Breaking News
October 2000 - December 2000

Cuts in Health Benefits Squeeze Retirees' Nest Eggs 
By Milt Freudenheim, New York Times 
December 31, 2000 

To help pay medical bills left behind when her husband, Gordon, died of skin cancer complications last summer, June Yeager, 82, of Oakdale, Minn., was forced to use a third of his $10,000 in life insurance. It was not that the Yeagers lacked health insurance; they were eligible for Medicare and received benefits from Minnesota Mining and Manufacturing, from which Mr. Yeager retired in 1975 as a shipping clerk.

But 3M decided in 1994 to alter its benefits package for retirees: Retired employees said it increased the annual out-of-pocket deductions for retired blue-collar union members, for example, to $1,500 from $140, and cut back on payments for doctor bills not covered under Medicare.

The Minneapolis company was hardly alone in instituting such changes. Most employers, in fact, have cut or dropped coverage for retirees in the last six or seven years as health care costs have soared. (Health care premiums will increase between 10 and 30 percent in 2001, according to the major insurers.) And a growing number of elderly Americans like Mrs. Yeager have been forced to dip into savings to pay for hospital deductibles or prescription drugs, which are not covered under Medicare.

Fewer than one in four employers now provide medical coverage of any kind for Medicare-eligible retirees; 40 percent provided retiree coverage in 1994, according to a recent national survey of companies with 500 or more employees by William M. Mercer, a benefits consulting company. About 31 percent of employers still cover retirees under age 65, who are not yet eligible for Medicare, but that, too, is down
* from 43 percent in 1994 and 46 percent in 1993, Mercer said.

The largest companies, those with at least 5,000 employees, are more likely to cover retirees, said Frank McArdle, research director in Washington for the benefits consulting firm Hewitt Associates. However, even many of them, like 3M, have limited the benefits by raising deductibles, or placing caps or ceilings on how much they will pay, and shifting other costs to the former employees, he said. Employers are eager to try a defined contribution approach, much like the 401(k) retirement plan, that would pass on the responsibilities of meeting rising health care costs to the employees.

Many retirees had expected their comprehensive health coverage to last forever. Mrs. Yeager, whose husband was employed at 3M for 34 years, and a group of other 3M retirees and their spouses contend that the company had promised lifetime benefits. But they say that, without being consulted, their benefits were reduced in 1994 in bargaining with the Oil, Chemical and Atomic Workers union. The group is seeking class action status for a lawsuit against 3M in Federal District Court in Minneapolis.

"We were just about breaking even under the old contract," said Edward Hughes, 75, of Maplewood, Minn., a factory worker at 3M for 46 years who was diagnosed with Parkinson's disease after he retired in 1991. "Under this one, my wife and I are having to go into our savings."

Helen Braumberger, 79, a 3M factory worker for 37 years, says she now struggles to pay for cancer treatments. "I had to give up my car," a seven-year-old Buick, to save on expenses, she said.

Katherine Hegmeyer, a 3M spokeswoman, said the company did not discuss pending lawsuits.

Retirees have been hit hardest by cutbacks in prescription drug coverage. Bruce Vladeck, who used to head the federal agency that runs the Medicare and Medicaid programs, calls drug coverage for retirees "a disappearing phenomenon." As employers retreat, "the pressure to expand Medicare benefits to include prescription drugs obviously increases," said Mr. Vladeck, who now directs a Medicare policy center at Mount Sinai Hospital in New York.

More than a decade after Congress repealed a Medicare expansion that had included prescription drug coverage, bipartisan debate over bringing some form of drug coverage back continues. President-elect George W. Bush and Vice President Al Gore supported the idea during the election campaign. Mr. Bush said he favored a drug benefit as part of an overhaul of Medicare.

"Corporate America is also interested in a Medicare drug benefit," said John Rother, director of legislative and public policy at AARP, the retiree advocacy association. "Prescription drugs are a growing burden for any company with a unionized labor force" strong enough to insist on keeping retiree drug benefits, he said.

The retreat from retiree health benefits has accelerated since 1993, when a new accounting rule forced companies to reduce their reported income by an amount equal to the present value of future promises for retiree health care. Later, after the promises were sharply reduced, many companies added back the projected savings to increase their annual net income.

Among the first to abolish retiree health benefits was J. P. Morgan, the investment banking company. Starting in 1989, Morgan reduced these benefits for existing employees and eliminated them for new hires. To ease the transition, Morgan employees could take cash from a portion of the company's retirement life insurance benefit, which was also later abolished.

Last year, Boeing joined the list. It eliminated company-subsidized retiree medical coverage for employees hired after Jan. 1, 1999. Retiree health benefits continue for those hired earlier, except for former employees of McDonnell Douglas; they were buying their own health insurance before McDonnell and Boeing merged.

Changes are also planned at General Motors. The automaker provides generous health benefits for nearly 700,000 retirees and their dependents, at a cost approaching $2 billion in 2000. But coverage for retired salaried workers not protected by union contracts will drop over the next few years. G.M. has said it will no longer take responsibility for retiree health coverage for tens of thousands of salaried workers hired after January 1993. To cushion the blow, G.M. is building a fund for these workers to use when they retire, setting aside 1 percent of their salaries each year.

G.M. and other large automakers have been working with the unions to try to slow health care costs by promoting the use of generic drugs and disease management programs to assure appropriate use of pharmaceuticals, said Preston Crabill, G.M.'s director of health care plans. The change in health coverage at G.M. resembles the switch from pensions to 401(k) plans that swept corporate America in the 1980's and 1990's. In both cases, the employee assumes the risk of accumulating enough to cover expenses that may grow with inflation.

Benefits consultants say many companies are moving toward providing employees with a predetermined amount of money, called a defined contribution, for health care, instead of guaranteeing defined benefits with open-ended costs.

In a tight labor market, employers have been reluctant to change to defined contributions for health care for active workers, who could easily find jobs with better benefits elsewhere. But health care experts say the changes that have been felt by many retirees are in the cards for active workers, too, when the economy slows and employers regain the upper hand. A 1999 survey of employers for the Kaiser Family Foundation said more than half would seriously consider a defined contribution approach.

"Because of the economy and the labor market, you can't squeeze worker health benefits," said Deborah Steelman, a Washington lawyer who represents insurance companies and drug makers, and a member of a bipartisan commission on Medicare reform. "It's logical for employers to say, `These people don't work for me any more.' It's a place to cut."

But Patricia Wilson, an independent health benefits consultant in Rosemont, Pa., pointed out that promises of retiree medical benefits had been essential during the last decade of corporate downsizings when many companies reduced their payrolls.

After all, she said, "adjustments in the work force could not have been accomplished without the existence of retiree medical benefits" to attract volunteers to take early retirement. 

Gordons' Comment: Have you written a letter, phoned, e-mailed your Congressman in support of HR 5405, The Emergency Retiree Health Protection Act? Representative John. F. Tierney of the 6th Mass. 6th District has introduce H.R. 5405, The Emergency Retiree Health Benefits Protection Act. The Bill proposes preventing employers from changing or eliminating health benefits promised to retirees by making necessary changes to ERISA. The purpose of H.R. 5405 is to ensure reasonable health benefit expectations of retirees from ERISA-regulated group health plans are fulfilled, to minimize the incidence of prolonged legal disputes arising from post-retirement cancellations or reductions of retiree health benefits from such plans, and to prevent further adverse effects on retiree health arising from such post -retirement changes. The complete text of the bill can be found at: http://thomas.loc.gov/ In the appropriate box enter: H.R.5405 Additional informational web site on pensions can be found at: www.pensions-rus.org/index.html

Again, this bill would prevent employers from changing or eliminating health benefits promised to retirees, which they are allowed to do by the current law. By making the necessary changes to ERISA through H.R. 5405, it will insure that no employer fails to honor a commitment made to a retiree in terms of providing adequate health benefits. It may be the only hope to protect ERISA in the future as illuminated by what has happened to Sears retirees/employees as well as those in other organizations.

Montgomery Ward To Close Operations
Retailer Closing All 250 of Its Stores After More than 125 Years in Business

Martha Irvine - Associated Press Writer - December 28, 2000

Retailer Montgomery Ward Inc. is shutting down after more than 125 years in business and numerous attempts to entice shoppers back to its struggling stores, employees said Thursday.

Wards spokesman Chuck Knittle declined to comment but said the company planned to make an announcement later in the day.

Dozens of employees were seen leaving the company's headquarters with boxes in hand Thursday. Several said they had been told at a meeting that General Electric Co.'s GE Capital Unit, owner of the 250-store retailer, was pulling financial support from Wards in the wake of sluggish holiday sales. GE Capital referred all calls to Wards headquarters in Chicago.

``I'm just devastated,'' Anece Rich, a 28-year Wards employee who worked in the company's mail room, said as she left Wards headquarters. ``They took care of us as best they could.''

A supplier said Wards officials had stopped accepting orders at its distribution centers and had told him they were closing all 250 stores.

``They are shutting down. It's official,'' said Ronnie Goldfinger, senior VP of Highland Park-based Performance Marketing Inc., a manufacturer's representative that sold consumer electronics to Wards.

Retail analysts also said they had heard the end of the company was near.

``It's sad. It's too bad because a lot of effort has gone into trying to save the thing,'' said Sid Doolittle, a Chicago-based retail consultant who spent 28 years as a Wards executive.

Begun in 1872, Wards pioneered mail-order catalogs when it came out with a single sheet of dry-good items for sale. It was the first U.S. mail-order house to sell general merchandise. Sears, Roebuck & Co. wasn't founded until 1886 and didn't put out its first general merchandise catalog until a decade after that.

Ward opened its first store in Plymouth, Ind., in 1926.But the company, which now employs about 37,000 in 31 states, has been financially unstable for years.

Hope had been rekindled in August 1999 when the company emerged from Chapter 11 bankruptcy, announcing a plan to revamp many of its stores.

But some analysts said it was too little too late.

``Wards has not established themselves as anything distinctive in the marketplace,'' said George Whalin, president of California-based Retail Management Consultants. ``There's just no reason to go there -- unless maybe they're the closest store to your house.'' Whalin said it had become increasingly difficult for Wards to survive in a retail market swamped with competitors -- everything from Home Depot to Best Buy and Target.

News of Wards' apparent demise comes two days after Massachusetts-based discount retailer Bradlees Inc. announced that it is going out of business. ``It's brutal. It's as competitive as anything out there,'' Whalin said.

Wards had been shooting for sales growth this year of about 9 percent. Instead, it hovered at a sluggish 2 percent.

``It's like leaving part of your life behind. My heart's breaking, but I'm going to go and look for another job, because that's all you can do,'' Sharon Bray, a 35-year employee who worked in systems quality assurance, told WBBM. She held out little hope that anything would save her job. ``No more Wards, not unless someone jumps in and buys us,'' she said.

Sears Names New V P Human Relations
 December 29, 2000

Sears, Roebuck and Co. has named Greg Lee, senior vice president, human resources, effective Jan. 1, 2001.

Lee, 50, will lead and oversee all human resources-related functions. He will report to Sears President and CEO Alan J. Lacy. Lee succeeds John Sloan. Sloan will be leaving the company to pursue other interests. During his tenure, Sloan lead a number of successful efforts to improve HR processes and practices.

Lee will join Sears from Whirlpool Corp., where he was senior vice president, human resources since June 1998. Prior to joining Whirlpool, Lee served in the same capacity for St. Paul Companies, a property and casualty insurance company.

Lee also held a variety of executive human resources positions at PepsiCo, including vice president, human resources for the company's international restaurant business and for Frito-Lay.

"Greg is a proven human resource executive whose broad experience with consumer goods and services companies is highly relevant to Sears," Lacy said. "His talents and skills will allow him to make immediate and significant contributions to Sears success."

Holiday Sales Fall Flat
Dow Jones Newsroom - December 27, 2000

Despite a big surge of last-minute shoppers, the country's largest retailers said that their same-store sales for the crucial shopping season were flat or up only slightly.

Hoffman Estates-based Sears, Roebuck and Co., Wal-Mart Stores Inc., Target Corp. and Federated Department Stores Inc. all reported that sales at stores open at least a year are falling below their expectations for December.

A variety of factors conspired to depress sales, including higher energy prices, a shaky stock market and bad weather throughout much of the month. But perhaps the biggest obstacle was the enormous strength of last year's sales, which got a boost from the red-hot economy and millennium expectations.

When the final numbers are counted, total sales for this year are expected to be up about 3%, compared with a 6.2% increase last year, according to William Ford, senior economic adviser at TeleCheck Services Inc., a unit of First Data Corp. TeleCheck clears purchases made by check, which account for roughly one-third of consumer spending. Mr. Ford's numbers do not include Internet or catalog sales.

Sears said in a statement that same-store sales would fall below its expectation of 1% to 2% growth, but didn't say whether results would be below last year's.

Bentonville, Ark.-based Wal-Mart said sales at stores open at least a year are running below the 3%-to-5% increases it had projected for December. The giant discounter noted that the five-week reporting period doesn't include the Friday and Saturday after Thanksgiving.

Including those shopping-heavy days, Wal-Mart said it would have met the low end of its same-store sales projection, indicating that people either shopped early or late.

The company said that based on trends so far, its five-week reporting period ending Friday will fall short of its original projections. One reason is that the final week of last year reflected "pantry-loading" and other preparations for the rollover to 2000.

Minneapolis-based Target Corp. said sales are running "way below plan" for December, due to weak volume that persisted right up until Christmas. The company had expected a total sales increase of about 5% at its discount stores, Mervyn's and department stores.

In a report released after the stock market's close Tuesday, Target said it saw strong sales in pharmacy operations, sporting goods and intimate apparel. Sales were weakest in men's clothing, electronics, domestics and home improvement. Stores on the East Coast and in selected sites along the West Coast performed the best, while sales were softest in the middle of the country.

Federated, which owns Macy's and Bloomingdale's, said strong fourth-week sales weren't enough to offset weak sales earlier in the month. The Cincinnati company said it expects same-store sales growth to be slightly below 3% for the month.

Jewelry stores were hit particularly hard. Zale Corp. said its comparable-store sales declined between 3% and 4% for the November-December period., compared with a 16% in the year-ago period. The Irving, Texas, jewelry chain earlier lowered lofty projections and said it expected holiday sales to rise 3% to 4%.

The only companies that saw their expectations turn into reality were those expecting sales declines. J. C. Penney Co., of Plano, Texas, which has struggled in recent years, said its percentage sales decrease was in the low-to-mid single digits. Shopko Stores Inc., Green Bay, Wis., also said it expects to report a sales decrease of 2% to 5%, in line with its plan. 

Economy is in a Blue Mood
By Dr. Irwin Kellner, CBS.MarketWatch - Dec 26, 2000

It takes an awful lot to undermine confidence, but when the consumer's mood finally sours, it's tough to shake the blues. People had their annual post-holiday hangover before the holidays this year, and the economy is paying the price.

By all accounts, the holiday shopping season was a bust. There were no items hot enough to get shoppers to open their wallets -- even with discounts of as much as 50 percent.

Readers of this column should not be surprised. I first warned back on Sept. 12 that the nation's retailers were at risk of finding a lump of coal in their stockings come Christmas morning. That's because, even then, attitudes were beginning to darken.

The stock market was falling while interest rates and energy prices were rising. The Middle East was flaring up, and, to top it off, layoffs were climbing as both heavy industry (manufacturers) and light industry (the dot-coms) began to cut staff.

Then came the presidential election stalemate.

One week after the election, I pointed out that political uncertainty was something that had to be reckoned with, since it usually involves uncharted territory (see my column of Nov. 14).

Twice before -- in 1974, when President Nixon resigned, and in 1990, when President Bush shut down the government -- political uncertainty was enough to undermine confidence and turn a mild slowdown into a full-blown recession.

People stopped buying, business stopped hiring, and the stock market tanked. The ripple effects from these decisions continued long after the event was over.

The same thing is happening today. Concern over the election caused consumers to spend less, leaving retailers with mounds of unsold merchandise. This means less restocking, which, in turn, will mean fewer orders, and eventually reduced output.

All the talk in the media about a possible recession isn't helping things, either. There is such a thing as a self-fulfilling prophecy.

If things are allowed to run their course, there will be a recession. That's because it takes a downturn to get prices of goods and stocks low enough to make them attractive once again. It also takes a recession to get taxes and interest rates down, thus making money more available.

Of course, a recession will exact its toll in rising unemployment and falling profits. So why not shorten the process by cutting interest rates and taxes sooner, rather than later?

It might just be enough to reawaken those animal spirits we supposedly harbor, bringing back some much-needed exuberance.

U.S. Retailers Rely on Busy Weekend to Shore Up Holiday Sales
 By Heather Landy - Bloomberg, December 22, 2000

Wal-Mart Stores Inc., Circuit City Group and other U.S. retailers are banking on a last- minute rush by holiday shoppers this weekend to make up for sluggish sales the first three weeks of the month.

Tomorrow probably will be the busiest shopping day of the year as consumers finish buying gifts and start hunting for year- end bargains, analysts said. Visa U.S.A. said it expects to process 4,100 transactions a second at its weekend peak, a 22 percent jump from the record set on Dec. 24 of last year.

Brisk business this weekend is crucial to Sears, Roebuck & Co., Target Corp. and other chains that haven't kept pace with December sales forecasts. Analysts blame higher fuel prices, stock- market volatility and Midwest snowstorms for the shortfall. Stores are slashing prices now to lure shoppers and help salvage what has shaped up to be a disappointing season, analysts said.

``They're going to have to pull out all the stops,'' said Tracy Mullin, president of the National Retail Federation trade group, who spoke at a news conference in Washington. ``They're going to have to do well'' on Saturday.

Retailers plan for a certain level of discounts and other promotions each year to fuel business and clear their shelves of leftover inventory. If sales fall short of forecasts, stores may have to resort to steeper-than-expected price markdowns, which reduce the amount of profit made on each sale.

``All indications are that retailers at this point are pushing the panic button, not wanting to get stuck with a large inventory overhang after Christmas,'' said Kurt Barnard, president of Barnard's Retail Trend Report.

Kmart Corp. is discounting some goods by as much as 70 percent. Bloomingdale's, a Federated Department Stores Inc. chain, is offering 20 percent-off coupons for certain items.

`Aggressive Step'
Home Depot Inc. is offering a rare 10 percent discount on most items through Dec. 24. The last time the No. 1 retailer of home-improvement supplies held such a promotion was in 1993.

``This is an aggressive step on the company's part to invigorate its business,'' said Lehman Brothers analyst Alan Rifkin, who has an ``outperform'' rating on the stock.

Retailers have reason to expect a late surge in business. Last year, when Christmas fell on a Saturday, the top four shopping days of the holiday season came on Dec. 18 or later, according to the International Council of Shopping Centers.

With Christmas on a Monday this year, consumers have a full weekend to complete or, in some cases, start their shopping. The last time the holiday fell on a Monday was in 1995. That year, the final two weeks of the season generated more than 60 percent of all holiday sales, according to the ICSC.

Overall, December same-store sales are expected to rise 2 percent to 4 percent from last year, according to Bank of Tokyo- Mitsubishi economist Mike Niemira, who previously forecast a gain of 4 percent. He adjusted his estimate earlier this week to allow for a disappointment after Wal-Mart, Sears and other chains said sales still trailed expectations as of last week.

Same-store sales, or sales at stores open at least a year, are a key measurement of a retailer's business because they exclude results from stores that were opened or closed within the year.

With Sales So Sluggish, 
Retailers Are Hoping for a Holiday Miracle

By Rebecca Quick,  The Wall Street Journal - Dec.21, 2000

As the clock runs out on holiday shopping, major retailers are counting on a frantic end-of-the-year buying binge to save them from one of the most disappointing gift-giving seasons in recent years.

For them to pull it off, it will take nothing less than a Christmas miracle.

So far this holiday season, the nation's largest retailers, from Wal-Mart and Sears to Federated Department Stores, all say sales have come in below plan for three weeks running. The rare retailers that seem to be hitting their sales plans are those that expected the worst. J.C. Penney Co., for instance, says sales are coming in at the lower end of its December sales plan, which means sales have dropped about 5% from the year-earlier period.

Last weekend, after the nation finally turned away from an endless presidential election, there was a brief window of hope that sales would pick up. But even that was shut after much of the country was hit by snowstorms and drastic weather kept shoppers away from malls. For the season to date through Sunday, overall sales were running 8.2% below a year earlier, according to the International Council of Shopping Centers, a New York-based trade group that tracks sales at mall specialty stores.

Nevertheless, despite these predictions of doom and gloom, many retailers and analysts have been reluctant to drastically downgrade their initial projections. Many stores are going all out -- including staying open 24 hours -- to pull in last-minute shoppers, in the belief that this final weekend really could still save the season. Jeff Feiner, retail analyst at Lehman Brothers, says he still expects sales to grow in the 3% to 5% range he predicted before the holiday season began.

There's precedent for his optimism: In 1995, which was the most recent time Christmas fell on a Monday leaving two extra weekend shopping days, "it added 1% to 2% of overall sales for the holiday season," says Mr. Feiner. "It's extremely difficult to gauge until that last weekend comes in." According to the National Retail Federation, holiday sales rose 3.7% in 1995, which is basically in line with what some analysts think is still possible this year.

Meanwhile, ever-hopeful retailers say the combination of a late Hanukkah and the nation's propensity for putting off their gift buying to the last minute has helped sales pick up this week. "I'd say it's probably going to be a soft Christmas but not a disaster," says Leonard Riggio, chairman of Barnes & Noble Inc. "But I just don't know for sure -- this has been a booming week."

If online sales are any indicator, there's plenty of last-minute shopping left to be done. BizRate.com, a Los Angeles firm that tracks sales at 2,400 online retailers, says online sales peaked on Dec. 18, when shoppers spent $254.1 million on the Internet. That's well past the Dec. 13 date it had expected sales to peak online, which means consumers' apartment lobbies and doorsteps may still be snowed under with boxes for a few more days.

"We're seeing legs we didn't expect this late in the season," says Seth Geiger, a vice president at BizRate -- despite the fact that closely-watched Web retailer eToys Inc. last week warned that its holiday sales so far are only about half what it had expected.

Catalog sales, meanwhile, seem to be faring better than traditional stores. The Direct Marketing Association has surveyed about 70 of its catalog members, who say their catalog sales have increased this holiday anywhere from 5% to 15% over last year. Still, catalogs are seeing a bit of a growth slowdown too. Last year, the group's members were experiencing sales growth closer to 20% above the year before.

Whether a blockbuster last weekend can save the entire holiday season, however, is still a long shot to some. "Just about everything that could go wrong this season has," says Dan Barry, senior retail analyst at Merrill Lynch. This week, Mr. Barry lowered his holiday sales growth estimates for stores open at least a year to 2.4% from 2.8% for the group of leading retailers he covers, which includes Wal-Mart Stores Inc., Kmart Corp. and Federated Department Stores Inc. If he's right, it will be the slowest holiday sales growth since the recession in 1990, when shoppers spent just 2.6% more than the year before.

That's not preventing retailers from holding out hope, though. Wal-Mart has been quick to note this calendar year's similarities to 1995. In fact, the Bentonville, Ark., discounter even made a point of reminding analysts that it missed its sales forecasts the first three weeks in December 1995. But during the week that included Christmas, Wal-Mart's sales jumped 32%, a boost that helped the retailer catch up with its sales forecasts for the season. "The procrastination factor seems to get pushed back more each year," says Wal-Mart spokesman Tom Williams.

To up their odds for a comeback, retailers intend to keep selling until the last possible moment. Kmart, based in Troy, Mich., is going a step further and plans to keep its stores open 24 hours throughout this weekend. The retailer's 2,100 stores will open at 6 a.m. on Thursday, Dec. 21st and won't close again until 8 p.m. on Christmas Eve.

The hope is that round-the-clock access will help recoup lost sales. "It's no secret that it's a really late season this year, so it's an opportunity to provide a convenience to our customers," says Mary Lorencz, a spokeswoman for Kmart. "Also, we can recapture lost sales from customers who weren't able to get out because of the weather." An advertising circular, set to arrive in homes on Thursday, will promote the longer hours, as well as discounted merchandise.

Others are resorting to special promotions. Nordstrom Inc., based in Seattle, ran unplanned newspaper ads this week in Chicago, Detroit, Dallas and Minneapolis in an effort to spur late shopping. Meanwhile, the retailer's Nordstrom.com unit on Tuesday began e-mailing shoppers to remind them that they must order by 10 a.m. on December 23rd for guaranteed Christmas delivery. Sears, Roebuck & Co. based in Hoffman Estates, Ill., says sales for the three weeks ending Dec. 16 have been below its plans for "low-single-digit growth" for the month. But there's still time to draw in shoppers.

On Saturday, Sears will give shoppers who come to the store between 7 a.m. and 8 a.m. a $10 coupon to be used at any time during the day. The strategy behind the early-opening coupon: "If you're the first retailer that consumers come to, you'll have them for the better part of the day," reasons Lee Antonia, a Sears spokeswoman.

Target Corp.'s Target discount store division hasn't planned any special promotions or extended hours for the weekend. But Target, based in Minneapolis, reported its sales for the third week of December already were on plan for a "mid-single-digit" increase. In a last-minute rush, sales could soar. "We're still kind of holding out hope," says Patty Morris, a spokeswoman.

Already, some sectors are starting to perk up. Sales picked up markedly this past weekend at the Forum Shops at Caesars Palace in Las Vegas, with jewelry sales showing particular improvement. "Our retailers are very optimistic that things are picking up into a very good season," says Maureen Crampton, marketing director at the Forum Shops, which is owned by Simon Property Group Inc.

Certainly, some shoppers got a later start than usual this year and plan to finish up last-minute -- something retailers are counting on. Indeed, with two extra days between Thanksgiving and Christmas this year, plenty of shoppers felt like they had more time to put things off. Andrea Draths, for example, is usually done with her shopping by Thanksgiving, but on Monday, the 44-year-old administrative clerk still had several gifts to buy. "The weather was so warm for so long, I didn't think about it until it was a month away," explains Mrs. Draths, who lives in the Chicago suburb of Glen Ellyn.

Meanwhile, Joedda Sampson, who owns a women's clothing shop called Full Moon Rising and a home furnishings annex in Pittsburgh's Station Square, says holiday sales at her two stores are down 10% and 15%, respectively. But she's holding out hope for Saturday and Sunday. "I suspect we will be slammed," she says.

Retail Stocks eke Small Gain

By Jennifer Waters, CBS.MarketWatch.com, Dec 20, 2000

Following their usual pattern, retail stocks managed to post some gains in the face of widespread carnage in the broader markets.

After an early tumble, by the end of the session, the S&P Retail Index eked out a rise of 1.3 points, or 0.2 percent, to close at 785.90.

That didn't keep some major players from taking a beating, though. Sears Roebuck & Co. (S: news, msgs) , which dropped nearly 8 percent at one point in the session after a Lazard Freres analyst cut the department store retailer's rating to "outperform" from "buy" closed at $32.40 for a loss off 97 cents.

Target Corp. (TGT: news, msgs) missed the bulls-eye again Wednesday after reporting weekly sales Monday that were below expectations. The stock closed at $28.19 for 56-cent loss.

Down Jones Industrials' component Home Depot Inc. also got floored again as it fell $1.50 to $41.13.

On the upside grocery store issues Winn-Dixie Stores Inc. and Safeway Inc. were ended up gainers. Give thanks to Merrill Lynch analyst Mark Husson, who added Safeway to his firm's Focus 1 list.

Winn-Dixie was up 63 cents, or 3.5 percent, to $18.63 and Safeway gained $1.50 to close at $60.

IBM Sends Letter to SEC Seeking Permission to Exclude New IBM Employee-retiree Stockholder Resolution on Executive Compensation, Vapor Profit and Transparent Profit Reporting
December 18, 2000

IBM sent a letter to the SEC seeking to exclude a new stockholder resolution on executive compensation and an IBM employee countered that in a letter the SEC should be receiving in the mail today. The stockholder resolution calls on IBM to pay executives incentive pay based only on profit from real company operations. IBM has been including "vapor profit" in the executive compensation pay formula. Vapor profit is pension fund money the company must count as profit under an accounting rule, FAS 87, but all the money actually stays in the pension fund and none gets transferred to the company.

"Mr. Gerstner and four other IBM executives got $15 million in cash and another $8 million worth of stock grants last year in part based on vapor profit," said proponent Donald S. Parry,. "Executives have boosted the surplus in the pension fund to increase the vapor profit under the accounting rule so they can get more incentive pay. They boost the surplus by slashing retirement pay with cash balance plan conversion and by refusing to grant adjustment for inflation." Mr. Parry is an IBM retiree who has not seen a cost of living increase in his retirement pay in over ten years.

IBM's letter to the SEC argues that the resolution can be excluded under SEC rules because it deals with ordinary company business and because it includes what IBM considers to be false and misleading statements. In the letter responding to IBM the employees answer every point made in IBM's letter. "IBM is seeking to exclude this resolution not because it is false but because it clearly and accurately reports how IBM executives are acting in a self serving manner that hurts stockholders, employees, retirees, and the company as a whole," said IBM employee James Marc Leas, who drafted the response letter for Mr. Parry. Mr. Leas successfully overcame IBM's attempts last year to exclude a resolution he proposed concerning IBM's cash balance plan conversion. That resolution went on to receive the support of 28.4% of the stockholders in April, the largest vote ever for any IBM stockholder resolution opposed by management. That resoluton won the support of all the institutional investor advisory services, including ISS, Proxy Monitor, and Marko. Mr. Leas submitted that resolution again this year. So far IBM has not sought to exclude it.

The resolution calls for executive incentive compensation to be determined by profit from real company operations not including accounting rule profit from pension fund surplus. It also calls for IBM to provide transparent financial reporting of profit from real company operations. The resolution describes how IBM boosted the profit report using pension fund surplus that cannot be transferred to the company. It shows how employees and retirees are being hurt by this scheme while no real money is coming into the company so there is no real advantage for stockholders.

"IBM executives should not get millions of dollars of real company money based on an accounting rule profit report that provides no real money to the company," said Mr. Parry. "They are the only ones to benefit from this scheme."

The referenced correspondance can be found at:

http://www.allianceibm.org/resolution1.htm 
(Mr. Parry's resolution) 

http://www.allianceibm.org/resolutions/SECletter.htm 
(The text of IBM's letter to the SEC)

http://www.allianceibm.org/resolutions/resptoIBM.htm 
(The IBM employee response letter)

Mr. Parry and Mr. Leas can be reached at the phone numbers below. 
The SEC lawyer handling the matter is Carolyn Sherman, and she can be reached at 202 942-2900.

For Further information, contact: 
James M. Leas: 802 864-1575 day and evening 
Donald S. Parry: 904 287-7720 Janet Krueger: 507 529-8777(w) 507 289-9030(h) 
Phil Nigh: 802 769-7316(w) 802 652-4090(h) 
Bill Syverson: 802 769-9590(w) 802 863-6479(h) 
Hans Heikel: 802 769-1692(w) 802 862-1692(h)

Holiday Sales a Lump of Coal
By Anna Driver, Reuters - December 11, 2000

Santa Claus delivered another round of disappointing holiday sales to U.S. retailers last week, as a slowing economy continued to mute cash registers and procrastinating shoppers held back on purchases.

Consumers, mindful of higher interest rates and a spike in fuel costs, have cut budgets this year. With Dec. 25 falling on a Monday, shoppers will have a full weekend to do last-minute gift buying.

``While the expectations were relatively modest, it seems that the later season is possibly causing consumers to take a 'wait and see' approach to buying in hopes that maybe they can do better on pricing, or maybe they are just choosing to wait,'' Mark Picard, a retail industry analyst with Lazard LLC, said on Monday.

Wal-Mart Stores Inc., the world's largest retailer, said customer traffic was sluggish, and sales at its stores came in below company forecasts for the week ended Dec. 8. The results marked the second week in a row that sales for the Bentonville, Ark.-based retailer have fallen short of its expectations. Most retailers have seen shopping traffic fall off considerably since a burst of activity during the Thanksgiving holiday weekend in November.

Sears, Roebuck and Co., the No. 2 retailer behind Wal-Mart, said same-store sales for the latest week came in below company forecasts that sales would grow 1 to 3 percent. Sales of home appliances and tools were the strongest, the Hoffman Estates, Ill.-based retailer said.

Shares of Wal-Mart ended off nearly 6 percent, or $3-1/6, at $51-3/8 on the New York Stock Exchange. Sears closed off 34 cents at $34.77 on the NYSE.

Federated Department Stores Inc., parent of Macy's and Bloomingdale's department stores, also noted that sales slowed last week, but the company still expects to meet its forecast for same-store sales growth of 3 percent in December.

``As we suspected could happen, customers appeared to slow down their shopping in the second week of December, and as a result, sales this past week were disappointing,'' the company said in a recording for investors.

Shares of Cincinnati-based Federated ended 1/16 higher at $34-5/16 on the NYSE. Shares have a 52-week low of $21 and a year high of $53-7/8.

Data from the National Retail Federation and retail consultant RCT Systems Inc. showed that year to date, foot traffic in U.S. malls fell 0.5 percent from a year ago, while customer traffic at department stores fell 3.8 percent.

Prospects for this week don't look much better, following a blast of wintry weather that hit the middle of the country on Monday. The season's first major snowstorm brought blizzard conditions to much of the nation's midsection, and also brought the possibility of a slowdown in mall traffic.

But, Lazard's Picard said that snow is a boon to some retailers.

``You see some businesses that sell shovels and snow blowers and the clubs -- where people stock up on things -- have historically done okay with snow,'' he said.

Home Depot, Wal-Mart Seek to Be Top Appliance Sellers
By Delbert Ellerton, Bloomberg, November 24, 2000

Home Depot Inc. and Wal-Mart Stores Inc. are turning up the heat in the appliance business as they team with manufacturers to cut prices and lure customers from industry leaders.

By year-end, all 1,064 Home Depot stores in the U.S. will sell ovens, washers and other appliances, while Wal-Mart in the next two years may have appliances in about half of its 3,050 discount and Sam's Club stores, analysts said.

This move into appliances is being felt by competitors such as Sears, Roebuck & Co., which is lowering prices and spending more to advertise. Home Depot and Wal-Mart may force other retailers to follow Circuit City Group and exit the $17 billion U.S. appliance business, analysts said.

``Home Depot and Wal-Mart are magnets,'' said appliance analyst Efraim Levy of Standard & Poor's Equity Group. ``They are brands that people trust and (customers) feel they can get a low price.''

Both retailers have exclusive marketing agreements with General Electric Co. and Maytag Corp. This lets them sell their appliances for 3 percent to 4 percent less than Sears, Lowe's Cos. and Best Buy Co., analysts said.

Market Share
In as little as three years, home-improvement retailers such as Home Depot and Lowe's may control as much as 25 percent of the appliance market. Wal-Mart alone may command as much as 10 percent, said analyst Nicholas Heymann of Prudential Securities.

``They're definitely going to get market share,'' Sears Chief Executive Alan Lacy said in an interview.

Sears now is the biggest U.S. seller of appliances, with about 38 percent of the market. Lowe's is second with about 6 percent to 7 percent and Best Buy is third with about 4 percent to 5 percent, analysts said. Circuit City, which decided to stop selling appliances four months ago, held about a 9 percent share.

Home Depot and Wal-Mart already have proven that they can dominate any product category they enter, said Angela Auchey, a portfolio manager at Federated Investment Management Co., which owns shares of both companies.

Wal-Mart, for example, surpassed Toys ''R'' Us Inc., the largest U.S. toy chain, as the top seller of toys in the U.S. in 1998 by offering lower prices. In the grocery business, the company is opening more supercenters, warehouse-size stores that have full grocery departments, and is taking business from chains such as Albertson's Inc., analysts said.

Virtual Inventory
Unlike their rivals, Home Depot and Wal-Mart carry a limited inventory of appliances, just enough for consumers who want to take their purchases home the same day. This so-called virtual inventory arrangement keeps storage and distribution costs low, allowing the two retailers to discount appliances.

``We don't have to have high (profit) margins,'' said Don Galloway, Home Depot's national appliance merchant. This lets the No. 1 home-improvement retailer charge about 3 percent less, he said.

Wal-Mart, the world's biggest retailer, is expected to offer discounts of 3 percent to 4 percent, said retail analyst John Lawrence of Morgan Keegan & Co. The company recently expanded a test of appliances to 100 stores from 12 stores.

Wal-Mart sells General Electric appliances in its namesake stores and Maytag products at Sam's Club centers.

Kiosks located in Home Depot and Wal-Mart stores let customers select and order appliances directly from General Electric or Maytag warehouses through General Electric's distribution network.

``We never touch it,'' Galloway said.

General Electric and Maytag, the No. 2 and 3 appliance makers, are the only manufacturers that offer Web-based sales and one-day delivery from their regional warehouses, analysts said.

Bentonville, Arkansas-based Wal-Mart will only devote about 900 to 1,500 square feet of space at the front of its stores to appliances, said Lawrence, who rates Wal-Mart's shares ``long-term buy.''

Fighting for Customers
Home Depot and Wal-Mart were given a chance to enter the appliance market in July when the No. 2 seller Circuit City said it would stop offering the products, leaving as much as $1.6 billion in annual sales up for grabs.

The following month, Heilig-Meyers Co., the biggest U.S. furniture chain, filed for bankruptcy and said it would close 300 stores, cutting its sales of appliances.

Home Depot and Wal-Mart are expected to win former Circuit City and Heilig-Meyers customers because they already attract a large number of shoppers with low prices on other goods, analysts said.

Some customers may visit a Wal-Mart supercenter two or three times a week, said Morgan Keegan's Lawrence. Wal-Mart said its stores attract 100 million shoppers a week.

Cutting Prices
Competition has increased as retailers wrestle to win customers abandoned by Circuit City and Heilig-Meyers.

In September, Home Depot ran national television and print ads offering General Electric and Maytag products at reduced prices, including Maytag's Neptune washer for $898. The Neptune cost about $1,000 when it was introduced in 1997. The average price of a washer is around $400.

Sears has run national advertisements to promote interest- free financing. Manufacturers are cutting prices as well and are offering rebates in conjunction with retailers.

Best Buy, the No. 3 U.S. appliance seller, also had promotions offering interest-free loans on some appliances and cut prices on others. The retailer has denied analyst and investor speculation that it may exit the appliance business by the end of the year.

``Best Buy will decide sooner rather than later that they should get out, (especially) once Home Depot and Wal-Mart are geared up,'' said portfolio manager Tim Ghriskey of Dreyfus Corp., which owns Home Depot and Wal-Mart shares.

If it does, that may mean there's more easy-pickings for Wal- Mart and Home Depot.

New Retail Chiefs Face Ghosts of Profits Past
By Leslie Kaufman, New York Times - Nov. 26, 2000

It's never easy being the new kid on the block. If it is Christmas and you are a retail executive, it's worse. Every move you make is scrutinized, tallied, weighed against your future.

Whether selling gold-sequined pants, plain microwaves or hot new MP3 phones, the nation's merchants have always seen the holidays season as a do-or-die time. The six weeks from Thanksgiving to Christmas bring in some 50 percent of most stores' revenue, and as much as 60 percent of profits, according to Jeffrey Feiner, a retail stock analyst at Lehman Brothers.

The 2000 holiday shopping season is shaping up to be the biggest pressure cooker in a decade. With the American economy flying high for the last decade, the holiday season has been all rum punch and mistletoe for retailers: sales have grown at 4 to 5 percent a year since the mid-1990's. But the dawn of the millennium has been rough: the stock market is volatile, gasoline prices have soared, interest rates are higher and consumers' appetite seems largely sated by earlier buying binges. And concern about the undecided presidential election is distracting shoppers just as the holiday season starts to peak.

Dan Barry, the chief retail economist at Merrill Lynch, is predicting "the worst Christmas for sales and profits since 1995" and the worst Christmas sales since at least 1990. In his latest holiday report, Mr. Barry predicted that comparable store sales at major retailing chains this Christmas season would rise only "a paltry 2.5 percent," half as much as they did last year.

Ouch. In recent months, the largest national retailers from Target to Gap Inc. to even the usually invincible Wal-Mart Stores warned that sales growth was slowing going into the fourth quarter. Consumers could scent a whiff of desperation in the air as some stores, trying to rev up spending, put up holiday decorations as early as September or offered early, aggressive promotions through coupons or other discounts.

In this turbulent year of all years, executive turnover at the top of the nation's retailers has been particularly high. Among those appointing new chief executives or chief operating officers were Wal-Mart, the country's largest retailer, and Wal-Mart.com; Sears, Roebuck, the largest department store chain; Kmart, the second-largest discounter; J. C. Penney, the second-largest department store chain; Toys "R" Us; Nordstrom; Lord & Taylor, a division of the May Company; Polo Ralph Lauren; and the Victoria's Secret catalog unit, a division of Intimate Brands.

"It is really unusual to have so many major, major broadline retailers with new C.E.O.'s," said George Strachan, retail analyst at Goldman Sachs.

Each new boss faces a very different task. H. Lee Scott Jr.'s responsibility, to stay on top of the well-oiled Wal-Mart colossus, is hardly the staggering challenge facing Charles C. Conaway as he moves to halt a slow sinking at Kmart. Each new executive brings a different range of experience and confidence to the task, and each has had a different amount of time to try to shape the holiday season.

Alan J. Lacy was a six-year veteran of Sears who had already tackled some of the company's worst financial messes before moving up to become chief executive on Oct. 1, but Roger Farah arrived at Polo Ralph Lauren after spending six years hawking sportswear at the former Woolworth, now Venator. Jeanne Jackson left Gap Inc. to become the chief at Wal-Mart.com last April, but Allen Questrom, formerly of Barneys, took the helm at Penney only in mid-September.

Whatever their backgrounds, the executives face a common challenge: Whether the expectation is fair or not, they have to make this Christmas a success.

"The financial market has a very short memory in terms of how long people are in their jobs," said Robert Kerson, president of the global retail practice at Korn Ferry, who conducted the recent searches that led to the hiring of Jane Elfers at Lord & Taylor and John Eyler at Toys "R" Us. "They've got to show improvement. They've got to build some momentum. They are going to be judged to some degree by the performance of this last quarter."

The difficulty is this: Everyone in the business knows that a new chief executive can do very little to improve sales at Christmas, especially if she or he arrives just weeks or months earlier. The vast bulk of merchandise is bought months in advance. The merchandising strategies, the advertising buys and the schedule for putting key products on sale are already choreographed.

They are all dealing with "inherited plans," said Herbert Mines, chairman of Herbert Mines Associates, an executive recruiting firm that specializes in retailing. "So the trick with Christmas is to make sure that the stores are well manned, that day-to-day advertising is good, that the merchandise gets into the stores. It's the execution part of the job."

Still, it would be folly not to take some sort of stand. So when four of these newly initiated executives were asked about their plans for making a difference this holiday season, they had answers. Surprisingly, perhaps, they were almost completely different.

Nordstrom: Reinvigorating Customer Service
In September, at a moment of crisis, Blake Nordstrom stepped to the presidency of the company that bears his name. Despite the boom in retailing, the company, based in Seattle and once a model of merchandising and service, has been struggling with disappointing sales and earnings. Its previous management team, the first to contain no family members, had taken many steps toward refashioning the stores from modernizing the clothing assortment to updating the computer system to allowing for centralized inventory and purchasing.

But the rapid moves created unrest among the chain's rank-and-file, who felt left out of the decisions in a system that increasingly concentrated decisions at headquarters.

While Mr. Nordstrom, representing the fourth generation of his family to run the business, thought that the company had perhaps gone too far out on fashion statements, alienating longtime customers, he also felt that re-energizing the sales force should be his No. 1 task.

In the days after his ascension, Mr. Nordstrom toured stores, meeting with some 4,000 employees in 10 days. Nordstrom's longstanding reputation for service and the personal relationship that its clerks are encouraged to develop with customers is a key point of differentiation in the market, he explained.

"If our people don't feel positive, customers are going to feel it immediately," he said. "You can't edict a smile or excellent service."

Mr. Nordstrom had been one of six company co-presidents until February, then president of the Nordstrom rack group, a major division. In his short tenure as chief, he has enacted or is considering changes both large and small, many of them in response to suggestions from his 10-day staff tour. He said, for example, that he intends to introduce soon a package that could increase compensation as well as incentives for sales associates.

Beyond that, he said, he is using the resources of headquarters "to remove barriers, real or perceived, between sales people and customers."

In response to complaints by employees that the worst way to hurt a customer relationship is to be out of stock on a desired item, Nordstrom is testing an Intranet service in two regions. It will allow sales staff at one store to post needed items on a central computerized list that all stores can check eliminating the need to call stores one at a time. "This is a Band-Aid to help out sales people until we have a system that is more appropriate," Mr. Nordstrom said. In contrast to the practice of previous years, clerks receive additional compensation when they find the product in another store and make a sale.

In another change, customers no longer have to pay delivery charges when items are out of stock in one store and available for purchase from another.

Last month, the stores also made consumer-friendly changes to a credit certificate program. Originally, customers could accumulate points by making purchases through the Nordstrom credit card, eventually earning a gift certificate that could be redeemed only for merchandise. Now, the customer can use the certificates against a credit-card account balance. "These are all small changes," Mr. Nordstrom said, "but when you add them they signal a 100 percent commitment to the customer."

Wal-Mart.com: It All Comes Down to Fundamentals
The leviathan of the retail world has not led a charmed life online. Started in 1996, Wal-Mart.com lagged behind other virtual powerhouses like Amazon.com and eToys.com in attracting customers and building a significant revenue stream. In the summer of 1999, Wal-Mart.com announced that it was undergoing a major overhaul for the holidays; in fact, it did not get its revamped version up and running until January 2000. But soon after, Wal-Mart, determined to tackle the problem more systematically, spun off the site into an independent entity with venture capital backing. In April, it brought in Ms. Jackson, a well-respected retailer, who most recently had been running Banana Republic and Gap Online, to be chief executive of its online arm.

Ms. Jackson found that some of her long-term goals were at odds with her holiday wish list. In October, she shut down Wal-Mart.com for almost a month while it switched to a new technology platform; the timing of the move caused worried murmuring among analysts.

Acknowledging that it was "risky" to close up shop for a month during the run-up to the holidays, she said that the costs of operating the old Web site while she worked to start the new one were prohibitive. "It was just better business to devote 100 percent of staff effort to the new system," she said.

But knowing full well the importance of the Christmas season, she set out to improve her site accordingly. Last holiday season, on-time delivery and customer responsiveness had been a trip wire for the site. Yet while Wal-Mart.com broke ground on a new fully automated fulfillment center this summer, it will not be nearly ready this December. So Ms. Jackson hired a team to work with the third-party contractors that handled the order-taking and package delivery.

"We have to make sure that when the customer orders something, that order gets sent to the distribution center immediately," she said. "And we had to make sure the mechanisms were in place that, in case that did not happen, we caught it."

Another big push involved visibility. "I do not think we hit the customer's radar screen," she said of previous holiday seasons. To remedy that, she focused on promoting the hot products, like scooters, that she knew consumers would want this year. The scooters have been featured prominently in store circulars, television advertising and online marketing programs.

Wal-Mart's November circular, distributed to roughly 90 million people, advertised that certain key products were available at Wal-Mart.com as well as in the stores. The move paid off when pool tables, for example, priced at $188, sold out quickly at the stores but were still available online.

"This is all nuts and bolts," Ms. Jackson said, "but there was not enough focus on it last year."

Sears, Roebuck: An Energy Boost at a Fashion Show
A week ago Wednesday, barely six weeks into the job, Alan J. Lacy stood before 3,500 Sears employees and received an unexpectedly thunderous ovation. For the last five years, Sears had invited its employees to preview its Christmas advertising campaign. But Mr. Lacy, who took the helm of the enormous chain on Oct. 1, wanted to make a splashier effort to rally the troops.

So he staged a 45-minute runway show to the throbbing beat of Christina Aguilera, the teen pop sensation. To showcase the products that the company expects to be hot, Sears hired 18 model-dancers to prance down the aisle, displaying everything from negligees and boxer shorts to Craftsman screwdrivers the company expects to sell some 15 million of the tools in the fourth quarter. The audience went wild, showing an energy that Sears executives said they had not seen in years.

In many ways, Mr. Lacy faces the toughest job among the new retailing chief executives. For years, the venerable Sears has been slowly losing market share to aggressive discounters like Target and to fast-growing merchants like Kohl's. His predecessor, Arthur C. Martinez, started to clean up the company's dowdy fashion image, moved deeper into the hot home furnishings and appliance market and took several other obvious steps to help put the retailer back on track.

It is up to Mr. Lacy, who made his reputation by stopping losses in Sears's credit card business, to engineer new ways to make the vast chain leaner and more cost-efficient.

Stepping up to the chief's job as late as he did, Mr. Lacy said he knew he could only tinker around the edges with the programs in place, which he said pleased him.

That he has done. In response to the decision by Circuit City last summer to pull out of the appliances market, Mr. Lacy ordered new commercials to emphasize that Sears, which makes the popular Kenmore brand, should be the choice for shoppers.

Mr. Lacy also says he has been focusing on keeping the wheels of the Sears operation well-greased. "We have to make sure we really execute very well programs in place," he said. To do that, he is keeping a close eye on plans to keep the sales floors well-staffed, always a huge concern during the bustling holiday season, and the seasonal help well-trained.

Then there was that fashion show/ pep rally. "People are working day and night at headquarters to make sure things happen properly," he said. "We wanted to get people fully engaged in what is going to happen at the store level and also to go back to their desks happy."

Lord & Taylor: Making Big Bets on Best Sellers
From the moment that Jane Elfers became president of Lord & Taylor on June 1, "the holiday season was my first and foremost focus." she said. Despite the short time frame, she added, "you can have, I think I did have, an effect."

Lord & Taylor, the venerable chain with headquarters on Fifth Avenue in Manhattan, has been struggling to remain hip and relevant in an overcrowded retail environment. While its peers boomed in recent years, Lord & Taylor saw its sales per square foot drop from $237 in 1997 to $218 in 1999.

Ms. Elfers is determined to turn around the trend quickly. As a veteran merchant, she has chosen to put all of her energies into the goods on the store shelves.

She assembled her team of buyers early last summer and asked them to predict what products would be big for the holidays. Then she bet big. When everyone agreed that leather was going to be a runaway hit for the season, she went department to department, asking how her stores could be bigger than ever in leather goods.

The answer was not only to expand coats and boots into color, but also to offer leather hats, leather scarves and leather accessories.

Animal hide was not exactly a secret this season, but Ms. Elfers said her team got behind other merchandise that other stores will not receive until spring, like flower pins and chain belts.

"Many manufacturers were not on the trend," she recalled of the shiny belts. "It is not like they were sitting around with this stuff. And we said, `What can you do for us?' We placed huge orders, and it is doing wonderfully for us on the accessory floor."

Ms. Elfers said that once the key products were selected, the store followed up with promotions. "We made a lot more out of big items instead of doing a lot on many little items," she said. Leather is featured on the cover of the seasonal catalog and has been displayed prominently in direct mail promotions and print advertising.

"Every store chooses key products," she conceded. "But this year the difference for us was the intenseness of the focus. We were very, very intense." In a telephone interview, in fact, she sounded very, very intense and hopeful.

"I am very optimistic about the season," she said. "We are already seeing some nice results."

Sears CEO Wastes No Time Putting His Brand on Stores
By Calmetta Coleman, The Wall Street Journal - Nov. 16, 2000

Since taking over as chief executive of Sears, Roebuck & Co. seven weeks ago, Alan J. Lacy has marched into 27 Sears locations, spending a total of 80 hours in the stores. He has also had 14 sessions with senior merchants, discussing product lines.

His conclusion: Sears simply has to get more shoppers into the stores and keep them there longer. To accomplish that, he is tearing into the retailer's advertising, store features and corporate culture.

He criticizes Sears' best-known marketing campaign, the "Softer Side of Sears," for focusing on just one part of the retailer's offerings. Meanwhile, the current "Good Life at a Great Price" ads focus too much on price, he says.

"That's been our problem. We've advertised the lines of business and the promotions better than we've advertised the destination," Mr. Lacy said during an interview earlier this week at headquarters in Hoffman Estates, Ill. "But why should I go to Sears vs. Target?"

Mr. Lacy, 46 years old, said marketing executives are now reviewing ways to advertise the Sears name as a brand, rather than focusing just on specific retail brands such as Craftsman or Kenmore. In the end, Sears might not scrap its "Good Life" slogan, Mr. Lacy said. It could be included in a revamped campaign.

Meanwhile, Sears is trying to find ways to make its stores more appealing. In a program begun under Mr. Lacy's predecessor, Arthur Martinez, Sears is now testing features such as in-store cafes and computer labs where customers can check e-mail or take computer courses -- the idea being to get people to spend more time in stores. It is under way in just a handful of stores in the Midwest, and Mr. Lacy said Sears won't decide whether to roll out the features chain-wide until after the holiday shopping season.

In recent years, Sears -- which sells everything from tools to dresses -- has been hurt by competition from discount chains, such as Wal-Mart Stores Inc. and Target Corp.'s Target stores, as well as higher-priced department stores. And while big appliances, such as refrigerators, have always been a Sears strong point, it now faces competition in that area from Wal-Mart and Home Depot Inc., both of which are pushing into appliances.

"I think they're going to have to fight harder to keep that business," said Linda Kristiansen, a retail analyst for UBS Warburg.

While Sears has had no trouble making profits with the help of its credit business, its retail business has seen slow growth compared with competitors. Over the past two years, the company has had relatively modest sales gains, even as a strong economy boosted retail sales overall. At 4 p.m. in New York Stock Exchange composite trading Wednesday, Sears was up $1 at $31.46, off its 52-week high of $43.50.

Mr. Lacy has said he will steer the company toward "having more of a lifetime relationship with customers." For instance, Sears typically sends coupon mailings to people new to a neighborhood, but it rarely follows up. In the future, Sears might send additional mailings to push merchandise appropriate to customers' stage of life, whether they just had a baby or need major home repairs, Mr. Lacy said.

But even as he tries to draw more shoppers to Sears, Mr. Lacy says he must change the company's corporate culture, persuading everyone to focus on improving Sears overall, rather than just their individual departments.

"We have to, as an organization, work better together and leverage what we do well. It's tough in some ways to get people to think beyond what is," he said.

As he engineers change, he knows that some people won't stay with Sears. "I describe myself as a player-coach. I like to let good people do their jobs. If you're not good, you don't get on the team," Mr. Lacy said. Already he has trimmed the number of people reporting directly to him, to 17 from 20, and he promises more cuts.

He also is penciling in changes on the executive-meeting calendar. Sears used to hold quarterly meetings with its top 200 employees. The meetings lasted four hours and "there was not a lot of dialogue," Mr. Lacy said. Since he took over, the meetings have been held every two weeks, for two hours, and he answers questions from employees. Mr. Lacy says that once he is settled in the top job, he plans to make the meetings monthly.

Sears is now working on plans for its businesses in 2001, and Mr. Lacy says he is warning people the company won't keep holding on to under-performing categories, which he declines to name. Says Mr. Lacy, who joined Sears in 1994 as vice president of finance, "We've never had productivity goals before."

That shows in the results. While Sears' credit business has helped boost overall profits in recent years, same-store sales have grown at a rate slower than the overall retail industry.

Mr. Lacy views appliances, where Sears has strong sales and market share, as a model to turn around the rest of the retail business. In a meeting with retail analysts in New York last week, he said, "We have a case study that we would like to implement elsewhere within our company."

Sears Grabs Pruning Shears
By Susan Chandler, Chicago Tribune, Nov. 9, 2000

For Alan Lacy, Sears, Roebuck and Co.'s new chief executive, less is definitely more.

After only 39 days on the job, Lacy promised Wednesday that the nation's second largest retailer soon will be doing "fewer things better."

That means Sears will pare its home-services offerings, which include everything from kitchen remodeling to pest control, making sure they are a good fit with the Sears brand, Lacy said.

It also will result in fewer Sears catalogs. Right now, the Hoffman Estates-based retailer has its name on 17 catalogs, only two of which are produced by Sears. Many of the catalogs, which are produced by licensees, sell merchandise that isn't even available in Sears stores.

"Rather than just lending our name, we want to make sure this effort supports our retail proposition," Lacy told retail analysts and bankers gathered in New York to hear his first presentation after his appointment to CEO was announced in September. He declined to specify what license relationships might be severed.

> From the outset, Lacy said he would offer no grand plans and no quick fixes. > But the finance whiz promised to bring a sharper focus to Sears' portfolio of > diverse businesses as he continues to get a better handle on Sears' retail > side. > To be sure, Sears investors are hoping Lacy's promotion represents a new era. Although Sears' hard-line businesses have remained strong performers in the 1990s, the retailer has been unable to fix its apparel business despite an eight-year effort by Lacy's predecessor, Arthur Martinez. Meanwhile, Sears' stock price has fallen to the low 30s and its market capitalization has plunged.

Lacy didn't shy away from the sore spots, presenting a frank, sometimes harsh, assessment of Sears' ailing core retail business. And he vowed to redirect Sears' resources toward winners and away from losers, promising to "manage for growth and returns."

One major trouble spot: Sears' rock-bottom profit margins. Its 3.3 percent retail operating margin is the lowest among its competitors, trailing even discounters such as Kmart and Wal-Mart, Lacy said.

By comparison, Kohl's Corp., a fast-growing, aggressively priced apparel chain from Menomonee Falls, Wis., boasts a 9.9 percent operating margin, he said.

"We recognize we don't make enough money in the retail business," Lacy said. "We're not happy with the underlying financial performance."

To improve Sears' returns, Lacy will scrutinize the company's off-the-mall chains, touted by Martinez as the company's future growth source.

Already, Lacy is hinting that he may slow the growth of Sears Hardware, a chain of freestanding hardware stores created to appeal to the convenience shopper. Although Sears Hardware has frequently been cited as one of Sears' few off-the-mall success stories, Lacy said he is putting expansion plans on hold while he assesses the chain's financial performance and prospects. One obvious problem--Sears Hardware was selling too many commodity items with low profit margins, Lacy said.

"We haven't quite cracked the code yet," he added.

Lacy also may be hitting the brakes on NTB, Sears' chain of tire and battery stores. Although it was designed to appeal to upscale drivers of sports cars and sport-utility vehicles, NTB has failed to deliver consistent revenue growth and profitability, Lacy said.

If these businesses can't improve financial performance, Sears will "withdraw resources," Lacy said.

The only off-the-mall concepts that Lacy praised were Sears' dealer stores in rural areas, which are operated by outside dealers and stocked with inventory by Sears, and the Great Indoors, a fledgling chain of four upscale home remodeling and improvement stores. Sears will roll out 10 more Great Indoors stores next year. Lacy said he envisions a chain of 150 Great Indoors eventually, but he declined to specify a timetable for the rollout.

"The Great Indoors represents a very attractive and potentially significant growth vehicle for us," Lacy said.

As for the dealer stores, which replaced many Sears Catalog stores, there isn't much room left for growth, Lacy said. There are 750 dealer stores nationally with prospects for perhaps another 250.

But Sears can and should be doing a better job of attracting new customers to its 860 core department stores, Lacy said. To that end, Sears will be adjusting its marketing message again.

Under Martinez, image advertising was key to wooing female shoppers. But the "Softer Side of Sears" campaign was sacked last year for a more price-oriented strategy with the tag line "The Good Life at a Great Price. Guaranteed."

Lacy indicated he might move the pendulum back slightly by doing less price promotion and more advertising that supports Sears' private-label brands such as Canyon River Blues denim.

He also plans less mass-market advertising and more one-to-one marketing with customers. "Sears is the eighth-largest advertiser in the U.S," he said. "Ninety percent of that is spent as if we don't have a clue who our customers are."

To better target ad dollars, Sears may cut back on Sunday newspaper circulars and make more product pitches over the Internet based on customers' buying habits.

One million Sears shoppers have given the company permission to e-mail them with ad pitches, he said.

Lacy said he was pleased with Sears online business, which has grown to $500 million in annual sales, a figure that includes products researched online. Sears wants to be a "truly integrated clicks and bricks" retailer, he said.

Despite the growth in online shopping, however, Sears still is committed to its physical stores and improving the shopping experience for customers.

"We're going to focus on what really matters," he said.

Sears CEO Lacy Says
2001 Will Be 'Transition Year'
By Calmetta Coleman, The Wall Street Journal - November 8, 2000

In his first address to the investment community as head of Sears, Roebuck & Co. (S), Chief Executive Alan J. Lacy said 2001 would be a "transition year," as the company focuses on improving its retail business.

Lacy said the company overall will focus on becoming truly customer centered and will demonstrate a "total commitment" to productivity and returns. In addition to continuing retail initiatives - such as editing apparel assortments - set by his predecessor, Chairman Arthur Martinez, Lacy said the company also would aim to tailor its marketing to individual customers rather than focusing primarily on mass efforts, such as newspaper circulars.

However, because of forward planning in retail, visible changes aren't expected before the second half of next year. But Lacy, who took the helm as Sears' president and CEO early last month, insisted change definitely would be forthcoming. "Our sense of urgency here is high," Lacy told a group of analysts during a presentation at the Waldorf-Astoria here Wednesday.

"We recognize that we really don't make enough money in our retail business," Lacy said. In addition to 860 full-line stores, Sears has 2,100 specialty stores. Some store formats, such as dealer stores - operated by outside dealers and stocked with inventory by Sears - have done well, while other performance has been varied and inconsistent.

"We need to force these businesses to improve their performances and, if they can't, withdraw resources" and use them on better-performing businesses, Lacy said. He declined to comment on any specific businesses or product lines that might not be doing well.

Lacy also reiterated that Sears, Hoffman Estates, Ill., would continue to be a multi-faceted company, doing business in retail, credit and services.

The CEO said the company's key growth initiatives going forward would be its Great Indoors store concept, the Sears Gold MasterCard and the online business. Sears previously said it would begin rolling out The Great Indoors, a home decor and improvement format. Lacy said the stores have the capability to generate about $50 million each in annual sales.

Looking to the more immediate future, Lacy said he expects holiday retail sales to fare well. "I think our opportunity for the holiday season is really in December," he said, noting that the promotional calendar for this November is similar to last year. In December 1999, Sears cut back on promotional events, which helped profit margins but hurt same-store sales. This year, the company will focus on more special events, such as customer appreciation days, which should boost sales.

Just a week before Christmas in 1986, Jill Wellman, benefits manager at a unit of Varity Corp., wrote a memo about how the company could reduce its retiree health-care costs.

"You have asked that I be inventive in coming up with a solution," she wrote. "As far as I can determine there is only one solution" that doesn't involve the risk of having to pay the benefits in the end, "and that would be the death of all existing retirees and survivors."

Her memo, however, went on to suggest "more practical" though "not necessarily legal" solutions to meet the cost-cutting goal sought by Varity, a farm and industrial equipment maker, as well as hundreds of other companies at the time. These included establishing "an offshore company responsible for the retirees but not accountable under United States law and have it go bankrupt and thus terminate the plans." Another option: terminating the benefits, facing "an almost certain class-action suit" and negotiating a settlement pact.

Ms. Wellman's list of possible tactics was just one of numerous compiled by Varity's managers and executives. Obtained by retirees suing the company, but never before made public, the documents are rarely seen blueprints that show how one company, aided by its benefits consultants, plotted to sharply reduce retiree medical coverage to give its balance sheet a boost.

Varity ultimately tried most of the ideas, with mixed results, paralleling cost-cutting moves at many other companies nationwide during the 1980s and 1990s. Among other steps, Varity actually did set up a business unit to fail. The failure was designed to free it of health-care coverage of about 4,000 retirees. After the unit's 1988 collapse, some of the 1,500 workers who had transferred to it sued, alleging they had been misled about the security of their benefits, and the U.S. Supreme Court ultimately ruled in their favor, restoring the benefits. Many other retirees were stripped of some of their health-care coverage less drastically, through a strategy the company dubbed "Creeping Take Aways."

Varity merged with Lucas Industries in 1996, and that company was acquired by TRW Inc. in 1999. "We're simply not in the position to comment on the motivations or decisions made by previous management," a spokesman for TRW says. 

Ms. Wellman, now with another employer, says the memo was written in "frustration" after numerous requests from upper management for solutions to the perceived high cost of retiree medical benefits. She stresses that she wasn't recommending any of the steps she outlined. "I was not party to overall corporate strategy," she says.

By the mid-1980s, Varity, like many employers, was eager to reduce the cost of its retiree medical program, and it asked its benefits experts to come up with solutions. Company executives didn't initially think they could unilaterally slash the benefits, as these had been promised to salaried employees and negotiated with unionized ones, who had accepted lower wages in return. "Worse yet, there is language in many of the contracts, booklets, and general descriptive material that implies a lifetime commitment," company documents noted. "We would never" succeed in court.

But the executives quickly figured out that, under federal pension law, there was little risk in trying. If successful, the company would save money; if sued, the worst outcome would be getting stuck with the benefits as promised. There are no punitive damages under the Employee Retirement Income Security Act, a federal pension law known as Erisa.

A December 1986 memo penned by Paul W. Pittman, Varity's benefits manager, outlined strategies for minimizing the chance of lawsuits. Under the heading "Creeping Take Aways," he detailed how the company could "would progressively introduce minor reductions and usage controls . . . designed to be insufficient to warrant retirees incurring the legal cost and trouble to have the benefits reinstated." Mr. Pittman couldn't be reached for comment.

If the retirees failed to challenge such moderate reductions in court, the company could later deflect legal challenges to deeper cuts by saying the retirees' prior inaction indicated an acceptance that benefits could be cut, other company documents noted.

And, if sued, Varity had options at hand for holding down costs, Mr. Pittman wrote. Should retirees "pool resources or approach their union to fund their case and take the company to court," the company could drag out the case, which would put "financial pressure" on the retirees "by forcing them to incur their own medical expenses, in addition to funding the legal proceedings. The next step is for the company, at a carefully chosen moment, to suggest to retirees that they agree to reinstatement of the plan, but at a much reduced level."

Mr. Pittman also proffered a suggestion he dubbed "pleading." He said the company could tell retirees "that the burden of medical expenses amongst U.S. retirees is unbearably high and would ultimately cause Varity Corp. to cease trading in the U.S., and that this would necessitate not only a loss of medical benefits, but also possibly the loss of some pension rights as well." Any agreements on this front would help the company establish its right to make even deeper cuts later, other company documents noted.

And like Ms. Wellman's list, Mr. Pittman's included the possible creation of a unit designed to go belly-up. Termed "Organized Liquidation," he predicted that retirees would sue. But, he wrote, "if made to look realistic, the collapse of [the unit] could be part of a strategy leading to a negotiated reduction" of benefits.

In the next few years, Varity aggressively tried out the memo writers' suggestions, including moving ahead with Massey Combines, the unit that was designed to fail. "Project Sunshine" was the name of the effort to persuade employees to transfer into the unit, assuring them it had a "bright" future. (Interestingly, Ms. Wellman, the 1986 memo writer, worked there when it failed in 1988; she later worked as a human resources director at another Varity unit.) In addition, the company began its program of "Creeping Take Aways," limiting benefits by such things as a retiree managed-care program and higher co-payments and deductibles.

But savings from these moves weren't considered significant enough, company documents show, which is why in 1992 Varity began planning additional cuts. The eagerness to plow ahead was driven in part by a new accounting rule requiring companies to report the cost of future retiree health-care costs on their financial statements.

In a July 1992 memo, consulting firm Towers Perrin assured Varity that it would send over an expert who has "successfully negotiated rather dramatic decreases in postretirement welfare benefits." Indeed, while the Varity staff was hoping to get a 40% reduction in retiree medical costs, Towers Perrin's model, dubbed Strawman, subsequently projected a 63% reduction in the accumulated liability.

Some of the reduction would be accomplished by changing the assumptions used to calculate Varity's health-care liability. But "the real reduction," Towers Perrin concluded, "can come only if the benefits are reduced."

A spokesman for Towers Perrin says the firm was merely pointing out options, noting that the role of actuaries is to "provide advice on the choices a company faces as well as the consequences of these choices," but that the decisions and consequences are a client's. "Unfortunately, when companies are in financial difficulty, consultants help them find ways to recover, and not everybody can be satisfied," he says.

To aid Varity, Towers Perrin prepared charts showing which units had the highest potential retiree costs. Meanwhile, a "Litigation Risk" analysis prepared by Varity's legal consultants showed which units would be the easiest targets for benefits reductions, thanks to ambiguous wording in labor contracts. "The Company is not committed to maintenance of a retiree's standard of living," noted a memo Varity sent to managers later that year, headed "Philosophy & Objectives."

That memo -- it is unclear who wrote it -- went on to say: "We are not averse to assuming acceptable levels of risk [of lawsuits]. . . . No approach is too aggressive to consider." This was followed by another memo -- identified as an "overview statement" by Varity's then-chief executive officer, Victor Rice -- emphasizing the importance of taking "aggressive actions that would be reviewed favorably within the financial community." The memo added: "Continue to aggressively push legal counsel on risk analysis. . . . I don't believe in `show stoppers,' and won't accept them. Give me a course of action." Mr. Rice couldn't be reached to comment.

In April 1993, the company announced it would significantly reduce benefits. As the company predicted, the retirees sued. At the time, it was also battling Howe vs. Varity, the lawsuit over the failed Massey Combines unit. The Des Moines, Iowa, jury in that case heard testimony from executives about how Mr. Rice, the CEO, had bragged that he had "loaded all his losers in one wagon." It concluded that the workers had been duped and awarded them $36 million in punitive damages. However, as punitive damages aren't allowed under Erisa, the award was thrown out. In 1996, the Supreme Court upheld the lower court's decision to reinstate the retirees into Varity's health-care plan -- which Varity was in the process of cutting.

In 1993 and 1994, union and salaried retirees brought separate suits against different Varity units over the 1994 cuts, and in 1997 the company agreed to settle the suits, restoring 90% to 100% of the benefits. In one notable retiree victory in 1997, a federal judge in the Eastern District of Michigan granted a motion for summary judgment to retirees at Varity's Kelsey-Hayes unit, citing "a veritable mountain of evidence" that the company had promised lifetime medical benefits to 3,300 retirees and their spouses.

As it turned out, in none of these cases did the memos play a role. They were discovered too late to pertain to Howe vs. Varity, while the other cases were resolved before the memos became material, says Roger McClow, an attorney in Southfield, Mich., who represented Varity workers in three of the lawsuits.

After TRW bought the company, the retirees were enrolled in existing TRW retiree medical plans. A TRW spokesman says it believes the arrangement with the retirees has "worked well for both the retirees and the company." TRW's plan documents note that it maintains the right to change the plans at any time.

--- One Company's Blueprint

Excerpts from internal documents from Varity Corp. discussing the company's ideas on how to save money on retiree medical benefits:

-- Terminate all retiree benefit coverage . . . . This approach would almost ensure a class action suit against the company and would likely result in a negotiated settlement involving lower benefit levels . . . . 

-- Establish an offshore company which is responsible for the retirees but not accountable under U.S. law, have it go bankrupt and thus terminate the plans. -- 
From a confidential memo dated Dec. 19, 1986

-- The company is not committed to maintenance of a retiree's standard of living. -- No approach is too aggressive to consider in approaching the redesign of our retiree benefit programs -- From a statement called "Philosophy & Objectives"

-- Take Away or Amendment as a Means of Achieving an Agreed Reduction There are a number of companies that have initiated take away or reduction actions knowing that they would lose at court if challenged. The aim has been to put temporary financial pressure on retirees to force them to agree to early reinstatement but at reduced level. . . . -- From a Dec. 16, 1986 memo

Shame on Sears
Bigger Medical Premiums Boost Bottom Line at Sears 
Ms. Russell Visits a Food Bank
By Ellen E. Schultz, Staff Reporter - The Wall Street Journal
October 25, 2000

Sears Roebuck & Co. has figured out how to turn its medical-benefit program for retirees into a source of corporate income.

You read that correctly. Last year, the giant retailer's retiree-medical plan added $46 million to the Sears bottom line. And that was on top of  the $38 million the benefits program contributed in 1998. The key to these surprising profits is an arcane accounting rule introduced in the early 1990s. The rule required companies for the first time to report their total anticipated costs for retiree-health coverage. Many companies used the rule to justify cutting that coverage, or shifting its cost to retirees. As a result, a lot of older Americans are struggling to pay their medical bills. The rule also offered companies a way to arrange their financial statements so that retiree-benefit programs actually became new profit centers. Employers and benefits consultants have received heat recently for turning pension plans into sources of corporate income. 

Now, the transformation of retiree-medical programs into opportunities to bolster earnings demonstrates that these companies and their outside advisers possess multiple subtle methods to squeeze profits from their current and former employees. This latest corporate maneuver was made possible by Financial Accounting Standard 106. Accounting authorities required that large companies adopt the rule by 1993. 

At a time when medical-cost inflation was running in double digits, the rule was supposed to force companies to acknowledge the potentially huge retiree-medical liability many of them seemed to face. Some of the charges that companies initially reported on their income statements under the new rule were indeed gargantuan, and they fueled an atmosphere of crisis surrounding corporate health-care costs.

Many companies invoked the mammoth liabilities to explain why they had to reduce retiree benefits. But the crisis turned out to be exaggerated. An analysis of corporate filings with the Securities and Exchange Commission reveal that over the 1990s, companies faced lower medical-cost inflation rates than they had predicted when standard 106 took effect and, as a result, smaller retiree-health liability. 

What's more, many companies actually had incentives to err on the side of taking overly large initial charges under the new rule. One incentive was that excessively pessimistic estimates of future health-care liability provided a rationalization for reducing retiree benefits. 

That spelled bad news for millions of retirees, such as Elaine Russell, a 77-year-old former Sears worker in Seattle, whose rising medical premiums have forced her to rely on a free food bank. Retired Unisys Corp. accountant Albert Shaklee, 70, was forced to go back to work at a minimum-wage factory job for a time to keep up with his increased premiums. Companies had a second incentive to take inordinately huge retiree-benefit charges: If the estimates proved too big -- which is, in fact, what happened in many cases -- companies knew they could adjust their retiree liability downward by recognizing a series of paper gains on their income statements. This pool of potential gains could be drawn upon over a period of years and used to offset retiree-medical expenses.

The kicker is that at numerous companies, including Sears, the paper gains not only erased the retiree-benefit expenses, but exceeded them. And that is how benefit plans came to boost the bottom line. This sort of income isn't like cash that can be spent. But it can be used to buff a company's financial image by smoothing over dips in operating income. "It can sand the rough edges in a bad quarter," says Jack Ciesielski, an independent accounting expert who publishes The Analyst's Accounting Observer, a newsletter.

Consider the case of Sears. In response to accounting standard 106, the retailer took a whopping one-time charge of $2.9 billion in 1992 to reflect the present value of its entire obligation to pay for retirees' health care. Wall Street analysts didn't fret much about this accounting estimate because it had no immediate effect on operating cash flow. The analysts also knew that unlike vested pensions, which under federal law, companies must pay out, health coverage generally may be curtailed, either by killing benefits outright or making beneficiaries pay some or all of the bill.

Sears used the charge as justification to increase substantially the amounts that retirees would have to pay for health coverage. Shifting the financial burden to retirees has been the only way for Sears, based in Hoffman Estates, Ill., to "remain competitive with the retail industry, as far as costs go," company spokeswoman Peggy Palter says. Over the course of the 1990s, however, the rate of inflation of medical costs leveled off and decreased, making the initial Sears charge vastly overblown. In addition, the company's shifting of costs to retirees reduced its own obligation. To illustrate: In 1992, Sears reported an annual expense of $301 million for retiree-health benefits. 

The comparable figure for 1996 was just $76 million, a 75% drop. To reflect its own earlier overestimate of its liability, Sears posted credits in its financial statements in the mid- and late-1990s. The combined effect of these accounting adjustments and the retailer's continued benefit cuts was that by 1997, the Sears retiree-benefit plan was adding $41 million to overall net income. Ms. Palter of Sears confirms this account.

Meanwhile, retirees like Ms. Russell of Seattle are paying the price. She stopped working for Sears in 1984, after nearly four decades of full-time clerical duties at the retailer. When she turned 65, the federal Medicare program began reimbursing her for routine doctor and hospital bills. Her Sears retiree coverage provided supplemental reimbursement for prescription drugs. In 1998, when her prescription costs were about $50 a month, the premium for her supplemental coverage doubled to $58. That might not sound like a lot, but proportionally, it was a huge bite out of her monthly Sears pension of $183. The premium increase prompted Ms. Russell to drop out of the Sears plan in 1998. That gamble has hurt, because today she needs additional medications for colitis and a thyroid condition. He monthly prescription bill has leapt to $180. 

"I've always saved," says Ms. Russell, a widow who collects $974 a month in Social Security. She drives a 1977 Datsun station wagon and makes her own clothes. Still, it wasn't until Sears doubled the cost of her benefits in 1998, she says with evident embarrassment, that she started taking advantage of a Seattle senior center's free food bank for herself and her two cats. One day recently, she picks out hot dogs donated by a local grocer because they are close to their expiration date. She also chooses overripe bananas, which she says aren't bad if cooked. 

Sears maintains that even after shifting costs to retirees, it is "far more generous with benefits than others in our industry," says Elisabeth Rossman, vice president for benefits. "We have taken measures to prudently reduce our costs," she adds. "We were trying to strike a balance between duty to shareholders, so they could get an adequate return on investments, with our duty to retirees." 

Next Jan. 1, the company plans to cease paying anything for health coverage for employees over 65 who retire after that date, Ms. Rossman says. However, in 1998, she points out, Sears doubled, to 20%, the discount retirees may receive on clothing purchases. Companies such as Sears stand to gain when retirees like Ms. Russell drop out of the medical plan, because that ends a company's obligation to pay anything for coverage. Of the roughly 120,000 Sears retirees today, only about 80,000 are receiving medical coverage. Ms. Palter, the company spokeswoman, says costs may be one reason people drop the coverage, but that some retirees do so because they receive benefits under a spouse's plan or they return to work. 

Bill Rodino, a 72-year-old retired Sears appliance repairman and supervisor in Brooklyn, N.Y., got a new job to help pay for his Sears coverage. He now works 10 to 15 hours a week as a receptionist at a funeral home. That provides the extra cash to afford last year's 600% jump in his Sears premium, which is now roughly $80 a month. His prescription co-payments have risen to $75 a month. Even with his part-time job, he and his wife, Jeanne, have gradually drawn down their savings for day-to-day expenses. They weren't aware of the improved Sears clothing discount, says Mrs. Rodino, because they haven't bought new clothes in years.

The seeds of the retiree-health windfall for many companies were planted in the late 1980s, when the Financial Accounting Standards Board, the accounting industry's rule-making body, began to develop standards for reporting retiree-health obligations. Major companies, such as General Electric Co. and International Business Machines Corp., played an active role in the process, suggesting ideas to the accounting board. Companies showed the board computer simulations of how various proposals would affect corporate bottom lines. Corporations would have preferred not to have to report retiree-medical liability at all. But once that became inevitable, big companies urged the board to give them flexibility in how they projected their retiree-benefit costs, according to people involved in the process. The accounting board went along with many of their suggestions when it issued standard 106.

Jeffrey Petertil, an independent actuary who was an adviser to the accounting-board task force that drafted the new rule, warned in 1992 that standard 106 was so flexible that it would permit companies to overstate or understate their liabilities. But when he expressed this dissenting view in a newspaper opinion piece, his largest client, a major accounting firm, fired him the next day, Mr. Petertil says. He declines to name the firm. One illustration of the flexibility is the great leeway standard 106 allowed companies to adjust the medical-cost inflation rate used to estimate retiree liability. Having pegged that rate very high early in the decade, companies were able in later years to report income-statement credits that could be used to smooth earnings dips, says Mr. Ciesielski, the independent accounting expert. Sears, for example, initially used a 14% medical-inflation rate to estimate its liability in 1992, which was in line with national trends. By 1997, Sears had lowered its estimate to 11%. In 1998, it slashed the rate again to 6%.

The proportionally huge rate reduction in 1998, along with less generous benefits, permitted the retailer to report credits that allowed its retiree-health plan to contribute income to the company's bottom line. In 1998, the $38 million credit was the equivalent of a 2% increase in operating income.

The rate changes were made at a time when the company was struggling with credit-card delinquencies and weak apparel sales. Mr. Ciesielski says it's fair to assume that Sears and other companies have used credits from these plans "to smooth earnings during rough times."

Ms. Palter, the Sears spokeswoman, confirms the medical-inflation figures but stresses that the company didn't act to smooth its earnings. Sears changed the inflation assumptions "to be consistent with industry trends," she says. "It was a fiduciary duty to be as accurate as we could. Our experience was already showing that our estimates were too high, and the expenses would be lower."

SOME OF THE OTHER COMPANIES THAT HAVE BOOSTED THEIR BOTTOM LINES BY THIS METHOD.
*
R.R. Donnelley & Sons Co., Sunbeam Corp., Tektronix Inc., & Walt Disney Co., 
according to the analysis of corporate filings with the SEC.

TALLYING THE CUTS
The figures in the left-hand column are the expense amounts a company reported in the first year of operating under the new accounting standard for retiree-health benefits. In some cases that was 1992, in others 1993. Figures in parentheses reflect income-statement gains. 1992/1993 Company (in millions) 1999 % decline

HOW IT WORKED AT ONE COMPANY:

Walt Disney
Step No.1: Following its 1993 change in accounting standards, the company took a $202 million pre-tax charge to reflect retiree-health liability.

Step No.2: Citing the accounting change and large liability, Disney slashed retiree-health benefits, reducing its expenses by more than half the next year.

Step No.3: But then, estimates of benefit liability turned out to be excessive, so the company began to report paper gains to reflect lower-than-anticipated expenses. In 1995, Disney's gain was $43 million. The company reported a total of $47 million more in gains from 1996 through 1998. Thus, its retiree-health plan boosted its
bottom line.*
*Disney confirms the figures but declines further comment.

Note: At some companies, retiree-health benefits include life-insurance benefits. Returns from retiree-trust funds contributed to falling expenses at some companies. 

Health Advisory: Investors Should Do a Check-up on Firms that Use Medical Plans to Lift Profits
By Ellen Schultz and Robert McGough, Staff Reporters
The Wall Street Journal - October 25, 2000

Here's a way Procter & Gamble has made money that a lot of investors don't realize: Since the early 1990s, the purveyor of paper towels and countless other consumer products has had an investment trust to fund its retiree health benefits. The combination of rising stock prices and slowing health-care inflation has yielded a small bounty to its bottom line.

Other companies have taken additional steps to turn retiree health-care benefits into shareholder benefits. These include slashing benefits, something P&G hasn't done. While investors have begun picking up recently on the fact that pension plans are contributing handsomely to earnings at dozens of large companies, they appear to be oblivious to this latest twist in how retiree programs have become profit centers.

But are profits from health-care plans as valuable as profits from selling soap or movies or power tools? Some investors say no, they're not. These gains are desirable, but similar in nature to one-time gains that investors should factor in when analyzing price/earnings ratios, says James Gipson, president of the $1 billion Clipper Fund. Many investors, he adds, "just look at the reported earnings and don't take a more careful look to see what portions are recurring in the basic business."

In its latest fiscal year, P&G's retiree medical program boosted corporate pretax income by $336 million. That contribution amounted to more than 6% of the company's earnings before taxes. That is far more than P&G earns on average from the 300 brands it sells. P&G has had a boost to its bottom line from the retiree medical program each year from 1994 to the present. Altogether, the retiree medical plan has contributed $909 million to pretax income. Thanks are due largely to returns on the fund, whose assets grew to $1.3 billion on June 30, the end of P&G's fiscal year. (The fund had actually grown to $2.5 billion on June 30, 1999, but poor investment results have slashed the size since then.)

P&G confirms the data on the impact of its retiree health plan. But it says it doesn't think it is appropriate to compare the gains from its retiree health plan to pretax income of its average brand: "Those funds are there for retiree benefits; it seems to be a very odd comparison," a spokesman says. How, specifically, did P&G turn burdensome health-care liabilities into profits? The answer lies in Financial Accounting Standard 106. Put into effect by large employers between 1992 and 1993, it required companies to estimate their retiree health-care costs, which at the time appeared huge and bound to keep increasing, given then-double-digit medical inflation. The standard required those costs to be run through the income statement and identified on the balance sheet as a liability.

Meanwhile, some companies set up trust funds to pay for these future benefits. One-third to one-half of large companies -- predominantly utilities, defense contractors, banks, and pharmaceutical companies -- fund their post-retirement benefit plans.

As it turns out, the medical inflation rate tapered off sharply within a few years of the accounting standard's enactment. This meant the liabilities that companies had put on their balance sheets needed to be reduced. In shrinking these liabilities, companies created "gains" that had to be accounted for on the income statement. As for those trust funds, meanwhile, the booming stock market was creating investment returns that vastly exceeded expected returns, and the result also was a boost to income. Whether a result of the reduced inflation or the bull stock market, the gains are usually run through the income statement over a period of years. It is the long, drawn-out nature of the gains' impact on earnings that worries some critics, such as Jack Ciesielski, an accountant and publisher of The Analyst's Accounting Observer. If these gains (or losses) impacted income in the same year that they occurred, investors would be more likely to discount them, rather than treating them like a business's actual income, Mr. Ciesielski says. To some investors, the retiree health plans are an example of the feedback effect between the stock market and corporate earnings. Stock prices rise, which in certain circumstances can actually boost earnings at companies, which then becomes a reason for stock prices to rise even further.

Besides P&G, the tide of companies that have trust funds includes Hartford Financial Group, Hewlett-Packard and R. R. Donnelley & Sons. Hartford Financial, helped by the returns in its retiree-medical fund, has reported income from its retiree medical plan every year since 1993. Similarly, R.R. Donnelley had post-retirement income from 1996 to 1999.

The companies confirm the figures. P&G is more fortunate than most companies. When it set up an employee stock-ownership plan in 1989 to fund retiree medical benefits, the Internal Revenue Service approved the structure, which lets the trust earn tax-free returns. That tax break has since been repealed. The fund at P&G now mimics an overfunded pension plan: It has far more assets than it needs to provide the benefits. Unlike a pension plan, which can invest no more than 10% of the assets in the employer's stock, retiree medical funds can be 100% invested in the company stock. P&G's  fund, invested in P&G preferred stock, had investment returns of $803 million in fiscal 1998, which was more than it needed to pay the $67 million for retiree medical benefits. In its fiscal year ended June 30, the fund had a loss of $49 million, hurt by a slump in the company's stock price early this year. The company still enjoyed a $210 million boost to pretax income that year under the accounting treatment.

Sears Slow in Paying Suppliers
. . . Bloomberg Personal Finance

CBS Marketwatch  - Oct. 21, 2000

"Just as you can learn a lot about an individual's financial strength and savvy by examining his or her payment habits, so, too, can you learn a lot about a company's financial situation and supplier relationships by how it pays its bills. For example, Wal-Mart settles its accounts almost without fail every 35 days. Conversely, it usually takes retail competitor Sears more than 80 days to pay up. Now I ask you - which of these two businesses is paying bills at precisely the right time to garner any supplier discounts and avoid late payments? Which probably enjoys the better relationship with its suppliers? Which is more likely to haggle with suppliers over late payments and/or poor order fulfillment?"

Looks like Lacy has more than just angry retirees with which to deal when Martinez leaves. 

Sears Canada to Revive Eaton's
By Nicole Maestri, CBS.MarketWatch.com - Oct. 21, 2000

The huge storefront windows at the corner of Eaton Centre in downtown Toronto are covered over so tightly that even the most curious of onlookers wouldn't see a thing.

Sears Canada wants it that way. When the huge U.S.-based chain opens the new-and-improved Eatons stores in the same space of the landmark but failed Eaton's stores -- note the spelling difference -- it wants to do so with a bang.

A rare opportunity
"It's not often one gets the opportunity to launch a renewed department store," said Rick Sorby, executive vice president of marketing at Sears Canada, in a statement, "especially one people think they already know.."

Indeed, Sears' challenge -- giving a 130-year-old Canadian institution in shopping a makeover -- is no small task. So Sorby has gone to great lengths to keep the details under wraps.

On Sunday, Canadians will get their first peek of what's ahead with a 4 1/2-minute commercial that's being billed as a "unique, highly entertaining" minimusical.

It "will reflect the new sense of style of the brand," Sorby crowed.

Think aubergine. As in the purplish color that Sorby has been painting on oversized lipsticks, shoes and martini glasses on billboards in Canada's biggest cities, teasing the Nov. 25 opening.

Eggplant image
"Our goal is to create awareness that aubergine signals a new era in shopping," Sorby said.

But it will take more than a chic new color to make Eatons a success. Yes, it's got incredible name recognition and loyalty, but its profits had been spiraling downward since the early 1990s.

Checkered history
In 1997, the company was narrowly saved from bankruptcy after creditors approved a $419 million restructuring plan. Despite going public in 1998, the company continued to bleed money at a steady pace until it was put up for sale in May 1999.

It didn't help, of course, that it had taken on a significant amount of debt to upgrade all of its stores in a last-ditch attempt to revive the chain.

Last September, Sears Canada, which is majority-owned by Illinois-based Sears, Roebuck and Co. (S: news, msgs) and trades on the Toronto Stock Exchange under the ticker symbol "SCC," saw a good thing in its own back yard.

The department-store chain known for appliances and electronics snatched up the eight downtown Eaton's stores -- considered some of the best retail real estate in the country -- along with the long-established name, trademark, brands and Web site.

What's new?
So what is it about the "new" Eatons that will be so different and pull in customers? Not even analysts, an unusually inquisitive bunch, know.

"That's the $64,000 question that we're all dying to see," said John Williams, a partner with retail consulting group J.C. Williams in Toronto.

"They're definitely going after the more affluent people," said David Schroeder, an analyst with Dominion Bond Rating Service in Toronto.

"The stores are so huge, so it'll be a pretty broad offering, " Schroeder said.

Victoria Mazzucco, a sales associate at Holt Renfrew stores, a pricey, designer- driven chain of clothing stores in Canada, has heard some of the same. But she knows vendors who tell her other things as well. "They want to cater to both the upscale clientele and the in-between," she said. "There's a very wide demographic profile."

The revamped chain certainly won't compete with Sears Canada, one of the country's most profitable department-store chains.

Vendors have said the stores are decorated in very vibrant, eye-catching colors -- and not just aubergine -- in an effort to split up floor space and even make the stores cozy.

The main floor is said to include a spa area with private rooms in which shoppers can have their nails painted and their bodies wrapped in the cosmetic and skin-care products of their choice.

That, said vendors, is part of the new image that Eatons will use to lure customers into something that's much more than the run-of-the-mill department store.

It needs to. "Why would you go to a newcomer when they carry the stuff you already have?" retail consultant Williams asked.

Eatons is likely to stress customer service, a sticking point at the old Eaton's, according to Jamie Spreng, an analyst with Canaccord Capital in Montreal.

Double-edged sword
To be sure, major retailers and analysts are eagerly awaiting the opening to see if there's room in the market for another large department store, especially one whose name ties it to a failed chain.

"It's a Catch-22," said Williams. "The loyalty factor is to the history of the former company, which went bankrupt ... but there's tremendous awareness of the name, so it's certainly a great starting point."

Not to mention that it makes economic sense, Spreng said.

"It would be so expensive to try and re-brand," he said, adding that many Canadians still feel an attachment to the store, since it's a name they grew up with.

The Canadian market is already saturated with Sears stores, he said, but there's room for a smaller, upscale chain like the revamped Eatons.

Good times
And Sears may have timing on its side.

"If you're going to launch anything new, now is the time to do it," Williams said. "The Canadian economy is robust, and retailing is particularly strong."

Just as interest-rate hikes have cooled U.S. spending lately, Schroeder said they've had an impact on Canadian retailers, especially those selling big-ticket items.

"But the expectation is still pretty good. The economy is still doing well, consumer spending is still big and we're definitely expecting a good Christmas season," he said.

The store relaunch will coincide with the holiday season, and the company expects holiday shopping to draw customers back into old Eaton's stores.

If the idea works, it could mean big profits for Sears, Roebuck, which already has warned of a slowdown in the fourth quarter.

And it could mean Sears Roebuck has hit on an idea that it can transport across the border.

"I don't think we'll know in the near term the success of this," Schroeder said. Sears Canada is targeting $1 billion in sales for the first full year. "We'll see how close they get to that," he said.

Warning Clouds Sears' Profit Jump
By Susan Chandler - Chicago Tribune - Oct. 20, 2000

Continuing to ride a wave of improvement in its credit card business, Sears, Roebuck and Co. reported a strong third-quarter performance Thursday, but the retail giant also warned that profits in the critical fourth quarter could fall below last year's.

The nation's second-largest retailer, after Wal-Mart, said its third-quarter net income rose nearly 18 percent, to $278 million, or 81 cents per diluted share, exceeding analysts' expectations, as tracked by First Call/Thomson Financial, by a penny.

Revenue rose 4.7 percent, to $9.63 billion, as domestic same-store sales rose by 3.5 percent and Sears Canada revenue rose 6.9 percent.

Although clothing sales remained sluggish, Sears shoppers loaded up on home appliances, consumer electronics and sporting goods, company executives said. The strong showing comes at a time when once-hot retailers such as Gap Inc. and Eddie Bauer are floundering.

Last year, Sears' results were hurt by a one-time charge of $29 million, or 7 cents a share, related to layoffs at its Hoffman Estates headquarters and the exit from some automotive retail markets.

Sears' third-quarter earnings per share soared 31 percent, from 62 cents per share, fueled by an aggressive stock buyback program that reduced the number of outstanding shares by 11 percent from a year earlier. Excluding the charge, year-earlier earnings were 69 cents a share.

Alan Lacy, Sears' incoming chief executive, told analysts the retailer still believes it can meet its plan of growing 2000 earnings per share by a percentage in the low- to midteens.

But he added, "Given our strong performance year-to-date, this implies the potential for a down fourth quarter." Last year, Sears posted record fourth-quarter earnings as it cut back on sale promotions to boost its bottom line even as revenue declined.

Investors reacted badly to the outlook, with Sears' stock falling $2.34 a share, or 7 percent, to close at $30.86 on the New York Stock Exchange.

Sears said it is still expecting a strong retail showing in the fourth quarter as it moves to capitalize on Circuit City's exit from the appliance business.

Lacy promised that Sears plans to be more aggressive in holding sales events this December. Still, he warned that the credit business, which has fueled Sears' earnings recovery in recent quarters because of lower provisions for bad debt, would likely fare worse in the fourth quarter as delinquencies began to creep up again.

For the first nine months, Sears reported net income rose 26 percent, to $901 million, or $2.57 per diluted share. Earnings per share increased by 38.2 percent, from $1.86 per share. Excluding the year-earlier charge, earnings per share rose 33 percent, from $1.93.

Revenue rose 4.3 percent, to $28.68 billion.

Sears Says . . .
4th-Quarter Profit May Fall on Credit; Shares Fall 
By Heather Landy - Bloomberg - Oct. 19, 2000 

Sears, Roebuck & Co., the No. 1 U.S. department-store company, said fourth-quarter earnings may fall, partly because of lower profit in its credit-card unit, sending its shares down as much as 11 percent.

New Chief Executive Alan Lacy said on a conference call that income from the credit division may drop because of costs to promote the new Sears Gold MasterCard. The allowance for uncollectible accounts also may rise.

Sears shares fell $2.77, or 8.3 percent, to $30.43 in midday trading. Earlier, it dropped to $29.60, erasing the stock's gain for the year. The company had the fourth-biggest decline in the Standard & Poor's 500 Index.

Lacy declined to provide a specific forecast for the fourth quarter. Analysts had expected profit to rise to $2.05 a share, according to First Call/Thomson Financial, an increase from $740 million, or $1.98 a share, a year earlier.

Overall, earnings per share for the year will rise by a percentage in the low- to mid-teens, Lacy said.

Sears, based in the Chicago suburb of Hoffman Estates, Illinois, has 860 department stores and more than 2,100 specialty stores.

Third Quarter
Credit provided most of the gain in the third-quarter, when net income rose 4.9 percent to $278 million, or 81 cents a share, from profit from operations of $265 million, or 69 cents, a year earlier. Revenue rose 4.7 percent to $9.63 billion from $9.2 billion, the company said in a statement.

Lacy, who was appointed CEO on Oct. 1, is credited with turning around the credit business, which suffered from bloated costs and had legal troubles for the way it collected overdue accounts. He ran the unit from late 1997 to late 1999.

In the third quarter, the credit division cut collection and recovery costs in pursuing delinquent credit-card accounts, Sears spokeswoman Peggy Palter said. Marketing costs also fell from last year, when Sears spent more to promote its new Sears Premier card, she said. Operating profit at the division rose 22 percent.

Lacy was president of Sears' services business before taking the helm from Arthur Martinez earlier this month. Investors now are looking to Lacy to turn around Sears stores.

``He has to work some of that magic on the rest of the Sears empire,'' said analyst Joe Grillo of Deutsche Banc, who rates the stock a ``market perform.''

Apparel Slump
Demand for appliances, cosmetics, sporting goods and home- related items helped Sears overcome a slump in demand for summer clothing.

``People were more interested in getting digital cameras, big- screen TVs, DVD players, tools and appliances than in buying more apparel,'' said Mark Picard, an analyst at Lazard Freres & Co., who rates Sears shares a ``buy.'' ``Sears benefits from that, whereas most of the traditional department stores don't.''

The company didn't make as much profit on retail sales because of price markdowns on slow-selling apparel and the relatively lower profit margins of non-apparel goods. Gross margin, or sales minus the cost of goods sold, fell to 25.6 percent of sales from 26.5 percent a year earlier.

Third-quarter results were in line with the 80-cent average forecast of analysts polled by First Call/Thomson Financial.

There were no gains or charges in the most recent period. A year earlier, a charge of $29 million, or 7 cents a share, to cut jobs and close some automotive retail stores resulted in net income of $236 million, or 62 cents.

Holiday Season Shaping Up
Crain's Chicago Business - By Eddie Baeb - October 9, 2000 

A good, but not great, holiday shopping season is shaping up. And that has local retailers nervous about the impact of the expected sales slowdown — which would be the area's first during this extended economic boom.

Sales of apparel, home furnishings and general merchandise will be up an average 6% during November and December, compared with the same period last year, according to the Washington, D.C.-based National Retail Federation (NRF). While that's a healthy growth rate, it's off from the robust 7.3% run-up during the 1999 period and slightly lags 1998's 6.2% sales growth.

Area retailers concur that the NRF's projection will be reflected locally. Industry experts add that the slowdown, which will crimp margins, comes at a time when retailers' costs for labor, rent and other expenses are rising.

Looking to soften the blow, retailers of all sizes are planning heavy promotions and advertising this season in hopes of bringing in new customers and luring shoppers away from competitors. Merchants will try to rein in some costs by keeping inventory levels tight, which should help limit the need for hefty markdowns and end-of-season sales.

"You probably won't see the swollen inventories of Christmases past. I think you're going to see better assortments and harder-hitting prices," says Bill Stollon, general manager of Carson Pirie Scott & Co.'s flagship store on State Street.

In many ways, this season will be healthier than some had hoped, according to Rosalind Wells, the NRF's chief economist, based in New York.

"With all the talk about the slowing economy, retail sales in total are still up. The economy is still very strong," says Ms. Wells. "People are still making more money, and they're going to spend it."

'Last year was an anomaly'
Despite such optimistic talk, many merchants are gearing up for sales gains that won't stack up to last year's.

In fact, sales have been dismal throughout the year, as hikes in the interest rate and escalating fuel prices have tempered consumer spending. The Nasdaq market's plunge also has some consumers feeling less flush than a year ago.

Crate & Barrel CEO Gordon Segal says the Northbrook-based housewares and furniture chain is anticipating a 6%-to-8% increase in same-store sales this holiday season, compared with last year's 13% gain.

"Last year was an anomaly," says Mr. Segal. "The stock market was going crazy. The Internet was going crazy. People were going crazy over Y2K."

Without the hype of themed merchandise for millennium celebrations, retailers are looking to price promotions and in-store events.

Shoppers can expect to see more sales events like the recently concluded "Hot at Bloomingdale's" that featured giveaways of cameras and cars. Retail sources say there's likely to be more special sale items like the 19-inch TVs Wal-Mart Stores Inc. sold for $99 here the day after Thanksgiving last year.

Stores like Gap Inc. probably once again will rely on significant discounts for customers who spend more than a certain amount, such as $20 off purchases of more than $100. But department stores and discounters will counter, in hopes that a customer drawn to a store for a rebate or specially discounted item will buy other things.

"We have a very aggressive promotional program in place," says a spokesman for Hoffman Estates-based Sears, Roebuck and Co., which is hoping to post low-to-mid-single-digit sales gains during the holidays.

Retailers also are counting on continued high demand for scooters and consumer electronics like DVD players and digital cameras.

Alicia McNamara, manager of the Sharper Image store at Water Tower Place, says sales of scooters, electronics and remote-control cars should make this holiday season equal to or better than last year's.

"The Razors (Sharper Image's brand of scooters) are still going like the Energizer Bunny," says Ms. McNamara. "We're selling so many, we told the vendor we'll take whatever we can get."

But many retailers are playing it safe with inventory. Shelves will be well-stocked, but re-ordering will be kept to a minimum, which will help limit extensive markdowns and year-end sales.

Still, stringent inventory control may not be enough to salvage the season for some, like Downers Grove-based Spiegel Inc., which is struggling with weak sales at its Eddie Bauer unit. Eddie Bauer's same-store sales fell 12% in September compared with September 1999.

"We're probably a little more cautious in our outlook (for the holiday season) than we were earlier in the year," says a Spiegel spokeswoman.

Retailers big and small face these concerns as costs of rent and labor continue to climb faster than inflation, which is running at a 3.4% annual rate. Many stores have fattened bonuses and increased wages in an effort to hold onto workers.

A realistic outlook
"Retailers have to perform this Christmas, because there's severe pressure on profits," says Charles Schaaf, president of Schaaf Associates Inc., a retail real estate brokerage firm in Northfield.

So, as merchants cast an ever-optimistic eye toward the upcoming holiday season, they are also being realistic.

"Retailers are being conservative," says Daniel Skoda, former head of Marshall Field's and now president of Chicago-based D&R Consulting LLC. "Many are hoping for small single-digit increases and planning for flat or slightly down sales."

Diversity in Management 
By Ellen Almer - Chicagobusiness.com - Oct. 6, 2000

Former Sears, Roebuck and Co. CEO Arthur Martinez Friday told a group of black businessmen and women that while the retailer has made strides recruiting a more racially diverse workforce, the company's efforts at promoting and retaining those minority employees "are not yet sufficient."

Mr. Martinez, 60, who will remain chairman of Sears until his December retirement, noted that although 46% of the Hoffman Estates-based company's non-management workers are black, only a handful of its top 200 executives are minorities.

"When a company truly includes all cultures, productivity will rise. It's not just a warm and fuzzy management theory," Mr. Martinez told the 2,700 people attending a luncheon for the National Assn. of Black MBAs, which held it's 30th annual meeting this week at McCormick Place. "It can make a significant impact on the bottom line."

On Oct. 1., Alan J. Lacy, former head of Sears credit division, took over as president and CEO of Sears, which has struggled recently to keep up with rivals Wal-Mart Stores Inc. and Home Depot Inc.

One of Sears' weakest areas-women's apparel-was a topic Mr. Martinez addressed Friday. He said the division has been energized by the addition within the past few years of an African-American woman who developed the store's Apostrophe line of clothes for young career women. Profits from that line more than doubled, to more than $70 million this year from less than $30 million a few years ago.

But Mr. Martinez acknowledged he was "not happy" when Sears was excluded from a Fortune magazine list of the 50 best companies for minority employees. "We want our executive suite to fully reflect . . . the diversity of America," he said.

J.C. Penney's Same-Store Sales Fall 
As Retailer Issues Profit Warning

Oct. 5, 2000 - A WSJ.COM News Roundup

J.C. Penney Co. warned that it will miss expectations for its fiscal third quarter and may report a loss following a decline in September sales.

In addition, Kmart Corp., which posted a sales increase for the month, said results were "below plan." Meanwhile, Sears Roebuck & Co. and Federated Department Stores Inc. each saw strong monthly sales, as well as specialty stores Talbots Inc. and The Limited Inc.

Penney, of Plano, Texas, said Thursday that September same-store sales, those at stores open at least a year, fell 4%.

The chain blamed a "challenging retail environment" and continued disappointing results in its Eckerd drugstore operations, where the retailer expects to post an operating loss in the quarter. The company also pointed to more promotional activity than expected at its department stores.

Penney's total sales fell 0.9% to $2.83 billion, while department-store sales fell 4.8%.

Analysts surveyed by First Call/Thomson Financial had expected the company as a whole to earn 10 cents a share for the quarter, which ends Oct. 31.

September same-store sales at its drugstore operations, excluding about 300 recently closed underperforming stores, rose 8.8%, led by a 14.3% increase in pharmacy sales. But front-end same-store sales fell 1.2%. The retailer said more promotional activity than anticipated hurt operating profit.

Total drugstore sales for the five weeks ended Sept. 30, increased 3.8% to $1.196 billion.

Catalog sales, which include jcpenney.com, decreased 2.9% for the month. Sales at jcpenney.com rose to $25 million in September from $7 million a year earlier. Sales at the retailer's direct-marketing services were flat at $93 million.

Kmart's Rise in Sales Is "Below Plan"
Kmart, the No. 2 discounter in the U.S., said net same-store sales rose 2.4%, but, excluding the impact of store closings and inventory liquidation, same-store sales edged up 0.9% for the period.

"September sales were below plan with promotional and clearance sales offsetting regular sales growth," Chuck Conaway, Kmart chairman and chief executive, said in a prepared statement. "We continue to focus on inventory levels and inventory mix while dramatically raising the level of store execution."

Kmart, based in Troy, Mich., posted net sales of $3.08 billion, up 4.1% from September 1999.

The retailer, which has been facing increased competition from Wal-Mart Stores Inc. and Target Corp., named Mr. Conaway, former president of CVS Corp., as its chief executive in June. Since then, Kmart has announced plans for fast changes in operations. In July, the retailer announced that it would shutter 72 underperforming stores, increase markdowns on discontinued inventory, and launch a program to upgrade its computer systems.

Dillard's Same-Store Sales Fall 6%
Dillard's Inc. reported a 6% decline in same-store sales and a 5% decrease in total sales, which fell to $788.9 million from a year earlier. The Little Rock, Ark., department-store chain didn't provide additional information in its news release.

In May, Dillard's said its fiscal first-quarter net income dropped nearly 31% amid disappointing sales, which the retailer had blamed on bad weather and a late Easter, but those results marked the fourth consecutive quarter when Dillard's earnings have fallen below the estimates of Wall Street analysts.

The company's downward sales spiral began last spring, when the 65 stores it gained from the $2.9 billion acquisition of Mercantile Stores performed worse than anticipated. The company had expected the Mercantile acquisition to boost sales without the expenses associated with internal expansion.

Sears' Sales Rise Amid Strength in Specialty Stores
Meanwhile, Sears, the second-largest U.S. retailer behind Wal-Mart, reported a 3% rise in domestic same-store revenue for the five weeks ended Oct. 2, amid strength from home appliances, sporting goods, fine jewelry and footwear. The retailer's specialty stores, such as its Sears

Auto Centers, also performed well. Total revenue for the five-week period rose 4% to $3.66 billion, while total domestic revenue rose 4.2% to $2.63 billion.

The Hoffman Estates, Ill., retailer said revenue amounts for the month reflect the implementation of Securities and Exchange Commission guidelines for licensed business revenue.

Federated Posts 2.9% Increase in Same-Store Sales
Federated, of Cincinnati, reported that September same-store sales rose 2.9% from a year earlier. Total sales rose 2.2% to $1.63 billion, while department-store sales rose 3.6% to $1.47 billion.

The retailer's direct-to-consumer sales fell 8.8% in September to $166 million. The direct-to-consumer segment includes the operations of Fingerhut, Bloomingdale's By Mail, Bloomingdales.com, Macy's By Mail and Macys.com.

Federated operates department stores under the names of Bloomingdale's, Bon Marche, Burdines, Goldsmith's, Lazarus, Macy's, Rich's and Stern's.

Talbots's Sales Soared 25% in September
Talbots posted a nearly 25% surge in same-store sales amid healthy trends across all geographic regions.

"Given the fact that September is a month in which virtually all of our merchandise is at regular price, we are extremely pleased with our comparable-store sales performance," Arnold B. Zetcher, chairman, president and chief executive, said in a prepared statement.

Talbots also boosted its third-quarter earnings outlook to a range of $1.00 to $1.02 a diluted share, above the 84-cent-a-share estimate from analysts surveyed by First Call/Thomson Financial. A year earlier, the retailer earned 63 cents a share.

The Hingham, Mass., women's-apparel retailer said it is "optimistic" about its business ahead of the holiday selling season.

May's Same-Store Sales Inched Up 0.7%
May Department Stores Co. posted a 0.7% increase in same-store sales. Total sales at the St. Louis retailer rose 6% to $1.3 billion.

The company didn't open any department stores in September. For the year-to-date, however, May has opened 20 of the 23 new department stores planned for the year. Its DavidUs Bridal unit opened four stores in September.

Last month, May warned that third-quarter earnings would fall below estimates and last year's third-quarter results. The retailer blamed a disappointing August, slow back-to-school sales and the fact that clearance of spring and summer apparel was "more difficult than expected."

May operates department stores such as Lord & Taylor, Hecht's and Filene's, as well as 113 bridal stores.

Specialty Retailers Post Mixed Results
The Limited's comparable-store sales jumped 10%, while net sales advanced 9% to $801.1 million. The Limited, of Columbus, Ohio, operates specialty stores including Express, Lerner New York, Lane Bryant, Limited Stores, Structure and Henri Bendel and also owns about 84% of retailer Intimate Brands Inc.

Abercrombie & Fitch, a Reynoldsburg, Ohio, retailer of casual teen clothing, saw its same-store sales fall 2% in September, following a 3% drop in August. The once-highflying company has suffered with problems in its women's-apparel line since last fall.

Ames Department Stores Inc., of Rocky Hill, Conn., said September same-store sales fell 3.9%. The discount retailer said higher layaway sales hurt its monthly figures, following the adoption of the SEC's layaway accounting rule.