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May / June '99

Sears' Money Machine Faces Credit Crunch

Melissa George
Crain's Chicago Business, June 21, 1999

Bathing suits and women's shorts aren't the only things collecting dust at Sears, Roebuck and Co. this spring.

Smaller Risky-Account

Targeted Credit Cards

"You have so many card issuers out there creating cards for everyone from skiers to airline junkies," says Chris Theoharides, president of credit consultancy Advantage Consulting Group Inc. in New York. "Sears is facing intense competition."

Sears, Roebuck and Co. (NYSE: S) executives today updated financial analysts in a meeting held in New York on the company's progress with its strategic business initiatives, including the key role of Sears marketing transformation. 

"Our plans to drive growth in revenue and profit during the second half of this year and beyond remain on track," said Arthur C. Martinez, Sears chairman and CEO. "We continue to build market share in key appliance and home electronics categories. Our efforts to extend excitement and focus around our apparel offerings, including the addition of private brand shops and nationally known brands like Benetton USA. and Timberland are progressing well. These will be complemented by Sears 'Exceptional Value' program, which will showcase an outstanding combination of quality and value for our customer." The company is planning an August press event in Chicago to introduce its new umbrella advertising campaign that will be launched early this fall. The campaign is being created through a collaborative effort between Ogilvy & Mather and Young & Rubicam, Sears two primary agencies. 

According to Martinez, the growth of Sears hardware, dealer and The Great Indoors specialty stores has continued in 1999 with exceptionally strong same store sales. Sears cost containment program and strong cash flow have enabled the company to repurchase approximately $600 million of its outstanding shares since the first quarter of 1998, while also sustaining a solid capital expenditure program. In fall 1999, the company will introduce the Sears Premier Card, providing Sears most frequent customers with enhanced features and benefits. "We have made solid progress these past six months in restructuring our marketing initiatives and processes," said Mark A. Cohen, Sears executive vice president, Marketing. "The result of our marketing efforts will be evident in the third and fourth quarters. "We are integrating all marketing activities to better present a unified view of Sears to our customers, and have significantly strengthened our value messaging," Cohen said. "Our redesigned advertising will better represent all businesses and brands and position Sears as a value-packed, fashionable store." 

The company also is making progress in its efforts to strengthen whole-house marketing with compelling offers conveying Sears value proposition. Promotional events, including Super Saturday, key holiday events such as Memorial Day, and two-day sales, have resulted in significant sales increases, and will continue throughout the year. Sales of Nickelodeon's Blue's Clues apparel, merchandise exclusive to Sears through the important back-to-school season, have exceeded expectations. Sears partnership with Nickelodeon's Blue's Clues extends through 1999. 

Sears is taking direct action to reach and appeal to younger customers during back-to-school 1999 through its recently announced sponsorship of Sears Presents Backstreet Boys Into The Millennium, a concert tour throughout the U.S. and Canada by one of the world's greatest pop groups. The Backstreet Boys will appear in Sears advertising and promotions to enhance Sears image as a fun, compelling place to shop. The new Sears Pulse Card, a loyalty program created to build a relationship with junior apparel purchasers, will give card members frequently changing discounts and promotional offers tied to the Backstreet Boys during the tour and to product specials throughout 1999. 

Sears, Roebuck and Co. is a leading U.S. retailer of apparel, home and automotive products and services, with annual revenues of more than $41 billion. The company serves families throughout the country through 850 full-line department stores and more than 2,100 specialized retail locations. More information about the company is available on Sears Web site, http://www.sears.com .

Source: Sears, Roebuck and Co.

Fraud Lawsuit Filed Against Sears

Associated Press, Jun 16, 1999

Edwardsville, Ill - Sears, Roebuck & Co. collected up to $400 million for tire balancing services it never performed, then paid millions to keep the fraud quiet, according to a lawsuit filed in Madison County Circuit Court.

The lawsuit, filed Tuesday, also claims managers destroyed the tire-balancing machines with sledgehammers to cover up the fraud.

The complaint, which seeks class-action status, estimates 7 million to 30 million people who purchased Sears AccuBalance service from 1989 to 1994 were potentially defrauded.

The balancing machines were used to shave off a tiny layer of rubber to make sure the tires were round.

Sears workers typically charged $12.50 to process each tire but often skipped the procedure, which was impossible for the buyer to detect, according to the lawsuit.

It also contends Sears management knew that most of the balancing services never were performed, but pressured employees to sell the services anyway.

Attorney Stephen Katz, who represents the plaintiffs, said he believes Sears failed to do the work up to 90 percent of the time in its 800 tire stores nationwide.

Sears spokesman David Albritton declined comment today on the lawsuit, which he said the company had not seen.

But he noted the case is the same as a federal lawsuit pending in Tampa, Fla. That lawsuit was filed in September 1991, thrown out and recently reinstated late last year by a federal appeals court that ruled notices Sears sent in 1992 for reimbursement of ``unnecessary and/or improper repairs'' were too vague to be understood.

The lawsuit accuses Sears of paying almost $30 million in ``hush money'' to buy the silence of the machine's manufacturer, Assix International Inc., of Tampa, Fla., after that company's workers reported significant discrepancies between the services Sears sold and the work recorded by mechanical counters on the machines.

Assix leased about 1,300 machines to Sears for $300 per month each, plus a royalty of 15 cents on every tire shaved, according to court documents. Sears paid Assix based on cash register receipts and not the counters, the suit said.

In 1994, Sears paid $30 million in cash and property for a $6 million contract termination settlement and to acquire the AccuBalance machines, the lawsuit contends.

The lawsuit alleges that Sears, based in the Chicago suburb of Hoffman Estates, distributed a ``secret video tape'' telling workers to destroy the machines and the counters with sledgehammers, then sell the remains for scrap. It claims Sears also acquired all Assix paperwork regarding its AccuBalance machines as part of ``massive cover-up efforts.''

Editor's Comments: Appears that there was excess pressure for automotive income and the complete failure of internal and traveling audit functions.

Top Court Sides  with Workers -- Employers Must   Honor Handbooks

Max Jarman
The Arizona Republic, May 27, 1999

The Arizona Republic; The Associated Press contributed to this article. The Arizona Supreme Court ruled Tuesday that companies may not unilaterally change provisions of their employee handbooks without the approval of covered employees and without compensating them for any entitlements they may lose.

The decision could require Arizona companies to honor provisions of old handbooks, though they have been replaced by more current policies. It could prompt businesses to retroactively get employee sign-offs on past changes and somehow compensate them for the changes.

''It creates a profound disincentive for employers to communicate openly and in writing with their employees,'' noted John Alan Doran, a Phoenix attorney who represented ITT Corp., the defendant in the case.

According to Doran, the decision affects employee handbooks issued prior to 1996 when the Arizona Employment Security Act specifically stated that, unless otherwise designated, employment policy manuals do not constitute employment contracts. But, Doran noted the state's top court is now weighing the constitutionality of the act, and if it is thrown out, all handbooks could be subject to the ruling.

Especially affected by this week's ruling are provisions in the handbooks that could be argued to grant an employee some kind of entitlement such as vacation and holiday pay, medical benefits, sick time or other perks. ''Employers will have to revisit how handbooks are written, what is contained in them and how they communicate with their employees,'' Doran said. Many may simply elect to do away with them.

The case, known as Demasse vs. ITT Corp., involves six employees, including Roger Demasse, who worked for ITT in the Phoenix area from the 1960s until they were laid off about 1993, Doran said. The employees claimed they were illegally fired because provisions in company handbooks, dating from the time of their initial employment, outlined a seniority system under which layoffs would occur.

''These people believed the longer they stayed with the company, the more secure their jobs were,'' said Jack Levine, a Phoenix attorney representing the workers. ''As a result, they didn't look for other work or take advantage of employment offers or other openings elsewhere in the company.''

By the time the employees were furloughed, the company had done away with the seniority protection in the event of a layoff and the policy had been eliminated from subsequent editions of the company's employee handbook. The employees argued that the handbooks at the time they were hired reflected contractual terms of their employment which they never agreed to change and therefore were still in place at the time they were fired.

In 1994, the U.S. District Court for Arizona ruled that employers could change the conditions of employment outlined in their handbooks at any time without the approval of the employees and dismissed the case. Levine appealed to the 9th U.S. Circuit Court of Appeals in 1996 and the case was remanded to the Arizona Supreme Court for a determination. The case was argued in October.

The top court disagreed with the decision of the district court and concluded in the 3 to 2 ruling that the employment provisions in handbooks can represent binding contracts and cannot be unilaterally altered without the employees' consent and an offer of compensation to make up for any lost entitlement.

''It holds an employer to a handbook that was published 30 years ago when there were different methods of production, different rules of competition and different ways of doing business,'' Doran said. ''And the only way to change it is to engage in one-on-one with each employee in the company.''

Justice Frederick Martone, a dissenter, added the ruling ''will create havoc with employer-employee relations'' by subjecting employers to different obligations to different employees and by setting up potential conflicts between employees covered by different versions of a handbook. Not all handbook provisions can be considered binding as contract terms, Levine added.

''It's got to be something that would make the reasonable person rely on it,'' he said.

Justices Stanley Feldman, Thomas Zlaket and James Moeller (now retired) supported the decision with Charles Jones and Martone dissenting.

Retirees Protest Decrease in Life Insurance

Patti Bond
Atlanta Journal, May 17, 1999

For some veterans of Sears, Roebuck and Co., retirement has been anything but peaceful. On Thursday, retirees came from across the nation to draw attention to their quarrel with the company's chief executive.

Flanked by a bagpipe player, about 60 Sears retirees waved signs and marched in front on the Merchandise Mart on Peachtree Street to protest a cost in life insurance benefits. Afterward, they went inside to the company's annual meeting and peppered chairman and chief executive Arthur Martinez with questions.

The Atlanta protest is part of a nationwide fight by thousands of retirees who are trying to restore the value of life insurance policies cut by Sears in 1997. Sears reduced company paid life insurance benefits from an average of about $17,000 to $5,000 as part of a cost-cutting effort. The cut, which affected 84,000 retirees has spurred hundreds of protests nationwide.

Hoffman Estates, Illinois based Sears, which has battled consumer lawsuits and financial trouble in recent years, said the cuts were needed to keep the company competitive. Sears said it was spending almost twice as much as other retailers on retiree benefits and has no plans to back off of its decision.

While the continued protests have become an irritant to Sears, the larger issue of how far a company must go to honor commitments to retired employees is being watched closely by other businesses. Sears maintains that when times get tough, commitments to retirees are subject to cutbacks, just like any other expense. So far, the courts have tended to agree.

"We had to do something," Martinez said. "Home Depot and other young companies are not burdened financially with a large retiree health care or a life insurance plan, and that enables them to be much more competitive." To minimize the impact on retirees, Sears is phasing the reduction over ten years and is subsidizing replacement insurance that doesn't require a physical exam.

The retirees have taken their fight to court. In January, a U.S. District court in Illinois granted class-action status to a lawsuit against Sears filed by a former store manager. At issue in the suit is whether Sears misled its employees about lifetime benefits. Sears insists it consistently communicated to employees it had the right to make changes.

Sears isn't the only company to battle angry retirees in recent years. Many large corporations have changed their retiree health benefits because of rising costs and changes in accounting rules. Consequently, federal courts have seen a rash of cases over retiree benefits.

The rulings have been mixed so far. Campbell's soup Co. and Walt Disney Co. settled cases stemming from retiree benefits cuts. Last year, General Motors Corp. won a court battle to change retiree health care benefits even though it had promised lifetime benefits to employees.

"Generally, the court finds in favor of an employer if the company reserves the right to change benefits,?" Said Bruce Palmer, chairman of the department of risk management and insurance at Georgia state University.

"The variety of court opinions is a reflection of each companies contract language." 

Sears, Mom Call Truce in Telemarketing War

USA Today, May 17, 1999

A West Virginia homemaker who stood up to telemarketers is got the ultimate apology Friday. Executives from the firm, its lawyer, and parent company Sears flew to West Virginia it to say they were sorry.

Like many Americans, Diana Mey, 40, of Wheeling, West Virginia, had been harangued by sales calls during dinner. She told American Home Improvement Products not to call her again. When the calls didn't stop, she sued in small claims court under the telephone consumer protection act of 1991.

The companies response? It counter sued the mother of three for more than $10,000 for wiretapping because she taped one of the calls to document it, which is legal in her state.

"This was clearly a mistake," says Tom Nicholson of Sears, which bought the home improvement company after the incidents. He says the company's policies have been changed.

Mey, her husband and three sons accepted the apology and a check for an undisclosed amount. "I was scared," Mey says. "But I wanted my boys to see that you stick to a fight because of your principals."  

Like a poorly stitched hem, the overhaul led by Sears, Roebuck and Co.'s merchandising guru isn't holding up.

Seven years after his appointment by CEO Arthur Martinez to spiff up the dowdy retailer, Merchandising President Robert Mettler again finds himself launching a sweeping overhaul of the 840-store chain.

This time, however, a harsher spotlight has been turned on Mr. Mettler because the mess is one created largely by him.

The depth of Mr. Mettler's troubles became apparent last fall when sales at Sears, which had outpaced rivals' for so many quarters, hit the skids. Profit margins have

sagged as a result of discounting, and customers have fled to competitors like Kohl's Corp. and discount chain Target.

Now, Mr. Mettler — who, before joining Sears, was CEO of the California-based Robinson's department store chain — is under pressure as never before to turn things around.

This time, he has little room for error. Unlike the previous overhaul, which stretched over several years, Mr. Mettler is

expected to record higher sales by this fall.

"We're working hard on it," said Mr. Mettler, 58, in an interview before Sears' annual meeting in Atlanta last week. "There are a lot of issues, whether marketplace issues or our own, and I'm optimistic about the future."

Mr. Martinez expects sales of apparel, which analysts estimate were flat or lower during the last nine months, to rise 4% to 6% during the second half of 1999. He says he is confident Mr. Mettler will pull off the turnaround, and insists he's not considering a management shake-up.

"Bob's a great merchant. He's built a multibillion-dollar apparel operation," Mr. Martinez said after the shareholders meeting. "He, like I, is not satisfied with where we are."

Investors clearly are becoming impatient with Sears' lackluster performance.

Sears' stock has fallen to the $48.75 range, roughly 25% off its 52-week high. Same-store sales, or sales at stores open at least a year, fell for five straight months beginning last August. So far this year, same-store sales have been essentially flat, vs. increases of 5% to 6% for competitors.

'We will have our day'

The company's poor sales and declining profit margins were the topic of repeated questions from shareholders in Atlanta, some of whom "attended" the meeting via the Internet. One Web user asked, "Is the company doing everything possible when it comes to innovation?"

Mr. Martinez defended the company's performance, noting that cutthroat pricing on basic apparel by competitors, especially Wal-Mart Stores Inc. and Dayton Hudson Corp.'s Target, has undercut many mid-priced retailers, including J. C. Penney Co.

Sears' sales of goods such as lawn and garden products, electronics and appliances have risen robustly, he said. And apparel sales — though weak recently — have mushroomed to $10 billion from $4 billion since 1992.

"Competitive pressures have affected all retailers," he said. The discounters and other rivals "will have their day, but we will have our day as well."

Companies such as Wisconsin-based Kohl's, which is upping its store count 20% each year, tend to have an advantage over mature chains like Sears. Their new stores, which figure into same-store sales one year after opening, generally attract more customers and boost sales more rapidly than older units.

Nonetheless, Sears has fallen short of its own 1%-to-3% target for sales growth this year, , analysts say. Actual sales rose just

0.7%. Other retailers, including department stores and discounters, have exceeded their plans for sales growth.

"Sears definitely has to drive comparable-store sales in the second half of the year," said Richard Church, an analyst with New York's Salomon Smith Barney Inc.

By August, the apparel departments of about 450 Sears stores will have been updated, Mr. Mettler said. The rest of the chain will be finished next year.

Sales of clothing — a highly profitable merchandise category — hit a slump last year "because we got overassorted," Mr. Martinez said. "We had too many vendors in too many small bites."

Cluttered sales racks are being replaced by boutique-like displays featuring new, lower-priced apparel lines by Benetton and Liz Claiborne, as well as existing in-house brands such as Fieldmaster men's clothing, Canyon River Blues denim collection and Apostrophe, a line aimed at young working women.

Needs to restore growth

Sears also is weeding out lackluster apparel suppliers, chopping prices on basic clothing items such as shirts and pants, launching a new line of tabletop and gardening merchandise and mulling an expansion of apparel for petites.

"It's no secret that we're not where we want to be," Mr. Martinez told investors during the meeting. "What we need to do is restore the kind of growth we (reported) over five years in our apparel group."

With competition growing and the obvious apparel problems they inherited fixed, Messrs. Martinez and Mettler may find their second turnaround more difficult to achieve than the first.   

Analysis of Operations Operating results for the Company are reported for four domestic segments and one international segment. The domestic segments include the Company's operations in the United States and Puerto Rico. The Company's segments are defined as follows: Retail consisting of: - Full-line stores - Specialty stores (Home stores and Auto stores) Services consisting of: - Home Services - Direct Response Marketing Credit which manages domestic Sears Card operations Corporate consisting of administrative activities of a holding company nature, the costs of which are not allocated to the Company's businesses (includes e-commerce, international) consisting of retail, services and credit operations conducted in Canada through Sears Canada, Inc. ("Sears Canada"), a 54.7%owned consolidated subsidiary For the 13 weeks ended April 3, 1999, net income was $146 million, or$0.38 per share, as compared to $133 million, or $0.34 per share for the comparable 1998 period. The increase in net income was primarily due to improved performance of the Credit segment, partially offset by declines in the Retail and Services segments and higher corporate expenses. Operating income in the first quarter of 1999 was $245 million compared to $222 million in the comparable 1998 period. Operating income by segment was as follows: 13 Weeks Ended (millions) April 3, April 4, 1999 1998Retail $ (69) $ (60)Services 75 80Credit 295 252Corporate (73) (60)International 17 10Total operating income $ 245 $ 222The Company's consolidated effective tax rate in the first quarter of1999 was 37.9% as compared to 40.4% in the prior year period. The decrease in the effective tax rate is primarily due to a reduction in domestic taxes on international operations and the favorable resolution of certain tax audit issues.

Due to holiday buying patterns, merchandise sales are traditionally higher in the fourth quarter than other quarterly periods and a disproportionate share of operating income is typically earned in the fourth quarter. This business seasonality results in performance for the13 weeks ended April 3, 1999 which is not necessarily indicative of performance for the balance of the year. The Company makes available by phone a recorded message on the sales performance of its domestic stores. The message is updated weekly and can be heard by calling (847) 286-6111.RetailRetail revenues decreased 2.8% to $6.42 billion for the 13 weeks ended April 3, 1999 from the comparable 1998 period due to the divestitures of Western Auto and HomeLife. Excluding the impact of the divested businesses, first quarter Retail revenues increased $212 million or3.4%. Retail revenues and related information are as follows: (millions, except number of stores) 13 Weeks Ended April 3, April 4, 1999 1998 Change Revenues: Full-line stores $ 5,066 $ 4,936 2.6 % Specialty stores 1,356 1,669 (18.8)% Total Retail revenues $ 6,422 $ 6,605 (2.8)%Number of Full-line stores 847 834Number of Specialty stores 2,104 2,727Total Retail stores 2,951 3,561Comparable store sales percentage increase 1.9% 4.9%Full-line stores revenues increased 2.6% over first quarter 1998.Apparel revenues increased 2.1% during the first quarter after a 5.4%gain in 1998. Women's special sizes, girl's and infant's apparel, jewelry, cosmetics and fragrances posted strong sales increases, while women's sportswear and men's apparel had solid revenue gains. These increases were partially offset by decreases in dresses, boy's apparel, footwear and children's furniture. Hardlines revenues comprised of home electronics, home appliances, home office and home improvement merchandise sales, as well as licensed business sales, increased 2.9% in the first quarter of 1999. Gains in home appliances, home electronics and home improvement were partially offset by a decline in home office sales.  

WASHINGTON May 14 (AP) -- A Labor Department investigation found 227 children were working at Sears, Roebuck & Co. in violation of child labor law. The giant retailer has agreed to pay a fine and audit its stores for problems each year. In most cases, teen-agers were operating heavy machinery, which is prohibited by labor law, said Labor Department spokeswoman Susan King. There were a few instances of teens working too many hours, she said. The results of the investigation and the settlement were to be announced later today by Labor Secretary Alexis Herman. Sears, the nation's largest department store and second-largest retailer, will pay a $325,000 fine to settle the allegations, King said. Under the agreement reached this week, the company also agreed to conduct annual audits of its 845 ``full-line'' stores and step uptraining of managers, she said. Nationwide, the company has 11,150 workers under age 18.The 1998 Labor Department investigation in 23 states involved 71 of the nation's 825 stores, King said. Violations were found in 44 stores. In most cases, 16- and 17-year-olds were found loading and operating power-driven paper balers, a machine that flattens cardboard boxes, or operating freight elevators or fork lifts. Under federal law, children are not permitted to operate this sort of hazardous equipment. In a few cases, some 15-year-old workers were working more hours than permitted under law, King said. Under the agreement, Sears does not admit to any of the allegations. Sears spokeswoman Jan Drummond had no comment on the charges leveled but said the company hopes to use the agreement to improve working conditions for teens. ``We have an opportunity to be a model in the retail industry in making an attractive and safe workplace for teen-agers,'' she said today. King said the department was pleased by Sears' response when they were presented with the allegations. ``When brought this information, they were willing to do a very comprehensive agreement,'' King said. ``They can do more than we can do alone. ''She noted that the department has only 1,000 investigators nationwide to monitor laws including child labor, minimum wage and overtime. ``To get 845 stores self-audited every year is, for us, a real extension of the ability to protect kids,'' she said. The company also agreed to give information on labor law to parents of all workers under 18 and to step up training of every store manager. Labor initiated the investigation because Sears is such a large company and because 60 percent of teen-age workers work in retail, King said. She added that the investigation and the agreement to be announced today are important in the department's effort to enforce child labor laws. ``Sears is the American pie of retail stores,'' she said. ``It's not Susan's 5 and 10 or Susan's Dress Shop. It's Sears.''

Editor’s Note: A great example of the products of inexperience and attention to very basic disciplines. Some comfort can be found in the observation that Arthur exploits the young and not just the old.