeans of the same age say they should be painting or gardening.

Business leaders in the United Kingdom, the U.S. and Germany dreamed up the concept of "retirement" in the late 1890s as a way of luring workers to their companies and weeding out the old and inefficient. Before then, a person worked until he died or amassed enough cash for comfort. Public retirement systems were first devised in the U.S. in the 1930s, with President Franklin Roosevelt's New Deal. In Europe, politicians wove the first social safety nets during the decade after World War II. France, Germany and Italy eagerly used their new prosperity to build more- comfortable societies. Although German Chancellor Otto von Bismarck proposed "old-age insurance" in the 1880s, it was offered only to people over 74, well above average life expectancy at the time.

In the 1970s, idealistic European politicians -- arguing that they were freeing up jobs for younger voters -- offered plans allowing workers to retire at 55, or even 52. In the 1980s, policy makers gave older workers more early-retirement benefits and automatic unemployment pay. Consequently, Europeans over 55 took themselves out of the job market in large numbers. The average retirement age in the EU fell to 59.8 in 2000 from 66.2 in 1950.

Belgium's conservative-led government has proposed raising the minimum retirement age to 65, but socialists and powerful trade unions have opposed the plan. Ginette Delplace, regional secretary of Socialist union FGTB, says, "By that age, you're worn out."

But some other countries are having moderate success changing this attitude. In March, Germany raised the bar for getting state pensions to 63 years old from 56. "We're still in a transition process," says Ewald Zimmerman, an economist with the German parliament's committee on pensions. Interviews with 50-year-old Germans suggest many still expect to retire at around 60, and the employment rate for the 55-to-64 set remains only 38%.

Says Otto Bjorklund, 63-year-old vice president for trade policy for Nokia Corp. of Finland: "Early retirement used to be the dream people had, but now they realize that you can't play golf every day."

Space Made for TV Craftsman at Sears
House makeover artist and carpenter signs a multiyear and potentially multirole deal as the retailer seeks to widen its appeal
By Stephen Rynkiewicz, Tribune staff reporter.
Tribune staff reporter Becky Yerak contributed to this report
Chicago Tribune - Online
June 17, 2004

Could Television Carpenter Ty Pennington be the Next
Martha Stewart?

Sears, Roebuck and Co. Wednesday said it has signed the craftsman of cable's TV's "Trading Spaces" and ABC's "Extreme Makeover: Home Edition" to a multiyear deal that includes product development as well as a spokesman's role.

"He's a designer at heart, a very creative guy," said Lee Antonio, a spokeswoman at Sears' Hoffman Estates headquarters. "He's got cool design ideas and will be working with our design teams in designing and developing new products."

A one-time model trained as a graphic designer, Pennington already designs furniture, which he sells online from his Web site, tythehandyguy.com.

Bob Vila, the former "This Old House" host, remains in the Sears marketing lineup. But in a promotional role tied to "Extreme Makeover," Pennington proved broad appeal beyond the tool set.

"Bob is most closely associated with Craftsman tools. Ty could be affiliated with lawn and garden, home electronics, apparel, home fashions--really anything in the store," Antonio said.

Still, Sears is not saying what projects Pennington will be involved in beyond a publicity role in the Sears American Dream Campaign, a $100 million community development effort.

In a conference call Wednesday, Sears declined to say whether Pennington would appear in ads or lend his name to a line of proprietary products--as Martha Stewart did with Kmart Holding Corp. or Chris Madden with J.C. Penney Co.

"Sears totally gets today's family lifestyle and has the best products and services designed to deliver that ideal to the American consumer," Pennington said.

"As part of the Sears product design and marketing teams, I'll be celebrating Sears as the good life partner at home and at play, full of new ideas, exciting products and a tremendous sense of style," he said.

In Bow to Retailers' New Clout,
Levi Strauss Makes Alterations
The Wall Street Journal - Online - Staff Reporter
June 17, 2004

To Get Into Wal-Mart, Vendor Overhauls Distribution, Creates Lower-Cost Brand 'Signature' Starts Out Shaky

When Levi Strauss & Co. was preparing for its biggest new jeans launch in decades, it hired as a sales executive someone it considered the perfect choice: a vice president from motor-oil maker Pennzoil Co.

Ted Fox had no fashion or apparel experience. The main reason he won the job last year, executives say, was that he knew how to sell to Wal-Mart.

The unorthodox bet reflects a fundamental power shift. For much of Levi's 151-year history, it was a powerful supplier. It produced an iconic brand that millions wore, or aspired to wear. It could choose its own styles and sell them where it pleased. Shoppers wanted Levi's and didn't care where they got them.

But in today's world, Levi finds itself the supplicant, and it's retailers who call the shots. Not just in apparel but in a broad swath of product categories, power is swinging to the companies that deliver goods: retailers and other distributors who literally get products into the hands of the consumer. The suppliers are being forced to adapt.

"The balance of power has shifted," says Levi Chief Executive Officer Philip Marineau. "When I first started in this business, particularly in packaged goods, retailers were a way station to the consumer. Manufacturers had a tendency to tell retailers how to do business."

With the tables turned, once-mighty brands such as Levi must undergo transformations to put retailers' wishes ahead of their own. When Levi began to sell to Wal-Mart Stores Inc. last year, it overhauled its entire operation, from design to production, pricing to distribution. The process was wrenching and full of setbacks, and it is only now showing signs of paying off. "We had to change people and practices," the chief executive says. He adds: "It's been somewhat of a D-Day invasion approach."

Many forces underpin the power shift. Retailers have consolidated. Wal-Mart's vast growth gives it a hugely dominant role, accounting for 9% of all non-auto-related consumer sales in the U.S.

In addition, computer systems now let retailers track sales in real time. While grocers used to rely on a Procter & Gamble Co. to tell them how many tubes of Crest toothpaste to stock, today big retailers know what is selling at each of their stores every day by the hour. So they don't have to rely on suppliers to tell them how much to stock.

As stores have improved inventory controls, they have also been better able to cut costs and lower prices. The lower prices, in turn, helped spur Americans to keep shopping through the recent recession. And to the extent they shop on price, brand clout is weakened and more power flows to the company that comes in direct contact with the consumer.

Retailers' increasing strength has led some to upgrade stores and introduce private-label and exclusive products, such as those bearing famous names like Isaac Mizrahi and Martha Stewart, sold at Target and Kmart respectively. Some of these marketing changes have enticed consumers to buy across traditional demographic lines, so that a shopper who frequents a high-end store like Neiman Marcus may now be willing to shop Target as well, maybe even for part of the same outfit.

The story of Levi Strauss's capitulation to the new power of retail began in 1999. The company was struggling to boost declining sales and to reduce debt, which had ballooned in a buyout that had consolidated ownership in the hands of a few descendants of the founder. To turn itself around, the company hired as chief executive Mr. Marineau, then running PepsiCo Inc.'s North American beverage business.

Mr. Marineau had no apparel or fashion experience and appealed to Levi for marketing reasons. He had been schooled in PepsiCo's direct-to-store delivery system of bringing soda and snacks to stores in its own trucks -- bypassing the warehouses and outside trucking companies used by most packaged-goods makers.

Within days of his appointment, Wal-Mart called him to broach the idea of selling Levi's at its stores. It believed the famous Levi brand would add star power to its burgeoning apparel offerings and attract even more shoppers.

The new CEO initially rejected the overture. He says he felt Levi couldn't meet Wal-Mart's strict production demands. Levi had a history of making late and incomplete deliveries. Wal-Mart needed it to be fast and accurate.

And he had his hands full: Levi was scrambling to cut costs, close plants and reduce its roughly $2.7 billion in debt. With the company straining to execute a broad turnaround, it was a treacherous time to have to overhaul a production and distribution system and launch a new mass line.

In addition, some senior-level executives were dubious about selling a Levi brand to mass retailers. Some managers worried that doing so would damage the brand's cachet and further undermine Levi's shrinking business of selling jeans at regular prices. For a brand that cherishes a classy image, there is always concern that selling at a discounter or mass merchant could downgrade it.

Alienated Customers
Indeed, Levi already had a retail problem. It had alienated some of its traditional department-store customers by expanding to lower-end chains like J.C. Penney Co. and Sears, Roebuck & Co. over the years. The company also was losing ground to Gap Inc., which stopped selling Levi in 1991 when it went exclusively with its own brand.

But Mr. Marineau believed that Wal-Mart offered an opportunity too great to ignore. Mass merchants such as Wal-Mart were selling a third of all jeans in the U.S., and their share of apparel sales was growing. Selling to Wal-Mart would be the fastest way to boost sales of Levi jeans, which had suffered from declining sales in department stores and specialty chains for years.

Wal-Mart agreed to wait while Mr. Marineau prepared the jeans company to meet its demands. Levi opened an office in Wal-Mart's hometown of Bentonville, Ark., and, between October 2002 and July 2003, built an entirely new distribution system for Wal-Mart.

Historically, Levi jeans arrived from factories at company-owned distribution centers, where they were labeled with store tags. After a short wait, they were packed back up and sent to retailers' distribution centers or stores. Under the new system, Levi goods would arrive from independent factories with store tags already attached. After a short stay at one of two "pool points," Wal-Mart's own trucks would pick them up and deliver them to Wal-Mart's distribution centers, from where they would be sent to individual stores.

Levi developed its design-sales-distribution system to meet Wal-Mart's specifications, not its own, says Scott LaPorta, president of Levi Strauss Signature, a new jeans brand Levi created to sell at mass retailers. That included Wal-Mart and, since December 2003, Target Corp.

While the system wasn't as efficient as those of some Wal-Mart suppliers, it would enable Levi to get new jeans to Wal-Mart much faster than the old process. The speed, combined with feedback from Wal-Mart, would let Levi reduce guesswork about the number of pairs needed. The goal was to greatly reduce excess stock and markdowns.

Some big Levi customers such as J.C. Penney and Kohl's worried they might lose shoppers who could buy Levi jeans at Wal-Mart or Target for as much as 25% less. Mr. Marineau contended they would actually benefit from the decision to sell to Wal-Mart. "By learning to do business with Wal-Mart, you improve your supply chain and logistics in general," he says. He recalls telling skeptical department-store retailers, "Our service to you will only get better as we service Wal-Mart."

To persuade the different types of retailers -- department stores, specialty chains, upscale boutiques and mass merchants -- to all carry Levi-brand products, Mr. Marineau proposed a segmentation strategy: He would sell different versions of jeans for different prices, from Levi Strauss Signature jeans to $150 upscale vintage designs.

The idea included positioning Levi Strauss Signature as a "premium" mass brand. To differentiate Levi Strauss Signature, the company developed new labeling and styles. They'd have no distinctive "red tab" peeking out from the back pocket, no trademark Levi pocket stitching and no famous two-horse logo. Instead, they would bear the Levi name in a cursive scrawl. They also got less-expensive fabric. Levi Strauss Signature jeans were expected to sell at about $23 -- higher than other mass brands of jeans but below Levi's regular brand, which often sold for about $29.

Last July 15, Levi Strauss Signature jeans went on sale at all 2,800 Wal-Mart stores in the U.S. The launch didn't go as well as planned. After a few weeks, Wal-Mart complained that some styles were selling more slowly than its other denim brands, which were priced at $15 to $18. "Inventory turns," the rate at which a product sells out and has to be replenished, were slower than planned. Three months later, Wal-Mart slashed the cost of a basic pair of men's Levi Strauss Signature jeans to $19 from $23, hurting Levi's profit margins.

Meanwhile, important parts of Levi's core business began to deteriorate as executives focused on Wal-Mart. Some department stores reduced orders. Sales of regular Levi's, which had begun to show signs of stabilizing before the launch of Levi Strauss Signature, resumed their decline. Fashion experiments, such as a new high-fashion line called Type 1 jeans, flopped. An explosion of new varieties flowing from Mr. Marineau's segmentation strategy didn't do enough to boost volume.

In a sign of how poorly its jeans were doing, last year Levi began selling its regular-price Levi styles to Costco Wholesale Corp., the big warehouse-club chain. Previously, Levi had refused to sell its traditional jeans line in Costco, thinking the warehouse retailer, with its steep discounts, would tarnish its brand image. (To supply Levi merchandise, Costco had relied on third parties, called diverters, whose sources may include overstocks.) Levi sold Costco more than $150 million of jeans in 2003, according to industry sources, and Costco now is among Levi's 10 biggest customers, according to filings with the Securities and Exchange Commission.

In December 2003, the Levi board hired corporate turnaround specialists Alvarez & Marsal to work alongside Mr. Marineau to cut costs and debt. For its fiscal year 2003 ended Nov. 30, Levi posted a net loss of $349 million. Sales, which had been projected to grow by 2% to 5%, instead slipped 1%, to $4.09 billion. Debt ballooned to $2.32 billion from $1.85 billion a year earlier.

Getting Better
But things began getting better early this year. After Wal-Mart had cut prices on Levi Strauss Signature, the line's rate of turnover improved, says Mr. LaPorta, the new brand's president.

Levi began to tweak Signature to inject more style into the line, in a move executives hope will help it command higher prices. Mr. LaPorta says sales are rising for $22.95-to-$23.95 jeans that offer more fashion details, such as embroidered tabs tucked into back pockets, pants with cargo pockets and cropped hems, and women's corduroy pants with wider waistbands and button details. With several months of selling to the mass customer under its belt, Levi has adjusted its pricing and product design strategy so that it is giving discount shoppers more fashion at a good price.

Levi is adding a clothing line for infants, a line of bags and wallets, and even khaki pants for men, modeled after Levi's Dockers khaki brand, all to be sold under the Levi Strauss Signature label.

Wal-Mart appears satisfied. It says the introduction of Levi's has attracted a new apparel customer to the chain. Instead of existing customers trading up to the Levi Strauss Signature brand, some customers who normally shopped only for necessities have begun to sample clothes, the company's treasurer said at a March meeting with industry analysts.

In its first quarter this year, Levi narrowed its losses and reported a 10% jump in sales, thanks in large part to Signature, which contributed about $105 million in sales. Levi's revamping of its distribution and production to serve Wal-Mart helped the jeans company improve its overall record of timely deliveries. Producing a season of new jeans styles used to take Levi 12 to 15 months, from conception to store shelves. Today, it's just 10 months for Levi Strauss Signature, and for regular Levi's, the time is now down to 7½ months.

Levi's expansion into Wal-Mart is part of a turnaround plan aimed at improving style and fit and at making the brand available to a broader range of consumers. Recently, Levi began selling to some higher-end stores that hadn't carried its brand for years, including Bloomingdale's and Barneys New York. Both retailers report strong sales of Levi's higher-priced "premium" line, which is more cutting-edge and uses better quality fabrics than the Levi's sold at Wal-Mart.

 

Healthier and Wiser? Sure, but Not Wealthier
By Mary Williams Walsh - New York Times - On line edition
June 13, 2004

By many measures, today's older workers appear better equipped for retirement than any previous generation. Their homes are worth more than their parents' homes were. Their bank accounts are fatter. And study after study suggests that typical late-middle-age employees have accumulated more wealth than their counterparts did a quarter-century ago.

But virtually all of these studies have a flaw, a crucial asset that is left out of the equation. Add it back in, and the rosy picture suddenly darkens.

That asset is the traditional pension, an employee benefit that was widely available until the early 1980's but has been vanishing from the American workplace ever since. More than two-thirds of older households - those headed by people 47 to 64 - had someone earning a pension in 1983. By 2001, fewer than half did. The demise of the old-fashioned pension has been much discussed, but the effect on family finances has not. That is because the impact has been hard to measure.

New evidence suggests, though, that the waning of the pension has, imperceptibly but surely, stripped older workers of an immense store of wealth - much more than they probably guessed, if they thought about it at all. Retirement benefits today, particularly the 401(k) account, simply are not worth as much as the older kind of benefits. Some studies suggest otherwise, but they tend to rely on average balances of retirement accounts, and the averages have been skewed upward by the extraordinary gains of a few wealthy households.

When the holdings of more typical households are tracked instead, today's near-retirees turn out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983. The sweeping change in employee compensation appears to be the reason, according to new research by Edward N. Wolff, an economist at New York University who analyzed 18 years of household financial data collected by the Federal Reserve.

Mr. Wolff found that the average net worth of an older household grew 44 percent, adjusted for inflation, from 1983 to 2001, to $673,000. But much of that growth was in the accounts of the richest households, which pushed the averages up. When Mr. Wolff looked at the net worth of the median older household - the one at the midpoint of the economic ladder, a better indicator of what is typical - the picture changed. That figure declined by 2.2 percent, or $4,000, during the period, to $199,900.

For a generation to emerge from two bullish decades with less wealth than its parents had "is remarkable," Mr. Wolff said. Based on economic growth and market returns over those 18 years, he said, their wealth "should be up around 30 or 40 percent."

The Fed's household-finance data also show that when pensions were more common, they served as a social leveler. Companies that offered them had to use the same pension formula, involving years of service and salary, for all workers in a plan; otherwise, the companies risked losing their tax break. The rich in those days bought big houses and invested in stocks and other assets that were out of reach for the middle class. But pensions would offset, to some degree, the difference between how these groups lived in old age. Traditional pension plans were part of a system that reduced the poverty rate among the elderly to just 1 in 10 in 2002, the lowest in half a century.

The advent of self-directed retirement plans, by contrast, is giving rise to an elite minority who are well prepared for retirement, and a majority who are falling behind, the numbers show.

"The people at the top did better than they ever would have under the old system," Mr. Wolff said. "Basically, they made out like bandits."

JANE NOBILETTI, who sells long-term care insurance in Manhattan, has not done the math, but she senses some of this already. Earlier in her career, she earned a partial pension when she worked at a large insurance company. But after she had spent more than 20 years there, the company merged with another and began cutting costs, and Ms. Nobiletti felt compelled to leave.

By resigning, she walked away from the biggest part of her pension; traditional plans normally pay the maximum to those who stay 30 years. She said that she enjoyed her new job, and that she had never tried to calculate how much of a pension she forfeited by leaving her former employer.

"Once you've lost it, there's no point in thinking about it anymore," she said. Her current employer, a small insurance wholesaler, has a 401(k) plan, and Ms. Nobiletti, who is in her early 50's, is using it to supplement her reduced pension.

"The pension that I do have, I'm glad it's going to be there, but it's no big deal," she added, estimating that she will receive $1,000 to $2,000 a month when she is old enough to collect the benefit.

"I'm not set up, by any stretch of the imagination. I won't have the lifestyle that I now have. I will have to sell my apartment and move out of New York, and I don't want to do that."

Ms. Nobiletti's experience is just part of a much broader trend. Countless American workers have relinquished part of a pension by moving from one job to another over the last two decades, reducing the years of service that traditional pensions reward. Many more have stayed in place as their companies have merged or reorganized, but they have seen their benefits sheared off anyway because new corporate leaders decided to do away with the plans.

In some sectors, like commercial aviation, pension plans began falling like dominoes after deregulation, because companies could no longer build pension costs into the prices they charged for their products. Still other workers lost out because their industries - especially unionized ones like textiles or steel - died or moved offshore. The new industries that have grown up in their place, like technology, have tended to offer other forms of compensation, like stock options.

In 1985, about 115,000 American companies had traditional pension plans. As of last year, only about 31,000 did. Of those, many are thought to have frozen the benefits, pension specialists say, so that additional years of service no longer build a bigger pension. Others have closed their plans to new employees, or reduced their benefits formulas. Precise data on such changes are nonexistent, but Daniel L. McCaw, chief executive of Mercer Human Resource Consulting, said in Congressional testimony this year that as many as a quarter of surviving pension plans were either frozen or on the brink of a freeze.

As companies have moved out of the pension business, many have set up self-directed retirement programs instead, like 401(k) plans. Traditional pensions were paid out of a pooled pension fund, which was managed by professionals, but the new plans call for employees to set up their own accounts, deposit a portion of their earnings and manage the money themselves. Some companies make matching deposits. The old pension plans were automatic; the new ones are voluntary.

In 1983, only a tiny fraction of households had 401(k) accounts. But by 2001, about 62 percent of older households had one. Some analysts hail the new plans, saying that they ultimately may prove better than pensions. The new plans allow employees to change employers without forfeiting part of their benefit, as Ms. Nobiletti did, for example. And because they do not involve a fixed, predetermined benefit, as traditional pensions often do, they can be less vulnerable to inflation.

The new retirement plans also free workers from having to tie their fate to the fortunes of a single company.

Marcus Weaver, a manager at an industrial services company in Florida, said he was disappointed at first when his employer froze his pension during a merger in 1992. But then he saw a documentary on the collapse of the pension fund at Bethlehem Steel, in which many steelworkers lost part of their pensions. That made Mr. Weaver think that maybe it was just as well that he hadn't been relying on a pension.

"If somebody that huge could have imploded like that, it shows you that for the individual, it's probably better to go the 401(k) route," he said. "Then all your eggs aren't in one basket."

To many people, the 401(k) account simply looks bigger than a pension. Pensions are less tangible than other forms of wealth. Their value is hard to grasp, because it is usually expressed as a formula - some multiple of future salary and years of service, perhaps with other factors. For many workers, that is meaningless until retirement looms.

A 401(k) balance, by contrast, is expressed as a simple amount in dollars. It is easier to understand and therefore seems more substantial.

Philip Merten, who owns a small video production company in Miami, says he has been trying in recent years to make the most of the various self-directed retirement programs at his disposal. His company has a small-business retirement plan, called a SEP-IRA, and he contributes to that. He also continues to manage a 401(k) account that he built up in a previous job as a television cameraman. His wife has a 401(k) balance, too, from a past job at Telemundo, the Spanish-language television network. Through careful stewardship, these various retirement accounts add up to several hundred thousand dollars.

"We've been diligent," he said. The couple have also done well on other investments, particularly in real estate. They own their home, which they bought in 1999, and a condominium in Coral Gables, Fla., which they bought in 1989 when they were newly married.

"That's probably the best investment," Mr. Merten said. "Property values have just gone through the ceiling."

He said he thought that the condominium had quadrupled in value from the $50,000 they paid 15 years ago, and that their house had more than doubled in five years, to more than $500,000.

MR. MERTEN is happy with his decision to go into business for himself, he said. But it has forced him to go out and shop for health insurance on his own, and that process has given him doubts about retirement, and whether he is building a nest egg quickly enough. "My own gut feeling is that we need to speed up the rate a bit," he said.

His father spent his career at Bank of America and earned a substantial pension. He often urges Mr. Merten to set aside more. Mr. Merten does not think that there is any chance he will have retirement resources like his father's.

"Working for a big company like that, he knew exactly what he'd make, and he could plan," Mr. Merten said. "I think it's a lot harder now."

The Fed's household-finance data back Mr. Merten's impression that his family has done reasonably well with self-directed retirement benefits. The central bank has conducted regular, detailed surveys of the value of various assets held by households going back to 1983. Self-directed retirement accounts were just starting to appear in the workplace then, and, by the Fed's count, the average older household had about $8,000 in such a plan. By 2001, it had $96,600 - an impressively bullish increase.

Of course, households were losing access to pensions at the same time. But that side of things usually does not show up in the statistics. The Fed does collect detailed information about pensions in its surveys, but because the pensions are expressed as a formula, and other household assets are expressed in dollar amounts, it does not add the two together. Instead, it tracks most household assets - real estate, bank accounts, securities and so on - in its regular reports. The information on pensions is kept separate, in an appendix.

It is not impossible to convert pension values into dollars. Actuaries build their careers on doing precisely such calculations for their corporate clients. Mr. Wolff said he applied standard actuarial methods to the Fed's undigested pension data, and added the resulting values to the other household assets, for a complete picture of household net worth. That is how he arrived at the 2.2 percent decline in wealth for median older households.

Actuaries who were told about Mr. Wolff's research said the findings made intuitive sense to them. "The concept sounds right,'' said Steven G. Vernon, a vice president and consulting actuary at Watson Wyatt Worldwide.

People like Mr. Vernon calculate pension values routinely. They say that there are reasons traditional pensions hold more value than the newer benefits. For one thing, it is more efficient to run a pooled trust fund than a lot of individual accounts. In a pooled pension fund, employees who die before collecting much of a pension effectively pay for the benefits of those who live longer. Arguably, pooling the purchasing power of many participants reduces money-management fees and brokerage costs, as well. Mercer Human Resource Consulting estimates that for that reason, the performance of the typical pension plan is one to two percentage points better than that of the typical 401(k) plan.

Mercer and other retirement specialists say that complex federal regulations have driven many companies away from traditional pension plans, and that relaxing those rules might bring the companies back. So far in Washington, there has been talk about such a change, but no action. It took two years for Congress to make just a single modification in the pension rules, changing an interest rate that companies use when calculating pension values. Pension advocates say that Washington tends to react only in a crisis, and that this generation's unpreparedness for retirement won't be a crisis until people actually retire and feel the pinch.

As it dawns on workers that they don't have enough to live on, some are simply deciding to delay retirement. The Society of Actuaries recently reported that the number of people who say they will never retire, while small, doubled from 2001 to 2003, to 8 percent.

Pete Miller, 64, a computer program manager who lives in Northborough, Mass., recently did some of the calculations and discovered how important a pension can be. He taught at Boston University for many years, building up a large individual retirement account, and joined Lotus Development in 1993. Lotus had a traditional pension plan, "as good as you could get at that time," Mr. Miller said. I.B.M. took over Lotus in 1995 but brought employees like Mr. Miller into its own pension plan and gave them credit for their years at Lotus.

IN 1999, I.B.M. changed its pension plan, reducing some people's anticipated benefits and setting off a firestorm. Some employees sued; I.B.M. restored some of the benefits, but the controversy is still in court. Mr. Miller continues to work for the company.

Because he has his individual retirement account from his previous job, he said, the I.B.M. lawsuit is not a make-or-break issue for him. His wife also teaches and has a retirement account. With those assets, Social Security and the pension, he estimates that he and his wife will have retirement income of $4,000 to $5,000 a month, as long as they live frugally and do not draw down their principal. The I.B.M. pension will pay him about $500 a month, he said. He calculates that it would have been $1,000 a month if the terms of the plan had not changed.

"Five hundred dollars isn't that much, but it actually adds up," he said. His real estate taxes recently went up by about $500 a year. His two children are in high school, so they will need college tuition money just when he would normally retire.

"That $500 a month extra would have more than taken care of our property taxes," he said. "An extra $500 would have paid the property tax and the insurance on our home and auto."

Mr. Miller says that changes in retirement benefits have hit many American workers harder than him - and that he wonders how people who have no pensions at all will manage.

"There's no question that I've got to work as long as I possibly can," he said. "I don't make any secret of the fact that my aim is to maintain full-time employment until I am 69."

He's likely to find many of his generation working right alongside him.

J. Alex Tarquinio contributed reporting for this article.

Retailers Sew Up Profit with Own Labels
By Becky Yerak - Tribune staff reporter - Chicago Tribune
June 13, 2004

May Sees Field's Brands as a Plus

J.C. Penney Co. got the cold shoulder when it tried to lure national brands Ralph Lauren and Tommy Hilfiger into its department stores during the 1990s.

The designers didn't want to be associated with the middle-brow chain, Penneys was told. So the retailer developed its own brands.

"Thank god," Penneys Chief Executive Allen Questrom says today.

The reason for his gratitude: Private-label brands deliver fatter profit margins and have become "a differentiator on why you'd shop at Penneys," he said. Sales have been up three straight years for the Texas-based department store.

Initially used for commodities such as milk, bread and cheese, store brands are gaining shelf space in categories ranging from trousers to toasters. Sales of private-label goods rose 38 percent from 1997 to 2002, according to marketing data provider ACNielsen. That's twice the rate of national brands.

And it's why many retailers share Questrom's reverence for exclusive products.

May Department Stores Co. last week cited the potential for higher private-brand sales as a key reason to spend $3.24 billion on Marshall Field's.

"Taking Marshall Field's proprietary brands and mixing them with some of May's upper-tier proprietary offerings should significantly improve our ability to provide distinctive merchandise," May Chief Executive Officer Gene Kahn told analysts Thursday.

Other retailers singing the praises of private brands include Kohl's Corp., Dillard's Inc., Federated Department Stores Inc., and Saks Inc. The merchants have been touting their sales numbers and rolling out additional lines.

Even the world's largest retailer has noticed. Wal-Mart Stores Inc. recently hired a former Sara Lee Corp. executive to beef up its private brands.

At Penneys, private brands such as Home Collection bath-and-bed products, Stafford shirts and St. John's Bay clothing comprise 40 percent of sales.

At Federated and May, sales are not as impressive.

"Their private-brand business is 13, 15, 16 percent," Questrom said of the two department store firms during a recent Wall Street analyst meeting.

But May, with an assist from Field's, is looking to change that.

Within the next five years, May wants to boost the share of its proprietary goods to 20 percent of sales, up from about 15 percent.

Growth potential seen
Kahn sees plenty of growth potential at Field's: Proprietary brands account for less than 10 percent of sales.

"So we have significant opportunities to reach toward that same 20 percent level" for Field's, he said.

Field's has made "significant progress" in proprietary offerings, Kahn said. But by the next spring season, May expects to have in place the changes necessary to boost the private-label lineup. That could include some Lord & Taylor lines, he said.

But last month was tough for May. While sales at stores open at least a year were up 2.9 percent for Federated, May saw monthly sales fall 3.8 percent.

"I was at a Robinsons-May store last weekend and was not particularly wowed by any merchandise I saw," particularly in the private-label Valerie Stevens line, said James McComb, president of Minneapolis retail consultant McComb Group.

But May will expand its proprietary offerings, which offer higher profit margins, for a variety of reasons. Merchants usually spend less to advertise them. They also avoid paying a premium for a designer name.

Plus "they control the sourcing and the manufacturing and can produce a comparable quality product at a lower price," said McComb, a former executive at Target predecessor Dayton Hudson Corp. "They'll pass some savings on to consumers, but can capture higher profit margins."

Private brands gain cachet
In fact, some department store private brands have evolved to the point that they have the cachet of national brands. McComb cites Penneys' Arizona denim line and Federated's INC.

"INC used to be jeans," he said. "Now it's in fashion magazines. You can't find INC jeans anywhere."

But a dominance of private brands isn't necessarily an inoculation against falling sales.

Take Sears, Roebuck and Co. Its large stable of exclusive brands distinguishes the Hoffman Estates department store chain from many retailers.

Only at Sears can one find Kenmore appliances, Craftsman tools, DieHard batteries and, on the clothing side, Lands' End, Covington and Apostrophe.

Private brands account for about 55 percent of sales at Sears--but the company's still on pace for its fourth straight year of sales declines.

Sears has said it's happy with the performance of proprietary Lands' End and Covington, but both sell classic apparel at a time when there's renewed interest in trendier fashions.

"It doesn't help when your own brands come out with frumpy products when the market is shifting away from you," McComb said.

Sources: The companies, Chicago Tribune

Big Employers Join Forces in Effort to
Negotiate Lower Drug Prices
By Milt Freudenhein - The New York Times
June 12, 2004

Hoping to slow the rising cost of providing health coverage, 50 of the country's largest employers are creating a buyers' club to bargain directly with drug makers on behalf of five million active and retired employees and their families.

The move is a major departure from the current industry practice of employers paying middlemen - known as pharmacy benefit management companies - to provide drug coverage for their insured workers. Those prices are supposed to be at discounted rates. But because drug pricing is notoriously opaque, employers cannot be sure they are getting the best possible deal.

By shrinking the role of middlemen, the employers hope to seize control of a system that they say has fueled one of their fastest-growing costs. The 50 employers in the buyers' group spent roughly $4 billion for prescription drugs last year. Over all, the nation's employers spend more than $70 billion through pharmacy benefit managers, and their drug bills rose 9.1 percent in 2003, on top of eight years of double-digit increases.

Employers say they typically cannot determine the true costs of drugs, and note that their bills are largely based on discounts from "average wholesale prices'' that are quoted by the industry but that no one actually pays.

Consider this example: A 30-day supply of 40-milligram tablets of Lipitor, a cholesterol treatment that is the world's best-selling drug, costs $112.48 at the "average wholesale price.'' For the average employer drug plan it is reduced to $97.51, not counting various rebates from the manufacturer. But at the Drugstore.com Web site, available to anyone, the price is $94.99.

"Large employers have an opportunity here to basically change the model and to get to price transparency in prescription drugs," said Jane Lohmeier, benefits manager of one of the employers involved in the effort, the FPL Group. The company spent $14 million last year to provide benefits for 33,000 people at Florida Power and Light and its other divisions.

"We require price transparency in everything we do," Ms. Lohmeier said. "But drugs have been a little bit of a black box."

Even when prices are lowered, employers' overall costs keep rising, because manufacturers offer rebates to the pharmacy benefit managers that lead them to encourage higher use of multibillion-dollar products. Although a portion of those rebates are passed along to the employers, the companies suspect that they would be better off negotiating directly for the best prices for the drugs that best suit their employees' needs. "We pay twice as much for drugs as we did five or six years ago," said Greg Folley, the benefits and compensation director for another member of the group, Caterpillar, which provides benefits for 66,000 employees and retirees and their dependents in the United States. "We would like to drive the inefficiency associated with the rebate process out of the system."

The employers are working through the Human Resources Policy Association, a Washington trade group of senior executives for 220 large companies, and through Hewitt Associates, a benefits consulting firm. The group has started discussing drug pricing for next year's health plans with drug makers and the large pharmacy benefit management companies that currently arrange the discounts and rebates.

The group plans to negotiate on the 50 drugs that its members spend the most on, including Lipitor and another cholesterol treatment, Zocor; Prevacid and Nexium for heartburn; the painkillers Celebrex and Vioxx; Zoloft, Paxil and Effexor for depression; and Allegra, an allergy drug.

They are seeking "a revolutionary change," said David B. Snow, president and chief executive of Medco Health Solutions, one of the largest pharmacy benefit managers, which has offered to cooperate with the employers' group.

Medco and other benefit managers would maintain a role even if the employers negotiated their own drug deals: they would continue to manage the employers' payments for thousands of less expensive drugs, including generics, and would still operate the mechanics of company drug plans.

The benefit manager companies will receive fees to cover their costs and profits on crucial services like determining plan members' co-payments in stores and directing patients with chronic diseases to mail-order pharmacies.

Still, Mr. Snow said he doubted that the employers could save money by negotiating their own deals for the 50 drugs. "It's worth trying, but I'm highly skeptical that they can do it," Mr. Snow said.

Drug companies, he said, trim their prices only when the deals result in larger market share for their products - something he said the employers were unlikely to achieve by making deals outside the larger buying pools controlled by benefit managers like Medco, which represents more than 60 million people.

Another pharmacy benefits management executive, though, said the employers' group might succeed if it sticks together and shows its resolve. "The cohesiveness of the buying group will matter a lot in terms of their ability to move market share," said Timothy F. Dickman, president and chief executive of Prime Therapeutics, which manages drug plans for 10 million members of nine Blue Cross and Blue Shield plans. "If you don't get the price you want, you have to be ready to move your business" to another manufacturer.

A spokesman for the Pharmaceutical Research and Manufacturers of America, a drug industry trade association, said that the group could not comment on the marketing arrangements of its members.

But Kenneth Sperling, a health care consultant at Hewitt, said drug makers so far "have reacted positively" to the employers' initiative. "The pharma companies realize that the current rebate model has a limited future," he said.

The system is changing as Medicare prepares to begin paying for prescription drugs in 2006 and writes new rules requiring more clarity on pricing, Mr. Sperling said.

The current system is "all based on sales volume and rebates,'' Mr. Sperling said.

"You can't get to the right solution until you fix the pricing model," he said. "If the cost is not real, it is not fair to the consumer'' who will be making choices and paying a growing share of the costs.

"We have a responsibility to show consumers the real cost of the drug and the real cost of the alternatives so they can make an informed choice with their doctor."

The buyers' group is the latest and most far-reaching of several recent efforts to change the way employers pay for drugs. For example, Towers Perrin, a benefits consulting firm, has recruited "numerous companies" by promising to pass through to them 100 percent of rebates and other manufacturers' payments made to their pharmacy benefit manager, which is Medco, according to Rich Ostuw, a principal at Towers.

"Transparency means you know what the real price is," Mr. Ostuw said. "The employer needs to understand what the true price is'' - both the gross price and the net price without the rebate.

On another tack in the push for transparency, Stephen N. Limbaugh Jr., a federal district judge in St. Louis, recently ordered Express Scripts, one of the largest benefit managers, to open its electronic and other records for inspection by lawyers who are suing the company. Stephen E. Littlejohn, a spokesman for Express Scripts, said the company would not comment on current litigation.

Mr. Folley, at Caterpillar, said that by using prices established directly with the drug makers, "consumers and providers can look to see what is the most cost-effective drug among many that are similar and identical in efficacy."

"We want to let the consumers and doctors have a good basis for deciding which drug to select," he said.

But Patricia Wilson, an independent consultant who helps large companies with their drug plans, questioned the effectiveness "of taking the 50 most costly drugs and thinking that you can negotiate a better price."

Employers, she said, would have more success if they worked more closely - not less - with their pharmacy benefit managers. "The question is, How do I keep pressure on the P.B.M.'s to get a better price?" she said.

And one benefits management executive, Kevin Nagle, said that negotiating payment rates for stores and mail-order pharmacies is also important in controlling drug costs. Mr. Nagle is president of Envision Pharmaceutical Service, a smaller benefits manager that says it has two million members. Negotiating contracts with drug companies, he said, is "only one part of the equation."

Field's Acquired, but Name to Stay
By Becky Yerak, Tribune staff reporter - Chicago Tribune
 June 10, 2004

May wins bidding war, pays $3.24 billion

Marshall Field's is getting a new owner, but its name and its Frango mints will live on.

Capping a three-month bidding war, Target Corp. said Wednesday that it would sell its Chicago-born Field's chain and nine of its Mervyn's stores to May Department Stores Co. for $3.24 billion, a price one retail observer called "astronomical."

May, the St. Louis-based parent of Lord & Taylor, outbid Federated Department Stores Inc. Had Cincinnati-based Federated won, many industry observers expected it to rebrand all 62 Field's stores as part of its Macy's or Bloomingdale's chains.

Without Field's, Minneapolis-based Target is free to focus on its more profitable namesake discount chain. Wall Street has long hounded Target to sell Field's and Mervyn's, two chains squeezed between discounters such as Wal-Mart Stores Inc. and luxury retailers such as Nordstrom Inc.

May is happy to take Field's, which finds itself with a new owner for the second time in 14 years. The addition of the 152-year-old Field's chain brings May immediate expansion, more purchasing clout with suppliers and new opportunities to cut costs.

May Chief Executive Gene Kahn called Field's "a dynamic franchise with a lot of wind in its sails."

"This combination will produce excellent economies of scale, improved buying power, and an expanded distribution network," he said.

Field's gives May a major presence in the upper Midwest among relatively upscale consumers, particularly the 40- to 60-year-olds critical to traditional department stores.

"May has a similar base, but its customers are not nearly as upscale, with the exception of Lord & Taylor," Kahn said.

Kahn said he planned to keep open side-by-side locations of Field's and Lord & Taylor, such as in Water Tower Place. Lord & Taylor carries only apparel and accessories while Field's is a full-line department store stocking furniture and other home goods.

Kahn also said he plans to maintain the innovations added at Field's 800,000-square-foot State Street store. Last year, the State Street flagship allowed specialty retailers, from clothier Pink to Italian scooter maker Aprilia, to open "mini-shops" in about 10 percent of the store in a bid to attract new shoppers.

In fact, Kahn said he may roll out the concept to other Field's locations.

"The State Street store is one of America's most exciting stores," Kahn said. "We'll do nothing to take away from that."

The store instantly becomes May's largest. A Lord & Taylor store in Manhattan tops out at 611,000 square feet.

After completing the deal and integrating Field's, May expects to save $85 million in fiscal year 2005, $140 million in 2006 and $180 million annually thereafter. The acquisition also is expected to contribute to earnings starting in fiscal 2005.

It had been assumed that Federated had the inside track for Field's. Business has been humming at Federated, with sales at stores open at least a year up 2.9 percent last month. But May, which also owns Filene's, Kaufmann's and David's Bridal, needed a jump-start. Its latest monthly sales fell 3.8 percent.

"May needs to do something to raise itself out of the doldrums," said industry analyst Kurt Barnard, president of Retail Forecasting in Upper Montclair, N.J. "Its same-store sales have been less than scintillating."

May had sales of $13.3 billion in 2003 while Federated had $15.2 billion. But now the two companies will be together at the top of the department store sales rankings. Field's had 2003 sales of $2.58 billion.

Some analysts also point out that Field's stores are, in a way, a better fit for May, which isn't quite as upscale as Federated's Bloomingdale's and Macy's.

While Field's is venerated by generations of Chicagoans for its Frango mints, green bags and Christmas displays along State Street, outside of this area it is largely regarded as a middle-of-the-road chain.

"Marshall Field's is in a lot of B malls, and May sells to the masses not the classes," said Howard Davidowitz, of New York investment banking firm Davidowitz and Associates. "May also was worried that Federated was getting ahead of it in size."

But the pursuit of Field's also made sense for Federated, Davidowitz and others say.

"Neither has a big upper Midwest presence," said Eric Beder, senior equity analyst for J.B. Hanauer & Co. in New York. "It's May's last chance to get into the upper Midwest at some level of size."

The key markets for Field's are Chicago, Minneapolis and Detroit. It also has stores in five other upper Midwest states.

Davidowitz, who had been expecting Field's to sell for about $2 billion, called the $3.2 billion purchase price "astronomical."

Beder had forecast $2.3 billion to $2.7 billion.

"May really wanted it," he said. He called the purchase price "top dollar."

The deal comes as Field's has picked up the pace in a department store sector that had been struggling until recently. Last month, sales at Field's stores open at least a year rose 1.7 percent.

Field's had been headquartered in Chicago until its 1990 acquisition by Dayton Hudson Corp., now Target. Most of its operations were then moved to Minneapolis.

Ditching the Field's name would have enabled Federated or May to save money. But now May will count on reducing costs through management cuts and efficiencies, Beder said.

Field's is one of the few remaining large department store chains.

"This is a consolidating industry, but there's little left to consolidate," Davidowitz said.

Dillard's is doing poorly and is twice the size of Field's, he said. But the family members who run the Arkansas-based chain are reluctant to sell.

Also, Target is still reviewing its options for the 257 mostly West Coast Mervyn's stores that it did not sell to May.

Besides keeping the Field's name, May also said that Linda L. Ahlers will remain as Field's president and that the division will remain based in Minneapolis.

More important to Chicagoans, May said it will "maintain the product exclusives--such as Frango mints--that are longstanding traditions at Marshall Field's."

Marshall Field's Sold for $3.24 Billion
Chicago Tribune staff reports
June 9, 2004

The owner of Lord & Taylor stores said it has agreed to buy Marshall Field's from Target Corp. for $3.24 billion in cash.

The May Department Stores Co. will offer jobs to all 25,000 Field's employees in 8 Midwestern states, Target said in a statement.

The deal includes 62 Marshall Field's stores, nine Mervyn's stores in the Twin Cities area, three distribution centers and about $600 million of Marshall Field's credit card receivables, Minneapolis-based Target said.

"Our decision to sell Marshall Field's, though not easy, reflects our long-term commitment to create substantial value for our shareholders over time, combined with our responsibility to our team members, our guests and the communities we serve," said Bob Ulrich, chairman and chief executive officer of Target Corp., in a statement. "We believe that the sale of Marshall Field's to The May Department Store Company as an ongoing business enhances the opportunity for all of our stakeholders to enjoy continued success for many years."

In 2003, Field's produced revenues of $2.6 billion and pretax segment profit of $107 million.

St.Louis-based May said it expects the deal will be completed in the fiscal 2004 second or third quarter.

Target said the transaction is subject to regulatory approval and should produce an after-tax gain of about $1 billion, or more than $1 per share.

Sears' Shares Up On Kmart Buzz
Store-buying Talk Lifts Both Stocks
By Becky Yerak - Tribune staff reporter - Chicago Tribune, Online edition
June 9, 2004

Sears, Roebuck and Co. stock rose 5.5 percent Tuesday on speculation that the Hoffman Estates department store chain might buy some stores from or even invest in Kmart Holding Corp., which saw its shares climb nearly 7 percent.

The buzz behind the stock run-ups of the two retailers is largely due to the recently announced sale of as many as 24 Kmart stores to Home Depot for about $365 million, said Art Hogan, chief market analyst for Jefferies & Co. in Boston.

"There are several different levels to the chatter, like Sears may purchase some interest in Kmart or purchase [stores] from Kmart," said Hogan, who said the latter deal is more likely.

Both stores have been struggling. May sales in Sears stores open at least a year dropped 3.7 percent. Kmart's sales were down 12.9 percent for the quarter ended April 28.

Besides lousy financial results, Sears and Kmart share something else that's fueling the speculation: a key investor.

ESL Investments Inc., a Greenwich, Conn., hedge fund, is Kmart's majority owner. ESL's Edward Lampert also is chairman of the retailer. And Lampert owns nearly 14 percent of Sears, making him its biggest investor.

For more than a year, Sears watchers have wondered if Lampert will nudge the two into a marriage or at least some business arrangement.

Kmart has one thing that Sears wants: freestanding stores. Sears wants to expand its network of off-mall stores, which sell everything from milk to appliances. It has only five Sears Grand stores open or planned now, but a Sears executive recently said the company believes there's the potential for up to 500.

At least one retail expert says Kmart's sale of stores to Home Depot suggests a liquidation mindset.

"They're not selling bad stores to Home Depot. They're selling stores," said Howard Davidowitz, of New York retail consulting firm Davidowitz & Associates.

"They realize the value of their real estate and are trying to become some sort of investment company because they also realize being a retail venture is impossible."

Davidowitz said it makes no sense for Sears to merge with Kmart. First, Sears doesn't need the cash that Kmart is piling up. Second, Kmart, as a retailer, is a "cadaver," he said.

"Kmart is hopeless. Sears has a tremendous amount of work to do, but it's not hopeless," Davidowitz said. If Sears were to buy Kmart, "what it would get with that money is a terrible business that can never compete."

Sears watchers pointed out Tuesday that if Sears were eyeing Kmart for a takeover, Sears' stock would likely sink.

Sears' stock closed up $2.11 to $40.41 a share on Tuesday. Kmart rose $4.33 to $66.33.

How Sears Fights Terror
By Arnold Ahlert - New York Post - online Edition
June 4, 2004

RAILING about the "evils of big corporations" is one of the fa vored hobbies of leftists everywhere. Here's a story about Sears that ought to give them second thoughts.

Whenever military reservists are called to active duty, the law states that companies are required to keep their jobs available - period. Since most people in the private sector are making more money than they do in the service, this can result in a pay cut. In addition, there are no legal requirements for companies to maintain other employee benefits such as medical insurance or bonus programs.

So what is Sears doing about it? Plenty.

Sears has decided - voluntarily - to pay the difference in salaries and maintain company benefits for all their called-up reservist employees for up to two years. In a war against terrorism that has demanded relatively little sacrifice from most Americans, Sears is stepping to the forefront with a kind of corporate activism that is both timely and welcome.

Will other corporations follow their lead? The bet here is many of them with see the value of corporate policies which honor employees willing to defend our country.

Bravo, Sears.

Sears Rivals on Rise as its Sales Fall
By Mike Comerford - Business Writer - Daily Herald - Suburban Chicago
June 4, 2004

The softer side of Sears, lately, has been same-store sales, which fell in May by an unexpected 3.7 percent.

Shares in the Hoffman Estates-based retailer promptly fell nearly 3 percent, or $1, to end at $37.13.

As rival retailers are having a strong spring, Sears, Roebuck and Co. on Thursday blamed slack consumer demand and the late arrival of the Memorial Day holiday this year.

With the sale last year of its profitable credit unit, Sears is relying solely on its less than stellar store sales.

However, growing profits rather than sales has been Sears' strategy all along, according to George Rosenbaum, chairman of the retail consulting firm of Leo J. Shapiro & Associates in Chicago.

Sears Chief Executive Officer Alan Lacy has been eliminating product lines that generate sales but little profit, Rosenbaum said.

"Lacy is more into profits than sales right now," Rosenbaum said. "They now want to build sales by having a big, big advertising promotion."

Indeed, Sears spends more on advertising than Wal-Mart Stores Inc and Target Corp. combined. At $1.8 billion in 2003, Sears' ad budget is the biggest of any retail store chain, according to an industry trade publication. Sears is revitalizing its ads this year, but its overall budget is expected to be flat.

Despite the size of its ad budget, Sears' same-store sales have fallen most months in the last three years while several top rivals have grown sales.

Overall U.S. retail sales across the industry rose in May as shoppers splurged on spring clothing, undeterred by the impact of soaring gasoline prices on household budgets.

Wal-Mart said sales at stores open at least a year rose 5.9 percent last month.

"The jobs picture, wage gains, the improving employment situation may have certainly helped offset the higher (food and oil) prices," said Ken Perkins, an analyst for Thomson First Call.

Upscale spring clothing was a bigger hit with shoppers than in the same month a year earlier, giving a boost to department stores such as J.C. Penney Co. Inc. and Nordstrom Inc.

Yet Sears sales headed in the opposite direction, with its total U.S. May sales falling 4.7 percent to $2.08 billion.

Sears said sales declined in its home-group categories, while spring apparel sales continued to be weak. Stores not located in malls - an important barometer because Sears' new concept store Sears Grand has an off-mall format - reported flat sales.

During the month, Sears upgraded its home-fashion presentation, with improved merchandise and fixtures in 300 stores, which could help future reports. Based on April and May, Sears expects second-quarter same-store sales will be flat to slightly down.

For the year to date, Sears' same-store sales slipped 1.1 percent, while total sales fell 2.4 percent to $8.13 billion.

May Sales Dim Sears' 2nd-quarter Outlook
By Becky Yerak - Staff Reporter - Chicago Tribune
The Associated Press contributed to this report 
June 4, 2004

Experiencing weakness in every department of its traditional mall stores, Sears, Roebuck and Co. was one of the few major retailers to post disappointing May sales, and the Hoffman Estates merchant on Thursday provided a more somber assessment of its second-quarter financial outlook.

The nation's biggest department store chain, on pace for its fourth straight year of shriveling sales, reported on Thursday that revenues in May dropped 3.7 percent. Wall Street expected a dip of only 0.1 percent in same-store sales, or sales at stores open at least a year, according to an analyst survey by Thomson First Call.

Problems persisted with Sears' "soft lines," including clothing and home furnishings. But what Sears watchers found most alarming was slackening sales in several meat-and-potatoes Sears businesses, including consumer electronics.

"Of particular concern was the announcement that total appliance was down in the range of 1 percent to 3 percent, and lawn and garden and fitness was down in the range of 7 percent to 9 percent," Merrill Lynch analyst Daniel Barry said in a report Thursday. "Considering the unusually warm weather, particularly on the East Coast, these two divisions should be performing better."

Sears continues to struggle even as 74 retail chains on average posted a better-than-expected increase of 5.7 percent in same-store sales compared with last May, according to the International Council of Shopping Centers. The group was forecasting a 5 percent improvement. Many of the nation's largest merchants, including Wal-Mart Stores Inc., Federated Department Stores Inc. and Costco Wholesale Corp., posted solid numbers in May.

"While there's been a worry about high gasoline prices, at this point it has not affected spending," said Michael Niemira, chief economist at the International Council of Shopping Centers.

And the outlook for retailers in general in June is bright, with same-store sales expected to be up 5 percent to 6 percent, the council says.

Sears, however, won't be running in that pack.

As recently as mid-May, it predicted that sales in the second quarter would be flat to slightly improved. But on Thursday, Sears ratcheted down its estimates, now forecasting revenues in the quarter ending June 30 to be flat or down slightly.

"I think Sears is heading for a very bad place," said Howard Davidowitz, chairman of New York-based retail consulting and investment banking firm Davidowitz & Associates Inc.

"What you have is a store that simply is not driving in customers," he said.

Sears' strongest proprietary brands, including Kenmore, Craftsman and Diehard, are under pressure as other retailers open hundreds of stores a year while Sears' store base stagnates. And the major retail initiatives that Sears is undertaking aren't paying off either, Davidowitz said, citing Sears' purchase of Lands' End to improve its apparel reputation.

On Thursday, Sears' stock fell 2.6 percent to close at $37.13.

Wal-Mart reported an overall same-store gain in May of 5.9 percent--better than the 5.0 percent analysts expected. Costco reported a 16 percent increase. Analysts polled by Thomson First Call expected a 10.3 percent gain.

Target Corp.'s results were pulled down by its Mervyn's division, and it posted a same-store sales increase of 4.6 percent, below the 5.1 percent Wall Street expected.

Nordstrom Inc. reported a same-store sales increase of 9.4 percent, better than the 6.1 percent Wall Street expected. Saks Inc., which operates Saks Fifth Avenue stores and moderate-priced stores like Younkers and Carson Pirie Scott, reported a 9.4 percent gain in same-store sales, better than the 6.2 percent analysts anticipated.

Federated had a 2.9 percent increase in same-store sales. Analysts had expected sales to be up 1.7 percent from a year ago. J.C. Penney Co. reported a same-store sales increase of 9.1 percent in its department store sector. Analysts expected 4.1 percent.

May Department Stores Co. posted a 3.1 percent decline in same-store sales, worse than the 1 percent decline forecast.

Gap Inc. posted a 6 percent increase in same-store sales, above the 4.9 percent forecast. AnnTaylor Stores Corp. had a 9.9 percent increase in same-store sales, above the 4.5 percent analysts expected. Talbots posted an 8.1 percent increase in same-store sales, compared with the 2.3 percent forecast.

Retail sales rise
Following disappointing numbers in April, retail sales shot up in May, with wholesale clubs showing the strongest gains. An exception was Sears, whose sales continued to slide.

SAME-STORE SALES IN MAY
Percent change from 2003 for select stores Department stores J.C. Penney 9.1% Kohl's 5.0% Sears -3.7% Specialty retailers Gap 6.0% Talbots 8.1% Discount stores Target 5.8% Wal-Mart 4.7% Wholesale clubs Costco 16.0% Sam's Club 11.8%

Sears Misses Mark, Others Boast Healthy Sales in May
By Sandra Guy - Business Reporter - Chicago Sun-Times
June 4, 2004

Sears Roebuck and Co. failed to revive its poorly performing sales in May, proving to be a major disappointment in an otherwise robust sales month.

Other retailers across the board, from Wal-Mart to Nordstrom, boasted healthy returns as shoppers refused to let rising gasoline prices curtail their thirst for halter tops, green dresses and '70s-style T-shirts.

Sears' stock price fell $1, or 2.6 percent, to $37.13 after the Hoffman Estates-based retailer said sales at stores open at least a year dropped 3.7 percent in May from a year ago. Wall Street analysts had expected a decline of 0.1 percent. The stock traded above $56 as recently as last December.

Sears' same-store sales have fallen short of Wall Street's forecasts for four straight months now, ratcheting up pressure on CEO Alan Lacy to meet Sears' predictions of an uptick in sales in the second half of the year and a full-year same-store sales increase of 1 to 3 percent.

"I wouldn't write off Sears, but it's getting closer to the point where it's going to take something close to a miracle to execute a strong turnaround," said Joseph Beaulieu, retail analyst with Chicago-based Morningstar.

Even Sears lowered its second-quarter sales forecast Thursday, saying sales will remain flat or drop slightly rather than remaining flat or slightly improving.

Most troubling in May were sales declines in tools, appliances, consumer electronics, lawn-and-garden products and home-fitness equipment -- areas where Sears traditionally generates sales growth.

Sears' Auto Centers and its specialty stores -- dealer and hardware stores and The Great Indoors home-decor chain -- reported sales declines, too, leading to an overall drop in May sales of 4.7 percent, to $2.08 billion from $2.18 billion in May 2003.

So far this year, Sears' sales have declined 2.4 percent, to $8.13 billion from $8.33 billion in the same period last year.

Lacy blamed "the shift of Memorial Day to the June sales month from May 2003, combined with a slackening in consumer demand across most categories" for Sears' falling short of its own sales forecast.

Sears' efforts to offer more fashionable apparel proved futile, too. Apparel sales in May declined in all categories -- children's, men's and women's clothing, and shoes and accessories.

Best Buy, Lowe's and Home Depot have been whittling away Sears' market share in hardware, appliances and electronics. If Sears loses its anchor sales in those categories, the retailer will have a harder time convincing shoppers to make more frequent trips to buy apparel, said William Cody, managing director of the Jay H. Baker Retailing Initiative at the Wharton School.

Lacy said Sears is continuing to rework its stores by redoing seven departments -- kids, men's apparel, consumer electronics, home fashions, home appliances, ready-to-wear clothing and Sears Auto Centers.

Other retailers with disappointing sales were Dillard's, whose May sales dropped 5 percent from a year ago, and bankrupt Spiegel Inc., where sales dropped 7 percent at its Eddie Bauer chain from a year ago. Sales declined 7 percent at the Spiegel and Newport News catalogs and Web sites for the four-week period ended May 29 from a year ago.

Department stores rallied in May, with Marshall Field's same-store sales increasing 1.7 percent from a year ago, better than Wall Street analysts' estimates for flat sales.

Field's did best in selling jewelry, shoes and intimate apparel.

"Field's is in a good position to be sold," said Morningstar's Beaulieu, referring to Target Corp.'s decision to try to sell the Field's chain.

Department stores that charged full-price and still had impressive results were Nordstrom, Saks and Neiman-Marcus, which reported May sales gains of 9.4 percent, 9.4 percent and 8.5 percent, respectively.

Bright colors, retro fashions, a sprinkling of discounts and brighter news about jobs and personal income lured shoppers who wanted to brighten up their wardrobes.

"There's an explosion of color. It's a welcome addition to a wardrobe of khaki, white, black and denim," said Candace Corlett of WSL Strategic Retail in New York.

Among fashions making a comeback are the knit shawl, the Diane von Furstenberg wrap dress and T-shirts with controversial slogans and a contrasting color around the collar and arm-bands.

The $25 T-shirts, like the ones Jimmie Walker wore on the '70s-era TV show, "Good Times," give wearers an opportunity to make a political and a fashion statement at the same time, said Wharton's Cody.

Discounters and mid-level department stores did well, too.

Wal-Mart reported a sales increase of 5.9 percent, better than analysts' 5.1 percent forecast.

J.C. Penney sales gained 9.1 percent in May from a year ago, more than double analysts' 4.1 percent forecast. The Plano, Texas-based company said strong fashion sales and its introduction of the Chris Madden line of home decor helped boost sales.

However, retailers cautioned investors that gasoline prices may dampen sales in June.

Frank Titus Dies at 75
By Joan Giangrasse Kates - Special to the Chicago Tribune
June 3, 2004

Former Sears executive honored for good works

Francis L. "Frank" Titus was only 8 years old when his father left his family.

The oldest of three boys, he helped pay the bills by doing odd jobs around the neighborhood, while his mother worked at a shoe factory. At age 12, he was hired at the local movie theater, where he was an usher seven days a week.

Family members described Mr. Titus' boyhood years as grueling, with a schedule that required him to finish school by 3 p.m. and then run to the theater, where he'd work most nights until midnight. They said it was three years before he was able to take a day off.

"They were so poor that with his first paycheck he wanted to treat his family with something special from the theater," said his son, Steve. "He got off work at midnight, went home and woke up his mom and brothers, and they all sat there drinking milk shakes for the first time."

Mr. Titus, 75, of St. Charles, a Korean War veteran and a retired executive with Sears Roebuck & Co., died Monday, May 31, in his home, of cancer.

Born and raised in Greenup, a small rural community in central Illinois, Mr. Titus was an academically gifted student in high school. In 1950 he graduated with honors with a bachelor's degree in education from Eastern Illinois University in Charleston, where he helped pay for his tuition and board by working in the school cafeteria and going home to a part-time job on the weekends. A year later, he married Gerry Price, his wife of 53 years.

After college, Mr. Titus enlisted in the Army and served during the Korean War. He was stationed at Ft. Sill, Okla., where he was put in charge of a statistical unit. When his unit was called up to go to Korea, family members said that against his wishes, his supervisors ordered him to remain at the fort and in his position.

"He was a genius when it came to numbers, and his superiors knew it," said his son. "They weren't about to let him go because the work he was doing was classified and involved a lot of math. There wasn't anyone who could replace him."

After his military discharge in 1953, Mr. Titus went on to receive his master's degree in business administration from Indiana State University in Terre Haute. He also later completed work toward his doctorate there.

Mr. Titus began his career with Sears in the early 1950s, while in graduate school, working as a stock boy at the Terre Haute store.

A few years later, he was accepted into the company's executive training program, which over the years was followed by a series of managerial promotions, that required him and his family to move 13 times to several states, including Michigan, Wisconsin, Pennsylvania and Illinois.

At the time of his retirement in 1988, Mr. Titus was one of the top executives at Sears and had served as the president of more than one Chamber of Commerce. He was a United Way chairman and an honorary chairman for the Salvation Army in the various places he had lived.

In the late 1970s, West Virginia Gov. Jay Rockefeller recognized Mr. Titus for his humanitarian efforts in helping to coordinate relief efforts for families left destitute after floods ravaged parts of West Virginia and Pennsylvania. A year later, the State of Kentucky also acknowledged him as an Honorary Kentucky Colonel for his good works when floodwaters destroyed many homes there.

"He never forgot his humble beginnings and always reached out to the underdog," said his son.

Besides his wife and son, Mr. Titus is survived by two daughters, Susan Cook and Sara Caggiano; two brothers, Ed and Bud; 10 grandchildren; and many nieces and nephews.

Visitation is scheduled from 4 to 8 p.m. Thursday in Norris Funeral Home, 100 S. 3rd St., St. Charles. Services will begin at 11 a.m. Friday in the First Baptist Church of Geneva, 2300 South St., Geneva.

J.C. Penney, Wal-Mart May Sales Rise, Helped by Jobs
Bloomberg
June 3, 2004

Sales at U.S. retailers including J.C. Penney Co. and Wal-Mart Stores Inc. rose in May, as rising employment drove demand for spring clothing and household goods.

Sales at stores open at least a year topped analysts' estimates at upscale department-store chain Nordstrom Inc., which had a 9.4 percent increase, and at J.C. Penney's department stores, where the gain was 9.1 percent. Wal-Mart, the world's largest retailer, said U.S. sales climbed 5.9 percent from a year earlier, within its May forecast.

The economy added 625,000 jobs in April and March, spurring consumers to keep spending at merchants such as Nordstrom and Federated Department Stores Inc. Rising gasoline prices, which are more $2 a gallon in some parts of the U.S., may hurt consumer demand, investors said.

"There's definitely the fear out there that rising gas prices will slow down consumer spending," said Jonathan Mueller, an analyst with Houston-based AIM Constellation Fund, which owns shares of Nordstrom and Wal-Mart among $7.3 billion in assets under management. ``On the flip side, the job numbers have been getting better.''

U.S. disposable personal income rose an average 4.4 percent each month through April, compared with a year earlier, according to Bloomberg data. Increasing gas prices have sliced more than $7 from shopper's weekly budgets, Wal-Mart Chief Executive H. Lee Scott said last month.

Rising Oil
Shares of Wal-Mart rose $1.07 to $57.42 at 12:23 p.m. in New York Stock Exchange composite trading. J.C. Penney gained 12 cents to $36.16, while Nordstrom rose 2 cents to $41.40.

At Target Corp., the No. 2 U.S. discounter, a same-store sales increase of 4.6 percent was less than analysts' estimates, according to Thomson Financial. Sales rose less than expected at Target's namesake discount stores and fell more than forecast at the company's Mervyn's locations.

Budget-conscious consumers sought bargains on groceries, pet supplies and electronics at Wal-Mart. The company's results got a boost from an 11.8 percent increase at Sam's Club locations, whose sales have risen faster than Wal-Mart discount stores for the past year.

The Bentonville, Arkansas-based discounter, which had forecast a May gain of 4 percent to 6 percent, said same-store sales this month will rise in the same range.

Industry Gains
U.S. retailers' sales rose 5.7 percent last month, based on results for 74 companies, said Michael Niemira, chief economist for New York-based International Council of Shopping Centers. The gain topped his 5 percent forecast and was higher than the 2 percent increase in May 2003.

Same-store sales, a key indicator of a retailer's performance, exclude results from new or closed locations.

Gasoline prices had no impact on spending by 75 percent of consumers with household incomes of at least $75,000, according to a survey by the group.

Consumers' "willingness to pay full price at our stores is very strong and creating momentum," Burton Tansky, chief executive of Neiman Marcus Group Inc., said on a conference call with investors yesterday after the retailer's quarterly earnings.

May same-store sales rose 8.5 percent at Neiman Marcus, helped by demand for floral print chiffon dresses.

Department Stores
J.C. Penney said spring clothing and the early May introduction of the Chris Madden line of home furnishings helped sales rise last month. Analysts surveyed by Thomson Financial had expected sales at J.C. Penney's department stores to increase 4.1 percent and Nordstrom's sales to rise 6.1 percent.

Federated, owner of Macy's and Bloomingdale's stores, said sales rose 2.9 percent. The retailer raised its second-quarter same-store sales estimate to as much as a 5 percent gain, from a prior forecast of 2 percent to 4 percent.

Sears, Roebuck & Co., the largest U.S. department-store chain, said May sales declined 3.7 percent, more than expected. Results from the Memorial Day weekend were shifted to June this year instead of being counted in May, the retailer said.

Sears Names Two New VPs
Chicago Sun-Times
June 2, 2004

Sears Roebuck and Co. Tuesday named new merchandising managers of two strategically important departments -- home fashions and home electronics.

Steve Ryman, 50, most recently of Kmart, was named vice president and general merchandising manager of home fashions, succeeding Barbara Pizzella, who left Sears in May. Ryman oversaw national product launches for Kmart, including that of Martha Stewart Everyday.

Sears also named Tasso Koken, 49, as vice president and general merchandise manager of home electronics. Koken succeeds Ray Brown, who left Sears in July. Koken most recently served as president of Dreamfield Associates, a strategic and marketing consulting company.

Computer Sciences Signs Deal with Sears
June 1, 2004

El Segundo, CA, Jun. 1 (UPI) -- Computer Sciences of California said Tuesday it has signed a 10-year deal to provide support services to Sears, Roebuck and Co. of Illinois.

Computer Sciences said under the 10-year agreement, valued at approximately $1.6 billion, it will provide Sears with information technology infrastructure support services.

Computer Sciences will provide desktop, server, voice and data network support, as well as services for systems supporting Sears-related Web sites and decision-support technology. Sears will retain responsibility for overall technology standards, architecture and service policies.

The agreement will allow Sears to focus on its core retail and related services systems, while providing improved capabilities coupled with the opportunity for significant operational and cost efficiencies.

Approximately 200 Sears associates currently manage the company's technical infrastructure. Under the agreement, the majority of those workers are expected to begin transferring to CSC beginning June 12.

Big Retailers Face Overtime Suits
As Bosses Do More 'Hourly' Work
By Ann Zimmerman - Staff Reporter - The Wall Street Journal
May 26, 2004

Some of the nation's biggest and most cost-sensitive retailers, including Wal-Mart Stores Inc., RadioShack Corp. and Dollar General Corp., are battling a raft of lawsuits accusing them of using low-level managers to do the work of regular employees, in order to avoid paying overtime.

Wal-Mart, a retailing giant with about 3,500 stores and 1.2 million workers in the U.S., and a well-known focus on lean margins, already faces 30 overtime-related suits on behalf of hourly workers in 28 states. Assistant managers who filed suit in Michigan and California, seeking back pay and damages say they spend much of their days on the same tasks assigned to hourly employees entitled to overtime.

The suits claim there is very little difference between the job duties of the hourly workers and assistant managers, especially the nighttime assistant managers, who, "in most cases, are simply glorified stockers who unload trucks, move products into the store and stock shelves," according to legal documents.

Such practices could be illegal, although the retailers deny wrongdoing. Under federal law, managers may be entitled to overtime pay if more than 40% of their time isn't spent supervising or if their jobs don't include decision making.

Wal-Mart disputes the assistant managers' claims, saying that its managers' time is taken up largely with interviewing job candidates, making out schedules and handling other supervisory duties. "Wal-Mart does manage its costs carefully," the company said in a statement. But it said it wouldn't ask its most expensive workers to spend most of their time on hourly tasks.

Cost management can lead to understaffing. At a manager's meeting last August in Houston Wal-Mart Chief Executive Lee Scott complained about stopping at one of his local Wal-Marts on a Friday afternoon to buy formula for his granddaughter and finding impossibly long lines at the registers. A district manager told him the store had overspent its labor budget for the month and had sent workers home. Mr. Scott was unavailable for comment.

As businesses try to control labor costs, the practice of excluding low-level supervisors from overtime pay has accelerated across many industries, including restaurants, insurance and financial services, says Ross Eisenbrey, vice president of the Economic Policy Institute, a Washington-based think tank funded by labor unions.

Who should be eligible for overtime is a hot economic and political issue. For companies in the intensely competitive retail sector, labor costs can have a big impact on the prices retailers can charge. While the weakened economy of recent years kept prices down as shoppers looked for bargains, for retailers the lack of pricing power was partly offset by the large pool of job-hungry workers willing to do more to keep the paychecks coming.

Wal-Mart tries to hold labor costs to a slim 8% of sales, according to legal documents, compared with 9% to 10% on average at other large-store retailers. The company also encourages store managers to reduce their labor costs each year by about 0.2% or 0.3%, according to legal documents. Last year, Wal-Mart posted sales of $256 billion and net profit of $9 billion.

Last month, the Labor Department unveiled a major revamp of overtime rules, in part to clarify the numerous lawsuits concerning who is entitled to such pay. The new rules ensure overtime pay for managers earning less than $23,660 a year and deny it to most administrative personnel earning more than $100,000 annually. The rules also exclude a number of employees within that range from claiming overtime.

The new rules sparked controversy in the U.S. Senate, as Democrats and some dissident Republicans passed an amendment to the corporate-tax bill that would exempt 55 job categories from the regulations. The amendment is expected to stay intact as the tax bill makes its way through the House and is signed into law.

Those distinctions matter at retailers. Managers with RadioShack, which is based in Fort Worth, Texas, sued their employer in federal court in Chicago last year, seeking overtime back pay. The managers, who are required to work at least 52 hours a week, say that they spend most of their time selling merchandise and have very little supervisory authority. About 40% of the company's approximately 7,000 managers have joined the suit, which is seeking class-action status. RadioShack paid $30 million to settle a similar suit in California state court on behalf of 1,200 managers in 2002. RadioShack denied wrongdoing in that suit. It has declined to comment on the pending litigation.

In March 2002, a Dollar General manager filed suit in federal court in Birmingham, Ala., claiming that she worked up to 90 hours a week without receiving overtime pay, bonuses, vacation or sick time. In January, the federal court certified the suit as a class action for those who want to opt in. In these and the various Wal-Mart suits, the companies have denied the allegations.

For Wal-Mart, based in Bentonville, Ark., the allegations from assistant managers are just one of many issues that the world's largest retailer faces. While the staunchly nonunion company has been a major target of labor organizers in recent years, the assistant managers' suits related to overtime pay aren't part of those broader unionizing efforts. The actions generally stem from individuals or groups of staffers seeking legal advice about a potential grievance and the representation usually of contingency lawyers, who work for a percentage of any settlement.

The more than 30 lawsuits pending in 28 states allege that the company required hourly employees to work extra hours for no pay. In 2000, Wal-Mart settled for $50 million an overtime-related suit filed in Colorado on behalf of 67,000 hourly workers.

The average store manager earns about $100,000 a year before any bonus. Assistant-manager salaries range from around $30,000 to more than $45,000 a year, and they aren't eligible for overtime pay. Full-time hourly employees are paid about $9 an hour for a 34-hour week, or about $16,000 annually, and they rarely are allowed to work overtime.

To stay within budget, according to people familiar with the matter, Wal-Mart district managers have encouraged store managers to send hourly workers home before their shift is over. Meanwhile, many assistant managers, who are required to work at least 48 hours a week, say they may stay on the job for as much as 75 hours a week, trying in part to cover for the employees sent home.

In one Wal-Mart suit filed in Marquette, Mich., in late 2002, Vickey Ramsey, a former Wal-Mart assistant manager, said she was required to work more than 48 hours a week and spent most of that time on tasks routinely performed by hourly workers. Ms. Ramsey, at her request, is now an hourly worker. In February this year, a second Michigan suit was filed. Since the filings, about 50 Wal-Mart employees have joined the two suits, says John Underhill, one of the attorneys in the cases.

To keep the stores on budget, managers sometimes sent as much as a third of the employees home in the middle of their shift, says Kim Comer, a plaintiff in the second Michigan suit, who spent 13 years as an assistant manager at Wal-Mart stores in Texas and Michigan before quitting last August. In addition to telling employees not to come in, she says she and the other assistant managers were expected to do the jobs of hourly workers. Some days, she spent a full eight-hour shift on the cash register, the job she had when she first started at Wal-Mart as a college student. Although she believed her job was to train, counsel and supervise hourly employees, she says she spent no more than 30% of her time on those tasks.

This past January, three assistant managers sued Wal-Mart in Los Angeles, claiming they were unfairly denied overtime. Under California law, managers who spend less than 50% of their time supervising other employees and doing other administrative tasks are entitled to overtime pay. All three lawsuits seek class-action status. Wal-Mart employs about 17,000 assistant managers in the U.S.

The lawsuits say assistant managers are in a bind: To get the required work done, they have to either force hourly employees to work off the clock or pick up the slack themselves, which may require them to put in very long hours. They say it is futile to complain to store managers, who have a strong incentive to keep labor costs low; a portion of store-manager compensation comes in an annual bonus pegged to store profits.

Kmart Promises "Baby Steps" in Recovery Plan
By Emily Kaiser - Reuters
May 25, 2004

TROY, Mich., May 25 (Reuters) - Kmart Holding Corp. (KMRT.O: Quote, Profile, Research) on Tuesday said it would focus on improving merchandise and customer service in hopes of winning back shoppers who defected before and during the retailer's bankruptcy.

In its first annual shareholder meeting since filing for Chapter 11 protection in January 2002, Kmart said it was taking small steps such as coordinating its print and television advertising campaigns and clearing out unwanted merchandise as it tries to rebound from years of sagging sales.

"I wish I could tell you that there is some grand five-year plan," Chairman Edward Lampert told a small contingent of shareholders here. "We're taking baby steps to try to define a message that we think ... will resonate with customers."

Lampert, head of ESL Investments, owns just over half of Kmart's stock and is seen as a financial whiz rather than a retailing expert. He and the company have kept a low profile since Kmart emerged from bankruptcy in May 2003.

At the meeting, the company made no financial projections and gave few concrete examples of how it plans to improve sales. In the recently ended fiscal first quarter, Kmart's total sales were down 25 percent, while sales at stores open at least 13 months -- a key retail measure known as same-store sales, fell nearly 13 percent.

The retailer closed 600 of its 2,100 stores while in bankruptcy, and emerged from Chapter 11 with a smaller debt pile and a new management team that has turned in two consecutive profitable quarters.

However, analysts have long questioned where Kmart fits in a discount sector dominated by Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research) . While Kmart was downsizing, Wal-Mart and Target Corp. (TGT.N: Quote, Profile, Research) opened hundreds of new stores.

"The competition is continuing to get increasingly sophisticated," said Darrell Rigby, head of Bain & Co.'s global retail consulting practice.

"Wal-Mart, which has always had some weakness in its softlines business, is starting to get better in that area," he said. "Target is continuing to be very aggressive in pricing of its commodity-like products, and continuing to improve its stable of designers and quality merchandise."

Lampert said Kmart "can't win" if it tries to compete with Wal-Mart in areas such as technology and logistics, but would focus instead on categories like apparel.

He said the company would launch a new clothing line in July, and had nearly completed a year-long project of clearing out excess inventory.

The inventory cutbacks helped boost profits but also hurt sales. Lampert said the lost sales were largely unprofitable and the company would stick to its lean inventory strategy.

Kmart has also cut back on newspaper advertising circulars, but the remaining Sunday inserts are now better coordinated with Kmart's television advertising. For example, if television ads show grills on sale, the circular will also feature grills on the cover -- something Kmart had not done in the past.

Lampert said the company would consider using some of its $2.2 billion cash pile for acquisitions, but declined to comment on long-running rumors that Kmart might merge with Sears, Roebuck and Co. (S.N: Quote, Profile, Research) . Lampert is also a large Sears shareholder.

He said some money would be invested back in the stores, but noted that Kmart had spent heavily on its stores and technology before the bankruptcy, and the focus was now on improving merchandise. Still, he acknowledged that many stores needed nicer fixtures and other upgrades.

"If we wanted to take the capital we have and make every store look like Saks Fifth Avenue, we could," he said. "But if we're still selling the same things we were four or five years ago, it's not going to work."

Spiegel Catalog Sold for $53.4 Million
By Sandra Guy - Business Reporter - Chicago Sun-Times
May 25, 2004

The Spiegel Group, the bankrupt retailer that pioneered mail-order marketing, has reached an agreement to sell its 99-year-old flagship business, the Spiegel Catalog.

The company also is weighing offers for the Eddie Bauer outdoor-apparel chain, company officials said Monday.

The catalog's buyer is Pangea Holdings Ltd., the same Bermuda-based private-equity company that has agreed to buy Spiegel's Newport News mail-order and Internet business for $28.6 million. The Newport News sale is expected to close next week.

One of Pangea Holdings' three partners is Christian Feuer, a former marketing vice president at both Spiegel and Newport News.

Pangea has agreed to acquire Spiegel Catalog and its Web site for $53.4 million -- $2 million in cash plus $22 million in inventory commitments and $29.4 million in debt, according to Spiegel's court filing on the sale.

''It's pretty sad,'' said Eric M. Beder, an analyst with JB Hanauer & Co. who doesn't own shares. ''Spiegel was one of the great brand names that just got very tarnished. The fact that they got so little for the catalog is very depressing.''

Since Spiegel is operating under Chapter 11 bankruptcy, a bankruptcy judge will have the final say. Pangea must vie against any better offers. A hearing on the matter is expected June 15.

The future of Spiegel catalog's employees and its headquarters in west suburban Downers Grove have not been decided, said Spiegel spokeswoman Debbie Koopman. However, Spiegel Group is offering to provide computer and personnel services for Spiegel catalog after the sale so Pangea won't have to do so. Those jobs are now located in Chicago's suburbs.

The number of Spiegel Catalog employees is being cut to about 30 after Spiegel Inc. announced April 20 that it had started firing nearly half of its combined corporate and Spiegel Catalog work force to reduce red ink and make the catalog more appealing to a buyer. The catalog had sales of $265 million in 2003 and $522 million in 2002.

Spiegel Inc. has cut a total of 2,600 jobs, or 18 percent of its work force, since it filed for Chapter 11 bankruptcy protection on March 17, 2003.

The drastic downsizing, and a possible move elsewhere, mark the end of a catalog era in Chicago, said Sid Doolittle, founding partner at McMillan Doolittle retail consultancy in Chicago.

Chicago was home to the first mail-order business, Montgomery Ward's, which started in 1872 at Clark and Kinzie streets. The Sears, Roebuck and Co. catalog followed in 1887. Montgomery Ward closed its catalog operations in 1985, and Sears closed its legendary Big Book catalog in 1993.

Separately, the New York Post reported last week that creditors of Spiegel will consider preliminary offers for the Eddie Bauer retail chain from major buyout firms, including Apollo Group, Bain Capital, Kohlberg Kravis Roberts & Co., Thomas H. Lee Partners and Texas Pacific Group.

In March, L.L. Bean, the retailer famous for hiking boots and rugged outdoorwear, said it no longer was interested in buying Eddie Bauer.

The Eddie Bauer chain of 435 stores is Spiegel's best asset; it recorded $1.27 billion in sales in 2003.

After Spiegel Inc. sells its assets, the company could hold what is known as a "liquidating" Chapter 11 proceeding, according to a Chicago lawyer who asked not to be named. In that case, Spiegel would use the proceeds of the sales to pay its creditors and cease doing business.

One source close to the negotiations has repeatedly cautioned that each of the three Spiegel Inc. units could be bought and then sold to someone else, including the Otto family that bought Spiegel Inc. 20 years ago.

Contributing: Bloomberg News

State Offers Great Goodie Bag to Wal-Mart
By Steven R. Strahler - Crain's Chicago Business
May 24, 2004

Discounter gets biggest share of handouts here: study

As the Chicago City Council prepares to vote Wednesday on whether to allow Wal-Mart Stores Inc. to open locations in the city, a study released Monday says that Illinois tops all states in subsidizing the No. 1 retailer's expansion. Illinois contributed a whopping $145.7 million in tax breaks, free or subsidized land and other handouts to 29 Wal-Mart deals since the early 1980s, according to Good Jobs First, a Washington, D.C.-based research and advocacy group.

Texas was a distant second, with $107.7 million earmarked for 30 deals, the study said. Wal-Mart isn't seeking any direct incentives for a proposed West Side store and another on the South Side, the city says. But the 50-acre South Side site, where Wal-Mart anticipates occupying a third of the 465,000-square-foot retail development, is earmarked for a $31.5-million tax-increment financing district (TIF). The TIF would help fund demolition of a steel mill and construction of a new road and viaducts. A City Council vote on the incentive hasn't been scheduled. On Wednesday, the Council will address zoning changes associated with Wal-Mart's proposals.

Holding the goodie bag

Nationally, more than $1 billion in incentives has been showered on 244 Wal-Mart projects, according to the Good Jobs First study. But, the study authors note, that figure could be the "tip of the iceberg," considering the difficulty of compiling comprehensive statistics and what is described as Wal-Mart's contention that it actively seeks incentives for about a third of its 3,500 stores nationwide.

Wal-Mart said it hadn't seen today's report but pointed to $52 billion in new sales taxes and another $4 billion in property taxes it has paid out over the last decade.

"This is exactly how the system is supposed to work-businesses are offered incentives to come in and the payback more than offsets the initial investment," says a Wal-Mart spokesman. The report's authors, he adds, have "done little more than shoot themselves in the foot today."

Greg LeRoy, executive director of Good Jobs First, which tracks corporate and government economic development policies, says, "The sales tax is not Wal-Mart's money. That's just revenue getting shuffled around. It's not a net fiscal gain."

Comparing Wal-Mart's property tax bill with incentives that reduce it, he says, "The question is how much do they pay and how much don't they pay."

The study was partially funded by the United Food and Commercial Workers International Union, which has sought to organize Wal-Mart and non-union supermarket chains.

Distribution center incentives

The report said that Wal-Mart's largest-ever subsidy was $48.7 million in 1997 for a distribution center in Downstate Olney. Most of the money-$46 million-came from local property tax breaks, but the state kicked in nearly $1 million for infrastructure improvements, according to the study.

A Wal-Mart "supercenter" scheduled to open next year in Country Club Hills will receive an estimated $12.3 million in property tax and sales tax rebates. Other stores, in Bridgeview, Evergreen Park and Rolling Meadows, each received more than $5 million.

"The new welfare queen is now Wal-Mart," says William McNary, co-director of Citizen Action Illinois, which publicized the report.

With $1.4 million in identified subsidies, Arkansas-Wal-Mart's home state-was second only to the state of Washington's $1 million in the least amount of subsidies.

Mr. LeRoy said that Wal-Mart was hardly alone in its appetite for subsidies-only the most aggressive. "It's not like Sears is out there breaking ground in a zillion places like Wal-Mart," he says. The study added: "Wal-Mart is in a class by itself."

PENSIONS: The $366 Billion Outrage
 All across America, state and city workers are retiring early with unthinkably rich pay packages. Guess who's paying for it? You are.
By Janice Revell -  FORTUNE -  May 31, 2004 Edition

Let's just call it what it is: Gaming the system. And it's a game that has already resulted in skyrocketing tax increases and the loss of public services across the country—from the shutdown of libraries and community centers to the gutting of many local police and fire departments. It is also a game that is played in the nether regions of public finance, in the fine print of lengthy contracts that hardly anybody sees. As with so many other recent scandals—from Dick Grasso's $140 million pay package to CEOs of bankrupt airlines padding their own retirement accounts to big corporations manufacturing "earnings" that don't really exist—this one has to do with the generally ignored realm of pensions. But here the beneficiaries of the shell game may come as a surprise: school superintendents, librarians, sanitation workers, county clerks, and a host of other public servants. By now you can probably guess who's paying for it. That's right: you.

If you've read the metro section of your local newspaper—or seen recent reports in the Los Angeles Times, the Chicago Tribune, or the New York Times—you may have heard about some state and municipal employees receiving outsized pension payouts, far above what they ever made while working. But chances are you have a sense that the excesses are isolated incidents.

As shocking as it may be, though, the public pension morass is bigger, more wide ranging, and ultimately more costly than anything you've seen in the corporate world. The practices, quietly approved by elected officials, allow workers to dramatically spike their pre-retirement compensation, to retire on more than 100% of their pay, and to draw both their salaries and pensions, with guaranteed market returns, simultaneously.

That's what you'll find in San Diego, for instance, where a city worker qualifying for retirement can instead remain on the job and receive both his salary and an early-activated pension through a so-called deferred retirement option plan, or DROP. That pension, deposited into a special account, earns a guaranteed 8% annual rate of interest, plus a 2% annual cost-of-living adjustment. When the employee actually decides to retire—for real, that is—he can either collect the amount that has accumulated in his special pension account or let it keep compounding at that generous rate of return indefinitely. Add it all up, says Diann Shipione, a trustee of the San Diego City Employees' Retirement System, and the average city worker participating in the plan, earning about $50,000 a year, is eligible to collect a lump sum of about $305,000 at retirement. A fire battalion chief will receive $780,000; a senior librarian will haul in $765,000. But don't be confused: That isn't instead of an annual pension payout; it is on top of it. The post-retirement annual pension payout is equal to 75% of their salary for workers with 30 years' service, a payout that increases 2% a year.

Pension Deficit Disorder State and municipal pension giveaways are having a devastating effect on government budgets across America. Even in states where pension funds are flush, many local coffers have been hit hard. Colorado Lawmakers want almost half a billion dollars extra from taxpayers by 2011 to cover pension shortfalls. Dearborn, Mich. Increasing pension payments by $2 million this year and laying off 70 teachers. Syracuse, N.Y. Facing a property tax increase of 44% to cover eightfold increase in pension costs over last two years. Hanover, Pa. Property taxes are up by 50% in 2004. San Diego Next year's budget calls for reducing some police services, closing 15 community centers, and shutting libraries on Sundays. Houma, La. Because pension costs have doubled, police department cannot afford new guns or cars. Houston Property taxes could rise by at least 15%.

San Diego, you're thinking, must be one heck of a revenue-generating machine. It must be all those tourists who make the pilgrimage to the famed San Diego Zoo. Try again. The city doesn't have nearly enough money set aside to pay for those lush retirement benefits. The pension fund is short by about

$1.1 billion and counting. That's because, for almost a decade now, while it has been continually sweetening the pension plan, the city council has also voted to give the pension system far less money than its actuary recommended. But those pension benefits must be paid—they're protected by California law, just as public pensions are constitutionally guaranteed or protected in 40 other states.

As you'll see, the bill is now coming due, and the residents of San Diego are about to pay the price. "I feel like I've been witnessing a crime," says Shipione, who has been an outspoken critic of the city's pension policy. "You look at these numbers, and nobody in their right mind can justify what's being done. Nobody."

Houston mayor Bill White can't justify what's going on in his city either. In 2001 Houston sweetened the retirement plan for its 12,500 municipal employees so that any worker with 25 years of service who is at least 45 years old could retire and immediately begin to receive an annual pension equal to 90% of his salary, an amount that automatically receives an annual 4% cost-of-living increase. In other words, within three years, he'd be raking in more in retirement than he ever made working.

The generosity of the plan has meant that legions of Houston workers—44% of the city workforce—can quit within the next five years without taking a major financial hit. That, ironically, has spawned a second monster. To prevent an exodus of some 5,000 of its most experienced city employees, Houston has implemented a plan similar to the one in San Diego, in which those who stay on get both their salary and their pension, which will be credited with a minimum annual interest rate of 8.5%. If the stock market has a great year, they'll get even more.

White, who took office in January, says Houston can't afford it. The pension fund is now running a deficit of about $1.9 billion. "The fundamental problem here is a compensation system that makes it more profitable to retire than to work in the prime of your life," says White. And the result is a hole that can only be filled, he says, with either steep cuts in city services or property tax increases of at least 15%, or both.

The third option is to cut those lavish benefits. But that's easier said than done. Last September the voters of Texas approved a new state constitutional amendment prohibiting local governments from reducing pension benefits promised to employees. While the state did allow cities a one-time opportunity to opt out of the legislation, it can happen only with voter approval. So White is taking the issue to the polls on May 15. (The word as of presstime was that White stood a good chance of succeeding.)

Still, union leaders representing Houston's municipal workers are crying foul. The city's pension plan, they say, is an eminently fair tradeoff for wages that have long lagged far behind those of the private sector. "The pension is the only form of security that these city employees will ever have," says Kimbal Urrutia of the American Federation of State, County, and Municipal Employees. Mayor White, he contends, is engaging in what amounts to class warfare by attempting to focus the debate on the issue of higher property taxes. "He's targeting the wealthy voters," says Urrutia.

What's happening in Houston and San Diego is just the beginning of a cascading problem. Pension plans covering the nation's 16 million state and local government employees—about 12% of the entire workforce—are gobbling up increasingly large shares of budgets, setting the stage for bitterly fought battles among politicians, unions, and taxpayers. Collectively, the plans owe an incredible $366 billion more in pension benefits to current and future retirees than the money stashed away to pay for them. That's based on the most recently disclosed market value of assets, according to Santa Monica pension consultancy Wilshire Associates. The pension funds of companies in the S&P 500 are about $259 billion short. (Rather than use the current market value of their assets to express how underfunded their pension plans are, most state retirement administrators instead use a three- or five-year average. Using this "smoothing" method the pension hole doesn't look quite as bad—a mere $158 billion, according to Wilshire. But many industry observers criticize the use of averages to measure a pension fund's assets. "If you don't use the market value, you'll never know the truth," says Ron Ryan, president of Ryan Labs, a New York asset management firm that deals with public pension plans. "The retirement systems have a much more severe problem than they indicate.")

Indeed, the cash crunch has already begun: Just about everywhere you look in this country—from state treasuries in Massachusetts, New York, and West Virginia to modest-sized cities like Portland, Ore., and Burlington, Vt.—spiraling pension costs have already led to massive increases in income or property taxes or forced big cutbacks in services such as police and fire departments, libraries, schools, and parks.

How on earth did it get to this point? You may have heard about the "perfect storm"—a lethal combination of a crashing stock market and record-low interest rates—that has hammered the pension plans (and share prices) of many of America's largest corporations. Those same factors have also wreaked havoc on the finances of state and local pension plans.

But when it comes to the government plans, you can add a few more poisonous elements to the mix: elected officials who were more than happy to dole out lush benefits to their heavily unionized employees during—and even after—the stock market bubble; a system that lets politicians push the costs for those increased benefits off on future generations of taxpayers; and a general public that simply wasn't looking. "The public employee, no matter who you compare him to, has become the dominant sector of the labor force that is well pensioned and well benefitted," says Dallas Salisbury, president of the Employee Benefit Research Institute, an organization based in Washington, D.C., financed by employers, unions, and government agencies. "And the real question is, At what point, vis-–-vis tax burden, does the nonpensioned public start to pay attention to that as voters?"

Given that the bill is coming due, we might start to see voters wake up. As with Houston, says Tom Cavanaugh, who heads the government retirement practice for pension consultancy Mellon Human Resources, "there are many public systems where 40%, 50% of employees are now eligible to retire—these are huge numbers." Making the cash crunch even more severe is that in most cities and states, public pension costs are growing more rapidly than the tax base.

Today's problem can actually be traced to a historic advance decades ago for American workers in both the private and public sectors: the widespread adoption of defined-benefit pension plans. These traditional pension plans give employees a guaranteed annual payment upon retirement—$2,500 a month, say, for an employee with 25 years of service and an average salary of $60,000. The employer puts up all or most of the money, and workers gain real retirement security. Unlike defined-contribution plans, such as 401(k)s, the nest eggs accumulated under a defined-benefit plan can't be demolished by a cratering stock market.

But traditional pension plans are also a risky financial proposition for employers. If a plan's assets don't generate enough income on an annual basis to pay for those retirement benefits, the employer must make up the shortfall. For corporations that means either diverting cash flow from shareholders or, as has been the case increasingly, slashing employee benefits. In the case of government employers, it typically means increasing taxes or cutting back on services. As we'll see, cutting employee benefits is almost never an option.

There's another crucial difference between the public and private sector plans: A corporation, under federal law, typically must start pumping money into its pension plan once the value of the plan's assets sinks below 80% of its liabilities. But there is no such law governing state and local plans—the decision to pump additional money into a pension plan lies with the individual discretion of state and local governments.

Thanks to this discretionary funding system, shortsighted politicians can simultaneously dole out rich pensions to their heavily unionized workforces (thereby presumably currying favor with a powerful group of voters and avoiding nasty strikes) and keep the rest of their constituents at bay by shoving the liability for those increased benefits onto future taxpayers. "The next generation of taxpayers is not sitting at the table," says Jeremy Gold, a New York®¢based pension consultant. "In fact, the money is going from our children's pockets to today's municipal employees."

There is another big trend at play here: the ever-widening divergence between the proportion of public and private sector workers who participate in a traditional pension plan. For private sector workers, the number has progressively slipped, from almost 40% at the beginning of 1980 to about 17% now. "Companies have been burned over the past few years by bad pension plan performance, and they're trying to insulate their shareholders from that risk," says Kevin Wagner, director of the retirement practice at benefits consulting firm Watson Wyatt. "We will clearly see more corporate employers moving away from the promises of defined-benefit plans." In February, for instance, retail giant Sears announced that it was phasing out its defined-benefit plan, claiming that the move was necessary to compete with Wal-Mart, which does not offer its employees a traditional pension plan.

The story is very different in the public sector, where traditional pension plans have continued to flourish: Ninety percent of all state and local government workers are currently covered by a defined-benefit plan, unchanged from a decade ago. "It all comes down to strikes and votes," says Salisbury.

The statistics certainly appear to back up that statement: Only 9% of all private sector workers are now represented by a union, less than half the percentage of two decades ago. Meanwhile, the proportion of state and local workers with union representation has held steady over the same time, at about 43%, a percentage that union leaders say will rise in coming years. "We're in a growth industry," says Richard Ferlauto, a director with the American Federation of State, County, and Municipal Employees, which represents more than 1.4 million state and local government employees across the country.

It also helps to explain why government plans are generally much richer than those offered by corporations. The average public sector employee now collects an annual pension benefit of 60% after 30 years on the job, or 75% if he is one of the one-fifth or so of workers who are not eligible to collect Social Security benefits. Of the corporate employers that still offer traditional pensions, the average benefit is equal to 45% of salary after 30 years.

Just as important, about 80% of government retirees receive pensions that are increased each year to keep pace with the cost of living, a feature which protects pensions against the effects of inflation and that can increase the value of a typical pension by hundreds of thousands of dollars over a person's retirement. But such inflation protection is nonexistent in corporate plans. "Private sector employers figured out a long time ago that one of the most expensive things you can ever do is put on cost-of-living adjustments," says Wagner.

And then there are the plans, like those in Houston and San Diego, that allow workers to draw both their salaries and pensions simultaneously. Unheard-of in the private sector, the plans are burgeoning in the public sector, as government employers in municipalities ranging from Baton Rouge to Dallas to Philadelphia attempt to hold on to the legions of baby-boomers who are now qualified to retire.

Union officials say those greater benefits are part of a long-honored compact between governments and their workers. "Historically people deferred wages and traded them for retirement benefits," says Ferlauto. "That's been the public service quid pro quo." But whether they are actually trading off wages anymore is anything but certain. "I have not seen any recent studies that say yea or nay on that," says Mellon's Cavanaugh. According to the federal Bureau of Labor Statistics, state and local government employees averaged $23.56 an hour in 2003, compared with $16.49 for private sector employees. But that average is skewed by the fact that there is a much higher proportion of minimum-wage jobs in the private sector. When similar jobs are compared, the results are mixed: The BLS has found that private sector pay is better for many executive and managerial jobs, while the public sector pays better for many service and technical positions. And the results can vary significantly by locality.

For instance, the average Houston municipal worker is paid a salary of $32,000 a year, about 19% less than the $38,000 average earned by private sector workers in similar jobs, according to a compensation study supplied to FORTUNE by the city's human resources department. But factor in the value of the city's pension plan, and the city workers come out way ahead, says Joe Esuchanko, president of Actuarial Service Co., a consultancy hired by the city to evaluate its plan. To accumulate the same pension received by a city employee, the average private sector worker participating in a 401(k) pension plan would have to receive a salary that's at least 25% higher during each year of his 30-year career, save every dime of that difference, and generate an annual 8.5% return on his savings. "For most people, that's not likely to happen," says Esuchanko.

Back in the late '90s, nobody really cared about those old-fashioned defined-benefit pension plans. As the stock market boomed, workers with 401(k) plans were the ones getting rich. Meanwhile, public pension plans, which typically invest about two-thirds of their assets in equities, were suddenly overflowing with surplus money. Politicians responded by handing out heavily sweetened pensions as if they were party favors. With their pension coffers overflowing, state and local legislators were told that the changes wouldn't cost taxpayers anything.

The stock market did, of course, collapse, leaving public sector pension plans without nearly enough money to pay for promised benefit increases. Even more troubling is that many governments continued to sweeten pension plans long after the stock market bubble burst in 2000. The benefit enhancements that drove the costs of the Houston and San Diego plans over the edge were implemented in 2001 and 2002, respectively. Illinois offered a generous early-retirement package to state workers in 2002 that enabled 50-year-olds to retire with generous, unreduced benefits, a deal that cost the state $222,000 for each of the 11,000 or so employees who jumped on it (a scary $2.4 billion in total). In 2001 alone, pension benefits were increased in at least 17 state plans, including those in Delaware, Missouri, Nevada, and New Jersey.

All this was happening at precisely the same time that those puffed-up 401(k) accounts were shriveling, leaving millions of private sector employees watching helplessly as their retirement security crumbled. But the benefits promised to state and local employees remained rock-solid, thanks to those constitutional and legal guarantees. In other words, when it comes to state and local pension plans, the bubble never actually burst.

It certainly didn't burst for Henry Bangser, the superintendent of New Trier High School in Winnetka, Ill. In 2002, Bangser, who was then earning an annual salary of $190,000, informed the school board that he intended to retire in 2006. The board responded by cutting him a new five-year contract that will catapult his final salary to $346,000; on top of that, he's eligible for another $20,000 a year in bonus payments. Since Bangser's pension is based on his highest annual average earnings, he'll be raking in a minimum pension of $221,000 a year when he retires at age 57, increased annually by a 3% cost-of-living factor after he turns 61. "I'm very appreciative and proud that the board felt I merited retirement compensation that would be at or near the top when I finished," he says. But Bangser was hardly surprised. In fact, he expected it.

The ramping-up of final salaries—a practice known as "spiking"—to produce outsized superintendent pensions is standard practice among Illinois school boards. "This is pretty typical for how these contracts work around here," says Onnie Scheyer, the New Trier school board president. And it's not hard to understand why. While superintendents' salaries are paid out of local school board budgets, pensions are not—they are paid out of a retirement system that is funded by Illinois taxpayers. So when the local boards engineer those big pensions, they're basically playing with free money.

Career-end salary spikes are also commonplace for teachers. According to the Illinois Family Taxpayers Network, the 100 top paid teachers in the state raked in salaries ranging from $131,000 to $196,000 in 2003. For example, the salary of one Leyden High School trigonometry teacher has vaulted from $93,000 to $173,000 over the past four years. But that's hardly the norm, says Steve Preckwinckle, political director for the Illinois Federation of Teachers. He points out that in 2003 the average Illinois teacher retired with an annual pension of $42,000, increased annually by a 3% cost-of-living factor. "Nobody's going to get rich off that," he says. While he admits that abuses of the spiking system do occur, he says the system is nonetheless necessary to "make the pensions more livable" for teachers in general.

What's become less and less livable, though, is that the pension plans covering the 630,000 state workers and retirees of Illinois are now collectively underfunded by $35 billion, the worst deficit of any state system in the country. The salary-spiking incidents certainly haven't helped, nor did the costly 2002 early-retirement package. But the major cause of today's problem dates back to the early 1980s, when Illinois legislators began to skimp on pension contributions in order to balance their tight budgets. By the mid-1990s, when the assets in the state's pension plans had plummeted to a dangerously low 55% of liabilities, the government finally passed a law mandating huge cash infusions into the plans every year through 2045. The required contribution for fiscal 2005 alone: $2 billion.

Illinois Governor Rod Blagojevich, who inherited the pension mess plus a $5 billion budget deficit when he took office in January 2003, wooed voters with a promise of "no new taxes" during his 2002 campaign. So, with a tax increase effectively eliminated as an option, Blagojevich has turned to borrowing. Last year Illinois issued $10 billion in so-called pension obligation bonds, with the proceeds earmarked for the state's five pension systems. But while borrowing may have helped Blagojevich skirt his way around a short-term budget squeeze, it doesn't make the longer-term pension problem go away—it simply postpones it.

It's not only tax hikes that the lawmakers in Illinois are sidestepping. Absent from any of the proposed fixes to the massive pension shortfall is an attempt to cut back pension benefits for unionized workers. Earlier this year Illinois House speaker Michael Madigan sponsored legislation that would sharply curtail the career-ending salary hikes for both superintendents and teachers. But since then the proposed legislation has been amended to exclude the teachers entirely—only the superintendents, who are not unionized, would see the salary spiking come to an end. "I'll let you figure that one out," says superintendent Bangser.

The truth is, even if they wanted to change the benefits of existing employees, the Illinois legislators would probably run into a brick wall. Thanks to the widespread constitutional and legal guarantees, politicians even attempting to reduce benefits can almost surely expect protracted court challenges, like the one now being fought by the state employees of Oregon. The state's pension plan is one of the most generous in the country: A recent study by the Oregonian newspaper found that more than a quarter of employees with 30 years of service who retired in 2003 received a pension annuity greater than their salary when working. Faced with a gargantuan $16 billion pension deficit, Oregon passed legislation (which gained strong bipartisan support) in 2003 that would reduce future pension benefits for current workers.

The unions are now suing, claiming that benefit changes for existing workers are unconstitutional. The Oregon supreme court will hear the case in July, but state attorney general Hardy Myers has already indicated in a written opinion that he believes the key elements of the legislation will be thrown out for being an "unconstitutional impairment of contract rights."

Dave Wood certainly believes that his constitutional rights were violated. But the issue for the 67-year-old Wood, who retired in 1994 after working 31 years for the city of San Diego, isn't the dollar amount of his pension. His main worry is that the retirement system is going to run out of money.

Wood's concerns date to the mid-1990s when, under intense budget pressures, San Diego began a policy of deliberately contributing less to the employee pension plan than the amount recommended by the system's actuary. (Sound familiar?) In 2002, with the plan's finances severely weakened by a combination of the funding policy and a collapsing stock market, the city council voted once again to continue underfunding the plan.

That was bad enough, says Wood. But what really threw him over the edge was the fact that, at the same time, the city also handed out significant pension increases after negotiations with the unions. The changes meant that a 30-year worker could now retire and receive a benefit equal to 75% of his salary, increased annually by a 2% cost-of-living adjustment, up dramatically from the 53% of salary Wood received when he retired a decade ago. "That's unaffordably generous," says Wood. "I think what I got was fair." By June 2003 the plan had racked up an unfunded liability of $1.1 billion.

Wood, along with a group of his fellow retirees, decided to sue the city and the retirement system, claiming in essence that both had deliberately placed the pension fund's long-term finances at risk in order to gain favor from the unionized current workforce. What Wood and his fellow plaintiffs were seeking was a big-time infusion of city cash into the pension plan to return it to a healthy funding ratio. "They've been underfunding and jeopardizing my retirement—I find it egregious," says Wood.

The lawsuit worked. In March the city agreed to a tentative settlement that would require it to increase its annual payments to the pension plan dramatically, starting with $130 million in 2005 (a 40% increase over the prior year) and gradually rising in subsequent years. To put that amount in context, San Diego's total general revenue fund for 2004 is $742 million. No matter what, San Diego residents are now facing some drastic cutbacks in city services or unwanted tax hikes. As for the latest round of pension increases, they can't be reduced because—you guessed it—they're protected by law.

San Diego's mayor, Dick Murphy, and the city manager declined interviews with FORTUNE. Union officials likewise turned down repeated requests for interviews. But Frederick Pierce, president of the retirement system's board, contends that the funding arrangement was not illegal. And while he notes that the retirement board does not get directly involved in collective bargaining between the city and its unions, he says that there are "huge political pressures associated" with the entire negotiating process.

But fellow retirement board member Shipione says that's no excuse. "The whole thing was cooked," she says. "The deal was that the city would only agree to increase benefits if they didn't have to pay for it now."

So what's the answer to the pension morass? While changing benefits for existing employees is difficult, if not legally impossible, a handful of politicians have recently been attempting to at least reduce the amount of cash the plans siphon out of government budgets in the future. In California, for instance, Governor Arnold Schwarzenegger is proposing to create a new tier of pension benefits for newly hired state employees that would produce retirement benefits similar to those that employees received before Gray Davis sweetened the plan in 1999. Union groups have already voiced opposition to the proposal.

In New York City, Mayor Michael Bloomberg recently backed off a proposal to create a separate tier of benefits for new hires that he says would have saved the city nearly $10 billion over the next two decades and decreased benefits to "reasonable levels, competitive with the private sector, where most city taxpayers work."

A recent attempt by Massachusetts Governor Mitt Romney to force newly hired workers into a 401(k)-style defined-contribution plan was met with overwhelming union resistance and has been postponed indefinitely. If anything, the pendulum seems to be swinging the other way: In Nebraska, one of a handful of states that requires at least some employees to participate exclusively in a defined-contribution plan, employees were recently switched back into a more secure defined-benefit plan. The reason? The defined-contribution plan was providing employees with retirement income equal to only 25% to 30% of their pre-retirement salaries, compared with the 60% to 70% income replacement rate enjoyed by those workers enrolled in the state's traditional pension plan.

Governments will probably continue to offset rising pension costs by slashing services and, in the process, laying off workers—not a pleasant alternative for either the workers or the citizens of the community. This phenomenon has led some observers to accuse older union members of "eating their young" in order to preserve their own retirement benefits. In Houston union leader Urrutia says that city workers are aware of the fact that layoffs could be looming if their generous pension plan remains intact. But he says that city employees are prepared to take that chance. "This was their option from day one," he says. "They'd rather keep their pension."

Another alternative is for employees to contribute more to their pension plans. About 80% of all state and local plans require employees to make at least some contribution to their defined-benefit plan; the average payroll deduction is 5% of salary (that amount is deducted on a pretax basis, so the average reduction in take-home pay is about 4%). But increasing that amount is a tough sell: In California, Schwarzenegger is proposing that employee contributions increase from 5% to 6% of salary; union leaders vigorously oppose the plan.

Don't count on a booming stock market to come to the rescue. For most heavily underfunded state and local plans, the market would have to return to the irrational exuberance of the late 1990s to erase the damage that's been inflicted by the combination of the bear market and the increases in benefits. In New York, for instance, the assets of the state pension plan would have to grow by 22% per year over the next three years to avoid a continuation of double-digit property tax increases or dramatic cuts in services, according to state comptroller Alan Hevesi. The actual annual growth rate has averaged 8% over the past ten years.

No, it's looking as if the main responsibility for the public pension mess is going to rest squarely with taxpayers for the foreseeable future. Preckwinckle, of the Illinois Federation of Teachers, acknowledges that the situation might be creating some anger among workers in the private sector. "As more people are concentrated in positions that have no pension system at all, they look at some of these things with resentment," he says. "Hopefully some day they'll all join unions, and they can negotiate better benefits for themselves."
Reporter Associates Doris Burke, Joan Levinstein, and Patricia Neering

Gap Eyeing Expansion Again

Discount store could be coming; Old Navy adds plus sizes
After two years of attending to inventory and debt levels,
Gap is ready to concentrate on growth again.
CBS MarketWatch
May 20, 2004

Chief Executive Paul Pressler is considering buying companies or launching new brands, including a discount concept, as Gap shifts from turnaround to growth strategies for its three divisions and 3,000 stores.

"We're actively exploring several new growth opportunities ... that will capitalize on our core strength of design" with a focus on apparel, footwear and accessories, Pressler told analysts and investors during a late-day earnings call Thursday.

"We see not one but multiple opportunities for our company," he said of the Gap, casual-wear Old Navy and upscale Banana Republic stores.

After the bell Thursday, Gap reported a 54 percent jump in earnings for its fiscal first quarter to $312 million, or 32 cents a share, up from $202 million, or 22 cents a share, a year earlier. Total sales of apparel and accessories climbed 9.3 percent to $3.66 billion from $3.35 billion a year ago.

Shares of Gap ended Thursday's session at $22.51, up 11 cents. They were trading at $22.40 after hours.

Old Navy is set to introduce a women's plus-sizes section in a handful of its stores to grab a share of a growing $25 billion market segment.

Following on the popularity of product extensions into maternity wear, Old Navy President Jenny Ming said the company will begin selling large-sized clothing at 55 in-store shops in July. If the move is successful, Ming said she will integrate the line into all 842 Old Navy stores over two years.

Half of the plus clothing will be sized up from regular sizes and half will be designed exclusively. Though much of the merchandise will be targeted at young adults, Ming said Old Navy will create lines for teens and mothers.

The focus on larger sizes is aimed at giving customers broader fashion choices as well as an emotional tie -- Gap calls it "inclusion" -- of being able to shop for larger sizes in the "regular" store.

It also follows a trend in women's apparel to create larger versions of the trendy styles that regular-sized consumers find almost anywhere in malls and shopping centers.

Retailers such as Sears Roebuck and J.C. Penney are introducing bigger sizes in many lines. Earlier this week, teen favorite Hot Topic attributed much of its first-quarter profit performance to sales at Torrid, its fledgling plus-sizes concept for girls.

Ming also said she is looking to introduce other lines, such as swimwear and underwear. Such brand extensions, including plus sizes, also may appear at Gap and Banana Republic stores as well. Gap's core stores already have had much success with bodywear lines. Pressler stressed on the call his desire for what retailers call "organic growth" -- expansions or new lines of what's already there.

Pressler's eyeing swimwear at Gap and Banana Republic stores, as well as a "range of other opportunities" that could include improved and expanded fit offerings, and more stylish products for a "wide range of occasion needs."

Pressler noted that he's interested in creating "new revenue streams" and sees retail acquisitions or new concepts as channels to explore. Investors had been hoping to hear just that kind of talk.

In a note to clients ahead of the earnings call, Bernstein analyst Emme Kozloff berated Gap because it had not "articulated a hard-hitting organic growth strategy. The reality for Gap is that the company can no longer rest on its 'turnaround theme' because the market already 'gets it.'"

Pressler often has talked during his 18 months on the job about cleaning up the balance sheet and returning credit ratings to investment grade. During the quarter, Gap shed $170 million in debt early, paying $30 million, or 2 cents a share, to do so. Gap ended the quarter with $2.6 billion in funded debt. Pressler said he expects to continue reducing debt in coming quarters.

He's got a cash chest of $2.37 billion plus another $1.36 billion in restricted cash that backs letters of credit agreements and certain other obligations.

This week Moody's lifted Gap's unsecured debt rating to Ba2, the second-highest junk rating, and the senior implied rating to Ba1, the highest junk rating. Moody's lauded Gap for its "disciplined approach" to operations and its "continued trend of improvements in operating performance, positive comparable-store sales ... and solidly improved credit metrics."

However, Moody's warned ratings could be downgraded again if Gap finds itself in deeper debt. Jennifer Waters is the Chicago bureau chief for CBS.MarketWatch.com.

Backlash Confronts CalPERS
Business interests say the pension fund's fight for good governance hides a pro-union agenda.
By Tom Petruno, LA Times Staff Writer
May 20, 2004

The nation's biggest public pension fund has a long history of pushing companies to mind shareholder concerns.

This spring, some of the country's most powerful corporate interests are pushing back — contending that the California Public Employees' Retirement System has become arrogant in its demands and aggressively pro-union in its agenda.

The war between the California fund and opponents including the Business Roundtable, the U.S. Chamber of Commerce and the California Republican Party has escalated significantly in recent weeks. Both sides say that reflects the high stakes involved.

Some observers see the attacks on CalPERS as a clear sign that the business community is drawing a line in the sand on the pressure for corporate reforms that began with the Enron Corp. accounting scandal in 2001.

"There are people out there who would like [the CalPERS efforts] to backfire," said Paul Lapides, director of the corporate governance center at Kennesaw State University in Georgia.

The battle takes center stage in Pleasanton, Calif., today at the annual meeting of supermarket giant Safeway Inc. CalPERS, which owns 2.7 million Safeway shares, is insisting that Chief Executive Steven Burd resign, arguing that he has mismanaged the company for years.

CalPERS' critics, in turn, charge that the fund's campaign is personal — an attempt by CalPERS directors with union ties to punish Burd for the recent 4½-month strike by workers at supermarkets in Central and Southern California. The dispute ended Feb. 29 with a new contract that cut pay and benefits for new hires.

Corporate lobbying groups and some state Republican leaders have seized on the composition of the 13-member CalPERS board. CalPERS represents a largely unionized workforce, and not surprisingly, most of its board members have ties to organized labor.

"Labor disputes are best settled at the bargaining table," said David Hirschmann, senior vice president of the U.S. Chamber of Commerce in Washington. "We agree that investors should play an active role" in corporate governance, he said. "But we don't believe that company boards should become a forum for every social agenda in the public domain."

CalPERS denies that its push to unseat Burd is driven by a desire to avenge union workers.

Sean Harrigan, the president of CalPERS' board, said the fund was motivated by Safeway's net loss of nearly $1 billion over the last two years and by the 65% drop in its share price since early in 2001.

CalPERS pointed to support it has received from other big investors. Public-employee pension funds in Connecticut, Illinois, New York and New York City say they will withhold their votes for Burd and two other Safeway directors.

Two large investor-advisory firms — Institutional Shareholder Services and Glass, Lewis & Co. — also oppose Burd's reelection.

Harrigan said his role as a senior executive of the United Food & Commercial Workers Union, which represents grocery store workers, had no bearing on CalPERS' position.

"I'm not an old-school labor leader," he said. "There's no reason for me to want Safeway to be anything but successful."

But his comments didn't appease state Sen. Jim Brulte of Rancho Cucamonga, one of the state's leading Republicans.

"If there is no union agenda here, then this has to be one of the greatest coincidences in the history of California governance," Brulte said of CalPERS' stance on Safeway.

The California Republican Party on May 5 issued a sharply worded condemnation of CalPERS' drive against Safeway.

The supermarket firm declined to comment this week on today's vote. In recent statements, Safeway has said it was disappointed in the opposition to Burd, and that it had adopted a number of reforms requested by dissident shareholders.

Apart from its Safeway stance, CalPERS has drawn fire this spring for a broader effort opposing the reelection of certain directors at 2,700 companies nationwide.

The fund, which has the bulk of its $166-billion in assets invested in the stock market, says it is sending a message that corporate boards must pay closer attention to some key shareholder concerns, in particular about companies' relationships with the accounting firms that audit their books.

Harrigan said the fund adopted a policy to automatically withhold share proxy votes from all directors who are members of a board audit committee, if the audit committee has allowed the company's independent accountants to perform non-audit-related services to the firm.

That policy has put CalPERS in conflict with 90% of the companies in its investment portfolio, the fund concedes. What's more, one of the directors it targeted was billionaire investor Warren E. Buffett, who sits on the board of Coca-Cola Co. and is a leading proponent of better corporate governance.

The Wall Street Journal, in an editorial May 11, said the CalPERS vote against Buffett was taking governance reform "to absurd new lengths."

CalPERS argues that accountants face serious conflicts of interest if they are paid for services besides monitoring a company's books. And once CalPERS adopted a "zero tolerance" policy regarding audit committee decisions, Harrigan said, the fund believed it couldn't make individual exceptions in its voting, even for Buffett.

But "our withhold certainly does not mean we're in any way objecting to Warren Buffett's service on the board of Coca-Cola," he said.

At least one CalPERS director, state Controller Steve Westly, a Democrat, has called for the fund to reconsider its proxy-voting policies. Harrigan said the board would do so this summer.

In one sense, criticism of CalPERS' governance efforts is nothing new. The fund has periodically taken heat over the last two decades when it was largely alone in pushing companies to change practices that the fund believed were detrimental to long-term shareholder value. Since Enron, many other public pension funds have joined such campaigns.

The argument for activism is that pension funds are simply stuck with many stocks because their size and their long-term focus dictate that they must be buy-and-hold investors. Under those circumstances, if certain shares are laggards, agitating for change can't hurt, the funds say.

But some investor activists now fear that business interests are marshaling their forces to restrain corporate governance reform, just as the effort attracts more big shareholders. The concern is that CalPERS' controversial policies this spring have given opponents potent weapons to use against the reformers.

Specifically, both sides are lobbying hard to influence the Securities and Exchange Commission, which is weighing whether to give activists the ability to nominate their own director candidates to corporate boards. Reformers say greater access to the nominating process is crucial. The business community is adamantly opposed, fearing that some large investors would try to stack boards with special-interest candidates — for example, union representatives.

John J. Castellani, president of the Business Roundtable in Washington, said that his organization would cite CalPERS' campaigns in advising the SEC not to change the rules.

"What we're concerned about is that there are groups out there that will hijack the process of picking directors under the guise of good governance, but for reasons that have nothing to do with good governance," he said

Allstate in '03 Posted its Highest Annual Profit
By Tammy Chase Business Reporter - Chicago Sun Times
May 19, 2004

Allstate Corp., the second-largest home and auto insurer, behind State Farm, made $2.7 billion last year, its highest annual profit and more than double its 2002 profit.

And the company can keep it up this year, said Edward Liddy, Allstate's chairman and chief executive.

Profits have been helped by a steady diet of homeowner and auto premium increases in recent years. This year, rate hikes won't be as steep as Allstate customers have seen in the last couple of years, such as double-digit increases in homeowners' insurance two years ago.

Rate increases should be "modest" this year, comparable to the rate of inflation, Liddy told reporters at Allstate's annual stockholder meeting Tuesday. A Bloomberg News survey of 53 economists predicts inflation will rise by an average of 2.2 percent this year.

"Your company is in excellent shape," Liddy told shareholders. "But records, after all, are made to be broken."

Allstate's stock has done a bit better than the Standard & Poor's Index of Property and Casualty Insurers, but not by much. The index has lost 0.6 percent of its value year-to-date; Allstate has risen 0.6 percent.

Noting that aggressive insurers such as Progressive have double the stock price of Allstate, Liddy said he'd like to see his company's price better reflect the company's financial performance. Profits, revenue and new policies written are all on the rise at Allstate, and he said the growth is sustainable because the company's Allstate Financial division, which sells banking and investment services, is doing better than in recent years.

What has been working for Allstate -- and will continue to increase profit, Liddy said -- is more advertising and the opening of more Allstate offices. The use of credit scoring to write insurance policies has helped Allstate better assess customers' risks of losses, the company said.

Few shareholders spoke during the meeting, though one challenged Liddy on whether credit scoring -- which has been criticized by consumer groups in recent years -- was discriminatory toward poor and minority customers. Liddy said "it is not a device for redlining" and said "we really use it to expand the number of policies we write, not to restrict them."

Liddy told reporters Allstate has several prices it offers to customers, based on credit scores, driving records and other factors, and that the company has different types of insurance it can sell to customers based on those factors.

Because of that, he said, Allstate has no plans to follow competitors like State Farm Mutual Automobile Insurance Co. and USAA, which both reduced auto rates earlier this year. Good drivers already get better rates at Allstate, he said.

No Allstate agents spoke at this year's annual meeting. In past years, agents have expressed frustration with Liddy over his move in 2000 to force agents to become independent contractors of the company. The matter is still being litigated.

Liddy attributed the agents' quiet to a happier agent force, benefitting from profit-sharing.

At least one former agent, who spoke at last year's meeting but skipped it this year, disagreed.

Jim Fish, past president of the National Association of Professional Allstate Agents, said Allstate terminated its contract with him after he complained about the company at its annual shareholder meeting in 2002. Still a shareholder, he and his wife criticized Allstate's handling of its agents at last year's company meeting, after he had already lost his Allstate job.

"I think agents -- it's not that they're any happier, it's just that nobody's going to be willing to risk their careers to say something" during a stockholder meeting, said Fish, who lives in Mississippi.

An Allstate spokesman said there was "no correlation" between Fish's departure and his comments at past meetings.

Allstate fell 10 cents to $43.26 on Tuesday.

Calpers Added Allstate, Others to Proxy Drive
Reuters
May 19, 2004

SAN FRANCISCO, May 19 (Reuters) - Calpers, the biggest U.S. pension fund, said on Wednesday it withheld votes from board directors at Allstate Corp., Charles Schwab Corp. and Southwest Airlines because the companies allow auditors to perform non-audit services.

Calpers, the California Public Employees' Retirement System, has in recent weeks cast its proxy votes against numerous corporate board directors over the audit issue.

The $166-billion fund believes auditors should not provide lucrative services such as consulting because that could cause conflicts of interest.

The Calpers policy guiding its votes has come under criticism as too rigid, but the fund has said it will follow it to promote improved corporate governance. The fund concedes the effort is largely symbolic.

Allstate spokesman Michael Trevino said the board nominees opposed by Calpers received about 95 percent of votes tallied at the company's shareholder meeting on Tuesday.

Schwab spokesman Glen Mathison declined to comment on Calpers' votes. The discount brokerage held its shareholder meeting on Monday and board members were elected by "resounding majorities" according to preliminary results, Mathison said.

Southwest held its shareholder meeting on Wednesday and all of the airline's board nominees were elected, said spokeswoman Christine Turneabe-Connelly.

Sacramento, California-based Calpers also said on Wednesday it withheld its votes from directors at Edison International, citing a shareholder-approved poison-pill resolution the company's board failed to implement.

Calpers also said it would withhold its votes from the board of Gillette Co. because it failed to implement a shareholder-backed proposal to declassify the board.

The fund said it would withhold votes from certain Pediatrix Medical Group Inc., Xerox Corp. and Yum Brands Inc. board members, citing relationships with other companies.

Pediatrix, Xerox and Yum were not immediately available for comment.

Calpers said it cast votes to elect directors at Gateway, Hartford Financial Services Group , Target Corp. , and Waste Management Inc.

Cut Back, Sears Tells Workers
Lacy Memo Calls it “A spending Adjustment”
By Becky Yerak Tribune staff reporter
May 18, 2004

Citing disappointing sales, Sears, Roebuck and Co. has instituted a hiring freeze and is cracking down on discretionary spending to reduce costs.

The nation's largest department store chain asked workers in a May 14 memo obtained by the Tribune to minimize travel, defer training, streamline projects, eliminate off-site meetings and refrain from hiring consultants.

The company is even asking workers to delay moving their offices from one part of its Hoffman Estates headquarters to another.

"This is not a layoff initiative, but a spending adjustment in response to our recent performance," Chief Executive Alan Lacy said in the memo.

In April, Wall Street expected that Sears would post a 1 percent gain in revenues at stores open at least a year. Instead, Sears shed 1.8 percent. Sales fell in apparel, footwear, paint and tools, among other categories.

Sears expects second-quarter sales to be flat or slightly higher. But including April's numbers, sales are down 0.2 percent year-to-date. If the pattern holds, 2004 would mark the fourth straight year of lower same-store sales.

"We're asking that headquarters staff carefully evaluate discretionary expenses to minimize second-quarter spending and review second-half expense plans with the goal of further reducing costs," Lacy said.

The hiring freeze announced Friday applies only to Sears' headquarters, not to its stores.

Last December, Sears announced a restructuring called Project Sharp to make the company more efficient.

In March, it farmed out 260 information technology jobs, but most were expected to be hired by the new IT provider, Computer Sciences Corp.

The restructuring hasn't yet resulted in any layoffs, though Sears hasn't ruled them out. "We've said all along that was a possibility but never the intention of that program," spokesman Chris Brathwaite said Monday.

No projections on savings
Sears did not say how much it expects to save through the measures announced in the memo Friday, but at least one analyst said Wall Street has not been impressed by Sears' cost-cutting measures. "Current restructuring efforts have failed to show significant benefits," Joseph Beaulieu, Morningstar senior stock analyst, said in a May 10 report.

Also in the May 14 memo, Sears distanced itself from comments made by a Sears executive last week at a meeting of the National Association of Retired Sears Employees. Bill White, general manager for full-line stores, commented that Sears sees the potential of as many as 500 Sears Grand locations.

The format, Sears' answer to Wal-Mart Stores Inc., Target Corp. and other more conveniently located off-mall retailers, sells everything from milk to appliances.

So far, Sears has committed to opening only five Sears Grand stores, but it told shareholders at last week's annual meeting that it considers the format to be its biggest opportunity for expanding its store base. The number of Sears' mall-based stores has stagnated at about 870.

"Customers love the convenience, assortment depth and product mix they can't find anywhere else under one roof, and the format is drawing customers who have not shopped recently in a regular full-line store," Lacy told workers in the memo.

Nonetheless, 500 stores won't happen in the near term, Lacy said.

"It's roughly an 18-month cycle from choosing a site to opening the doors," he said. "We will grow in a quality manner as fast as resources allow."

Sears' real estate department has already "identified dozens of possible locations" for future Sears Grand stores, Lacy said.

At last week's retiree meeting, White also noted that Sears has the cash to expand now. Sears, in a conference call last month with Wall Street analysts about first-quarter results, mentioned it will have about $1.2 billion in cash after another round of buying back stock and retiring debt.

New stores are costly
Store openings don't come cheap. One of Sears' rivals, Home Depot Inc., said in January that it planned to spend $3.7 billion this year, of which 57 percent is earmarked for the construction of 185 new stores and 22 percent for the sprucing up of existing stores.

Lacy also told workers in the e-mail that Sears' total return--stock-price appreciation plus dividends--has outperformed the Standard & Poor's 500 by 45 percent since Lacy became CEO in late 2000. Over the same period, Sears' stock also has outpaced such rivals as Wal-Mart, Home Depot, Best Buy Co., Circuit City Stores Inc. and Kohl's Corp.

"Having said that, I recognize our challenges and that our recent performance does not build on the momentum you helped to create," he said to the workers.

Penneys Gets Teen Thumbs Up on Apparel
By Becky Yerak – Chicago Tribune
May 18, 2004

The only thing missing was a big foam finger.

Hosting an analysts meeting last month, J.C. Penney Co. bragged about its market share in everything from fine jewelry to curtains to towels.

"We're the No. 1 children's apparel store in the mall," gushed Vanessa Castagna, chief executive officer for stores, Internet and catalog for the Plano, Texas-based company.

In fact, among adolescents in particular, Teenage Research Unlimited has found that Penneys is that age group's favorite department store.

"Penneys carries the brands that teens want," said Michael Wood, vice president for the Northbrook teen habits tracker. "If there's any negative baggage associated with Penneys, it falls off the purchase when they leave the store."

In particular, Wood singled out Penneys' stocking of such brands as Mudd, Paris Blues and L.E.I.

Did we mention that rival Sears, Roebuck and Co. carries Mudd and L.E.I. too? And that the Hoffman Estates retailer is overhauling its kids' department, adding new brands and working on a "Work your Denim" school campaign?

But Penneys' reputation among teens illustrates the challenge that Sears faces in making a bigger name for itself in so-called soft lines, which have been dragging down 2004 sales.

In several instances, the two department store chains' operating and merchandising strategies are veering in different directions.

Take shoes.

Sears has some self-service in half of its 871 stores, particularly children's and athletic shoes. About 100 stores are entirely self-serve, and more are headed that way for customer convenience.

Penneys, however, is sticking with full-service, except for gym shoes.

"For a department store, which we are, the customer expects it," said Penneys executive Charles Chinni. "It allows us to do more fashion and dress and cater to a woman better."

Sears has Lands' End and specialty catalogs but no longer has the big book that Penneys repeatedly touts.

"They were losing a lot of money on it, as we were," said Allen Questrom, Penneys' CEO. "It's the catalog and Internet in combination that make it a success."

Penneys' curtain and drapery business, which covers one in three U.S. windows, is a good example. Having three sales channels helps, Questrom said, because curtains have several size, color and feature options.

"We have an assortment like no one else," he said. "It's why most stores in the mall have left the business; the investment in inventory to support it is beyond a satisfactory return."

Sears sells prepackaged curtains but exited the custom business.

Sears and Penneys are in the early stages of opening freestanding stores, but already their strategies are diverging.

The two new prototype Sears Grand stores sell magazines, convenience foods, cosmetics and Barbie dolls in addition to the Kenmore appliances, electronics and apparel found at Sears' mall stores. Sears Grand sales are doing well, but the company hasn't divulged sales per square foot.

Penneys' four off-mall stores average sales of $200 a square foot, compared with $143 at the mall. And Penneys isn't trying out any new product lines off-mall.

"They have a history of doing that," Questrom said of Sears Grand's diverse product lines. "We don't know enough about those products."

Special K
Ahead of the Tape by Jesse Eisinger - The Wall Street Journal
May 18, 2004

In the middle of a grim day for stocks, Kmart stood out.

Shares of the retailer, back from the near-death experience of Chapter 11, rose almost 10% on the news of its first-quarter earnings. The company reported net income of $93 million in the quarter, compared with a loss of $862 million last year. Cash on hand went up from the prior quarter.

But this isn't proof that Kmart is back. Like a contestant on "The Swan," today's Kmart Holding isn't the Kmart of last year, which was its "predecessor company." Right now, investors are seeing a significant difference in financial performance that is exaggerated because of the differences in accounting rules for today's Kmart and the ugly duckling of last year. The current quarter will be the first to give an apples-to-apples comparison.

Take something the bulls were particularly pleased about: The company's swing to an operating profit of $165 million from a loss of $39 million last year.

But what is the "normalized" operating income? Those numbers underwent several adjustments for one-time events. Since the company wrote down its property in conjunction with the bankruptcy filing, it had depreciation and amortization of $7 million in the quarter, compared with $177 million a year earlier.

If you add back the latter D&A figure to last year's loss, along with a $37 million charge for restructuring taken in that quarter, one gets a $175 million profit from operations. For this year, add the $7 million in D&A and take away $32 million in asset-sale gains to the most-recent quarter's figures, and operating income was $140 million -- down from last year.

Using those figures, Kmart shows a modest improvement in operating margin. But since it had significant clearance sales last year, there should be. It isn't as dramatic an improvement as it appears.

Kmart is hunkering down. It is reducing ad spending, raising prices and cutting its sales personnel in stores. That isn't exactly a tried-and-true recipe for retail success. Same-store sales fell 13% in the quarter.

Other bulls think that retail success isn't why the investment will work. They want management to milk the business for cash until it can sell its underlying real estate. That strategy is even more uncertain. Are there enough buyers out there for Kmart's locations? The irony is that if the retailing strategy fails, the real estate might appear less valuable to buyers.

Sears CEO Asks Staff to Tighten Belts
Lacy Says Spending Curbs Needed to Offset Lackluster Sales
By Sandra Jones - Crain's Chicago Business Newsroom
May 17, 2004

Sears, Roebuck and Co. Chairman and CEO Alan Lacy sent out an edict to his headquarters staff to cut back spending in the second quarter and review expense plans for the second half of the year as the retailer copes with declining sales.

“Making the day, the week, the month and the year are critical for us, particularly in light of our recent disappointing results in apparel and other businesses,” Mr. Lacy wrote in an online memo to employees in Friday and obtained by Crain’s Chicago Business.

In April, the Hoffman Estates-based retailer posted a 1.8% sales decline at stores open at least one year, as steep declines in apparel and home fashions outweighed gains in appliances and consumer electronics.

Sears will need to do better in May and June in order to meet its second-quarter earnings per share forecast of 78 cents to 83 cents and same-store sales that are “flat to up slightly” from a year ago. Same-store sales are a standard measure of a retailer’s health.

“It is important to note that this is not a layoff initiative, but a spending adjustment in response to our recent performance,” Mr. Lacy wrote in the memo.

The plan calls for employees to minimize travel, defer training expenses, eliminate off-site meetings and “carefully evaluate discretionary expenses.”

Mr. Lacy has been telling investors that 2004 would be the year Sears turns around a more-than two-year decline in comparable store sales.

After a 4.6% pick up in January, fueled by heavy promotions and clearance activity, Sears’ same-stores sales slowed to a 1.1% gain in February and remained essentially flat in March.

“This is part of our ongoing effort to bring costs in line,” a Sears spokesman says of Mr. Lacy's edict. “This is nothing new. We are making certain we are operating as efficiently and effectively as we can.”

Penneys Pulls Ahead of Sears
Retail-first Fix Looks Like Better Approach--for Now
By Becky Yerak and Susan Chandler - Tribune Staff Reporters
Chicago Tribune - May 16, 2004

At a cocktail party at J.C. Penney Co. headquarters near Dallas, Chief Executive Officer Allen Questrom told Wall Street analysts that his biggest competitors are shopping malls, Kohl's Corp. and specialty stores.

He failed to make any mention of the nation's largest department store chain, Sears, Roebuck and Co., Penneys' closest competitor in shopping malls.

The surprising omission was intentional. Questrom isn't worried about Sears because the venerable chain continues to lose market share and is grasping for a turnaround strategy.

While Sears remains the king of appliances with its proprietary Kenmore brand, it hasn't been able to turn around its apparel fortunes.

Despite Questrom's slight, Sears and Penneys have much in common. It starts in the executive suite, a battle pitting Allen versus Alan. That's Questrom vs. Alan Lacy, Sears' CEO.

But the similarities go beyond that.

Both men took over in late 2000 with the same challenge: fixing retailers that had fallen out of step with shoppers, who were increasingly favoring off-mall giants such as Wal-Mart, Target and Kohl's.

When it comes to sales trends, though, Penneys and Sears bear little resemblance to each other.

Penneys, with annual revenue of $17.8 billion, has had three consecutive years of sales growth.

April numbers rose 5 percent, thanks partly to such exclusive products as the $30 Stafford cotton wash-and-wear shirt that Questrom donned at the cocktail party.

Sears, with revenue of $41.1 billion, is on pace for a fourth straight year of sales declines. The biggest drag on Sears year to date: slower-than-expected sales of clothing and home furnishings.

Penneys' stockholders have come out ahead as well.

The price of their company's shares has risen 89 percent since the beginning of 2000.

Sears' stock has risen a more modest 37 percent, helped by the sale of its credit card business and an aggressive stock repurchase program.

The tale of the two retailers illustrates how difficult it is for retail chains to reinvent themselves.

Penneys has chosen to become a better department store, retail consultants say. By sticking to its knitting, Penneys has re-energized the goods that attracted shoppers in the first place--clothing, bedding, towels and draperies.

Questrom summed up his strategy this way: Penneys' mission is to provide "Neiman Marcus fashion at J.C. Penney prices."

Meanwhile, Sears has moved away from the department store label and is becoming more like a discounter. Sears Grand, its new prototype, illustrates the direction it is heading: liters of Pepsi, Cracker Jack and milk--the convenience items that tempt shoppers at Target and Wal-Mart.

"In many ways, we've tried to move away from the traditional department store approach in service and the way we merchandise and present products," Lacy said.

The backgrounds of Questrom and Lacy couldn't be more different, and that may account for the varying paths they have chosen for their companies.

Questrom, a Boston native, is a merchandiser by training. He became a turnaround specialist out of necessity.

Questrom pared down $8 billion in debt and led Federated Department Stores Inc., the parent of Bloomingdale's and Macy's, out of bankruptcy in 1992. Then he "retired" for a few years before being lured back to head Barneys New York, the chic fashion chain that ran aground in the late 1990s.

CEO helped stabilize stock prices
At Penneys, he inherited yet another outfit on the ropes, with sluggish sales and investors upset over a sharp drop in stock price.

News of Questrom's hiring alone sent Penneys' stock up 15 percent.

Since then, Questrom has worked hard to bring a fresher look to Penneys. fashions without alienating its loyal customers.

"We want to be a close second" when it comes to fashion trends, Questrom said. "People don't generally want to lead with fashion. But if they see something on TV or in the newspaper, they want to buy it."

Those efforts are paying off in higher sales and winning Penneys friends on Wall Street.

"Questrom's team strikes us as singularly focused on key merchandising, marketing and tech initiatives," A.G. Edwards analyst Robert Buchanan said.

Lacy, a Tennesseean, rose through the finance ranks outside the retail industry.

After holding high-ranking positions at Kraft Foods and its parent, Philip Morris Cos., Lacy jumped to Sears in 1994 and was named chief financial officer in 1995.

He later became head of Sears' lucrative credit card unit, which had been tarnished by a scandal relating to its treatment of bankrupt card holders.

Lacy got the business back on track and later won the horse race to succeed outgoing CEO Arthur Martinez.

When Lacy took over, Sears' hard goods business was at the top of its game. But Sears' apparel business was still struggling despite new private-label lines, redecorated stores and an award-winning advertising campaign for its "Softer Side."

A hard-nosed sales approach
Lacy promised Wall Street that he would apply financial discipline to the retail side of Sears as well. If a merchandise category didn't meet his hurdle rates for return on investment, they were gone. Sears stopped selling bicycles, wall-to-wall carpeting and cosmetics.

He applied the same hard-nosed approach to the collection of off-the-mall retail chains that Sears had created.

Lacy sold off National Tire & Battery and has warned that he may be ready to walk away from the Great Indoors, Sears' well-received home decorating and remodeling chain, if its profitability doesn't improve.

But some of Lacy's most dramatic moves have come in the area where he has the least expertise: apparel.

Sears spent nearly $2 billion in 2002 to acquire Lands' End, the preppy catalog company best known for its khakis and polo shirts. It has since rolled out Lands' End's khakis and polo shirts to all 871 Sears stores nationwide.

Lacy also directed the overhaul of Sears' mishmash of private-label apparel brands, killing most and replacing them with one classic line for women, men and children that it named Covington.

But the addition of Covington and Lands' End hasn't been able to cure Sears' ailing apparel business, which continues to struggle from the lack of a clear identity.

"The last 2 1/2 years have seen an enormous change in our company," Lacy said recently. Sears strengthened its hard lines, but "the apparel business has taken an enormous amount of work," he acknowledged.

Lacy must end 2004 on a sales upswing or risk losing his job, one retail observer said recently.

"I'd say, at best, he has until the end of the year," said Dave Novosel of Banc One Capital Markets Inc.

Despite his cocktail party chatter, Questrom says he does deem Sears a rival.

But because of Sears' shotgun approach to business, "we spend more time studying other people," he said. "They've gone through many changes and iterations from when Arthur Martinez was there."

Some retail observers see it this way: Lacy first tackled Sears' financial side with asset sales, stock buybacks and debt reduction, before turning his attention to stores.

Questrom tackled Penneys' retailing problems first and now is focused on improving its financial structure.

Still, it is Penneys' retail moves that are receiving favorable notice.

During an April conference call for Sears, one analyst asked if Sears shouldn't be looking at another retail overhaul to compete more effectively with Penneys.

But Penneys and Sears have traded positions before. Penneys surged ahead with a revived retail business in the 1980s, only to fall behind Sears in the mid-1990s.

Both retailers have now carved away businesses that might distract management attention from their core chains.

Penneys is selling its Eckerd drugstores. Sears sold its giant credit-card business last year to focus on retail issues.

That leaves Allen and Alan more time to figure out what customers want--and little room for excuses if they can't.

Target Plans Expansion of New Store Model
By Emily Kaiser  - Reuters
May 14, 2004

CHICAGO (Reuters) - Target Corp. (NYSE:TGT - news) is planning an expansion of a new prototype store model that it quietly unveiled in October, adding more food items and reorganizing departments in hopes of getting more shoppers into the discount stores.

The stores -- dubbed P2004 -- offer a wider selection of consumable items such as milk, packaged food and paper supplies, a larger baby section that puts frequently purchased items like diapers next to baby clothing and furniture, and an expanded entertainment department that groups electronics, music and videos, toys and sporting goods together.

The second-largest U.S. discount chain has reported faster sales growth than larger rival Wal-Mart Stores Inc. (NYSE:WMT - news) in recent months, but Wal-Mart's massive supercenters with full-line grocery stores get customers through the door more frequently to pick up staples such as bread and milk.

Analysts said Target's new store model could help narrow that gap.

On a conference call with analysts on Thursday, Target said it plans to have 200 new or fully remodeled P2004 stores by the end of the year. The retailer operates about 1,250 Target discount stores.

In addition, the company retrofitted about 80 stores last fall to add some of the new merchandise and design features. It plans to retrofit 130 more stores this year.

"Early results from our most recent store openings in March are better than expected," Target Stores President Gregg Steinhafel said on the conference call.

"We are moving quickly to incorporate the essential elements into all remodels going forward," he said.

Target spokeswoman Cathy Wright said the retailer tests prototypes every few years, and the last one was in 2001. The first P2004 store opened in Colorado in October. Most of the 25 stores that Target opened in March were also P2004, she said.

Deutsche Bank analyst Bill Dreher said the changes make the stores easier to shop in and encourage people to come in more often. The focus on consumable items should help Target improve on its average of 12 visits per customer, per year, he said.

The new stores are expected to be a main topic of discussion at a Target analyst meeting scheduled for later this month in Chicago. The meeting will include a tour of a P2004 store on Chicago's southwest side, Wright said.

The Minneapolis-based retailer has been reluctant to give much financial detail about the stores, saying it was too soon to make bold projections about their potential.

Executives tried to temper analysts' enthusiasm on the conference call on Thursday, noting repeatedly that the stores have only been open for a few months.

"We're probably spending too much time on (P2004) at this point in time," Chairman Bob Ulrich said in response to one of many questions from analysts about the stores.

"Suffice it to say we're very pleased initially, the guests certainly like it, the results are good, but too preliminary to put too much weight at this time," he said.

Sears CEO, Board Criticized at Shareholders Meeting
By Sandra Guy  - Business Reporter - Chicago Sun-Times
May 14, 2004

Sears Roebuck and Co. shareholders criticized CEO Alan Lacy's performance and the board's failure to act on their wishes at the annual stockholders' meeting Thursday.

But the vocally unhappy shareholders failed to win a majority of their peers' votes to create a committee that would lobby the board on shareholders' behalf.

For the fourth of the past five years, a majority of the shares voted (67.86 percent) supported activist Martin Glotzer's proposal to elect Sears' full board each year, rather than allowing directors to serve staggered terms. Glotzer and other shareholder activists argue that a yearly election is a good governance measure, partly because it makes it easier to unseat incumbents.

For the second time in three years, a majority of the shares voted (62.49 percent) asked the board to let shareholders vote whether to adopt, maintain or extend a "poison pill" provision designed to ward off a hostile takeover.

The proposals are non-binding, and Lacy said the Sears board would consider the ideas. However, he said Sears' board believes that the retailer's cumulative voting rule gives shareholders a great deal of power. The board's staggered terms provide a counterbalance and ensure that some directors have some knowledge and experience with the company, Lacy said.

Lacy took withering criticism from Doug and Carmen Liggett, a married couple from Indianapolis. Carmen is a Sears employee. Doug Liggett called Lacy's store redesigns "a monumental failure" and complained that the $10,000 of Sears stock Liggett purchased five years ago is now worth $8,300.

In a separate good-governance protest, the California Public Employees Retirement System withheld its votes from Donald J. Carty's and director William L. Bax's re-election bids because they are members of the audit committee, which authorized auditor Deloitte & Touche to perform non-audit services. Sears paid Deloitte & Touche $9.6 million in fees in 2003, including $2.5 million for tax planning and consulting and $53,000 for work on software licensing.

Nevertheless, more than 76 percent of the stockholders who voted re-elected Lacy, Carty and Bax, and 96.5 percent of those voting reappointed Deloitte as Sears' auditor.

Other shareholders complained that they have yet to benefit from a dividend from Sears' sale of its credit-card business. Lacy, who in early 2003 hinted that Sears might issue a special dividend as a result of the credit-card sale, said the board had decided instead to repurchase its shares, pay down debt and to invest $1 billion into the company pension plan.

Sears' board on Thursday announced that its regular quarterly dividend would remain 23 cents per share on Sears outstanding common shares. The dividend will be paid on July 1 to shareholders of record at the close of business on May 28.

More Sears Grand, Great Indoors Coming
By Sandra Guy  - Business Reporter - Chicago Sun-Times
May 14, 2004

Sears Roebuck and Co. will start building more of its off-mall, stand-alone stores -- Sears Grand and the Great Indoors -- but it isn't saying how many more.

Sears has retooled both concepts and likes the results, CEO Alan Lacy said after the company's shareholders' meeting at its Hoffman Estates headquarters.

Sears Grand stores are designed to be one-stop shops, selling everything from toys to convenience foods to flat-screen TVs, and offering a tire-and-battery center under the same roof as tools, electronics and clothing.

Future Sears Grand stores will be reduced in size to 175,000 to 185,000 square feet from the initial 210,000 square feet. Lacy declined to say what parts of the store would be cut. In fact, some Sears Grand stores likely will be large and others closer to 110,000 square feet, Lacy said.

Sears will also sell wine and open a pharmacy in some Sears Grand pilot stores to test the response, Lacy said.

The first two Sears Grand stores -- one in Gurnee and another in West Jordan, Utah -- have attracted shoppers who buy more frequently than shoppers at Sears department stores inside malls. Sears Grand shoppers also buy a greater variety of items than conventional Sears shoppers, Lacy said.

Sales of appliances, apparel and home fashions at Sears Grand are "terrifically" outperforming Sears' mall-based stores, Lacy said.

So Sears will "significantly" ramp up its expansion of Sears Grand stores, he said. Sears' initial plans called for five Sears Grand stores to be built.

Sears also retooled its Great Indoors home-decor store, and last October took a $141 million pre-tax charge, or 32 cents per share, to account for its decision to close three Great Indoors stores, convert a fourth into an outlet store, and revamp marketing, product selection and inventory controls at the remaining 17 stores.

Sears Plans a Trimmer Approach for Grand
By Becky Yerak - Tribune staff reporter - Chicago Tribune
May 14, 2004

Future Sears Grand stores will be a little less grand.

In recent months, Hoffman Estates-based Sears, Roebuck and Co. has opened two of the freestanding stores--each exceeding 200,000 square feet--to better compete against the growing dominance of discounters like Wal-Mart Stores Inc.

The stores, one in Gurnee and the other in suburban Salt Lake City, mirror a traditional mall-based Sears store for about 80 percent of its merchandise, while the remaining space is devoted to new lines such as magazines, convenience food items, cosmetics and toys.

On Thursday, Sears Chief Executive Alan Lacy told shareholders at the company's annual meeting that the retailer is considering two new, smaller approaches to Sears Grand.

Larger versions of the store will top out at about 185,000 square feet, and smaller formats will be in the low 100,000-square-foot range.

He didn't comment on changes to the merchandising mix, but he did say wine would be sold in future stores.

Despite the trimmer size, Sears Grand remains the "principal store growth vehicle for the foreseeable future," Lacy told shareholders concerned about Sears' stagnating store base.

On Wednesday, Bill White, general manager for full-line stores, said results for Sears Grand has exceeded expectations and that the company sees the potential for as many as 500 stores. Lacy didn't elaborate Thursday on how many additional stores are under consideration.

Lacy also said that Sears' Great Indoors home-improvement chain might be in a growth mode again by year-end after closing some stores last year. Sears once had visions for 150 stores, ended up opening 21, and now has 18.

Great Indoors' sales rose in April for the first time in months.

"I'm hopeful that at the tail end of this year we'll see store growth again," Lacy said.

During the meeting, Lacy had some explaining to do to unhappy shareholders.

With proceeds from last year's sale of its credit business, Sears has repurchased stock, paid down debt and contributed to its pension obligations.

Dividend increase urged
But one Morton Grove shareholder complained that Sears investors were overdue for a special dividend or an increase in their regular dividend. Lacy defended Sears' use of the proceeds, explaining that Sears' stock appreciation over the past year is largely the result of the stock buyback strategy.

Sears bought back nearly a third of its stock in 2003. In the fourth quarter alone, Sears repurchased 36.2 million of its shares at an average price of $48.72, for a total of $1.8 billion.

Sears' stock has since fallen to about $38.

Another shareholder said he felt that "Sears is in deep trouble." He said the value of his investment has dropped 17 percent and blamed continually weak sales.

He called Lacy "a monumental failure" who should have his role reduced at the company.

For his part, Lacy said Sears stock is up 45 percent since he took the helm in late 2000, outperforming rivals including Wal-Mart, Kohl's Corp. and Home Depot Inc. Lacy also noted that first-quarter sales were up and that Sears has delivered on its earnings forecasts so far this year.

Lacy was asked about Sears' largest investor, ESL Partners, a Greenwich, Conn., investment firm that has boosted its stake in Sears from 9 percent to almost 14 percent over the past year.

ESL Chief Executive Edward Lampert, who invested in Sears' stock early in Lacy's stewardship, is "a very happy shareholder," said Lacy, who talks to the investor "periodically."

Support up for 1-year terms
Shareholders on Thursday voted to elect directors on an annual basis instead of the current three-year terms. The measure was approved by 67.8 percent of the votes cast. That was up from the 60.6 percent backing that the shareholder resolution got last year.

Still, Sears' board of directors is unlikely to adopt the measure.

Lacy also shed more light on the apparel problems that hurt Sears' April sales.

In particular, the Lands' End clothing line had execution problems, Lacy said. A key supplier went bankrupt and other suppliers shipped late. Rather than accept the late shipments, Sears' canceled the orders.

Sears CEO Takes Hits Despite His 'Grand' Plan
By Mike Comerford Daily Herald Business Writer
May 14, 2004

Sears, Roebuck and Co. spent Thursday's annual meeting deflecting critics and outlining "Grand" plans.

Chief Executive Officer Alan Lacy sought to put Sears' performance in the best light while shifting the focus to future sales at pilot Sears Grand stores.

"We feel we are on the right track (but) I wish it were faster," Lacy told a crowd of investors at Sears' Hoffman Estates headquarters.

Lacy said the first Sears Grand outside Salt Lake City is so successful Sears wants to expand the concept. But he declined to say how fast.

Retail analyst John Melaniphy III said Sears insiders told him the newly opened Sears Grand in Gurnee is already ahead of projections.

"Someone (at Sears) told me they want to build 50, like yesterday," said Melaniphy, adding Grand stores are Sears' answer to Wal-Mart and Target.

Sears has announced plans for five more Sears Grand stores and is in the midst of experimenting with sales mix, layout and building size, or as Lacy called it, "Sears Grand large and Sears Grand smaller."

Envisioned to be mostly stand-alone stores, Sears Grand stores have central check-out, shopping carts and grocery goods along with more traditional Sears products. Wine and pharmaceutical products are also planned.

Although the local Sears Grand is part of the Gurnee Mills mall, Lacy said an exception had to be made because of a gap in Sears' reach there.

Lacy said the stores have been generating more visits and cross shopping for several goods instead of one primary purchase at a mall-based Sears.

The change in buying habits has helped apparel and home fashion item sales, he said.

Regardless of Lacy's positive report, shareholders criticized the board for not adopting annual elections for board members; terms are currently staggered over two-year periods. The staggered board proposal won a plurality of shareholder votes for the third straight year. Another proposal that won would have required a shareholder vote on any "poison pill" measure to fend off a hostile takeover.

Both measures were advisory and are opposed by the board.

Yet corporate governance was just one of the criticisms fielded by Lacy.

Critics hammered at his four-year tenure, noting he has been at the helm during massive layoffs, sagging sales and store closings. Sears' shares closed Thursday at $38.08, well off the high of $56.06.

One critic, shareholder and former employee Doug Liggitt, listed missed performance targets and called Lacy's tenure, "a monumental failure."

Some analysts say this could be a crucial year for Lacy's survival as CEO of the $41 billion-a-year retailer.

"I feel Sears is in deep trouble," Liggitt said.

Sears Defends Strategies to Angry Investors
Calls CEO Lacy 'Monumental Failure'
Crain's Chicago Business/Reuters
May 13, 2004

(Reuters) — Sears, Roebuck and Co. portrayed itself on Thursday as a cutting-edge department store chain expanding for the first time in decades, while shareholders railed against the retailer's weak share price, frozen dividend and top management pay. The 118-year-old Sears, the nation's largest department store chain, has been under siege on many retail fronts, but its chief executive said at the annual shareholder meeting that the company was accelerating expansion plans for its off-mall Sears Grand stores following decades of zero growth.

Especially irksome to some shareholders was Sears' decision not to declare a special dividend from last year's $3.4 billion sale of its credit card business to Citigroup Inc. Sears instead used the proceeds to pay off debt, refund its pension plan and buy back shares.

"You've been a monumental failure at improving Sears' stores," one shareholder told Chairman and Chief Executive Alan Lacy at the meeting in a Chicago suburb. "You've misled, misread and in effect lied to shareholders."

Lacy said he was not happy with the company's share price either, and noted that since he became head of the company in October 2000, Sears' shares had outperformed the stocks of several competitors including Wal-Mart Stores Inc. as well as the Standard and Poor's 500 index.

The company had considered a special dividend but tax considerations made the stock buyback preferable, Lacy said. He also defended his 2003 raise in the form of stock options and noted his bonus had been halved.

Two shareholder proposals opposed by company management were passed at the meeting: one seeking annual election of directors and the second asking that the company's so-called poison pill takeover defense plan be submitted to shareholders for a vote.

Lacy politely dismissed both proposals, saying the board would revisit their review of the issues, to which corporate gadfly Martin Glotzer said cheerfully they would be reintroduced next year.

Four directors, including Lacy, were re-elected to three-year terms, though shareholders withheld 24 percent of their votes from at least one of them.

Some shareholders did not spare Lacy their anger at the company's performance and what they regarded as rampant job- and salary-cutting and strategic missteps by management.

Lacy acknowledged some mistakes but said he was proud of how fast the company had changed its look, products and services.

He later told reporters that the company had erred in not transitioning quickly enough to spring fashions because of a "loss of institutional memory" when it centralized merchandising. Sears made some poor real-estate decisions with its Great Indoors home remodeling outlets, he added.

The company's new ventures include Sears Grand stores, intended to offer more premium brands than discounters such as Wal-Mart and Target Corp., while displaying more products than rivals Kohl's Corp. and J.C. Penney Co. Inc.

Lacy said customers visited the first Sears Grand store near Salt Lake City more often than traditional mall-based Sears' stores and bought a greater array of items. He projected slightly smaller versions of Sears Grand, though would not give a figure on the number of stores the company would open beyond the three more scheduled this year.

Sears Selling Upbeat Future While Analysts See Challenge
By Sandra Guy - Business Reporter - Chicago Sun-Times
May 13, 2004

Two starkly different views of Sears Roebuck and Co. are emerging as shareholders meet today to hear CEO Alan Lacy's yearly review at the retailer's Hoffman Estates headquarters.

Retail analysts see a company grappling to achieve a turnaround and struggling with management turnover. Sears sees itself heading into a bright future with the right people.

Shareholders demand that Sears change its corporate governance policies and pay attention to proposals the shareholders have adopted year after year. Sears' board insists it is acting in its shareholders' best interests, even if that means acting opposite the majority vote of the shareholders.

Yet both sides agree that Lacy has to show solid growth this year. Retail analysts consider the back-to-school season a crucial test.

How did it come to this?

Lacy started the latest chapter when he succeeded Arthur Martinez as CEO and president in October 2000. One year later, he announced the remake of the 111-year-old retailer into a store that would fall somewhere between a department store and a discount store.

The initial goal was to change the look and layout of the stores and cut 4,900 salaried jobs, or 22 percent of Sears' salaried work force, to better compete with rivals ranging from Home Depot to JCPenney to Best Buy.

Since Lacy took charge four years ago, Sears has cut 70,000 jobs and has come under pressure to prove that it can survive as a retailer after it sold its profitable credit-card business to Citigroup on Nov. 3. Credit-card income had accounted for more than 60 percent of Sears' operating profit.

The question that has dogged Lacy, a career chief financial officer, lingers: Why not hire a seasoned merchandiser to put some buzz into the company's maligned apparel offerings, especially now that Sears must live or die on its retail businesses?

Sears says the company is filled with merchandisers, is introducing more fashionable apparel and has quietly fixed problems with a weak infrastructure, excessive promotional pricing and inconsistencies from store to store.

This week, Sears hired Linda Knapp, 51, who previously was vice president and general merchandise manager for "mishmash," the former teen apparel business of Too Brands, a division of The Limited Too. It marked Sears' second takeaway from Limited Brands Inc.

Last September, Sears bought a young men's apparel line called Structure from Limited, and will introduce it in stores this fall.

Yet the new hires and acquisitions fail to overshadow a seemingly constant turnover at the top and troubles getting Lands' End to register with shoppers. On April 14, Sears realigned its leadership structure again, reducing to 11 from 16 the number of executives who report directly to Lacy.

Sears spokesman Ted McDougal earlier this week said Lacy has been courageous in ousting an entire executive team that had become "stagnant."

McDougal defended Sears' sale of its credit-card business by arguing that the retailer could no longer compete with major banks, and is now concentrating on increasing revenues in areas such as auto centers, consumer electronics, combined appliance and electronic stores, and the Sears Grand stand-alone stores.

Yet Sears' financial results remain a topic of analysts' concern.

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

Sears reported on April 21 a net loss of $859 million, or $3.90 per share, for the three months that ended April 3, compared with a profit of $192 million, or 60 cents per share, for the same period a year ago. Most of the loss was caused by an accounting change.

However, in a recent presentation to Wall Street analysts, Sears highlighted the fact that its fourth-quarter 2003 adjusted earnings were $2.24 a share, compared with $2.11 in the same quarter in 2002. That beat analysts' earnings forecast of $2.02.

At the shareholders' meeting, Sears confronts unresolved issues with people who own its stock.

Shareholder activist Martin Glotzer will introduce for at least the ninth time a proposal that Sears elect its full board of directors each year, rather than in staggered terms. A yearly election of directors would make it easier to unseat incumbents.

A majority of shareholders has adopted the proposal for the past two years, but Sears' board has refused to change the setup.

Health Insurance Plan Would Aid Part-Timers
Big Employers Seek Group Coverage

By Bill Brubaker - Washington Post Staff Writer
 May 11, 2004

About 50 of the nation's largest employers, including McDonald's, IBM, Sears, Marriott and Lockheed Martin, have joined forces to negotiate health insurance coverage for an estimated 4 million uninsured workers and their dependents.

The employers won't pay for this coverage. Rather, they announced plans yesterday to form a purchasing pool of their part-time and contracted workers who do not qualify for health benefits. The employers will hire a single health insurer to offer various levels of coverage at rates lower than what the workers could get as individuals.

Details of costs and implementation are sketchy.

Uninsured workers could pay as little as $30 a year for a membership card that offers access to group insurance rates or as much as $2,000 a year for a plan that guarantees more comprehensive coverage, regardless of any preexisting condition, according to coalition members.

"Thirty dollars a year will not give you real insurance," said Greg A. Lee, the senior vice president for human resources at Sears, Roebuck & Co. "But that might be good enough for, you know, a 20-year-old kid who doesn't have access to health insurance at all. On the other hand, someone [with a family] is probably going to want some higher levels of coverage and would probably be willing to pay a little bit more."

About 44 million Americans are uninsured, 35 million of whom come from working families, according to the HR Policy Association, a lobbying group for human resources executives that created the coalition.

Some in the health benefits industry say political pressure nudged major employers to take some kind of action.

"The number -- of 44 million uninsured people -- is staggering," said Mark F. Lindsay, a vice president of health insurer UnitedHealth Group. "We're in an election year and it is very, very clear that health care is going to be a major issue on the agenda."

"Part of this is a response to bad publicity," said Laura Clay Trueman, executive director of the Coalition for Affordable Health Coverage, a consumer lobbying group whose members include health insurers, pharmaceutical manufacturers, the American Medical Association and the U.S. Chamber of Commerce.

She mentioned media reports focusing on questions about Wal-Mart Stores Inc.'s health benefits. Part-time Wal-Mart employees are not eligible for health coverage for two years.

"When you've got Wal-Mart getting hit or others getting hit, [employers] want to show that they want to develop some opportunities for these people to get coverage," she said. "Because, you know, we all believe that Americans should have coverage. . . . So [employers] feel a pressure to put their collective minds to bat."

Wal-Mart isn't part of the coalition. A Wal-Mart spokeswoman said she was unaware of yesterday's announcement and was unable to say whether the company considered joining.

Encouraging part-time and contract workers to buy health coverage will increase productivity and decrease absenteeism, members of the coalition said.

Insured workers "have a tendency to be a little bit more comfortable in going to a doctor or to an emergency room . . . because they know they have coverage," said J. Randall MacDonald, IBM's senior vice president of human resources. "My guess is that some [uninsured] people bypass that. They're not going to spend the money. They're going to roll the dice."

Lee, the Sears vice president, said: "Healthy people are on the job more frequently." Sears has about 100,000 uninsured part-time workers at its 2,200 stores across the United States, he said.

Sears doesn't offer health benefits to its part-timers because of the cost, Lee said. "It's as simple as that. I mean, we made the decision a long time ago that it was just virtually unaffordable for us to cover our part-time employees," he said. "So this is a fabulous opportunity from our perspective to do some good" for part-time workers.

Executives from three insurers -- Aetna Inc., Cigna Corp. and UnitedHealth Group Inc. -- yesterday signaled their intentions to bid for this business. Part of their job will be to navigate through state rules that govern how coverage can be offered.

Lee said that if only 10 percent of the coalition's 4 million uninsured workers and dependents sign up for coverage the first year, "that's 400,000 people -- a good chunk of business" for a health insurer. "And as employees start talking about this, you would envision that number growing."

Sears Tower Deal Marks Return of the Mogul
By Dean Starkman &  Ray A. Smith – Staff Reporters – The Wall Street Journal
May 11, 2004

Purchase of Chicago Landmark by Group Including Chetrit Family Shows Clout of Individual Investors

A key player in the deal to buy one of the best-known U.S. landmarks is a little-known French-speaking, Moroccan-born New Yorker who represents the return of the old-style real-estate mogul to an industry increasingly dominated by institutional investors.

In competing for the Sears Tower in March, the group including Joseph Chetrit nabbed the building with an $840 million bid -- a price that has caused jaws to drop among Chicago real-estate professionals. To help land the deal, he offered a team of rival bidders a minority portion of the deal -- or cash -- in return for backing away, people familiar with the matter say. He also offered a nonrefundable down payment of $30 million, and postclosing capital improvements that would drive the total price over $925 million.

The Chetrit-led buying group would "very likely" change the name of the 30-year-old landmark, according to one person. But it won't be Chetrit Tower; selling naming rights is one way to haul in revenue.

The deal marks something of a personal vindication for Mr. Chetrit, who 14 years ago pleaded guilty to a felony count of violating federal customs law, when he was working in his business, importing and exporting fabric. He was sentenced to three months' probation, according to records in U.S. District Court in Manhattan.

Mr. Chetrit is a principal in Chetrit Group, a closely held company. The family firm's investment in the Sears Tower is alongside those of two other groups, an entity including Chicago investors Israel Gluck and John Huston and the Moinian family of New York, say people familiar with the deal. A spokeswoman for the ownership group, 233 S. Wacker LLC, confirmed the deal's ownership structure.

People close to the Chetrit side dispute that Mr. Chetrit was particularly active in the deal. They say he was one of more than a dozen negotiators, including the minority partners ultimately bought out. Further, the people say Mr. Chetrit now is a "passive" investor in the property with only a 9% personal stake and isn't an officer or director of the actual buying entity, 233 S. Wacker. Mr. Chetrit's older brother, Mayer Chetrit, is the general manager of the buyers' group and signed key documents on the deal, the people say.

But people familiar with the deal say Mr. Chetrit was key in bringing the deal together, as well as other deals over the past several years. Last year, for example, a Chetrit group and two other New York investors bought 530 Fifth Ave., a big office building in Manhattan, for $210 million.

In general, moguls are on a roll. New York investor David Werner and other investors bought New York's landmark Metropolitan Life tower for $675 million. And last October, New York investor Harry Macklowe stunned the real-state world with a record-setting $1.4 billion bid for the General Motors building, in New York.

The prices for the assets are considered high -- even bubbly. Several other deals are imminent. "This is the market of the individual investor," says Richard Baxter, executive director of Cushman & Wakefield, a New York real-estate services firm. "They're dominating right now."

Real-estate investment trusts, pension funds and other institutional investors remain powerful players, but several trends have worked to favor the moguls over the past several years. Two of the biggest: the decline in interest rates and the investment world's insatiable appetite for a securitized form of mortgages, known as commercial mortgage-backed securities. As interest rates declined, moguls were able to borrow and borrow greater sums. And banks were willing to lend greater and greater sums to them, knowing they could package the debt as mortgage-backed securities and resell to mutual funds, insurance companies and other institutional investors.

In the Sears case, Bank of America Corp. is lending the buyers $825 million, the people say, which amounts to a sky-high 98% of the purchase price and about 90% of the price including improvements. Bank of America expects to securitize "a substantial" portion of the loan, selling the riskier pieces to a growing number of so-called mezzanine lenders, according to one of the people. A Bank of America spokesman declined to comment, citing client confidentiality, except to confirm that the loan closed on April 30 and that the distribution process in the securities market is now getting under way.

The circle of real-estate moguls is small. Two members of the group that was bought out of the Sears Tower deal also are part of a partnership headed by developer Larry Silverstein that owns office leases on the destroyed World Trade Center. Four months before the Sears Tower deal, the Port Authority of New York and New Jersey, which owns the site, allowed the Silverstein-led group to get back its original $125 million investment in the leases, providing the group capital to deploy elsewhere. The group retained its right to control all 10 million square feet of office space at Ground Zero.

Even before the Chetrit group stepped forward, Chicago real-estate executives were caught by surprise when New York real-estate moguls Lloyd Goldman, Stanley Chera and Jeffrey Feil looked poised to lock in a deal for Sears Tower with MetLife Inc. at a seemingly high $811 million. Last year, when Trizec Properties Inc. declined an opportunity to assume ownership, the implied value of the West Loop landmark, built in 1974, was somewhere above $760 million. The building's value had taken a hit after the terrorist strikes of September 2001. The tower hasn't signed a significant new lease since the attacks, and occupancy stands at just below 90%, according to people familiar with the matter.

Rushing to complete the deal, the Goldman group hired engineers from Tishman Construction Corp., New York, to check out the building. Messrs. Goldman, Feil and Chera flew to Chicago in private jets to walk the tower themselves on March 9 -- the day word came of the Chetrit group's brash bid.

In 1990, Mr. Chetrit was fighting federal charges that he violated U.S. customs laws while importing South Korean textiles. According to a complaint filed in U.S. District Court in Manhattan by federal Customs agents, Mr. Chetrit was charged with allegedly filing false customs declarations and other documents to make South Korean fabric appear to have originated in France, to evade import restrictions.

The Chetrit family owned warehouse and other space in Manhattan. Mr. Chetrit, who is in his late 40s or early 50s, is known as tough negotiator, often conferring with his brother, Jacob, in French. He and his family capitalized on the real-estate downturn of the early 1990s by buying major buildings in New York and more recently, Chicago and California. With prices rising, they have sold properties. In January, the Chetrit family and others sold 1185 Avenue of the Americas, a major Manhattan tower, for $321 million to Reckson Associates Realty Corp., Melville, N.Y.

The Chetrits' Sears Tower gambit triggered three days of sometimes-acrimonious talks between the Chetrit group, the Goldman group and MetLife. The Goldman group believed it had a deal with MetLife -- and threatened to enforce it, people familiar with the situation say.

A deal was hammered out March 11 at MetLife offices in Parsippany, N.J., when the Chetrit group agreed to pay the Goldman group in return for dropping out of the deal.

Besides selling naming rights, according to a person familiar with the winning group's plans, the buyers intend to boost revenue through improvements to the observation tower, which attracts one million visitors a year, and obtain more for rights to broadcast from the tower's antennae.

Big Firms to Team up to Cover Uninsured Plan for Retirees, Part-time Workers
By Bruce Japsen - Tribune staff reporter – Chicago Tribune
May 11, 2004

Seeking to address a growing social problem and save themselves money, about 50 of the country's largest employers plan to band together to offer health insurance to workers who otherwise would not qualify.

The companies--including McDonald's Corp., Sears, Roebuck and Co., Caterpillar Inc., Ford Motor Co. and General Electric Co.--on Monday said they could eventually offer coverage to 4 million uninsured workers and their dependents by next year.

Coverage would be offered to part-time, temporary and contract employees as well as early retirees. Increasingly, these workers make up a larger share of the nearly 44 million uninsured Americans.

The move comes as rapidly increasing health-care costs lead many companies to cut or eliminate medical benefits. Employers say that trend is fueling part of the problem: Health-care costs from those who cannot pay are being absorbed by those with private insurance.

With congressional efforts to provide health benefits for all Americans stalled, analysts say private sector backing is key.

"When you have 44 million people uninsured in the nation, you shouldn't stop any effort to cover some of those individuals while working on a solution for all," said Diane Rowland, executive director of the Kaiser Commission on Medicaid and the Uninsured.

"Taking on the whole problem at once is not something that the country has demonstrated a willingness or ability to do," Rowland said.

The coalition intends to create a single pool of uninsured workers, contract workers and early retirees and then seek bids by September from large health insurance companies.

Employers hope, by creating a pool that spreads risk, to keep premiums below what workers would pay if they sought coverage individually, and to reduce barriers to coverage in general.

Workers could begin getting benefits in early 2005, according to the HR Policy Association, a Washington-based lobbying group comprising human resources executives.

Greg Lee, senior vice president of human resources for Sears, said backers hope to create a flexible plan.

"What we want to provide is a set of affordable solutions and let the uninsured decide on what is best for them," Lee said.

Sears alone has more than 100,000 part-time employees who would be eligible for coverage under the new plan.

Nationally, there are almost 44 million Americans who do not have health insurance coverage. The numbers of uninsured are climbing particularly fast among people with jobs as companies cut back benefits, according to a 2003 U.S. Census Bureau report.

Last year's census report on the uninsured said the percentage of people covered by employer-based health insurance dropped to 61.3 percent in 2002 from 62.6 percent in 2001.

To fill coverage gaps, participating employers also will offer coverage to former workers who have exhausted their Cobra benefits--coverage extended to workers for up to 18 months after they leave an employer. It also would cover workers' children who are students but who are no longer eligible for coverage.

The plan will be designed by Lincolnshire-based benefits consulting firm Hewitt Associates, which will work with employers to reduce costs by handling enrollment and other administrative duties.

Some of the nation's largest health insurers are expecting to bid to provide the coverage. They include Aetna Inc., Cigna Corp. and UnitedHealth Group, Hewitt said.

Bidders would be held to certain performance standards designed to ensure quality in helping the uninsured workers choose doctors and hospitals.

"The group is seeking guaranteed issue of some coverage benefits regardless of pre-existing conditions, and will work with the consulting firm and the health plan to streamline underwriting to cut costs," said Tom Beauregard, lead health-care strategy consultant for Hewitt.

By reaching out to the uninsured, employers hope to eventually rein in health-care costs that are climbing nearly 14 percent a year for large companies.

Uninsured workers tend to delay medical treatment and avoid lower-cost preventive care. As a result, they often end up seeking treatment in emergency room settings where costs are high.

CEOs Still Riding the Gravy Train
By Sandra Buy - Chicago Sun-Times
May 10, 2004

Shareholders' uproar about CEOs getting rich off stock options shifted the salary game in 2003, but most CEOs continued to reap healthy rewards.

Seven of 17 CEOs at large publicly traded companies in the Chicago area received double-digit percentage pay increases because their companies' boards of directors granted them far greater shares of restricted stock in 2003 than in 2002. Restricted stock is common stock that commonly vests over a set time period. For instance, some restricted stock may not be sold for a specified number of years, or until the executive retires.

"Restricted stock grants are the new favorites as companies look to shift out of stock options," said Jannice L. Koors, managing director of Pearl Meyer & Partners, a New York-based consulting firm that conducted the compensation analysis for the Sun-Times.

Companies are running from stock options because they might soon have to account for the options as an expense under pending new accounting rules. Also, shareholder activists blame stock-option grants for spurring top executives to hype their companies' earnings, which led to many of the abuses at companies such as Enron, WorldCom and Tyco.

However, the rewards that boards of directors granted the CEOs of three Midwestern stalwarts -- Illinois Tool Works, Sears Roebuck and Co. and Deere & Co. -- reveal that companies still are grappling with the intense scrutiny that shareholders are bringing to compensation policies.

Illinois Tool Works
An example of how restricted-stock awards have taken off is the 2003 compensation of W. James Farrell, CEO of Illinois Tool Works.

He was the big winner in compensation rewards among the Midwestern chief executives, but only because he received a multiyear restricted stock award, according to the Pearl Meyer analysis.

Farrell, 61, saw his total 2003 compensation soar three-fold from the previous year, because the board of the Glenview-based company granted him $9.3 million in restricted stock that will vest in three equal installments in 2003, 2004 and 2005. The grant boosted his overall compensation to $12.6 million.

The ITW board's compensation committee reported in a financial filing that it based the CEO's compensation on a variety of standards, such as the company's net income and the CEO's ability to meet performance targets and influence the company's long-term growth. However, some corporate-governance gurus believe restricted-stock awards are worse than stock-option grants.

Don Delves, a Chicago executive-pay consultant, said the shift from stock options to restricted stock "is a step backward in terms of accountability."

"A CEO's main incentive is to not leave," he said, referring to the fact that companies often fail to require CEOs to meet performance goals in order to qualify for the restricted stock.

Companies should tie a CEO's restricted-stock grants to his ability to jump significant performance hurdles, Delves said. However, he noted that ITW "is a solid Midwestern company" whose CEO compensation is not out of line.

Indeed, the 92-year-old maker of industrial equipment has grown its earnings and dividends per share by 14 percent annually over the past 10 years, according to a note to investors written by Edward Jones analyst Matt Collins, who owns no stock in ITW.

In April, the company achieved a financial trifecta by announcing its first share buyback, increasing its fiscal 2004 outlook and reporting better-than-expected quarterly earnings.

A spokesman for ITW did not return repeated calls for comment.

Sears, Roebuck and Co.
An exception to the restricted-stock trend was Sears, Roebuck and Co., which rewarded its CEO with a stock-option grant.

Sears CEO Alan Lacy realized the second-largest compensation increase in the Pearl Meyer analysis because the board granted him more than $2 million in stock options.

That boosted Lacy's total compensation by 48 percent in 2003 from the previous year -- to $4.3 million last year from $2.87 million in 2002.

Lacy, 50, also took advantage of the retailer's stock bounce last year to exercise previously worthless Sears options for a gain of $2.16 million.

Lacy exercised 75,479 stock options that would have expired in 2005.

"The strike price of the options in 2002 would have been greater than the price of Sears' stock; that's why the value was zero [in 2002]," said Sears spokesman Chris Brathwaite.

Sears' stock started climbing a year ago, to a high of $56.06, on speculation that the Hoffman Estates-based retailer would sell its $30 billion credit-card portfolio. The sale to Citigroup was completed in November 2003. Following the sale, the stock slipped, and closed Friday at $37.80.

Sears has slashed 74,000 jobs since 2001 (it now employs 201,000), redesigned its stores to look more like discount rivals and focused on selling more fashionable, proprietary apparel lines.

Yet Wall Street analysts remain skeptical about whether the strategies are working, because Sears' same-store sales lag its peers. Sears' comparable-store sales were negative in 2001, 2002 and 2003 as gross sales per square foot in Sears department stores dropped during those three years by more than 6 percent, to $180, according to a March note to investors from Goldman Sachs analyst George Strachan.

Delves, the compensation consultant, said Lacy's stock-option grant is normal procedure in corporate America.

Lacy benefits from another procedure that's also typical of CEO compensation -- an automatic stock "reload," in which CEOs are awarded one stock option for every one they exercise.

Though Delves had no criticism of Sears' pay procedure, he said he dislikes "reloads" because they give CEOs a free ticket.

"It's a fancy, well-disguised way to have your cake and eat it, too," Delves said.

Ironically, ITW's Farrell is a member of the Sears' board's compensation committee.

Deere & Co.
The third-highest compensation jump in 2003 went to Deere & Co. CEO Robert W. Lane, 54, who hopped aboard the restricted-stock award bandwagon.

Pearl Meyer calculated that Lane's compensation jumped 48 percent, to $7.64 million because the board awarded him restricted stock of $2.62 million, more than offsetting a decline of $800,000, or 23 percent, in the value of his 2003 option grants from the year before. However, the Moline-based tractor manufacturer is requiring the 54-year-old Lane to hang onto his restricted stock until he retires.

"That's a really nice feature. That's putting some teeth into it," Delves said.

A separate aspect of Deere's CEO compensation raised a red flag.

Deere's board stated in the company's proxy that its target bonus award for its CEO was 110 percent of the CEO's base salary. However, Deere gave Lane a bigger bonus than the target amount in 2003 even though the company's return on average consolidated assets was "between minimum and target performance," according to the proxy statement.

Deere did better on cost-cutting by exceeding its minimum goal in that area.

Despite the mixed results, the board rewarded Lane a bonus of 132 percent of his base salary. Other senior officers also got bonuses that exceeded the company's target awards.

A Deere spokesman declined to comment.

Deere's share price closed Friday at $66.87, 11 percent off the 52-week high of $74.93.

CHANGE IN COMPENSATION FOR AREA'S LEADING CEOs

Chicago area CEOs benefitted from a trend last year toward more generous awards of restricted stock and less emphasis on stock options. An analysis of 18 Chicago area CEO pay packages by Pearl Meyer & Partners consulting firm showed that the value of stock options fell by 32 percent, while the value of restricted-stock grants swelled by 108 percent.

* CEO no longer in office
N/A -- Could not calculate because there was no value on which to compare
Source: Pearl Meyer & Partners, New York

Employers Form Health Insurance Alliance
By Bill Brubaker - Washington Post Staff Writer
May 10, 2004

More than 50 of the nation's largest employers, including McDonald's, Marriott, Sears and Lockheed Martin, have formed an alliance to negotiate health insurance coverage for an estimated four million uninsured workers.

The employers will not pay for this coverage. Rather, they will form a purchasing pool of part-time employees, contract workers and others who don't qualify for insurance benefits at their companies. This pool, in turn, would negotiate with a single health insurer to get lower rates than the workers could get as individuals.

This plan is expected to be announced in Washington today at a press conference led by the HR Policy Association, a trade group representing senior human resources executives of more than 200 large companies.

Insurers eager to win this new business, including UnitedHealth Group Inc., plan to attend.

Greg A. Lee, a senior vice president for Sears, Roebuck & Co., said in a statement prepared for the news conference: "We are aiming to work with one health plan to create a series of coverage choices at different prices that can be tailored to fit a wide range of budgets, from low-income part-time workers to highly compensated full-time independent contractors not covered by a company plan."

The coalition, which also includes IBM, American Airlines, Ford Motor and United Parcel Service, said in a statement it was "alarmed by the 43.6 million Americans without health care protection, the drain on worker productivity, the ballooning costs of company health benefits, and the widespread inefficiencies in the U.S. health care system."

The group said it hopes to find an insurer willing to guarantee coverage, regardless of pre-existing conditions, for every worker in the pool.

"We're not a cure-all," J. Randall MacDonald, a senior vice president of IBM, said in remarks prepared for today's news conference. "The root causes of problems like the uninsured and sharply escalating health care costs are far too complex to be solved oversight."

Unions vs. Wal-Mart
By Cora Daniels - Fortune
May 17, 2004

Up Against the Wal-Mart

Think your job is tough? Meet the people whose task it is to unionize the world's biggest company.

It is a little before 11 p.m. in Las Vegas, and despite the seductive universe of slot machines and sex, Maurice Miller is out cruising Wal-Mart parking lots. Again.

"By midnight that lot will be f-u-l-l," he huffs in his Texas twang. He flicks the cigarette permanently nestled between his thick fingers and points out the window at the rows upon rows of cars. It doesn't seem as though the overflowing parking lot can be any fuller than it already is. The 16 Wal-Marts in Vegas are open 24 hours a day, seven days a week. That means Miller, 49, a self-described short, fat man with a wild salt-and-pepper beard, diamond studs in both ears, and an I-don't-take-any-crap attitude, never gets a break from one of the toughest jobs around. He is a full-time union organizer, and his mission is to convince Wal-Mart employees that they should join the UFCW (United Food and Commercial Workers). So he is always searching for workers—in parking lots and beyond—who might want to talk. Tonight he sees no likely prospects. Maybe tomorrow he'll have better luck.

Wal-Mart is the nation's largest employer, and not a single one of its 1.3 million workers ("associates" in Wal-Martese) is a union member. Changing that statistic, some union leaders argue, is the labor movement's most important challenge right now. "If we want to survive," says Stewart Acuff, organizing director of the AFL-CIO, "labor has no choice but to organize Wal-Mart." Though individual unions usually do not band together across turf lines for organizing drives, discussions are now underway across the labor community about what they call "the Wal-Mart problem." "What they do affects the standard of living across the globe," explains Acuff, referring to the retailer's ability to force competitors to move their wages and prices downward to compete. "In essence, Wal-Mart is a third-party negotiator at every bargaining table."

This may be the ultimate labor vs. company battle—a battle that the weakened labor movement desperately needs to win. For a rare inside look, FORTUNE spent ten days—the length of a union organizer's shift—shadowing people like Miller who are working on "the Wal-Mart problem." There are 12 of them, men and women living hundreds of miles from their spouses and children, slogging through days that are exhausting, lonely, and mind-numbingly boring. What's worse, even though the organizers have been camped out in Vegas for almost five years, buttonholing as many Wal-Mart associates as they possibly can, they still haven't succeeded in unionizing a single store. Despite all their dedication, they may well be fighting a battle they just can't win.

The campaign against the discount chain really started with Maurice Miller. Miller is something of a celebrity in the Wal-Mart labor movement, because he is responsible for the only modest success that the UFCW has had with the company. In 1999 he was a meat cutter at a Wal-Mart in Jacksonville, Texas; his wedding band sits on the stump of the ring finger on his left hand. That year, Miller says, Wal-Mart denied him a promotion into management that he had been promised. (A Wal-Mart spokesperson says the company does not comment on individual employment matters.) Frustrated, Miller asked his brother-in-law, an electrician in Kentucky, what he would do about it. The brother-in-law said he would file a grievance with his union.

"What do you do if you don't have a union?" Miller asked.

"You start one," his brother-in-law answered.

That night Miller sat at his computer and searched for unions. He came across the UFCW, which represents 1.4 million workers, mostly in grocery and retail stores. He signed a union card a few days later. (To unionize a workplace, 30% of workers must sign cards calling for an election held by the National Labor Relations Board, or NLRB. Unions usually won't call an election, though, unless at least half of the workers sign cards; they want to ensure a win.) Within a couple of months Miller had persuaded the rest of the meat cutters at his store to sign cards too. In February 2000 the department became the first in the chain to vote to establish a union. And with that, the labor movement had its toe in Wal-Mart.

Two weeks later Wal-Mart disbanded its meat-cutting departments nationwide. It now supplies its stores with prepackaged meat. Wal-Mart maintains that the move was in the works before the union drive. But the move galvanized the UFCW. The union decided to attack Wal-Mart in Las Vegas, which is a strong union town. In the spring of 2000 it began flying organizers there from across the country. Bill Meyer, 52, a veteran UFCW organizer who leads the Vegas campaign, arrived that spring and never left. He found the task in Vegas to be "monumental." News of what had happened to the Texas meat cutters had had a chilling effect. And Wal-Mart's culture was so strong that organizers unfamiliar with the company language and traditions were not making a dent. So in 2001 the union took the unusual step of relying almost exclusively on former Wal-Mart workers, even former Wal-Mart managers, to lead the campaign. Folks like take-no-crap Miller.

But Miller and his compatriots face formidable hurdles. For one thing, Wal-Mart is a very sophisticated adversary. According to Cornell University's office of labor research, 74% of U.S. employers currently wage moderate to extremely aggressive anti-union campaigns, Wal-Mart among them. While spokesperson Christi Gallagher maintains that the company is "pro-associate, not anti-union," Wal-Mart does everything from asking store managers to call a 24-hour hotline at the slightest sign of union activity to flying a ten-person labor team into stores to talk to employees. For another, Wal-Mart—like most retailers—has a large part-time, transient workforce; that's one reason retail has one of the lowest rates of unionization of any sector of the economy, hovering just under 5%. Many Wal-Mart employees work in Southern states where unionism isn't widely understood or embraced. And while many Wal-Mart workers undoubtedly want a union, none of them has stepped up to be the next Maurice Miller. Al Zack, the lead strategizer of the union's Wal-Mart campaign, who works from UFCW headquarters in Washington, D.C., gives this a positive spin: "All they are waiting for is for someone else to go first."

Union organizers are the foot soldiers of the labor movement. They spend their lives on the road, sleeping in aging hotels like the Frontier in Vegas, earning $35,000 to $60,000 a year (more than many Wal-Mart hourly employees make, but much less than many store managers do) and often working way past the sacred eight-hour day. In Las Vegas the UFCW's Wal-Mart organizers work ten-day shifts, then fly back to their homes in different parts of the country for four days at a time. Jon Lehman, 43, a former Wal-Mart manager, sees his wife and three children in Louisville just 72 days a year. On one flight back home, he says, "This is when I really start to miss my kids."

The organizers' days officially begin at about 9 a.m., when they huddle in Meyer's dingy suite at the Frontier for their daily strategy meeting. (Miller already looks tired. He started making calls at 6 a.m. to workers coming off the night shift or to those on the East Coast who have reached out to the union.)

But most of the organizers' time is spent driving nondescript rental cars to areas far from the strip, knocking on doors where no one ever seems to be home, or cruising Wal-Mart parking lots that always seem to be full. On the road their cellphones ring constantly with calls from workers, loved ones, and one another ("Lunch at the Palms buffet?").

It frequently takes five to six hours of knocking on doors before an organizer makes it inside a single house. "It is the same thing every day," admits Miller as he leaves an unmarked brown-paper bag of union materials at the door of a worker who's not home. The union's literature, updated since the arrival of the former Wal-Mart workers, quotes Sam Walton—never mind that Walton openly disliked unions—and pleads with associates to unionize to bring their store up to the standards that "Mr. Sam" would have wanted.

The boredom can be intense. "Oh, please, something happen," organizer Gretchen Adams, 57, sighs one afternoon behind the wheel. Four years ago Adams was a store manager in Florida with a reputation for speaking up for workers, which she says did not make her a favorite with top brass. Unbeknown to her, her husband got in touch with the UFCW on her behalf, and the union sent her an e-mail at home. "I got so scared," she says. "I was convinced Wal-Mart would find out and I would lose my job." A month later, she finally responded to the e-mail; in 2001 she quit and signed on as an organizer, taking a pay cut that, she says, was "in the tens of thousands."

It's 6:30 p.m., and Adams and her partner, Mary Lou Wagoner, haven't been inside a house all day. They knock on yet another door, a gray one on the second floor of an apartment complex. Success! A slight woman in her 60s, wearing a housedress and slippers, appears. She's a Wal-Mart associate who works nights, and she invites them to sit down in her tiny kitchenette. As easy-listening jazz plays at a deafening volume, the woman spends much of the next two hours venting about her boss. "I can't take the favoritism anymore," she says softly, looking past the organizers into a small living room covered in floral prints and frilly doilies. They nod their heads in support and barely utter a word. ("Most workers just want someone to listen," Adams tells me later.)

When the associate says that her recent "eval" (Wal-Mart-speak for evaluation) was unfair, Adams asks her, "Did you get a copy of it?"

The associate's eyes get big. "You serious? I can get that?"

"You should get a copy of anything you sign," advises Adams. "Start a folder with all that paperwork."

"I can get a copy of my eval? Really," the woman repeats, still in disbelief.

By 9 p.m., tired and hungry, the organizers get up to leave. And they finally come to the point of their visit: Adams asks the associate if there are others in her department who might be ready to sign union cards. (The woman has already signed one.) The associate names a few and promises to talk with them.

It is hard to imagine Cesar Chavez, whose impassioned speeches helped unionize migrant farmers, or Wyndham Mortimer, whose massive sit-down strikes shut down assembly lines at GM, having days like this.

The UFCW used to be more in-your-face. "In the old days we'd be chanting and protesting in the parking lot," says organizer Stan Fortune. "Now we are less confrontational and more covert." They have adopted this under-the-radar approach partly because they say Wal-Mart workers are too frightened to speak to them openly and partly because they don't want Wal-Mart to know the number of union card signers at any given store. If a company knows that more than 30% of workers have signed and therefore a vote is close, says Kate Bronfenbrenner, director of labor education research at Cornell, the easiest way to prevent that from happening is to flood a store with more bodies "packing the unit," as the tactic is known. The 30% then drops to, say, 20%—and the organizers have to recruit another 10%. Wal-Mart denies doing that.

When organizers do venture into stores, they often pose as shoppers, pushing carts and discreetly nodding to workers who have signed cards. It doesn't always work. Store managers frequently throw the organizers out. But even that is discreet. On a recent venture to a Vegas store, organizer Lehman gets out just a few hellos to workers before declaring, "We are being stalked." Since his head never seems to look anywhere but straight down the empty aisle, I'm convinced he's paranoid. But out of nowhere, one of the store's managers appears. The two exchange pleasantries the way co-workers do who have to tolerate each other: Lehman compliments the manager on losing a little weight; the manager says politely, "Thank you for noticing." Then the manager asks Lehman to leave. It is back to the car. Lehman hasn't talked to a single new face today about the union.

Some of the most fervent organizers are the newest converts—like Larry Allen, 48. Allen was an associate in a Vegas store in 2001 when Miller persuaded him to sign a union card. "The first day I walked into Wal-Mart with a union button, everything changed," says Allen. "In one day I went from being employee of the month to people not speaking to me." Last summer Wal-Mart fired Allen for solicitation; the company says that he was handing union literature to a co-worker in the store's break room. Allen denies it. The union claims that Wal-Mart fired him in order to quash an upcoming NLRB election there. (After investing 14 long months of work at the store, Miller says he had accumulated nearly enough card signers to call an election.) Wal-Mart says that's not so. The labor board is now hearing Allen's case. Meanwhile, Allen has paired up with Miller to organize full-time.

"How are you doing?" Allen says enthusiastically to every person wearing a blue Wal-Mart vest who passes him in the parking lot early one afternoon. (Miller hangs back quietly; he has cruised these parking lots so often that he recognizes the managers' cars and has already told Allen the coast is clear.) Most associates hurry past. Allen's UFCW T-shirt makes it obvious what he'd like to talk about. When he does get a nod back from one middle-aged woman, he hands her what he says is "interesting reading material." He watches her walk away, then cheers: She made it past the trash can without throwing the union pamphlet away. "Got one!" Allen exults.

It is a reminder that the organizers exist in a world where victories are subtle. Stan Fortune, 47, who was a cop before working for Wal-Mart for 14 years, spends much of his time tracking down internal company documents—such as pay scales or anti-union memos—that might strengthen the union's argument with workers. Usually workers give him the materials, sometimes anonymously. Fortune has gotten into the habit of keeping his car window cracked whenever he parks in a Wal-Mart lot: "It is amazing what [documents] people will slip inside."

To break up the document digging, once every six weeks Fortune makes the two-hour drive from Vegas to Kingman, Ariz., to speak to associates at his old store, taking in postcard views of Hoover Dam along the way. "Look at it!" he marvels as he steers the wheel with his knees so that he can drink a can of Coca-Cola mixed with peanuts. Kingman is too small to have a UFCW union hall, so Fortune usually meets workers at a local Mexican restaurant on Route 66. The waitresses, who are used to seeing him, usher him to a private room in the back.

The room is loud: Bright colors are everywhere, and a train rumbles by right outside the open window. Two associates are waiting. Fortune's cellphone rings; a third associate won't be able to make it this time. The scene is a world away from Vegas, but the talk is the same: Workers want respect and better benefits; the union says it can help. "We have to get the fence sitters," Fortune tells them, referring to associates who are still iffy about signing union cards. "It is going to take patience."

Though the organizers acknowledge that five years is a long time to wage a union campaign, they don't talk about any other outcome but winning. "We know we are not going to have any immediate results," says Meyer. "But we are building a movement. Women's suffrage took decades; the civil rights movement took a century. We are looking at something similar with Wal-Mart." But some observers question how long the UFCW realistically can keep at it. Because of the grocery worker strike it waged in California from October 2003 to February 2004, the union is strapped for cash—and the Vegas effort is costing some $3 million a year. In April, UFCW strategizer Zack was debating whether to lay off one or two of the 12 Wal-Mart organizers to save money. Even if the union did have bottomless pockets, the odds of success would be long. "No one can do it [unionize Wal-Mart] alone," says Ruth Milkman, director of the institute for labor and employment at the University of California. "It needs a full-fledged multi-union effort." So far, that hasn't materialized.

In the meantime, Gretchen Adams has more doors to knock on. Stan Fortune has more documents to hunt. Maurice Miller has more parking lots to cruise. On the tenth day of the shift, they have planes to get on so that they can see their families.

And in four days it will all start again.

What an Old Sears Catalog Could Teach eBay Today
By Randall Stross – New York Times – Digital Domain
May 9, 2004

IN warning about the consequences of invading Iraq, Colin L. Powell offered what he called the Pottery Barn rule: You break it, you own it. If, in a civilian context, someone coined an eBay rule, it might be this: "Satisfaction most emphatically not guaranteed. All sales final."

When Internet bulletin boards were first melded with auctions, there was little reason for buyers to pause in the absence of a guarantee. Bids were tiny, the risk small and the entertainment value of the novelty considerable. In the beginning, eBay's rise was anything but predictable; as late as 1997, it was but one funky site among 150 or so online auctions.

Today, of course, it is the behemoth, reporting quarterly results last month that its chief executive, Meg Whitman, says put it on track to reach merchandise sales of $32 billion this year. Its 105 million registered users constitute a sprawling country without borders, which Ms. Whitman notes is equivalent to the 11th-most-populous nation in the world, just ahead of Mexico.

The character of eBay's business has changed no less than its scale. More than $2 billion of its business in the last quarter involved fixed prices, not auctions. New, factory-fresh merchandise is crowding the used. For the first quarter of 2004, sales of collectibles were exceeded by sales of automobiles, computers, consumer electronics, clothing and accessories, among other categories. "EBay's business has evolved well beyond the neighborhood rummage sale," said Nancy F. Koehn, a professor at Harvard Business School.

The expanding eBay empire of the 21st century invites comparisons to its 19th-century predecessors, the mail-order houses. Their customers share a salient characteristic: their purchase decisions are wholly dependent upon the descriptions supplied by the vendor. Whether reading a page in a catalog or on the Web, there's no squeezing the Charmin.

Of course, eBay's computerized data centers had no counterpart in the messy headquarters of Sears, Roebuck, circa 1900. But Sears adopted one practice so modern, and so at variance with the eBay rule of no refunds, that it seems radical: a promise of "satisfaction guaranteed," to help it attract remote customers who couldn't examine the goods first.

"Kind Friend," Sears warmly addressed its catalog customer in 1900. "Any customer ordering anything from us and not finding it entirely satisfactory, even though it be exactly as represented, is under all circumstances at liberty to return it to us and we will promptly refund the money paid for it, and bear the freight or express charges both ways."

EBay takes a different approach. Its user agreement warns buyers that "unless you and the seller agree otherwise, you will become the item's lawful owner upon physical receipt of the item from the seller, in accordance with Ca. Com. Code § 2401(2) and Uniform Com. Code § 2-401(2)." No explanation is provided for the commercial codes' arcana.