Sears, U.S. Reach Civil Settlement Over 1994-95 Automotive Battery Advertising

"The investigation related to this matter has gone on for more  than two years," said Sears Chairman and Chief Executive Officer Alan J. Lacy. "Faced with the continuing expense and distraction of protracted litigation, we have decided that settling it now is in the best interests of all of our constituents."

 In 1994, Sears selected new vendors to supply its DieHard line of automotive batteries. Exide Technologies, the world's largest manufacturer of lead acid batteries, was chosen to produce the DieHard Silver and DieHard WeatherHandler automotive batteries. In September 1994, Exide began supplying the new batteries to Sears. In October 1994, Exide informed Sears that a small percentage of the DieHard Silver and DieHard WeatherHandler batteries had latent formation defects that might cause some of the batteries to fail to meet certain advertised specifications.

Exide assured Sears that the problems had been corrected. Sears also received test data provided by Exide that indicated the batteries met specifications, and Sears continued its advertising program. The advertising program principally featured the  DieHard Gold battery, which was not manufactured by Exide.

Sears later learned that test data provided by Exide was false. In March 2001, Exide pled guilty to conspiracy to commit fraud in connection with batteries it manufactured and sold to Sears under the 1994 contract.

Sears and Exide ended their relationship in 1999, and Sears selected Johnson Controls, Inc. (JCI) to produce the DieHard Silver and DieHard WeatherHandler batteries, a relationship that continues today. JCI has manufactured Sears DieHard Gold automotive batteries since 1997. Sears DieHard automotive batteries today are widely regarded as among the best in the industry.

"Customers who experience a problem with any Sears battery will benefit from our guarantee of satisfaction, and that was just as true during the period covered by this settlement agreement as it is now," Lacy said. Sears battery warranties traditionally have been among the most generous in the industry.

Under terms of the settlement agreement, Sears will pay the government approximately $63 million. The cost of the settlement will result in a one-time, special charge to earnings of $0.12 per share in the fourth quarter of 2001.

Sears, Roebuck and Co. is a leading retailer of apparel, home and automotive products and services, with annual revenue of more than $40 billion. The company serves families in the U.S. through Sears stores nationwide, including approximately 860 full-line stores. Sears also offers a wide variety of merchandise and services through its Web site, www.sears.com.

Could it be coincidental that Sears sales leveled out after the takeaway of the life insurance to our valued retirees and considering those that helped build the Company a "BURDEN"? Oh well, $46 million here and $60 million a year there. Our challenge of Martinez was considered by he as,  "There was an ego challenge at work and I was the target". Arthur stated,  "Maybe I was really dealing with the revenge of the Searsmen. Maybe they were actually angry that we had been able to achieve what they were not able to achieve."

Yes Arthur, you almost destroyed this great Company! However in leaving, Arthur did engineer and receive a huge retirement package for himself. Alan Lacy and his staff most certainly has a giant job, particularly with current economic conditions, to reposition its rightful retail place.

Weak Retailers at Risk in 2002

Reuters Newsroom - December 26, 2001

Only the fittest survive in lean times, and that could mean store closures, consolidation or even bankruptcies for weaker U.S. retailers banking on good holiday sales to pull them through the year, consultants said.

"Anybody counting on a great Christmas for survival better start preparing their Chapter 11 bankruptcy petition,'' Dominic DiNapoli, managing partner in business recovery services at PriceWaterhouseCoopers, said.

Most retail chains will be glad to close the books on 2001, as weak holiday sales capped a year already marked by the recession and the Sept. 11 attacks. Consumers slashed spending on items like clothing and luxury goods and stayed clear of malls, and spent more time at home.

Holiday purchases are critical to retailers' health because they can account for as much as 25 percent of annual sales. A weak season, coupled with economic damage inflicted by the U.S. recession may spell trouble for some.

Although final figures for the season are not yet in, Merrill Lynch retail analysts expect same-store holiday sales will rise 0.2 percent, marking the smallest gain in about 33 years, according to the firm's data.

Last year, retailer Montgomery Ward & Co., citing poor performance during November and December, filed for bankruptcy and shut its doors after 128 years in business.

Regional discount chain Ames Stores Inc. also filed for bankruptcy protection this year, but still operates 333 stores as it tries to reorganize. Housewares chain Lechters said in October it would close all of its 315 stores.

Department stores and mall-based specialty apparel chains really felt the economic pinch because consumers, mindful of tighter budgets, favored discount chains like Wal-Mart Stores Inc.

"It's pretty clear that the weakness at apparel and specialty stores is most pronounced and most vulnerable in the post-holiday period,'' Frank Badillo, economist at consulting firm Retail Forward, said. ``I do think we'll see store closings, more bankruptcies and consolidation.''

In a recent report, rating agency Fitch said it expects stronger department store chains like Federated Department Store Inc. and May Department Stores Co. to acquire groups of stores from weaker counterparts.

Wal-Mart is still king of retail hill

Regional, smaller discount chains like Green Bay, Wisconsin-based ShopKo Stores Inc. and Ames are seen under pressure because they have to compete against the size and might of giants such as Wal-Mart, Kmart Corp. and Target Corp.

"ShopKo in the Midwest has been doing somewhat better,'' Marie Menendez, an analyst for Moody's Investor Service, said.

"They've been successful at getting some of their operations under control, but given the kinds of increases we are seeing from Wal-Mart it's hard to tell where that customer is going to be doing their shopping,'' she said.

Wal-Mart has managed to snag market share from other retailers, grocery chains and drugstores in the shrinking U.S. economy. The retail giant said Wednesday its holiday same-store sales rose at the upper end of a range from 4 percent to 6 percent.

Fitch cut ShopKo's outlook from stable to negative earlier this year partly because of increased competition from discounters like Wal-Mart and Target in the Midwest. A spokeswoman for ShopKo said no one was available to comment.

Warm weather this season also hurt apparel retailers, who were denied big profit margins on items like winter coats and sweaters, Menendez said. "J. Crew is an example where we had a positive outlook throughout the summer and they managed the down-cycle excellently,'' Menendez said. ``They maintained liquidity and were able to continue to reduce debt, until they stopped selling sweaters.''  Moody's rates J.Crew's debt ``junk'' and gives the retailer a ''negative'' outlook. A ``junk'' rating on debt ordinarily raises borrowing costs.

J. Crew is a closely held clothing retailer based in New York. The company reported that sales at their stores open at least a year fell 24.8 percent in November. Officials at J. Crew were not immediately available to comment.

Retailers like Mattress Discounters Corp. have also not fared well in recent months because they are highly leveraged and ". . . have very low tangible assets,'' Menendez said. Consumers also stopped buying mattresses in the recession.

Larger retailers like Saks Inc. and Dillard's Inc. and discount giant Kmart, which have seen sales and profits flag in recent months, have enough liquidity to make it through more lean times, analysts said.

Sears Plans $1.5B Stock Buyback
By Eddie Baeb, Crain's Chicago Business
December 12, 2001

Sears, Roebuck and Co. Wednesday announced plans to buy up to $1.5 billion of its common stock.

The program is the third major stock buyback plan in the past two years for the struggling Hoffman Estates-based retailer. Since 1998, Sears has spent more than $2.80 billion acquiring its own stock.

"Share repurchase continues to be a compelling use of excess cash flow for the company, and an effective tool to create additional value for our shareholders," CEO Alan Lacy said in a statement.

The new plan, approved by Sears' board today, expires in December 2004.

Department Store Vet Named Head of Sears Apparel

By Susan Chandler - Chicago Tribune
December 4, 2001

After almost a year of searching, Sears, Roebuck and Co. has selected an executive with nearly two decades of experience in the department store sector to head its struggling apparel business.

Kathryn Bufano, a Chicago native, will assume the Sears post of executive vice president of softlines on Jan. 1. She is stepping into a high-profile position that will determine how Sears fares in the highly competitive and potentially lucrative apparel business, where it has been losing market share to more nimble competitors such as Kohl's Corp.

Bufano, who was not available for comment Monday, will report to Sears Chief Executive Alan Lacy. She will be responsible for brand development and worldwide sourcing for all men's, women's and children's apparel as well as footwear, home fashions and jewelry.

Sears found Bufano, 49, at Dress Barn Inc., a Suffern, N.Y.-based low-price women's apparel chain, where she has been president since February. Elliot Jaffe, chief executive of Dress Barn, said he was disappointed that Bufano was leaving and praised her as "one of the outstanding fashion merchants in the country today."

Retail consultant Kurt Barnard called Bufano "an extremely promising appointment."

"The Dress Barn customer is the customer that Sears would like to have. [Bufano] knows all the vendors and she knows how to get the vendors to make her customers happy," said Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J.

Before her 10-month stint at Dress Barn, Bufano spent six years at Macy's East, the department store chain. During part of that time, she was in charge of merchandising women's apparel and reported to the CEO. Before that, Bufano spent 17 years with Lord & Taylor. She began her retail career in 1976 with Chas. A. Stevens, where she was a store manager for the Chicago-based women's apparel chain.

Retail Sluggish Despite Discounting

Reuters - December 4, 2001

Deep discounting at U.S. retailers drew consumers to stores in November, two reports showed Tuesday, but disappointing results for the last week of the month herald a grim holiday season.

Analysts are hoping that consumer spending; which accounts for two-thirds of U.S. economic activit; will soften the recession that began in March and help lead the economy back onto a growth path.

But the Bank of Tokyo-Mitsubishi and UBS Warburg said Tuesday their retail chain store sales index fell 1.7 percent during the week ended Dec. 1; the largest drop since Sept. 11; following a 0.9 percent gain one week earlier.

Instinet's Redbook Retail Sales Average rose 2.4 percent in the four weeks ended Dec. 1. That gain matched a similar rise in the previous period, but there were some worrisome signs in the report.

Redbook said retailers were disappointed with the latest week's results, blaming unseasonably warm weather for a lag in sales of winter clothing.

"It's a very risky environment," said Mike Niemira, senior economist at BTM, who added that the significance of holiday sales went well beyond the retail sector.

"Statistically, a strong Christmas bodes well for the subsequent year from an economic standpoint. So, if it's a soft Christmas season, then that's the kind of the year that you look ahead for," he said.

The holidays are crucial for retailers since November and December sales account for around one-quarter of overall retail sales for the whole year. But the numbers do not look promising.

"Holiday shopping is expected to be the weakest since the recession of 1990/91," said Steven Wood, chief financial economist at FinancialOxygen, in Walnut Creek, California, in a report released after the data.

The Trouble with Discounts

Part of the trouble is that value-conscious consumers' increasing appetite for bargains cuts into the overall dollar value of sales, hurting retailers.

BTM's sales index, which measures overall sales volume in dollar amounts, fell to 386.4 last week; its lowest level in five weeks compared with 393.1 in the prior week.

The near 2 percent drop; for an index that hardly ever budges a full percentage point from week to week; indicates the trouble with revving up sales through deep discounting.

"The fundamentals just aren't there for a strong holiday season,'' said Steven Loeys, economist at Lehman Brothers.

Most U.S. retailers will announce monthly sales results for November this Thursday.

Consumer spending set a record in October, rebounding from a sharp fall-off after the Sept. 11 attacks. BTM expects a 3.0 percent rise over November sales last year.

Compared with the same week last year, the BTM index rose 3.1 percent, stronger than the prior week's year-over-year gain of 2.2 percent, and approaching the 3.3 percent rate of growth seen the week before Sept. 11.

The Redbook Average grew 2.7 percent year-over-year, after a 4.8 percent gain in the previous period.

But analysts cautioned against yearly comparisons, noting that growth relative to an exceedingly poor holiday season last year is misleading.

Cross-year comparisons are also made difficult by the fact that the Thanksgiving weekend; a crucial period for holiday shopping; was earlier this year than last, Lehman's Loeys said.

The BTM/UBSW Weekly Chain Store Sales Snapshot is compiled from seven major discount, department and chain stores across the country. They include J.C. Penney Co. Inc., Sears, Roebuck and Co., Target Corp., Kmart Corp., Wal-Mart Stores, Federated Department Stores Inc. and May Department Stores Co.

The Redbook Retail Sales Average is a sales-weighted average of annual growth in same-store sales at discount, department and chain stores that report results on a weekly basis. The index is released weekly by Instinet Research, a division of Instinet, a Reuters-owned electronic brokerage.

But the stakes are higher this year because of the weak economy, lost jobs and consumer skittishness following the Sept. 11 attacks on New York and Washington.

With sales slowing during a recession, retailers are pulling out all the stops to get shoppers into their stores during the holiday season, which typically generates 25 percent of annual sales.

"They are using tried and true methods of promoting to get people in the door,'' said Sarah Scheuer, a spokeswoman for the National Retail Federation trade group. ``The promotions are not fundamentally different, but there are more of them and they are more frequent.''

Sears, Roebuck and Co., the nation's fourth largest retailer, will open most of its stores from 7 a.m. to 9 p.m. this weekend, again offering some of the deep "doorbuster'' discounts it used during Thanksgiving weekend to woo customers.

"We will have some incredible deals to bring customers into the stores,'' Sears spokeswoman Peggy Palter said.

For example, Sears is selling $49 VCRs and and 13-inch television sets for $68 from 7 a.m. until noon. Hoffman Estates, Illinois-based Sears also added a "clearance center'' to its Web site, http://www.sears.com, this holiday season.

Plenty of sweaters, discounts
Hefty markdowns can already be found on sweaters, a holiday gift-giving staple. Yet despite the deals, unseasonably warm weather in many parts of the country has kept consumers away from the piles of neatly folded sweaters found in most apparel chains.

"I don't care how deep retailers discount cashmere sweaters,'' Candace Corlett, a principal at consulting firm WSL Strategic Retail in New York, said on Thursday. "Consumers are telling us they are overstuffed. They just don't have anymore room in drawers and closets for another cashmere sweater.''

At women's apparel chain AnnTaylor Stores Corp., all cashmere sweaters are 30 percent off.

At Brooks Brothers Inc., which British retailer Marks & Spencer Plc recently sold to Retail Brand Alliance, men's V-neck cashmere sweaters were marked down from $248 to $199.

On Gap Inc.'s Web site (http://www.gap.com), some sweaters are marked down 40 percent. The e-commerce arm of the largest U.S. apparel chain is also offering a coupon worth 15 percent off any purchase made in Gap stores over $100.

But it is still to early to tell whether the deep discounts will generate enough sales for retailers to call it a Merry Christmas.

Over the Thanksgiving weekend, sales at stores open at least a year rose a modest 2.3 percent, according to data from check acceptance company TeleCheck Services. That figure was down from last year's gain of 3.8 percent.

Sears Retail Sales
Same Store Sales Off
Reuters - December 3, 2001

Sears, Roebuck and Co., the No. 4 U.S. retailer, on Monday said it expects its same-store sales during the holiday shopping season to fall 3 percent to 4 percent, a decline from the flat sales expected prior to the Sept. 11 attacks in New York and Washington.

Discounts Rolling
Reuters Newsroom - November 29, 2001

With Sears selling televisions for $70 and stores selling sweaters near half price, discounts will be as plentiful as mistletoe and tinsel over the next few weeks as U.S. retailers try to lure holiday shoppers in a shrinking economy.

"We will have promotions every week, and we are more promotional this year,'' said Stephanie Brown, a spokeswoman for J.C. Penney Co. Inc. "We knew this was going to be a competitive year even before Sept. 11. Our marketing and promotion efforts are more intense this year,'' she said.

This weekend, all 1,080 department stores operated by Plano, Texas-based Penney will pass out chocolate bars with wrappers containing coupons for discounts of 20 percent to 30 percent off store merchandise.

Typically, retail chains offer markdowns and specials the weekend following Thanksgiving, then refrain from price cuts until the days just before Christmas, when inventories must be cleared.

Drug Costs Poised to Soar Anew

By Gloria Lau - Investors Business Daily
November 27, 2001

With the least leverage, they'll foot more of bill or get less of medical pie If you think your co-payment for drugs will stay anywhere near as low as $5 for generics and $10 for brand name drugs, you're in for an ugly surprise.

New forecasts show drug costs will shoot up at a double-digit rate every year for the next decade. The U.S. will spend $366 billion a year on prescription drugs in 2010 vs. $117 billion in 2000.

That's triple what we spend now. In all of history, Americans have never spent more than 9% of total health costs on drugs.

That's going to jump to 16%, ac-cording to data from the Centers for Medicare and Medicaid Services - the programs' finance arm. The group comes out every year with 10-year forecasts of drug and health care costs.

That's bad news for consumers and doctors - those with the least bargaining power in health care. "You have a $5 or $10 drug co-pay?" asked Rand senior economist Glenn Melnick. "Within 24 months, that's going to be gone. Drug costs are going up 20%-25% a year. If you're not paying much more for brand name drugs today, you will be in 24 months."

He predicts co-payments for generics will rise to $25 and brand name drugs to more than $50. Past drug price trends support this claim. Before 1992, a month of pills cost $30.47 vs. $71.49 today.

Beyond drugs, all health care costs are up too. Health costs rose 7.2% last year vs. 5.2% between 1992 and 1998. Total spending will double to $2.6 trillion between 1999 and 2010. That means it'll eat up 16%, instead of 13.5%, of gross domestic product.

"That extra money has got to come from somewhere," said Melnick, who also heads the health care finance program at the University of Southern California. "If my share of the pie grows, your share shrinks. The question is whose share will shrink?"

His guess is doctors and patients - those with the least leverage. Most people buy health insurance from a health plan or through their employers. Although the latter allows people some discounts, they are small.

What will happen? Initially health plans will see their drug and health costs rise. They'll miss profit goals and start offloading costs onto employers, who'll push costs onto workers.

Doctors also will get squeezed. Most doctors - even those in group practices - have little control over how much insurers pay them. Most big health plans have millions of members nationwide. The largest practices don't have a l0th as many doctors.

With no negotiating power, where does that put doctors? Right back where they were before they formed those physician practice management firms that went belly up in the mid-1990s. Doctors' incomes are already falling. General practitioners' net incomes dropped 16% last year to $90,280, according to Medical Economics, the leading physicians' journal. In fact, few doctors' specialties surveyed saw income growth that matched inflation, meaning their real incomes fell.

Are the drug-cost forecasts right? "Definitely reasonable, but forecasting is a very imprecise science," said Paul Ginsburg, former deputy assistant director of the Congressional Budget Office, which helps Congress estimate the cost of health policies. "But even if it's off by 30%, its significance it is the same."

Now, as president of the Center for Studying Health System Change, Ginsburg leads surveys of 12 cities in the U.S. every two years. He interviews employers, health plans, doctors and patients.

Today, half of all employers offer a three-tiered system vs. fewer than 10% in 1999, his last survey shows. Three-tiered co-pay systems ask members to pay $10 for generics, $20 for brand name drugs on a pre-screened list and $30 for other brand name drugs.

These tiered systems let health plans and employers offload more drug costs on to you and me.

"This rapid growth in pharmaceutical costs will hasten the day when consumers have more out-of-pocket costs and more financial incentives to economize," Ginsburg said. "There'll be more cost-sharing for drugs and doctors' fees."

That's happening at hospitals. Two months ago, Tufts Health Plan of Boston started charging pa-tients who want to use teaching hospitals instead of community hospitals an extra $250 per visit. In other words, Ginsburg says, people can choose quality - at a price.

_____________________________________________________________________

Comments: It appears that escalating drug and health care costs may well be passed on to Sears retirees due to Martinez's 1996 freezing of Sears contribution to your medical. We've been advised that many in the old "Plan E" (now known as Sears Medicare Plus Plan), have seen a 40% jump in premiums. It is recommended that you have your physician issue you a years prescription for a given drug. Order a 90 day supply for home delivery from Merck-Medco ( the prescription plan drug administrator). Once they have a copy of the doctors prescription, you may order by mail, or over the web: www.merckmedco.com Home delivery costs for a 90 Day supply are:

Generic: - $20, Preferred brand - $30, Non-preferred brand - $45

Remember, that if you once drop the Plan, you can no longer get it back. If you have questions regarding the Plan, please call the Retiree Service Center at 1-800-762-7327. You will be asked for your Social Security number and password PIN. The password PIN, is the two digits of the month and the last two digits of of year of birth. For example if you were born in June of 1928, your PIN number would be 0628.

For 2002, if you are still covered under the Plan, Sears has increased the lifetime maximum for the Plan from $150,000 to $250,000 for you or your spouse.

Sears retiree Gerald Weitzenhoffer has advised NARSE about a little known military service veterans Medical Care Recovery Program. As many of us are military service veterans, some may qualify and be eligible to participate in the Veterans' Health Care Eligibility Reform Act of 1996 and Pubic Law 104-262. The Law was enacted to simplify the rules for providing health care to veterans and introduce improvements in the quality and timeliness of the care received. To determine if your military service qualifies you for enrollment, see their web sites at: www.vba.va.gov - www.va.gov/vbs/health - www.va.gov/health/elig/eligibility.html Additional information may be found at: http:www.va.gov/mccr You can be secure more information by contacting your nearest VA Medical Facility or:

Medical Care Cost Recovery (174)
Department of Veterans Affairs
810 Vermont Ave., NW
Washington, DC 20420
Ph: 202-373-8858

The VA Health Benefits Service Center has established a toll free number to determine eligibility is: 1-877-222-VETS

Paul Liska, chief financial officer of Sears, Roebuck and Co., will speak at the Lehman Brothers Retail Conference in New York City on November 26, 2001 at 12:55 p.m. Central/1:55 p.m. Eastern time.

The presentation will be webcast live over the Internet at http://www.sears.com. To access the webcast, click on "Investors" and select "Calendar of Events." A replay of the call will be available on the Web site for approximately one week.

Software necessary to listen to the webcast, Media Player or Real Player, can be downloaded from the webcast site. Downloading the software may take up to 22 minutes with a 56K speed modem.

Sears, Roebuck and Co. is a leading retailer of apparel, home and automotive products and services, with annual revenue of more than $40 billion. The company serves families in the U.S. through Sears stores nationwide, including approximately 860 full-line stores. Sears also offers a wide variety of merchandise and services through its Web site, http://www.sears.com

Kmart Finance Chief's Tenure Brief
Ex-Sears exec served 6 months

By James Covert - Dow Jones Newswires
November 14, 2001

Industry observers are wondering whether other problems--including Kmart's relationships with customers and manufacturers--might cause the Troy, Mich., discount chain to trip up again soon.

Jeffrey N. Boyer, who had been with Kmart for six months, left the company to spend more time with his family, Kmart said Friday. Boyer, 43, had joined Kmart after serving as chief financial officer at Sears, Roebuck and Co., where he had worked since October 1999.

Boyer has been succeeded at Kmart by John T. McDonald Jr., formerly senior vice president of finance and treasury. Previously, McDonald had worked at CVS Corp., where Kmart's chairman and chief executive, Charles C. Conaway, had served as chief financial officer before joining Kmart in May 2000.

Boyer's Friday departure follows the resignation of Kmart's chief marketing officer, Brent Willis. After supervising the relaunch of Kmart's BlueLight Special promotions, Willis, a former executive at Coca-Cola Co., left Kmart in April to spend more time with his family, the company said at the time. Willis had been with Kmart less than six months.

"The revolving door continues, and it's not a good thing when the company is losing top executives," said Robert Buchanan, an analyst at A.G. Edwards & Sons Inc. in St. Louis.

Kmart spokesman Jack Ferry said Boyer's resignation was voluntary, and that it had nothing to do with Kmart's finances or accounting practices, which the financial officer oversaw.

At Kmart, a few promises have already been broken.

When it reported second-quarter earnings in August, Kmart did not reduce its inventories as planned, shaking the confidence of some investors despite Kmart's contention that inventories were up due to higher investment in fast-moving consumable items.

In October, Kmart's same-store sales declined 4.4 percent, well short of the outlook it gave in August, which called for an increase during the second half in the low single digits. CEO Conaway partly blamed the October decline on shifts and cuts in advertising during the month.

Emme Kozloff, an analyst at Sanford C. Bernstein & Associates in New York, declined to speculate on whether Boyer's departure was related to such issues. Signs of a lack of unity in Kmart's ranks were evident at a meeting with analysts on Sept. 10, when Conaway didn't introduce Boyer, she said.

HomeLife, a former unit of Sears that filed for bankruptcy protection in July, is liquidating its 128-store chain. Sears bought the rights to the leases partly because it may be responsible for lease payments to HomeLife's landlords.

"The faster we get rid of (the leases), the better," says a Sears spokeswoman. Clifford Katz, the New York lawyer who represents the creditors committee, says Sears' offer was the only one made for all of the leased stores. HomeLife was advised on the deal by Northbrook-based Hilco Real Estate LLC and Newmark Retail Financial Advisors LLC of New York.

Tens of thousands of employees are being forced to drop their health plans and choose a different one this month as companies across the country sharply reduce their rosters of H.M.O.'s and other managed care insurers.

Some employees will have to change doctors as well, if their physicians are not on the roster of the new health plan. Everyone who makes the switch will have to deal with a new set of customer service representatives and often different rules and out-of-pocket payments.

Health care economists say large employers are trying to force the managed care companies to hold down their charges as they compete for a smaller number of large contracts. Employers say that by reducing the number of plans, they can save money and tighten control over the quality of care.

But critics like Alain Enthoven, a professor of management at Stanford, say employers are "going in exactly the wrong direction." With fewer choices, he said, doctors and hospitals will be under less pressure to compete by lowering prices.

Consumer advocates charge that the cutbacks are part of a strategy to shift more of the costs gradually to employees as health care inflation spirals upward.

"Businesses have found that they don't have a magic bullet to reduce their own costs," said Ron Pollack, executive director of Families USA, a consumer group based in Washington. "Their strategy is going to be to shift those costs and the burdens, and push people into more restrictive health plans."

The narrowing trend comes after years in which companies made more medical options available, said Jim Maxwell, health policy director at the JSI Research and Training Institute in Boston.

"Because of the managed care backlash," he said, "employers backed away from the tougher forms of managed care," which had helped to restrain cost increases, he said. And as the insurers changed their products to try to attract plan members, they dropped many of the restrictions that kept costs in check. For example, many health maintenance organizations stopped requiring members to get second opinions before treatments could be approved, and many no longer required permission from an internist or other primary doctor before a patient could consult a specialist.

Now, though, employers are facing rising health costs along with a weak economy, and their only way to keep expenses in check "is to negotiate more aggressively with the carriers," Mr. Maxwell said.

The changes are extremely widespread. In five years, 93 percent of Fortune 500 companies reduced the number of health insurers they offered, and none increased the number of insurance carriers, Mr. Maxwell reported in a study completed last year for the National Health Care Purchasing Institute.

In just the last two years, Sears, Roebuck (news/quote) dropped 120 health maintenance organizations and kept 65; American Express (news/quote) jettisoned 164 health plans and kept only 48. This year alone, Xerox

(news/quote) removed 92 H.M.O.'s from its roster of 222 for employees wishing to choose a new plan, but current members of these H.M.O.'s could remain.

Sears, which covers 100,000 employees across the country, felt "forced into" dropping H.M.O.'s that demanded steep premium increases, said Liz Rossman, vice president for benefits at Sears. Some health plans were asking for 70 percent and 80 percent increases. She said most employees whose plans were dropped would still have access to the same doctors through a large national network offered by Empire Blue Cross.

Employers said that when they used many insurance plans, each one covering a relatively small number of employees, it was hard to negotiate rates effectively.

Arleane Baltrusitis, vice president for benefits at American Express, which covers 60,000 employees, 6,000 retirees and their dependents, said that with 164 insurers, it was "difficult to know what you were getting, if you were really getting value."

"In the 70's and 80's, the concept was to contract with everyone in sight" in cities across the country, she said.

"Twenty years later," she added, "we realized we had lost any leverage" with the H.M.O.'s. With relatively few employees in each local plan, she said, American Express could not negotiate with the H.M.O.'s on services or what the contract was going to look like.

Now most American Express employees have a choice of an H.M.O. or a doctor in a preferred provider network through UnitedHealthcare, an operating unit of the UnitedHealth Group.

Xerox has tried another approach. Larry Becker, benefits director, said that to try to have better control of the dozens of health plans it still has outside its manufacturing center in Rochester, Xerox was dividing them into four groups that would be managed by Empire Blue Cross and Blue Shield, UnitedHealth, Aetna (news/quote) and Kaiser Permanente.

Smaller companies are also narrowing their sights. Kestrel Technologies, a rapidly growing software company based in Manhattan with 60 employees in seven states, hired Empire to take over from six health plans.

"I wanted to try to reduce premiums and provide equal benefits to all our employees," said Jake Karam, chief financial officer of Kestrel. The company's premium rates have plummeted 30 percent for the new year, he said, in part because insurers were more interested in covering a larger group of employees.

The drive to reduce the number of plans is spurred by the fact that as companies have laid off employees, their benefits departments have shrunk, leaving fewer workers to deal with health care insurers. "There is a greater push to do it this year because the rates are up and the benefit department has been downsized along with the rest of the firm," said Larry Boress, executive director of the Chicago Business Group on Health, an employers' group.

Consultants say H.M.O.'s are demanding premium increases of up to 17 percent from large companies for 2002.

Companies "are looking for one-stop shopping," said Laurel Pickering, executive director of the New York Business Group on Health.

Mr. Boress says the health plans are eager to become employers' sole health care managers. They offer discounts of at least 5 percent for the privilege, he said. "Insurers are terrified of selling a more comprehensive plan and competing with a less comprehensive plan" that siphons away healthier members, said Paul Ginsburg, president of Health Care Change, a research group based in Washington.

October Retail Sales

A WALL STREET JOURNAL ONLINE News Roundup, Nov. 9, 2001 Discounters like Wal-Mart Stores Inc. continued to perform well in October while most other retailers suffered as shoppers, spooked by the poor economy, worries about national security and the U.S. bombing campaign in Afghanistan, stayed away from the malls.

Wal-Mart, Bentonville, Ark., said Thursday that sales at stores open at least a year -- a key indicator of a retailer's strength -- rose 6.7%. Total sales at the world's largest retailer rose 15% to $16.62 billion.

Same-store sales rose 6.3% at the company's Wal-Mart stores and 8.3% at its Sam's Club warehouses. Total sales at Wal-Mart stores climbed 14.4% to $10.44 billion, and at Sam's Club rose 13% to $2.30 billion.

Wal-Mart also said it remains comfortable with the low end of a forecast made last week for fourth-quarter earnings of 48 cents to 49 cents a share.

Discount chains like Wal-Mart generally perform better than other retailers when the economy is weak, as shoppers head to stores with lower-priced merchandise.

"The real news here is less about a decline in retail sales, and more about a shift in where consumers are taking their dollars," said John Staton, a partner at Accenture Consulting's Global Retail Practice.

Indeed, Costco Wholesale Corp., Issaquah, Wash., said same-store sales rose 6%. The warehouse chain credited higher tobacco prices. Total sales jumped 13% to $2.83 billion. And Kohl's Corp. rung up a 13.5% increase in same-store sales.

While Wal-Mart, Costco and Kohl's benefited from their lower prices, they also were helped by superior merchandise, convenient locations and strong customer service at their stores, said Jim Leach, portfolio manager at Strong Capital Management.

However, not all discounters fared so well. Kmart Corp.'s October same-store sales fell 4.4%, a drop the company blamed on disappointing Halloween sales. Kmart said it liquidated more than $52 million of discontinued inventory, which accounted for 2% of same-store sales for the month. Total sales for the Troy, Mich., company dropped 4.9% to $2.42 billion.

Some analysts say that Kmart, which is in the middle of a restructuring, continues to suffer from shortcomings in its customer service and merchandising.

Meanwhile, Gap Inc.'s troubles persisted. The San Francisco clothing retailer said sales plunged 17% on a same-store basis. Total sales slipped 4% in October, to $1 billion from $1.1 billion a year ago.

The company said it is "carefully reviewing" all pending real-estate deals for 2002, and now sees 2002 square footage growth to be around 5%. The company said it won't commit to any new real-estate deal for 2003 until the first half of 2002.

Jeffrey Feiner, an analyst at Lehman Brothers Inc. in New York, said the beleaguered apparel sector redoubled its efforts to decrease the size of their bloated inventories, marking down prices on excess fall goods in order to make way for holiday arrivals.

"Inventories were cleared fairly aggressively during the month," he said. "And more importantly, retailers have been extremely cautious about ordering for Christmas."

J.C. Penney Co. said October companywide same-store sales were flat and total sales rose about 1% to $2.41 billion. Penney, Plano, Texas, said it was pleased with the October numbers, however, considering the difficult retail environment.

At Penney's department stores, same-store sales fell 0.7%, while total sales dropped 1.9% to $1.05 billion.

Meanwhile, same-store drugstore sales rose 9.3%, boosted by a 12% increase in pharmacy sales. Front-end sales at the Eckerd drugstore chain were up 3.3%, reflecting customer growth and improved unit sales. Penney said the growth supports the move to offer more competitive pricing and shows the effects of the stores' reconfiguration.

Penney's overall sales had been weak since the Sept. 11 terrorist attacks, and October got off to a rocky start as the U.S. military campaign began, but rebounded in the final two weeks of the month. The best-performing categories were apparel and home furnishings.

For Sears, Roebuck & Co., October same-store revenue dropped 4.4% and total domestic-store revenue fell 3.4% to $2.15 billion.

Federated Department Stores Inc., which operates the Macy's and Bloomingdale's chains, said same-store sales fell 8.7%. Total sales sank 8.9% to about $1.12 billion.

"While it remains difficult to forecast with any certainty in the current economic environment, we are hopeful that we will see an improved sales trend as we move into the holiday season," James M. Zimmerman, Federated's chairman and chief executive, said in a written statement.

May Department Stores Co. saw same-store sales drop 6.4% while total sales fell 4% to $965.5 million.

Apparel retailer Talbots Inc., a strong performer in the category until recent months, said same-store sales fell 13%. That was in line with Talbots' own target but lower than Wall Street had forecast.

Talbots, Higham, Mass., saw total company sales fall 5% to $130.3 million. The retailer blamed a shift in the start of its midseason sale, a weak economy that was exacerbated by the Sept. 11 attacks, as well as strong sales in October 2000.

In general, same-store sales at the nation's retailers were expected to be dismal last month.

According to the RCT National Retail Traffic Index compiled by Chicago-based consumer-research firm RCT Systems Inc., traffic at malls had stabilized and was improving in October until Halloween week, when an anonymous e-mail message warning people not to go to the malls on Oct. 31 began to circulate.

Adding to that was the cancellation of some Halloween events by malls and a heightened-security alert issued by the government amid the threat of another terrorist attack.

According to RCT, total mall traffic was down 5.3% to 676.6 million in October, with the steepest drop coming in the final week.

Sears Rehabs Great Indoors Plans

Ratcheting back expansion blueprint

Changes in store: Sears is paring back plans to expand its Great Indoors concept, a chain of high-end home-decorating superstores.

By Eddie Baeb, Crain's Chicago Business

November 5, 2001

Once touted by CEO Alan Lacy as one of Sears, Roebuck and Co.'s most important growth engines, Great Indoors hasn't been living up to the retailer's great expectations.

"There's a certain number of (Great Indoors) stores in affluent markets that will be very profitable and will do extremely well," Mr. Lacy told analysts late last month. "But if that's all the Great Indoors is, that's not as major a growth vehicle for Sears as we would like it to be."

The numbers tell the story: At $20 million to $25 million to build and open each location, the deluxe home-decorating superstore is proving costly. Each store is generating revenues of $35 million to $50 million, but sales growth at the 13-store chain is lagging. Same-store sales — a measure of results at stores open at least a year — have been anemic all year, and virtually flat in the third quarter.

As a result, Mr. Lacy is now paring back expansion plans for the Great Indoors concept — a move that's in keeping with his stated goal of pursuing fewer growth initiatives, focusing only on those with the potential to be multibillion-dollar businesses.

The Hoffman Estates-based retailer originally had planned to open 11 more Great Indoors stores by yearend; current plans now call for nine. Similarly, the plan to open 10 to 15 stores in 2002 has been ratcheted back to seven.

But even if Sears opened 50 Great Indoors stores nationwide, revenues would approach only $2.5 billion based on recent sales trends — a small fraction of Sears' overall $41 billion in revenues.

Part of the problem for Great Indoors — at least outside of the most affluent markets — is its emphasis on pricey, high-end merchandise, observers say.

The store "has to appeal to the mass market," says Wayne Hood, an industry analyst with Prudential Securities in Atlanta. "If instead of being 200 stores, it winds up a 45-to-50-store chain, it's not going to move the growth needle for Sears."

Slowdown in Growth
Meanwhile, the slowing economy hasn't helped.

Great Indoors, launched in 1998 — before Mr. Lacy became CEO — posted quarterly same-store sales gains of 13% to 29% through 1999 and 2000. But in this year's first quarter, same-store sales rose only 2% from the year-earlier period; in the third quarter, that figure was flat.

"On Sept. 11, the sales line for the Great Indoors changed dramatically — even at the stores that were showing very strong sales growth," Mr. Lacy said during the analysts meeting.

Great Indoors' archrival, Home Depot Inc.'s Expo Design Center, is also struggling, and industry sources say they expect the Atlanta-based home-improvement giant to scale back expansion.

A company spokeswoman won't say how many Expo stores Home Depot is planning for next year, but says the company's earlier plan to have 200 Expos operating by 2006 is "under review."

Expo has more upscale products than Great Indoors. It also devotes more floor space to room settings, while Great Indoors puts more emphasis on decor items, bath towels and bed linens. That's why retail experts believe that the economic slowdown has hurt Expo as badly as, or even worse than, Great Indoors.

"If (Great Indoors) is finding it difficult in this economy to drive sales, Home Depot must really be feeling it at Expo," says Shelly Hale, an analyst at Banc of America Securities in San Francisco.

Home Depot has reshuffled Expo's top management twice this year. But the Expo spokeswoman insists that the 40-store chain is faring well, although the company does not provide specific sales data.

She does say that Expo this year has begun offering lower-priced items, such as cabinet pulls that start at $1.99 rather than $7.

"We want to have a broader reach," she says. "We're starting to tell the value story better, by using both in-store presentation, merchandising and various marketing vehicles."

Risk of tinkering
Sears also plans to tweak Great Indoors' merchandise assortments to make the stores more appealing to middle-income shoppers. And it's looking to reduce opening costs and operating expenses. Great Indoors President Bob Rodgers was not available for an interview last week.

Retail experts expect Great Indoors to display lower-priced items more prominently, drop some high-end items and stack discounted merchandise to try to emphasize value pricing.

But tinkering with the merchandise mix and presentation can be risky.

It could wind up cheapening the store — blurring the distinction between Great Indoors' deluxe product assortment and merchandise at lower-end competitors like Bed Bath & Beyond and Target. Another downside: loss of the "wow" factor supplied by Great Indoors' snazzy kitchen and bathroom settings.

"It's very hard, because this is an upscale concept. If you put in $1.99 Rubbermaid products, you lose that," says Walter Loeb, president of New York-based retail consultancy Loeb Associates Inc. Great Indoors, he says, "has got to stay away from the discount image."

Sears Resolves Its Identity Crisis

By James Covert - Dow Jones Newswires
 November 2, 2001

After a year of navel gazing, Sears Roebuck & Co.last week said it has finally resolved its identity crisis.

"We're not a discounter - we don't want to be," Chairman and Chief Executive Alan J. Lacy told analysts at a meeting in Chicago. "We also don't want to be a department store. We want to be Sears."

Did Sears actually consider becoming a discount retailer? Lacy didn't elaborate, and he also played down his admission earlier in the year that he had considered leaving the apparel business altogether. But the depth of the CEO's soul searching since he took over last year shows just how uncomfortable the fourth-largest retailer in the U.S. has become over the past decade.

Like its fellow department stores in shopping malls across the country, Sears has faced increased competition from big discounters like Wal-Mart Stores Inc. (WMT). In addition to pricing pressure, Sears' middle-of-the-road department store model of the 1990s saw newcomers taking its market share with better merchandise selections and more convenient locations. Sears' consumer-electronics sales were assaulted by Best Buy Co. (BBY), while its tools and hardware division came under attack from the likes of Home Depot Inc. (HD).

Of course, Sears' uninspired apparel business has been up for grabs for years, and there was a good deal of anticipation last week for its turnaround plans there. But like much else with its restructuring, Sears' apparel initiative wasn't so much revolutionary as it was modest, reasonable, and bound to improve on current operations, observers said.

"This is not an exciting strategy that's going to turn a lot of people on and get people excited about Sears," said Sid Doolittle of McMillan/Doolittle, a Chicago-based retail consultant. "But that doesn't mean it's not the right strategy."

Indeed, the bulk of Sears' turnaround goals involve aggressive cost-cutting and streamlined operations at both the store and corporate level that executives say will increase accountability. While some worry that the streamlining will be difficult to execute consistently throughout Sears' fleet of 860 full-line stores, most analysts are hopeful that it's realistic and achievable.

The company has set a goal to boost its operating income by 50%, or $1 billion, by 2004. About two-thirds of that improvement will come through cost reductions that will include 4,900 layoffs, or 22% of its salaried work force, by 2003.

Taking A Page From Kohl's?
The other third of the profit boost, however, may be a little trickier to achieve. Sears' credit business has been managed well, and with the recent introduction of the Sears MasterCard, it's poised to deliver more than half of the company's revenue next year.

But the focus of Sears' new sales growth initiative relies on rehabilitating its full-line stores. Since last week's meeting, many analysts have likened Sears' new vision to the discount department stores operated by Kohl's Corp. (KSS).

Like Kohl's, Sears will centralize its checkout counters at store entrances. Store signs, as well as merchandise categories and displays, will become more uniform, fewer and simpler. So will the sales events that they advertise. Sales associates will be pulled from some areas of the floor altogether so they can provide better, more expert service in others.

But if Sears' stores have plenty of room to improve their shoppability, for many customers they'll still be less convenient than the likes of Kohl's, Best Buy, and Home Depot, whose stores are often located on the way to Sears, said Daniel Barry, an analyst at Merrill Lynch & Co. in New York.

"They're trying to put a convenience-type store in the mall," Barry said. "But it's going to be difficult to do that because they're in the mall."

In another move towards a Kohl's-like model, Sears will reduce its clutter of private-label apparel brands by half, and forsake professional clothing in order to focus on casual wear.

A simpler apparel offering will make it easier to highlight some of the name brands it offers, which include Nike Inc. (NKE) and Levi's jeans. But the main thrust of the new apparel strategy will be the introduction of a single, private-label "megabrand" that offers casual clothing for men, women and children.

Most of the editing of its clothing assortments will be complete by fall of next year, and the new private brand will be introduced about a year later, the company said.

Sears, however, didn't have much else to say about apparel, which makes up about 20% of its business, and is crucial to maintaining gross margins and earnings power. That has some analysts worried.

"This will be easier said than done, particularly as it will not benefit from a world-class chief merchant," said Bill Dreher, an analyst at Robertson Stephens Inc. in New York. "It appears there is no outside merchant who is available or ideally suited to the job, and who is that far superior to the current team."

Eric Miller, a retail analyst for Strong Capital Management's Strong Opportunity Fund, which recently added 1.6 million shares of Sears to its portfolio, admits the apparel strategy does pose some risk.

"I don't know what appeal the megabrand will have," Miller said. "I haven't seen it. No one's seen it."

Still, the prospects for the rest of the store are quite good, Miller said. Sears is simplifying its offerings across its merchandise categories, and will stop selling items including ceiling fans, faucets, bicycles and swimming-pool supplies.

In its consumer electronics department, Sears is scaling back its assortment of VCRs, but increasing its offerings in hot, new digital video products. Sears will surrender the battle over smaller, personal electronic devices to the big discounters.

Sales of large appliances, from washers and dryers to refrigerators, have held their ground against the competition. With its powerful Kenmore brand, Sears retains a massive 40% share of the market.

Sears plans to further improve the quality and timeliness of its maintenance and deliveries of appliances. That will protect its market share from recent incursions by home-improvement retailers, which don't have the ability to provide similar levels of service, Miller said.

Sears' tool sales, driven by its Craftsman brand, have retained a 33% market share in the face of competition, and Sears looks to protect that with the introduction of in-store "tool experts."

Miller also likes the fact that Sears has scaled back growth plans for its Great Outdoors home decor chain, whose upscale offerings have suffered during the economic downturn. He hopes company will be able to use the expertise it's gained with Great Outdoors to improve the home decor sections of its full-line stores.

Stock Is Cheap, But Skeptics Remain
NYSE-listed shares of Sears have responded well to CEO Lacy's arrival, having closed at their 52-week low of $28.05 on Nov. 10 last year, just as he was taking the helm from predecessor Arthur Martinez. On Thursday, the shares closed at $40.25, compared with a 52-week high of $47 reached on July 26, when investors still held out hopes for a Christmas recovery.

At nine times consensus earnings estimates for 2002, Sears shares are indeed inexpensive, said Robertson Stephens' Dreher. Still, he's maintaining his market perform rating on the shares.

"Although there may be early money moving in as the stock is cheap, we have little evidence to build a case that Sears deserves to return to the upper boundaries of its historical trading range," said Dreher, who is waiting to see results from the turnaround effort.

Strong's Miller, in turn, said he worries Wall Street won't give Sears the credit it deserves for its massive cost-cutting program.

"My fear is that the Street is consumed with the top line, and that they'll look for it sooner rather than later," Miller said. "Right now, they've got a great opportunity to enhance the margins."

As for more philosophical questions about Sears' identity, however, Miller admits he doesn't have any definite answers.

Sears Tower Observation Deck Reopens;
Ex. Pres Bush There

Visitors will have to pass through metal detectors and have their bags checked by X-ray machines before boarding elevators to the 103rd floor of the tower.

Former President George Bush helped Mayor Richard Daley and others reopen the tower's Skydeck Monday. The observation deck had been closed since the Sept. 11 terrorist attacks.

Former President Bush said the 110-story tower is a symbol of strength and vitality in the U.S. midsection.

Reopening the Skydeck sends a message to terrorists that they have failed to intimidate the U.S., Bush said.

The Cable News Network quoted the former president as telling reporters that his son, President George W. Bush, is doing well and is in good spirits and that the international coalition put together to fight terrorism is holding.

Sears is embarking on an 18-month initiative to transform itself from a department store into a more contemporary retailer. The ''new'' Sears will eliminate such department store traditions as shoe salesclerks. Shoes will be displayed on racks. And customers will pay for purchases at centralized checkouts, not at registers within specific departments.

Last year, Sears generated $1.3 billion profit on revenue of $40 billion. But it wants to double profit by 2004. It will trim 4,900 workers nationwide and streamline purchasing to save money. CEO Alan Lacy talked about the state of Sears in an interview with USA TODAY.

Q: You had a 7-year career with Sears before becoming CEO last year. What's the biggest change you've seen in retailing in that time?

A: The continued growth of off-mall retailing choices (Wal-Mart, Target, etc.) for consumers has been the biggest shift.

Q: After a year of evaluation, what have you decided are the best and worst aspects of the Sears brand?

A: Sears is a unique franchise. In some ways our greatest asset is being able to serve customers from a number of dimensions -- merchandise, service and credit. No one else has our mix of goods. That's the greatest aspect of the brand. (But) because we do so many things, it's hard to clearly position the enterprise. We're not a store for home improvement, electronics or apparel. We're a broad-line merchant for better goods.

Q: You must have spent time checking out the competition. What were the critical elements you evaluated in developing the blueprint for a new Sears?

A: We have 36 million customers every day in our full-line stores. That's a substantial customer base. And we paid attention to what they said about us and the competition. We talked about changes in merchandising strategies and changes in the in-store experience. The whole time we've had stores, we've been a department store. But we need to change to be more competitive with not just Kohl's and Wal-Mart, but Best Buy and Circuit City.

Q: How do you take the Sears heritage and make it more relevant for shoppers today?

A: Our sales force has tremendous knowledge of how to guide people to the best and bigger ticket purchase transaction that suits their need. It's true in fine jewelry and appliances. We feel we have a strong asset in our consultative selling for important purchase decisions. But beyond that, our customers want to come in and find the product quickly, transact quickly and get out. That's where we're disappointing them. Providing a department store level of service is not something our customers . . . expect from us. They expect it from Nieman-Marcus, but not from us. They know what they are coming for and want to get it and get out.

Q: Apparel is a big challenge for Sears and other retailers. You considered abandoning apparel earlier in the year but now say the company will back it even more aggressively. How are you going to do that?

A: The national brand assortment we offer in the store is much better than what customers give us credit for. So we are putting more advertising and marketing support behind those brands. We sell the top six brands of appliances. We also have strong brands in apparel. We have Dockers and Nike and are attracting more national brands. But we haven't been putting enough marketing support behind them. There are more national brands we need to get.

Q: You also said you are looking at the development of a ''mega'' brand for apparel that can be as strong as Craftsman and Kenmore. Can you really pull that off?

A: We tried to do very focused lifestyle brands for certain categories. None has critical mass appeal. If Sears is known for having better casual apparel and we can (appeal to) men, women and kids, we can provide enough critical mass and marketing support to make it stand for something.

Q: When will people really see a difference in the style and price of apparel offerings?

A: Most changes will come in the second half of the year.

Q: What will they see?

A: In a typical store now there is a three-tier price structure of good, better and best. We will still have products in those categories but more floor space will be devoted to better products. It's not so much that we'll be raising prices. We'll be very competitive. But we'll offer customers a better in-store experience. Merchandise will be presented with clarity. And people will have a better appreciation of national brands.

Sears Returns Focus to Core Franchise

By Susan Chandler - Chicago Tribune
October 25, 2001

Alan Lacy laid out a conservative game plan Wednesday for Sears, Roebuck and Co. focused more on cutting costs than growing revenue.

Sears expects 2002 revenue to be flat, a result of both the slow economy and Sears' selective exit of merchandise lines, Sears' new chief executive told Wall Street analysts gathered in downtown Chicago to hear his strategy message.

Lacy declined to offer an estimate of next year's profit, saying, "None of us know how much worse it will get."

But Lacy also made a bold promise: Sears will boost its operating income by more than $1 billion, or about 50 percent, within three years. The improvement will come about through a combination of administrative cost reductions and fatter profit margins in its apparel, credit and other businesses.

"We're focused on the right things. We have a tangible game plan," Lacy said. "We'll be more competitive with off-mall competition and more differentiated from mall competition. But it will take a couple of years of very hard work to get to this."

Lacy's message clearly put the focus back on Sears' core franchise--its national chain of 860 department stores--rather than on its off-mall chains such as National Tire & Battery and Sears Hardware. As part of that effort, Sears is centralizing some checkout stations to help customers get out faster and moving to a self-service format in some departments, including children's and athletic shoes.

Overall, Sears will be less like a department store, Lacy said, but that doesn't mean it will become more like a discounter. "We're going to be Sears," he said.

Lacy also announced Sears was pulling back on the rollout schedule for the Great Indoors, a home remodeling chain that has proved popular with upscale customers who normally don't shop at Sears.

Sears had been planning to open as many as 15 Great Indoors next year, entering new markets in San Francisco, New Jersey and Washington, D.C. That number has been reduced to seven, including two that were originally scheduled for this year.

The Great Indoors stores are too costly to build, Lacy said, and Sears hasn't figured out how to build them for less without "losing the `wow' factor."

Plans draw praise

Analysts mostly reacted positively to Lacy's message despite its lack of bells and whistles. "It's one of the most detailed strategies of change I've heard in years," said Daniel Barry, retail analyst with Merrill Lynch. "He is touching every area of the business."

By making the company less bureaucratic and more efficient, Lacy will be moving Sears toward the best practices of its most aggressive competitors such as Kohl's Corp. and Target Corp., Barry said. "You wonder why they didn't do it sooner."

Rick Church, Salomon Smith Barney's retail analyst, also liked the comprehensiveness of what he heard, but he said investors have adopted a "show-me attitude" after a decade of cost-cutting messages from Sears.

"It's a little unsettling to hear how their headcount has risen given the write-offs they've taken in past years," Church added.

As previously reported, Sears will lay off 4,900 workers, or more than 20 percent of its salaried workforce, during the next 18 months. The downsizing, which includes removing layers from Sears' extensive field organization, is expected to yield $275 million in savings by mid-2003.

Quarterly profit falls

Sears also reported lower third-quarter profit Wednesday, but Lacy said he was pleased with the operating income growth in the retail and credit business in the wake of economic turmoil.

Still, those improvements were more than offset by profit declines at Sears Canada and higher corporate expenses, which were partially related to consultants who advised Sears on its headquarters restructuring.

Sears' net income declined 6 percent, to $262 million, or 80 cents per diluted share, from $278 million, or 81 cents per diluted share, in the same period last year. Revenue increased 1.7 percent, to $9.75 billion.

Funding costs for its lucrative credit card business declined by $39 million as interest rates fell, but Sears had to increase its bad-debt provision by an equal amount. Its charge-off rate for uncollectible accounts increased to 5.6 percent from 5.0 percent last year because of higher customer bankruptcy filings this year.

For the first nine months, Sears' net income plunged 73 percent, to $241 million, or 73 cents per diluted share, from $901 million, or $2.57 per diluted share, last year. Revenue rose 1 percent, to $28.84 billion.

Sears shares rose 52 cents, to $38.31, Wednesday on the New York Stock Exchange.

Sears Revamp

By Sandra Guy -  Chicago Sun-Times
October 25, 2001

Sears, Roebuck and Co. announced Wednesday it will remake its department stores, rely on its traditional strengths in work tools and appliances and cut 4,900 salaried jobs, or 22 percent of its salaried work force, to better compete with rivals on all sides.

Sears' revamp is aimed at boosting operating income by 50 percent to more than $3 billion, doubling profits from retail and related services operations by 2004 and achieving annual savings of $600 million by the same year.

"We've been a department store. We don't want to do that anymore," said Sears CEO Alan Lacy, who unveiled his new strategy during a five-hour presentation Wednesday to financial analysts gathered in a chandeliered ballroom at the Ritz-Carlton.

But Sears doesn't want to be a full-scale discounter, either.

"We want to be Sears," said Lacy, who has been at the helm of the nation's fourth-largest retailer for a year. "We can carve out a unique position--we're not a discounter and not a department store."

The changes will include a less-cluttered look, central checkout areas and more self-service displays, advantages that discounters such as Kohl's and Target use to speed purchases and hold down costs. The revamp also includes fewer price promotions and behind-the-scenes overhauls of its store management structure and supply-chain processes.

Sears will remove sales help from departments such as children's and athletic shoes, and devote trained salespeople and more space to a broader assortment of its top-selling items such as appliances, work tools, dress shoes, home fashions, digital electronics, fine jewelry, and exercise and parlor-game equipment.

The number of apparel labels will be cut dramatically. However, more national brands will be added and an as-yet-unnamed private-label "mega-brand" that will apply to men's, women's and children's apparel will be introduced so that Sears can more easily market its clothing offerings.

The goal is to get the more affluent customer who already buys Sears tools and appliances to feel compelled to find value in the apparel aisles.

The store redesigns will start after the holidays in 50 of Sears' 610 mid- and large-size department stores. Those 610 generate 75 percent of the retailer's $41 billion in yearly revenues.

Another 160 stores are slated to be remodeled in 2003, followed by 160 in 2004, 160 in 2005 and 50 in 2006.

Another 210 smaller department stores will not be revamped initially, although they will eventually feature the same streamlined offering of clothes, jewelry and footwear and bulked-up assortment of tools, electronics and appliances as the bigger stores.

Lacy hinted that a few of the smaller stores will be closed, but he said there will be no massive shutdown.

He made no secret that Sears' strengths are hardlines, such as auto, appliances and work tools, and the credit-card business, which is being expanded with a Gold MasterCard aimed at more affluent shoppers. Sears aims to have 19 million Gold MasterCard accounts by year-end, and another 5 million next year.

Even the traditional Sears card will get extra attention next year when its use will be expanded on a test basis to hotels, gas stations, airlines and restaurants. Sears officials declined to name the partner companies.

Sears auto shops are implementing quick oil changes, a one-hour tire installation guarantee and a 30-minute-or-less battery replacement program.

Sears, which ranks No. 3 behind Best Buy and Circuit City in appliance offerings, also will focus more on high-end digital electronics, such as digital TVs and home theaters.

And the expanded Tool Territory section, which includes the No. 1 Craftsman brand, will be prominently featured in all the larger full-line stores.

The in-store changes are intended for easier shopping. Sears will use just 11 kinds of fixtures for displaying merchandise, down from 132 today, and limit store signs to four different kinds with standardized colors, fonts and placements.

Sears stock closed Wednesday at $38.31 on the New York Stock Exchange, up 52 cents. The company Wednesday also reported third-quarter earnings that slightly beat expectations.

Lacy refused to say how much Sears has spent on outside consultants who helped with the in-store, management, merchandising and supply-chain restructurings.

The work force streamlining means that store managers who now have 10 to 17 people reporting to them will have five assistant managers, each responsible for a specific part of the store. A new field staff, cut from 590 to 390 people, will spend most of its time inside Sears stores, rather than on the road.

Salaried employees will be given 60-day notices and one week's severance pay for each year of service, plus outplacement services.

Meanwhile, a new incentive plan that starts Jan. 1 and continues through 2004 will take effect for Sears' senior management. The incentives will be tied more closely to such difficult financial goals as achieving store revenue growth that exceeds the broad line index in 2004--a feat that Sears has not accomplished since 1996.

Along with the store revamping is a new merchandising strategy that will emphasize the Sears brand, introduce Sears commercials at movie theaters, make targeted appeals to African-American and Latino shoppers and boast of energy-efficient home appliances, where Sears holds a 40 percent U.S. market share.

Sears had already started chopping unprofitable or non-core services, including 73 home-improvement licensees, six catalogs and 15 clubs and services, and testing new formats, such as smaller-size Home Appliance and Electronics stores.

Under Lacy, Sears this year already closed 89 unprofitable stores, stopped selling cosmetics, sold its pest control business and ended some underperforming product lines, such as bicycles and basketball gear.

Quarterly earnings narrowly exceeded expectations despite the decline in shopping after the Sept. 11 terrorist attacks.

Net earnings were $262 million, or 80 cents a share, down from $278 million, or 81 cents a share, a year earlier. That was a penny better than the consensus per-share estimate of analysts surveyed by Thomson Financial/First Call.

Revenues gained 1.7 percent to $9.75 billion from $9.59 billion. But retail revenues slipped 1.8 percent to $7.33 billion.

Margaret V. Tomaszek, a vice president at Mizuho Financial Group's Chicago branch, said she is concerned that Sears may confuse its customers.

"It will come down to execution," she said.

Further, Tomaszek said she is concerned that customers, faced with a war, an anthrax scare and massive layoffs, will not rush out to buy appliances and therefore will not shop Sears' revamped apparel lines.

Sears to Cut Frills Along with 4,900 Jobs

By S.A. Mawhorr - Chicago Daily Herald  - October 25, 2001

Sears is looking to simplify everything from merchandise displays to the chain of command to its mixed message to consumers.

The changes announced in Chicago Wednesday were eagerly anticipated as analysts watch to see if Alan Lacy, who took over as chief executive a year ago, can reverse the company's 15-year-old slide from its position as the nation's No. 1 retailer.

Lacy said Wednesday he has spent the past year examining the retail chain's strengths and weaknesses and came up with the plan with the help of top executives.

That plan includes cutting 4,900 salaried positions as part of its plan to streamline operations, refashion retail stores and boost profits.

About 1,300 of those jobs will come from the Hoffman Estates headquarters while the rest will be positions in stores and field offices. The cuts represent 22 percent of the retailer's salaried workforce and about 2 percent of the total pool of employees.

Sears executives stressed that the job cuts are related to the company's efforts to restructure and are not simply an attempt to boost the bottom line.

"It's not that we're expecting people to work harder," said Chief Financial Officer Paul Liska. "We're streamlining processes so there is less work."

Several analysts praised the changes, but it's unclear if they'll be enough to reverse the chain's long-time loss of market share to discounters, who have lower overhead costs, and specialty stores.

Company officials said the restructuring plan should double the 115-year-old company's profits for its retail and service segments and save $600 million annually by 2004.

Acknowledging a top heavy management structure that got too many people involved in decision making, Sears announced a sleeker structure that would make greater use of hourly workers in the stores and cut out redundancies and overstaffing in the home office.

Sears is simplifying strategy, too.

Lacy said he's abandoning the strategy followed in the 1990s that had the retailer replicating the wide array of goods and personal service typical of the upper echelon department stores that are Sears' neighbors in malls while at the same time trying to compete with the lower prices of big box discounters.

That strategy has left Sears with profit margins that are too low and operating costs that are too high, Lacy said.

Now Sears is being squeezed by rivals that are doing a better job at discounting and a better job at delivering style and service.

So where does that leave Sears?

Perhaps where it's always been, right in the middle between discounters and department stores.

The retail chain will focus on its traditional strengths in appliances and tools, where it still dominates the market, as well as its ability to deliver and service big ticket items and help customers buy those items by extending credit.

And although Lacy closed down cosmetics counters, he also admitted he's not willing to abandon the "softer side" entirely after toying with the idea of eliminating apparel from the stores last spring.

Instead, Sears will improve the quality of clothes offered while consolidating several in-store brands into one unnamed "mega-brand." Lacy said the focus will be on classic clothes that aren't cheap but aren't too trendy or too pricey either.

Sears is making shopping simpler as well.

In response to criticism of cluttered display floors with scattered cashier stations that often go unmanned, Sears is redesigning display floors following a pattern much like Kohl's, which has been praised by shoppers because it's easy to locate merchandise and maneuver around the floor.

Merchandise will be laid out in a stair-step fashion, with low tables near the aisle and two rows of racks and shelves leading up the back wall where merchandise will be displayed so that customers can spot what they want from across the store, said President of Stores Mary Conway.

Checkout counters will be located in center aisles or near exits, she said. Signs will clearly mark zones for various merchandise. Display racks will be smaller, less noticeable and more uniform. Walkways will be wider and more clearly defined.

The simplified layout will make it easier for shoppers to find what they are looking for without asking a clerk for help, Conway said.

But Sears will not abandon entirely the department store model of personal service. Knowledgeable sales people will be on hand in appliances, consumer electronics and tools, areas where customers typically are looking for advice and help.

Executives are hoping a new ad campaign will show shoppers how Sears fits in between discounters and department stores. The campaign's tag line "Sears .... Where else?" is meant to remind shoppers that Sears is the one place they can find Nike athletic shoes and Krups coffee makers, as well as Levi jeans, Diehard car batteries and Kenmore washers and dryers.

Will Ander, an analyst with the Chicago-based retail consulting firm of McMillan/Doolittle, praised Sears for returning to its general retailing roots and playing up its strengths.

But he wonders whether the 115-year-old Sears brand will be relevant to the next generation of shoppers when they begin buying houses and start having babies and need brands they can trust at a price they can afford.

"What they're doing is a good fix for the next three to five years but what about 10 years from now?" Ander said. "How are they going to make sure the Sears brand is relevant?"

Lacey's moves follow remakes initiated by his two predecessors, Edward Brennan, who emphasized low prices and cut 33,000 jobs, and Arthur Martinez, who emphasized apparel and cosmetics, and cut 50,000 jobs.

Those earlier remakes helped for a time, but Sears couldn't keep pace with fast-growing chains like Wal-Mart, Kohl's, Home Depot and Old Navy.

The company also said third-quarter net income fell 5.8 percent to $262 million, or 80 cents a share, from $278 million, or 81 cents, a year ago. Per-share earnings met the forecast Sears issued Oct. 11.

Total sales rose 1.7 percent to $9.75 billion from $9.59 billion as increased revenue from the company's credit division exceeded a decline in department-store sales.

Sears Strategy

By Eddie Baeb - Crain's Chicago Business
October 24, 2001

CEO Alan Lacy outlines two-tier store model, but insists: 'We want to be Sears' Alan Lacy wants to split the Big Store in two.

The Sears, Roebuck and Co. CEO and his top managers told Wall Street analysts Wednesday that Sears will convert its full-line stores into stores that are half-discounter (featuring self-service sections), and half-specialty store, where salespeople roam the floor to help with purchases for items such as big screen TVs and kitchen appliances.

Mr. Lacy's strategy calls for slashing the number of vendors and brands carried at Sears store, as well as discarding the fancy merchandise racks that Sears installed several years ago when it was trying to emulate department stores.

"We don't want to be a discount store. We don't want to be a department store," says Mr. Lacy, who took over as CEO one year ago. "The short answer is we want to be Sears."

While analysts were impressed with the scope of Mr. Lacy's game-plan, concerns remain that a new-look, two-tiered Sears won't be enough to reclaim customers who have flocked to discounters like Wal-Mart and Kohl's and specialty stores like Best Buy and Home Depot.

"I'm confident they'll achieve the cost cutting they're talking about," says Daniel Barry, Merrill Lynch retail analyst. "But it's still a question of store revenue growth."

Mr. Lacy conceded that Sears' 861 full-line stores won't show much, if any, sales growth next year. But he's betting that a stronger Sears branding campaign, improved and more consistent store operations and a better defined selling proposition in each of Sears' business will lead to sales gains over time.

In the short term, Mr. Lacy is focused on slashing costs and bureaucracy from the way Sears runs its stores. Sears plans to increase its operating income by 50% to $3 billion by 2004, and double its retail profits.

Over the next 18 months, Sears will lay of 4,900 people — from headquarters staff to assistant store managers — as the company reorganizes to get its cost structure more in-line with its low-cost competitors.

"We will be changing almost every process in our stores," says Mary Conway, president of retail stores.

Sears also announced its third-quarter results Wednesday. The company earned $262 million, or 80 cents per share, for the quarter on revenues of $9.75 billion. In the year-ago period, Sears earned $261 million, or 76 cents per share, on revenues of $9.85 billion.

In retail and related services, Sears' sales for the quarter were $7.33 billion, down nearly 2% from $7.47 in the third quarter last year. But it earned $82 million on retail from the quarter, compared with $69 million last year.

Mr. Lacy, in a written statement, commented: "Our strong retail earnings growth reflects our heightened focus on bottom-line results. By tightly controlling margins, inventories and expenses, we more than offset lower retail revenues."