Julian Day, 50, must also find a chief of merchandising
who can set Kmart apart with the selection of goods on its shelves. He
also will need to hire new financial advisers and an in-house lawyer as
the retailer tries to remake itself into a serious competitor against
Wal-Mart and Target.
Day replaces Jim Adamson, a Kmart board member since
1996 and the company's chief executive since March. Adamson will remain
through the bankruptcy as nonexecutive chairman.
"I am honored that the board has asked me to serve as
chief executive as the company repositions itself for the future," Day
said Sunday in a statement. "Having the opportunity to address in the most
senior leadership role the challenges Kmart currently faces is indeed
exciting to me."
Day's appointment comes just two days after Kmart tried
to put controversy over corporate excesses behind it by firing the last of
25 executives who received $28 million in loans shortly before Kmart
became the largest retailer to declare bankruptcy in January 2002.
Its financial collapse will cost 59,000 workers their
jobs when Kmart closes the last of 600 stores across the country in its
struggle to stay alive after more than a century of retailing.
Kurt Barnard, president of Barnard's Retail Trend Report
in Upper Montclair, N.J., said Day will be "saddled with the enormously
difficult tasks of dealing with the nitty-gritty of emerging from
bankruptcy, and then with creating the kind of conditions that will make
it possible for Kmart to continue as a viable, going concern."
Barnard also questioned the timing of the announcement.
"Neither the investment community nor vendors like the
uncertainty that is brought about by a transition of this kind without any
reason given," Barnard said. "A transition that is announced over a long
weekend with Wall Street closed the next day is a very strange thing."
Day joined Kmart in March as its president and chief
operating officer. He had worked at Sears for 19 months, starting as an
executive vice president in 1999 and moving up to chief financial officer
and chief operating officer before leaving in 2000 when he was passed over
for the top job.
He also spent five years at Safeway Inc., a chain of
grocery stores based in Pleasanton, Calif.
Day is credited with giving store managers limited
authority to order what they needed -- rather than insisting that
headquarters do it. Day also launched new in-stock guarantees.
Under his first contract with Kmart, Day was given a
$775,000 bonus, $775,000 annual salary and perks such as a car and driver.
His new contract is expected to be filed this week in bankruptcy court.
Yorkshire-born and educated at Oxford, Day is a former
rugby player who enjoyed surfing while living in San Diego, before coming
to Michigan to work for Kmart.
In a 1999 analysis, Mark Husson, a supermarket analyst
at Merrill Lynch,
said: "Calling Julian Day just a chief financial officer is like calling a
Bentley just a car."
Kmart's board said in a statement that Day had a key
role in developing the company's business strategy for the first five
years after bankruptcy.
"His clear commitment, as outlined in that plan, to
position Kmart to compete aggressively in the discount retail sector
underscores our confidence in his ability, desire and passion to
decisively lead this company going forward," the board said.
Sunday's announcement included word that Adamson would
be retiring. He was named chairman of the board five days before Kmart
declared bankruptcy and is to remain in that job throughout the
reorganization. Kmart has said it will be out of Chapter 11 by the end of
April.
Neither Day nor Adamson was available for comment.
Since filing for bankruptcy, with Adamson as Kmart's
chairman and chief executive officer, the retailer has lost more than $2
billion as shoppers deserted the discounter for competitors like Wal-Mart
and Target. Analysts have complained that Kmart lacks a strategy to lure
customers back.
In a statement, Kmart's board of directors said: "We
will be forever grateful for Jim Adamson's unwavering dedication to Kmart
as an institution as well as its employees and other stakeholders. He
answered our call during Kmart's darkest days and placed Kmart on the road
to financial recovery."
The board also said that Day's "zest for tackling the
challenging operational issues that have plagued Kmart for years has
resulted in making this company stronger, leaner and more efficient as it
prepares to exit Chapter 11 . . . "
Although Day is a considered a get-it-done, tough
decision-maker, he has not run a major corporation like Kmart, which had
sales of $36 billion in 2001.
That was also one of the complaints about Chuck Conaway,
who was hired from CVS Corp., the drugstore chain, to run Kmart in May
2000. Over the next 20 months, Kmart's finances spun out of control as
Conaway and his team tried to beat Wal- Mart on prices, slashed
advertising and spent billions to improve the stores and the company's
inventory and distribution system.
Kmart's slide into bankruptcy is the focus of
investigations by its board, the FBI and the Securities and Exchange
Commission.
The board's role in the company's collapse, meanwhile,
is under the scrutiny of the House Energy and Commerce Committee.
Adamson's stewardship of the company has been questioned
by anonymous letter writers claiming to be employees.
Adamson, a member of Kmart's board for six years before
the bankruptcy filing, was on the search committee that hired Conaway and
was chairman of its audit committee as Kmart's finances unraveled.
Yet Adamson claimed he had no idea Kmart was collapsing
until he read an analyst's report in early January 2002 warning that the
retailer could be facing bankruptcy.
Adamson has also said that had he known the company was
in such a precarious condition, he would not have approved giving the $28
million in loans to 25 executives.
The last five still working at Kmart were fired Friday,
including the company's chief counsel, Janet Kelley.
As the company's lawyer in Troy, Kelley had been
overseeing the board's investigation of Kmart's collapse.
In one letter, to U.S. Rep. Billy Tauzin of Louisiana,
the Republican chairman of the House Energy and Commerce Committee, the
anonymous letter writers complained that Adamson and Kelley were working
closely with the company's law firm to "deflect the internal investigation
away from themselves."
"Mr. Adamson has been more concerned with controlling
the internal investigation than in formulating a plan to pull this company
out of its tailspin," the letter writers said.
Kmart is expected to complete its investigation this
week, and is to reveal the results when it files its reorganization plan
in court. The plan is to also describe how Kmart will be run over the next
five years.
The company's new owners are expected to put together a
new board. The new owners would be those holding Kmart's debts.
"The strategic announcements the company has made will
ensure the go-forward executive management team will be completely new,"
said Kmart's chief bankruptcy lawyer, Jack Butler.
Sears Considers Change
of Scenery --
Freestanding Store Going
Up in Utah
By Susan Chandler
Staff Reporter
Chicago Tribune
January 19, 2003
For decades, Sears, Roebuck and Co. and shopping malls
almost have been synonymous. Sears developed many of the nation's shopping
centers as it followed its customers to the suburbs. It almost always
secured a prime anchor spot.
But today's biggest retail winners--Wal-Mart Stores
Inc., Target Corp. and Kohl's Corp.--aren't in malls. And now Sears is
thinking it should be looking elsewhere, too.
The nation's third-largest general merchant is building
a prototype for a freestanding store in West Jordan, Utah, a rapidly
growing middle-class bedroom community in the Salt Lake City metropolitan
area.
If the store is a hit, it could be a model for Sears'
future growth, Sears Chief Executive Alan Lacy said last week. After all,
few new shopping malls are being built. The things that Sears learns from
the experiment could show up in its mall-based department stores as well.
Just building a regular Sears store on a parking pad
won't be enough, Lacy acknowledged. "We have to redesign the business and
change it quite a bit. Taking our existing store and plopping it next to a
Wal-Mart will not be successful."
The freestanding prototype is still a work in progress;
Sears hasn't even decided what to call it yet. But Lacy offered some
details.
Like Sears' current stores, it will be centered on home
and family. And it will be big: 200,000 square feet of selling space on
one level, more than twice as large as an average Sears.
The extra space will allow the store to carry
merchandise that Sears currently doesn't.
An outdoor nursery will offer plants and fertilizer for
do-it-yourself gardeners and landscapers.
There will be a bigger children's department. There will
be a toy department, something Sears abandoned years ago in the face of
growing competition from specialty stores and discounters. Sears recently
dipped its toe back into the toy business by featuring KB Toys boutiques
in 77 of its stores during the holidays.
The consumer electronics department will receive
supersizing treatment. Instead of selling only CD and DVD players, the new
Sears will offer customers the music and movies that go with them.
But one of the most dramatic surprises will be edible. A
convenience food section will offer bags of chips and bottles of soda.
It that sounds familiar, it should. Convenience food is
a strong seller at retailers like Target, which has used Skittles candy
and Hershey's chocolate in some of its acclaimed image advertising.
So far, Sears' plans are getting high marks from retail
experts.
"It sounds like what they should have done a long time
ago," says Sid Doolittle, retail consultant with Chicago's
McMillan/Doolittle. "If it does work, it could be a big win for them."
Shoppers want to get in and get out, he adds. Rightly or
wrongly, they believe that going to a mall takes longer than driving up
and parking outside a freestanding store.
And there's another advantage--shoppers become a captive
audience because there aren't any other stores to distract them, Doolittle
says.
George Whalin, president of Retail Management
Consultants in San Marcos, Calif., says Sears is trying to create a retail
hybrid.
"Sears is trying to get closer to a discount-store
format without giving up things that make a department store work such as
better quality merchandise," Whalin said.
In a way, it isn't that different from what Target has
done, taking a traditional discount store and scaling up the merchandise,
he said.
But won't there be a disconnect for shoppers when they
see Lands' End's
high- quality parkas and pants in a store that also sells pretzels and
Pepsi?
Whalin isn't overly concerned. "There would be some
conflict, but consumers are less concerned about status than they were in
the past. There are some very upscale consumers who shop in Target and
find it acceptable," he says. "Sears may be on to something here."
Willingness to try new things
If the prototype doesn't pan out, it's no big deal,
retail experts agree. "You can always stop doing it if it doesn't work,"
Doolittle says.
At a minimum, it could answer the question of where
Sears goes from here. With 870 full-line stores around the country and few
shopping malls being built, the Hoffman Estates-based retailer doesn't
have much room to grow its core business. But standing still isn't an
option for retail companies because investors insist on top-line growth
and healthy profits.
When retail experts talk about innovative retailers,
Sears isn't usually at the top of the list. Maybe it should be.
Since the early 1990s, it has built a freestanding
hardware chain, launched NTB, a tire and battery store, and created from
scratch the Great Indoors, an upscale home remodeling and redecorating
chain that now numbers 20 stores.
Not all its experiments have been successful, however.
The HomeLife Furniture chain, which Sears created and later sold off,
declared bankruptcy and liquidated in 2001, and the long-term verdict is
still out on Sears Hardware and NTB, which haven't generated the returns
that Lacy expects.
But the freestanding project is much less risky than
those examples because Sears is just augmenting its current store model.
Maintaining its department store heritage by carrying better brands like
Levi jeans and Dockers pants will be one way the new store differentiates
itself from Wal-Mart, Lacy said.
Sears veteran Jerry Post is spearheading the
freestanding prototype. Post, who joined Sears in 1976, was on the team
that developed the Great Indoors, which got off to a bang-up start after
its first store opened in Denver five years ago. His current title is
senior vice president for Sears' off-mall strategy.
Store name uncertain
One important thing to be decided is what to call the
off-the-mall store. Some Sears executives are arguing it must be named
something more than just Sears to differentiate from traditional Sears
stores, sources at the company say.
There's plenty of precedent for their argument.
Target operates larger-format stores called Target
Greatland and Super Target. Wal-Mart calls its grocery/discount store
combos "Wal-Mart Supercenters." "Big K" is the moniker Kmart Corp.
attached to its biggest and best stores.
But others think it would be foolish to abandon the
brand equity built into the Sears name.
"It's a no-brainer to call it Sears," Doolittle says.
"Not to call it Sears would be a terrible mistake."
Lucent Ends
Retirees` Death
Benefit
Reuters -
January 17, 2003
Telecommunications equipment maker Lucent Technologies
Inc., trying to cut costs and restore profits, said on Friday it would end
a death benefit for its management retirees and might also reduce their
health care coverage.
Lucent, based in Murray Hill, New Jersey, said it
alerted former management employees in a Jan. 2 letter that beginning Feb.
1 it will no longer pay death benefits to former management employees'
spouses, children under the age of 23 or dependent parents.
The former managers are still covered by Lucent's group
life insurance, and no change has been made to their health care coverage
at this point. Analysts have said Lucent could significantly cut costs by
reducing retiree benefits.
Lucent and other telecom equipment makers have struggled
for some two years as telephone companies slashed spending. Its retirees
have feared the company would reduce their benefits as a way to cut costs,
and Lucent has said cuts in health care coverage are possible.
"It's always a possibility," Lucent spokesman John
Skalko said. "We look at all our expenses to determine if any adjustments
are needed to reflect what's going on in the marketplace."
In fiscal 2002, Lucent posted a net loss of almost $12
billion. To get back to profitability, it has sold noncore assets,
eliminated money-losing products and announced plans to slash two-thirds
of its work force.
In a research note released Thursday, Sanford C.
Bernstein analyst Paul Sagawa cited regulatory filings in noting that
Lucent's post-retirement benefit obligations were underfunded by $7.4
billion at the end of September. However, he said fears that the
underfunding hurt the company's liquidity were overblown as Lucent would
likely cut benefits.
If, for example, Lucent were to restrict coverage to
catastrophic emergencies of more than $5,000, the cost of health insurance
would be halved, Sagawa said.
Lucent reached a new 20-month contract with the
Communications Workers of America union this week that cuts the company's
costs. Sagawa estimated the annual savings at $30 million.
Lucent's pension plan was also underfunded, by $1.7
billion at the end of September, but that gap -- less than 6 percent --
was likely erased since the market has improved since then, he said. He
said he does not expect the company to make any payments into its
pensions, and the expected payment of about $300 million to cover 2003
benefit obligations is likely to drop in subsequent years.
The death benefit, which has been in existence since
1913 when Lucent was part of AT&T Corp. (T,Trade), is equal to a year's
salary at the time of retirement. That could range from $50,000 to more
than $100,000, according to former company employees.
The change affects up to 31,000 former management
employees, or one quarter of Lucent's 127,000 total retirees, Skalko said.
"It's another step that we're taking to assure our viability as a going
concern going forward," he said.
Sears Gets
a Lift from Lands' End
By Susan
Chandler - Tribune staff reporter
- Chicago Tribune
January 17, 2003
CEO cautious in predicting '03 earnings
gain
Despite a disappointing downturn in its credit business
and declining same- store sales, Sears, Roebuck and Co. posted strong
fourth-quarter and annual income Thursday.
Sears' numbers were helped by its acquisition of Lands'
End Inc. and a sale of its interest in an auto-parts chain, which
generated a nearly $200 million gain in 2002's final quarter.
Sears Chief Executive Alan Lacy said he was "very
pleased" with the results, which occurred while "nearly every aspect of
our business has undergone change."
Investors were pleased as well. They bid up Sears stock
$1.83, or almost 7 percent, to $28.53 per share.
Even so, Lacy wasn't making any big promises for 2003.
Sears' earnings per share, excluding one-time items,
will rise only about 5 percent this year, he told analysts, as the company
continues to work through a rocky economy and rising delinquencies among
its credit-card customers.
That growth rate is less than a third of the 17 percent
increase Sears posted in 2002.
Lacy vowed to increase sales at Sears' department stores
this year, although most of the improvement is projected to come in the
second half. Rising sales would be a welcome change from 2002, when Sears'
same-store sales declined every month of the year, sometimes by double
digits.
Part of the improvement will come from Lands' End's
casual apparel, Lacy predicted. Lands' End's corduroys and sweaters will
be in place in 400 Sears stores by spring and throughout the 870-store
chain by the fall.
But the predictions weren't as rosy for Sears' credit
business, which frequently generates more than half of the Hoffman
Estates-based retailer's annual operating profit.
Acknowledging 2003 will be a workout year, Paul Liska,
Sears' president of credit, said bad debt levels will continue to rise,
peaking in the second half.
Write-offs of uncollectible debt also will increase as
the $12 billion Sears Gold MasterCard portfolio continues to mature, Liska
said. The result: 2003 operating profit from credit is expected to fall by
about 5 percent.
Sears recognized that it had a new round of problems
with its credit card business last October when rising bad debt levels
forced the company to revise its earnings target.
In the fourth quarter, operating earnings for Sears'
credit card unit fell $63 million, or 15 percent, to $363 million, as its
provision for bad debt rose $160 million, or 41 percent.
The news was far better on the retail side of the
business, where operating earnings rose 10 percent to $726 million.
Overall, Sears posted fourth-quarter net income of $848
million, or $2.67 per diluted share, up 72 percent from $494 million, or
$1.52 per diluted share, in the year-earlier period.
The bottom line was boosted by an after-tax gain of $179
million, or 56 cents a share, from the sale of Sears' stake in Advance
Auto Parts Inc.
Excluding one-time items, Sears' net income rose only 2
percent, to $669 million, or $2.11 per share, from $657 million, or $2.02
per share, in the year- earlier period. Revenue
rose 2 percent to $12.52 billion from $12.22 billion.
For the year, Sears reported net income of $1.38
billion, or $4.29 per diluted share, up from $735 million, or $2.24 per
diluted share, in 2001.
Revenue rose less than 1 percent to $41.37 billion from
$40.99 billion.
Home Depot
Is Struggling To Adjust to New Blueprint
By Dan Morse - Staff Reporter - The Wall Street Journal
January 17, 2003
New Chief Bob Nardelli
Tightened Central Control,
Angering Employees
ATLANTA -- When Bernie Marcus ran Home Depot Inc., he
fired up store managers inundated by paperwork from headquarters with this
advice: "Get a rubber stamp that says 'Bulls -- ' on it, stamp it, and
send it back to whatever bureaucrat sent it to you." The message: It's
your store; do what's best.
Bob Nardelli came to the company from General Electric
Co. two years ago with a very different approach: one that increasingly
favors directives from headquarters in Atlanta. As chairman and chief
executive, he has cut costs, centralized purchasing and tightened control
of hiring and store displays. Performance is now measured by lingo that
leaves many employees scratching their heads: receiving minutes per bill,
percent of E-Velocity and SPR audits, to name a few.
By all accounts, the country's No. 1 home-improvement
chain needed at least some tightening. But so far, Mr. Nardelli's swift,
aggressive renovations have disrupted employees and spooked many
shareholders. Home Depot's once-roaring stock has fallen close to its
five-year low, having dropped 51% since Mr. Nardelli arrived.
Sales growth, which started to slacken the year before
he took over, has slowed considerably. The company said earlier this month
that sales in stores open at least a year will plunge as much as 10% in
its fourth quarter, which ends Feb. 2. For the fiscal year, overall sales
are expected to rise 10%, compared with 17% the year before.
At a company traditionally known for independent-minded
managers and workers, some confusion and resentment have set in. After Mr.
Nardelli arrived, "things weren't presented to you; they were told to
you," says Tony Calveiro, a former store manager in Kansas City, Mo. He
left in July 2001 to become an assistant manager for Costco Wholesale
Corp., where he says he has more freedom.
Mr. Marcus says the company lost a lot of talented
employees after Mr. Nardelli's arrival, although departures have tapered
off. The company plays down the suggestion that it had sizable departures
of talented employees because of the changed leadership.
Mr. Nardelli has emphasized hiring more part-timers to
handle weekend crowds, but customers are complaining that the quality of
service has lagged. The CEO's order to keep store inventory leaner made
sense on paper, but in practice it has meant that homeowners and
contractors couldn't always find what they were looking for.
Meanwhile, Home Depot is no longer cruising along as it
did for nearly two decades, with strong sales and earnings quarter after
quarter. Among other factors, the company has blamed cautious consumer
spending and big promotions last winter that inflated sales in the same
period a year ago. No. 2 Lowe's Cos. -- a retailer known for its
disciplined operations -- has been chipping away at Home Depot's strong
lead. (Because the housing market has remained strong, the overall slow
economy hasn't hurt home improvement as much as it has other retailers,
some industry executives say.)
Three big institutional investors -- Fidelity Management
& Research Co., Alliance Capital Management Inc. and Janus Capital
Management LLC -- have dumped Home Depot stock valued at a total of $4.2
billion in recent months, according to FactSet Research Systems Inc. This
week, Gary Balter and Neel Gandhi, analysts at Credit Suisse First Boston
who have issued a generally favorable rating on the stock, nevertheless
fired a broadside at the CEO. Based on their own store visits, the
analysts wrote, "Mr. Nardelli in two years at the helm has not yet shown
the retail acumen that defines the winners." They cited a lack of skilled
employees, poor store displays, missing products and poor purchasing
decisions.
'Change Creates Fear'
Mr. Nardelli, 54 years old, is sticking to his strategy.
"Change creates fear," he says. The only way for Home Depot to thrive, he
adds, is for headquarters to know what's going on. "The naysayers could
say, 'Well jeez, you're adding all these metrics.' Well, take all the
gauges off the car. Why do you need a gas gauge? Why do you need a
speedometer?"
Morale is holding up, he says, given all of the changes
and the slumping stock price. "I love the entrepreneurial spirit. I just
want to have some compliant entrepreneurial spirit at a certain time," he
said in an interview last year.
Since he arrived, margins and cash on hand are up. The
balance sheet is strong. The company continues to add stores, so overall
sales are still climbing. Ken Langone, an influential board member who
helped hire Mr. Nardelli, says the CEO's strategy will pay off. "We think
Bob is doing a superb job and is making the changes going forward that are
necessary."
Today, the chief executive will spell out more
improvement plans at the company's annual investor conference. On tap:
continued programs to refurbish stores, more new merchandise and efforts
to boost customer service.
A big part of Home Depot's success story has been the
energy its managers customarily invested in taking command of their
stores, ordering as many hammers and faucets as they thought their
customers expected and hiring knowledgeable retired tradespeople and
hungry newcomers to work the aisles. "You had these evangelists, if you
will, who sold lumber," says consultant Robert Oxley. He used to train
Home Depot employees and now teaches vendors trying to sell products to
the company. These days, he says, "there's nowhere near the passion as
there was under the old guard," saying that's one of the consequences of
Mr. Nardelli's approach. "It's not manageable through a computer."
Mr. Marcus, who helped lead the company from its
founding in 1978 through early 2001, acknowledges that the old ways
sometimes got a little "loosey-goosey." And some of Mr. Nardelli's critics
concede that a company that had grown to more than 1,000 stores needed to
show more discipline, especially in light of increased competition.
Mr. Nardelli arrived in December 2000, after losing out
in the race to replace Jack Welch atop GE. The new Home Depot chief, who
lacked any retail experience, burrowed into the new job. Atlanta staffers
remember him calling meetings for 8 p.m. on weekdays and 7:30 a.m. on
weekends.
A number of executives left, some with strong
encouragement, as Mr. Nardelli brought more subordinates under his direct
control. He attacked labor costs, setting more structured "wage bands" for
specific jobs and limiting merit raises, which he says were "out of
control."
Home Depot's deflated stock has weighed on morale,
because many employees have received bonuses in the form of stock options
whose value has fallen. In break rooms and on the Internet, they grouse
about their CEO's $13.8 million in total compensation last fiscal year,
not including options.
Mr. Nardelli's challenges are compounded by the
reverence with which many employees regard Mr. Marcus and Arthur Blank,
the retired founders and longtime executives. Months after Mr. Nardelli
arrived, workers who spotted Mr. Marcus in their store would beseech him
to come back. But that is fading, says Mr. Marcus, who stresses that Mr.
Nardelli is making needed changes that employees are starting to
appreciate.
In a 1999 book, Messrs. Marcus and Blank wrote, "We hire
people who couldn't work for anybody else, who might otherwise be
well-suited to being self- employed or running their own shop, and many of
them become store managers." The authors lauded employees for outlandish
stunts. Larry Mercer, who would go on to become a top executive, once
refunded money to a customer who showed up with a set of car tires, even
though Home Depot hadn't sold them. After the customer left, Mr. Mercer
hung his tires over the service desk to remind everyone that the customer
is always right.
By the time Mr. Nardelli arrived, sales growth had
started to slow. On Oct. 12, 2000, Mr. Blank, who was then the CEO, warned
that profits would fall short of expectations for the remainder of the
fiscal year. Investors bailed out, driving the stock down 28%, its biggest
one-day decline ever. Home Depot's board accelerated the succession
process that brought Mr. Nardelli aboard.
Purchasing Shift
One of the biggest changes he has pushed involves
purchasing. Home Depot had nine regional buying offices, each one
acquiring products independently. Mr. Blank had said that the structure
helped boost sales 15% to 20%, because the people doing the buying
understood so well what customers in their local markets wanted.
But the company's decentralized buying diluted its
negotiating clout. And because each region would do things its own way,
the company couldn't easily coordinate nationwide buys with nationwide
store displays. Some vendors complained that the company was difficult to
deal with. "It was like having nine different wives," says one Midwestern
tool maker, who requests anonymity.
Mr. Nardelli's solution was to centralize buying in
Atlanta. At the same time, he moved to clean out dead and redundant items
from store shelves. The company, after all, didn't really need 13
different round-point shovels, he notes.
The buying changes, he says, have yielded better terms
from vendors that have widened the company's gross margin, or gross profit
as a percentage of sales, to 31.6% in the third quarter, from 30.2% for
the same period the year before. Cutting inventory has helped Home Depot
amass $4 billion in cash, up from $167 million two years ago.
Mr. Nardelli has forced stores to increase weekend
staffing by hiring more part-time workers: college students, for example, and people who have
other weekday jobs. Stores went from 30% part-time staffing in December
2001 to 50% just four months later.
But longtime employees say that some part-time workers
aren't as committed to Home Depot as full-timers. Customers, meanwhile,
have complained that they sometimes can't find knowledgeable sales help --
or, in some instances, any help at all.
In Decatur, Ga., Don Schneider, owner of Old Timers
Renovations, a residential- contracting business, spent 20 minutes one day, waiting for a
forklift operator to arrive and pull out a stack of drywall. "They need to
speed up their pit times," Mr. Schneider said, hefting the load into his
pickup truck.
Mr. Nardelli has acknowledged he went too far with
part-timers. The company has scaled back to a mix of 40% part-time and 60%
full-time. He says customer service has had its "ups and downs" but is
improving.
Managers also were directed to increase their "inventory
velocity," or the speed at which merchandise flows through their stores.
When some responded by ordering fewer products, customers couldn't find
what they needed. "On paper, all these changes make sense," says Steve
Mahurin, a former Atlanta merchandising executive at Home Depot who left
voluntarily 14 months after Mr. Nardelli arrived. "Unfortunately, they
don't work on the floor of the stores."
The company's buyers "in Atlanta truly do care," Mr.
Mahurin says. "They just have 1,500 stores to deal with and it's
impossible to give them the attention they need." Home Depot officials
counter that they still have plenty of divisional merchants who, while
they don't buy, keep tabs on local needs and communicate them to Atlanta.
Many on Wall Street have urged the company to imitate
Lowe's, which caters strongly to women shoppers. But some Home Depot
veterans chafe at new products purchased by Atlanta, such as crockpots,
which don't have much appeal to the company's core customers. Mr. Nardelli
also has pushed redesigned large- appliance sections in the stores but
says Home Depot will always serve the contractor and serious
do-it-yourselfer. And some of the new buys -- cleaning products, for
example -- have been hits.
Mr. Nardelli also says centralized buying will work more
smoothly once he gets new computer systems online. He acknowledges that
some inventory directives have caused problems and that every buying
decision hasn't been flawless.
"Has everything that's happened been perfect? No, this
guy has made some errors," says Mr. Marcus, the co-founder. That said,
"when he makes an error, he backs off of it, and he isn't ashamed to say,
'I made a mistake.' And he learns from it."
Sears Beats
4Q Views Despite Credit Business Losses
Dinah Wisenberg Brin
- Dow Jones Newswires
January 17, 2003
PHILADELPHIA -- Sears Roebuck & Co. (S),
buoyed by improved retail profits, substantially beat Wall Street earnings
forecasts in the fourth quarter, but the credit division lost ground as
the company increased the provision for uncollectible accounts.
Citing caution over an uncertain economy, the retailer
Thursday forecast a low to mid-single-digit percentage rise in earnings
per share for 2003. Sears posted income of $4.92 a share, excluding
special items, for the full 2002.
Sears expects operating income in its retail and related
services business to increase in a mid-teens range this year, and the
credit and financial services division to decline by a low to
mid-single-digit rate.
The company expects "flattish" comparable-store sales in
2003, with sales lower in the first half and higher in the second, one
official told analysts on a conference call.
The Hoffman Estates, Ill., company on Thursday reported
net income of $848 million, or $2.67 a share, in the fourth quarter,
compared with $494 million, or $1.52, in the comparable 2001 period.
Excluding a gain of 56 cents a share on the sale of
Sears' remaining investment in Advance Auto Parts in the latest quarter
and special items in the year- earlier period, the company posted
operating income of $2.11 a share, compared with $2.02 a share in the 2001
fourth quarter. A Thomson First Call survey of analysts produced a
consensus earnings estimate of $1.91 a share for the latest period.
Sears shares changed hands recently at $28.40, up $1.70,
or 6.4%, on volume of 10.1 million, compared with average daily volume of
6.7 million shares.
"Management is likely to be seen as slowly rebuilding
investor confidence by beating fourth fiscal-quarter expectations while
still raising the provision for bad debt," a Goldman Sachs research note
said.
The investment firm, which rates Sears stock at
underperform, raised its 2003 earnings estimate for the company by 20
cents, to $5 a share, and said Sears' EPS guidance for the year is "not
hugely below the current consensus of $5.25." Goldman Sachs or an
affiliate received compensation for investment banking services from Sears
or an affiliate within the past 12 months, the note said.
Operating income in the retail and related services
segment rose 9.7% in the fourth quarter due to overall margin improvements
and the acquisition of Lands' End, the company said. The gross margin rate
improved 140 basis points in the segment.
Operating income in the credit and financial-services
division declined 14.8%, with the higher provisions for uncollectible
accounts more than offsetting favorable funding costs and higher revenue,
the company said.
The domestic provision for uncollectible accounts rose
$160 million, or nearly 41%, because of higher charge-offs and a $150
million increase, to $1.8 billion, to the allowance for uncollectible
accounts, Sears said.
The higher allowance reflects increases in Sears Gold
MasterCard receivables, delinquencies and the net charge-off rate. The
charge-off rate rose in the fourth quarter mostly because of customer
bankruptcy filings over the past year, Sears said.
A note from UBS Warburg characterized the decline in the
credit division's operating income as "fairly modest," and said the
charge-off rate, while higher than in the year-ago period, was lower than
in the third quarter and below the firm's forecast.
"The major question remains whether reserves are
adequate, and we would feel more comfortable about the outlook with a
larger increase in the allowance," the UBS note said. The firm had
expected a $314 million increase, rather than $150 million, in the
allowance for uncollectible accounts.
UBS Warburg rates Sears stock at buy. The firm or an
affiliate has conducted investment banking business for Sears within the
past year, the note said.
A Sears official said on the conference call that Sears
is searching for a new chief of risk management for its credit operations.
While the credit results for 2002 were disappointing,
the fundamentals remain strong, Sears Chairman and Chief Executive Alan
Lacy said on the call. Sears had a strong finish to the year and record
2002 earnings per share, he said.
Chief Financial Officer Glenn Richter said Sears is
taking a "relatively conservative view" in its 2003 outlook because of the
uncertain economic environment.
Richter also said Sears plans a credit facility of $3.5
billion to $4 billion to back up its unsecured commercial paper program.
The facility should be complete in February, he told analysts.
Sears
Posts 72% Rise in Net With Help
from Asset Sale
By Amy
Merrick - Staff Reporter - The Wall Street Journal
January 17, 2003
Despite a slowdown in its credit business, Sears,
Roebuck & Co. said fourth- quarter net income jumped 72%, boosted by a big
gain from the sale of its stake in an auto-parts retailer and
better-than-expected retail results.
The company, based in Hoffman Estates, Ill., also issued
a cautious outlook for this year, saying that it expects little overall
improvement in store sales and warning that profits from its credit-card
unit probably will continue to weaken.
"The economy is going to be a challenge for everybody in
the first half of the year, and we're still working our way through a lot
of stuff in the first half" as Sears tries to turn around its struggling
department stores, Chief Executive Alan J. Lacy said in an interview.
His caution was reflected in predictions Thursday from
Federated Department Stores Inc., the owner of Macy's and Bloomingdale's,
which said it expects sales and earnings to be roughly flat this year.
For the quarter, Sears posted net income of $848
million, or $2.67 a share, which includes an after-tax gain of $179
million, or 56 cents a share, from its sale of its investment in Advance
Auto Parts Inc.
Excluding income from the sale, Sears would have earned
$669 million, or $2.11 a share, which is 20 cents above a Thomson First
Call consensus estimate of $1.91 a share. In the year-earlier quarter, the
retailer earned $494 million, or $1.52 a share.
Sears said operating income for its retail and services
unit rose 9.7%, aided by aggressive cost-cutting, improved merchandise
throughout its stores, and the acquisition in May of apparel-seller Lands'
End.
But the company was unable to lift its sales much during
the tough holiday season. Its fourth-quarter revenue was $12.52 billion,
with slight increases from both merchandise sales and credit revenue. The
total was 2.5% above the $12.22 billion it posted in the 2001 fourth
quarter. While Sears typically gets the best sales results from big-ticket
items, it said sales of appliances and home electronics slipped during the
quarter.
Operating income from Sears's credit business dropped
15% because the retailer had to increase the amount it sets aside to cover
bad credit-card debt. It added $150 million to its allowance for
uncollectible accounts during the quarter.
Its charge-off rate increased to 5.40% from 5.23% in the
year-earlier quarter, primarily because of a spike in bankruptcy filings,
Sears said. Charge-off rates, or the proportion of credit-card accounts
that a company has to write off as uncollectible, are likely to peak
during the second half of this year, the retailer said.
The company's credit business has come under close
scrutiny since Sears suddenly and substantially increased its allowance
for bad debt during the third quarter.
For the full year, Sears' net income increased 87%, to
$1.38 billion, or $4.29 a share, from $735 million, or $2.24 a share.
Revenue edged up to $41.37 billion from $40.99 billion.
Sears shares were up $1.83, or 6.9%, to $28.53 in 4 p.m.
New York Stock Exchange composite trading Thursday.
Excerpts From Sears 4Q Conference Call
Dow
Jones Newswires
- January 17, 2003
The following are edited excerpts of a transcript
provided by Fair Disclosure
Financial Network of Sears Roebuck & Co.'s (S) fourth-quarter conference
call.
Earlier Thursday, the retailer reported fourth-quarter
net income of $848 million, or $2.67 a share, beating a Thomson First Call
analyst estimate of $1.91 a share. In the year-earlier quarter, the
company reported earnings of $494 million, or $1.52 a share.
Speaking on behalf of the company were Alan Lacy,
chairman and chief executive; Glenn Richter, senior vice president and
chief financial officer; and Paul Liska, president of credit and financial
products and executive vice president.
LACY: Before turning it over to Glenn, let me provide a
few comments on 2003 earnings. Overall we are in a very uncertain economic
environment and we anticipate that the first half of the year will be
challenging. As a result we are projecting that comparable earnings per
share will grow modestly at the low- to mid-single-digit level over 2002.
We anticipate that retail operating profit results will be up strongly
with operating profit increasing in the midteens and are projecting a
mid-single-digit decrease in credit profitability. Glenn will provide you
more detail on our key assumptions. With those brief remarks I will now
have Glenn take you through more of the specifics on the financials then I
will come back to close with some additional thoughts on 2003 priorities.
Top Five Operating Goals For 2003 LACY: There are five
areas of focus that I want to highlight relative to 2003.
First of all, staying the course with the full-line
stores with all of the initiatives that we have just recently put into
place in 2002 (re-evaluating product lines, expanding popular departments,
centralizing check out and adding shopping carts). We are still settling
in and need to continue to improve our execution of these initiatives.
Second, restore top line growth in full-line stores. The
pieces are now largely in place and we anticipate to begin to show
positive comparable store sales in the second half of the year supported
by improved marketing.
Third, to grow what is working in credit and fix what is
not. The fundamentals of our credit business remain sound and while we
anticipate earnings will be down modestly this year we will still deliver
$1.4 billion in operating profit.
Our fourth priority is to grow our leading customer
direct business. The combination of Lands' End and Sears' direct
businesses creates the leading Internet and catalog hardlines and
softlines company with significant growth opportunities.
Our fifth priority for the year is to continue our focus
on productivity. We have made a lot of the progress but still have much to
do to get our cost structure where it needs to be.
On The Recent Acquisition Of Lands' End LACY: We bought
Land's End for two reasons. One is we thought it was a great business and
secondly we thought that brand at Sears would be very helpful to our
repositioning efforts.
The great business that we bought performed even better
than we thought it might. Lands' End had a record year last year and
they're both top-line and bottom-line performance in the second half of
the year after we acquired them, was greater than what we had anticipated
in our acquisition plan. We were very pleased with their catalog sales
during the fourth quarter in the holiday season. The brand continues to
grow very nicely.
In terms of the addition of the product at our
stores...we were very pleased with the absolute level of Lands' End sales
in our stores. ...The vast majority of the stores that had Lands' End saw
a significant lift in overall apparel sales versus those stores that
didn't. ...The people that appear to be buying Lands' End in our stores in
December were not people that we typically see on our apparel floors. So
we do think it has attracted a different customer.
On Pricing Competition CALLER: On the softline side can
you just comment quickly on the competitive environment? We have seen JC
Penney's being very aggressive from a pricing perspective. We have seen
Kohl's put out some rather volatile numbers. Just any color would be much
appreciated, Alan.
LACY: I think that I would say that certainly the middle
market apparel retailing sector is giving no reason for the customer to
buy something unless it is 50% off. The promotional intensity was
significant. Fifty percent off was sort of the price of entry to get the
customer's attention through the holiday selling season and I don't see
that abating anytime soon.
The only way to basically insulate yourself from that is
obviously to have unique product and I think in our case having Lands' End
at good value day in and day out is a point of differentiation at good
margin for us as well. But I think this promotional intensity is going to
continue certainly in the near- term.
On Its Consumer Credit Business LACY: Overall credit and
financial products operating income decreased by 15 percent to $363
million in the fourth-quarter, better than the low 20s decline forecast
that we had communicated in October. ...The growth in receivables reflects
the continued growth of the Sears Gold MasterCard product which ended the
quarter with balances of $12.3 billion. Portfolio yield declined by 126
basis points versus the prior year, primarily a reflection of a shift in
balances to the lower yield Sears Gold MasterCard product.
Sears Profit
up, Credit Woes
Linger
CRAIN'S CHICAGO
BUSINESS
January 16, 2003
(Reuters) — Sears, Roebuck and Co. Thursday reported
stronger-than-expected fourth-quarter earnings as solid holiday sales from
recently acquired Lands' End made up for weaker profits at its credit card
division. Sears, the largest U.S. department store operator, said the
retail side is also likely to outperform the credit card business in 2003.
It forecast that earnings this year would show a percentage increase in
the low- to mid-single digits.
The credit card division, which generates about
two-thirds of Sears' profits, struggled for the second straight quarter as
it set aside more money for people unable to pay their bills in a soft
economy. A 26 percent jump in personal bankruptcies forced Sears to write
off more unpaid credit card balances.
Sears shares, weak since mid-October, were up nearly 4
percent at midday.
Sears said its credit card unit set aside $160 million
more in the fourth quarter than it did in the same period last year to
cover for people unable to pay their bills.
Delinquencies for the quarter rose to 7.69 percent from
7.58 percent a year earlier, and the domestic allowance for uncollectable
debt swelled to $1.8 billion from $1.6 billion in the third quarter.
Sears started offering a high credit limit Gold
MasterCard about two years ago, hoping to get customers to spend more
money at its stores and elsewhere.
Sears' credit card business has been producing huge
profits as customers have transferred balances from other cards and made
big-ticket purchases, but it has also exposed the company to greater risk
as a slumping economy pushed more people into bankruptcy.
Fourth-quarter operating income for the credit card unit
fell 14.8 percent from a year earlier.
CREDIT WOES
A weak economy has made conditions tougher for the
credit card business. Sears fired the head of the unit in October, saying
he had sugar-coated the outlook.
Many investors say they lost faith in Sears management
because the company should have foreseen that a weak economy would make it
harder for people to keep up their credit card payments.
"Once
you lose that trust, it is a long-term proposition to gain it back,'' said
Roz Bryant, a retail industry analyst with Morningstar.
"I'd need to see more than a few quiet quarters (before confidence
is restored). There really needs to be some substantial top-line (revenue)
growth in 2003.''
Overall, Sears reported earnings of $669 million, or
$2.11 per share, for the fourth quarter, ended Dec. 28, up from $657
million, or $2.02 per share, in the same period a year ago. The figures
exclude one-time items.
Analysts on average were expecting $1.91 per share,
according to research firm Thomson First Call, which tracks analysts'
estimates.
In the latest quarter, Sears also had an after-tax gain
of $179 million, or 56 cents per share, from the sale of its Advance Auto
Parts Inc. stake.
Including one-time items, Sears earned $848 million, or
$2.67 per share, in the fourth quarter, up from $494 million, or $1.52 per
share, a year earlier.
For 2003, the company said it expects operating income
in the retail unit to grow in the mid-teens on a percentage basis, while
operating income in the credit card side will likely fall at a low- to
mid-single-digit rate.
The retail unit, which had been struggling as
lower-priced department stores such as Kohl's Corp. expanded, turned in a
9.7 percent gain in operating income in the fourth quarter.
Sears began rolling out Lands' End merchandise in some
of its stores in time for the holiday shopping season. On a conference
call, the company said stores that carried Lands' End had better clothing
sales than other stores.
Still, analysts were quick to point out that cost
cutting and Lands' End accounted for much of the improvement, and overall
sales remained weak.
"This
doesn't give us any reason to change our view that Sears' retail strategy
is flawed,'' Bryant said. "The big thing for
them in 2003 is to show that they're able to grow sales. Cost-cutting is
an easier thing to do.''
Sears said it expects higher sales at stores open at
least a year in the second half of 2003. Through December, it had reported
17 straight monthly declines.
Sears shares were up $1.02 at $27.72 near midday on the
New York Stock Exchange. The shares have fallen about 22 percent since
mid-October, when the company reported very disappointing third-quarter
earnings because of problems in its credit card business.
Sears Chisels Out A Better
Quarter
FORBES.COM
- Ari Weinberg
January 16, 2003
Thursday's fourth-quarter earnings announcement from
Sears Roebuck has given the company's investors reason to charge back into
the stock.
Despite a 14.7% decline in profitability at its
credit-card unit, the company's retail sales unit saw operating income
increase 9.7% and sales inch 2.8% higher. For the year
Sears (nyse: S -
news - people ) saw net income of $1.4 billion, or $4.29 per share,
compared to $735 million, or $2.24 per share, for 2001. Fourth-quarter
earnings, excluding a one-time gain, came in at $669 million, or $2.11 per
share, ahead of analyst expectations of $1.91 per share. This improvement
provided Sears investors reassurance that the retailer is headed back the
way of Target (nyse: TGT - news - people ) and Kohl's (nyse: KSS - news -
people ), not in the direction of now-bankrupt Kmart (otc: KMRTQ - news -
people ).
Sears Chairman and Chief Executive Alan Lacy, who took
over the retailer in late 2000, has been charged with getting the
118-year-old retailer humming again. He's exited several peripheral
businesses and sold the company's remaining interest in Advance Auto Parts
(nyse: AAP - news - people ) to help boost the bottom line. But it is
closer scrutiny of the company's credit-card receivables and improved
store efficiencies that will ultimately make the stock desirable again.
Sears' stock bottomed at $19.71 in mid-November, a month
after the company announced some emergency reparations to its credit-card
portfolio. The stock is up 40% since then and gained nearly 6.85%, or
1.83, to $28.53 on Thursday's results.
But for a company whose primary business is selling
appliances and house wares, the company's executives answered numerous
questions on Sears' credit card business and corporate funding position in
today's conference call.
In the coming months, Sears is planning to refinance
$4.7 billion of current liabilities, $2.7 billion in unsecured debt and $2
billion of asset-backed securities. Last year Sears also cut its
outstanding commercial paper to $2.9 billion from $4 billion at the
beginning of 2002. Additionally, the company is negotiating for a new
credit facility, as its current $4.4 billion U.S. facility, backed by
Citigroup (nyse: C - news - people ) and Bank One (nyse: ONE - news -
people ), expires in April.
Why the focus on funding at Sears? After spending
roughly $1.8 billion to buy catalog-retailer Lands End in June--a key part
of the company's drive to increases in store sales--Sears awoke to the
downtrend in its Sears card business and had to provision more cash to
shore up rising net chargeoffs and delinquencies. To maintain its own
credit rating, Sears must ensure that credit-
losses don't cut into the company's ability to pay interest.
The company has been switching its better customers to
Sears Gold MasterCard, which has higher credit limits and better
performance records. At the end of 2002 MasterCard receivables constituted
40% of the company's $30 billion in managed receivables, compared to 18.8%
at the beginning of the year. But the safety of MasterCard accounts may be
overstated by the company: Chargeoffs and
delinquencies for the MasterCard portfolio increased at a faster rate than
the Sears Card book.
Chargeoffs for the Sears Gold MasterCard grew to 3.41%
from 1.65% at the beginning of the year. Sears Card chargeoffs grew to
6.28% from 5.70%. Deliquencies on the MasterCard jumped to 3.78% from
1.98%, while deliquencies for the Sears Card went to 10.31% from 8.9% a
year ago. This trend caused one analyst to question whether Sears was
selectively shifting its card customers or moving them regardless of
credit prospects.
A retailer offering credit cards to its customers is not
new, but the current consumer credit environment has some analysts
questioning how far stores are willing to take their credit operations.
Concerns about Target's growing card operations gave its shares a little
ruffle in December. And recent Fed data that consumer credit actually
retracted in November means that new receivables could be slower to
arrive.
Sears has already been in and out of the consumer
financial services market-- buying Dean Witter
in 1981 and spinning out it and its Discover Card operations in 1993 (both
now part of Morgan Stanley (nyse: MWD - news - people ). While Sears still
derives a third of its profits from cards, the shift to MasterCard, a
credit network of major consumer banks, could prepare Sears to exit from
the card game once again.
Sears Reports Record 2002 Earnings Per Share Comparable EPS of $4.92 For
Year; $2.11 For Fourth Quarter
January 16, 2002
HOFFMAN ESTATES, Ill., Jan. 16 /PRNewswire/ -- Sears,
Roebuck and Co. (NYSE:S) reported today net income, excluding noncomparable items of $1.6
billion, or $4.92 per share for 2002 as compared to $4.22 in 2001, a 17
percent per share increase. On a reported basis, net income was $1.4
billion or $4.29 per share for 2002 as compared to $2.24 last year.
Non-comparable items are detailed in a schedule at the end of this
release.
"2002 was a year of tremendous change for Sears," said
Chairman and Chief Executive Officer Alan J. Lacy. "We made significant
progress in repositioning and restructuring our core retail business,
full-line stores, resulting in improved earnings for Sears. 2002 was a
record year for Sears in terms of earnings per share."
Fourth Quarter Earnings
The company also reported fourth quarter 2002 net
income, excluding non- comparable items, of $669 million, or $2.11 per
share compared to $657 million, or $2.02 per share in 2001, a 4.5 percent
per share increase. The increase is due to improved profitability in the
company's Retail and Related Services segment as well as a decrease in the
number of shares outstanding, partially offset by a decline in the Credit
and Financial Products segment.
"Despite a challenging retail environment and soft
sales, we made strong progress in improving our core retail operations,"
said Lacy. "The acquisition of Lands' End, continued improvement in
merchandise assortments, inventory management and vendor sourcing, and an
improvement in the cost structure of the full-line stores all contributed
to increased profitability."
Fourth quarter of 2002 was affected by one
non-comparable item - the gain on the sale of the company's remaining
investment in Advance Auto Parts, Inc. The sale resulted in an after-tax
gain of $179 million, or $0.56 per share and generated after-tax cash
proceeds of $335 million. Non-comparable items affecting the fourth
quarter of 2001 consisted of charges relating to implementation of
productivity initiatives, product category exits, and the Exide battery
litigation settlement. These non-comparable items, on an
after- tax basis, were $163 million, or $0.50 per share.
Reported fourth quarter 2002 net income, including the
non-comparable items, was $848 million or $2.67 per share, compared with
$494 million, or $1.52 per share in the fourth quarter of 2001.
Retail and Related Services
Retail and Related Services segment operating income for
the fourth quarter, excluding non-comparable items, increased 9.7 percent
to $726 million due to improvements in margin, as well as the addition of
Lands' End. "We are pleased by our strong profit performance in retail in
the fourth quarter especially in light of the challenging retail
environment during the holiday selling season," said Lacy.
Retail and Related Services revenues for the fourth
quarter of 2002 of $9.7 billion were 2.8 percent above last year's fourth
quarter revenues of $9.5 billion. Increased revenues due to the
acquisition of Lands' End, and the addition of seven new The Great Indoors
stores were partially offset by declines in full-line stores revenues. In
hardlines, revenue declined in
big- ticket categories such as home appliances, home electronics and lawn
and garden. Softline sales declined compared to the prior year, however,
sales improved over the prior quarter's performance.
Retail and Related Services gross margin rate improved
by 140 basis points to 29.4 percent. The improvement in margin was due to
the inclusion of Lands' End and improved inventory management and product
sourcing in full-line stores.
Selling and administrative spending was 7.5 percent
higher than fourth quarter 2001. The increase was due to additional
expense related to the inclusion of Lands' End and higher investment in
The Great Indoors, partially offset by a reduction in operating costs for
full-line stores. Selling and administrative expenses were 19.9 percent of
sales compared with 19.0 percent last year.
Credit and Financial Products
Operating income decreased by $63 million or 14.8
percent from the prior year as favorable funding costs and higher revenues
were more than offset by a higher provision for uncollectible accounts.
Fourth quarter domestic Credit and Financial Products
revenues increased 4.4 percent from a year ago, to $1.4 billion due to
higher average receivable balances. Credit receivables at the end of the
fourth quarter grew 11.5 percent over the prior year to $30.8 billion.
Funding costs declined by $43 million or 15.1 percent
from last year's quarter due to a favorable interest rate environment.
The domestic provision for uncollectible accounts
increased by $160 million or 40.9 percent over last year's period due to
higher charge-offs and a $150 million increase to the allowance for
uncollectible accounts. The allowance increase reflects the growth in
Sears Gold MasterCard receivables, as well as increases in the net
charge-off rate and delinquencies. The net charge-off rate for the fourth
quarter increased to 5.40 percent from 5.23 percent last year primarily
due to increased customer bankruptcy filings over last year. Delinquencies
for the quarter increased to 7.69 percent compared to 7.58 percent last
year. The domestic allowance for uncollectible accounts of $1.8 billion is
5.79 percent of ending credit receivables as of the end of the fourth
quarter of 2002 compared to 5.57 percent at the end of last quarter.
2003 Outlook
The company's preliminary outlook for 2003 is for
comparable earnings per share to increase in the low- to mid- single
digits. The Retail and Related Services business is expected to grow
operating income in the mid-teens, while operating income for the Credit
and Financial Products segment is expected to decline at a low- to
mid-single-digit rate. Sears Canada is anticipated to post increased year-
over-year profitability, and the Corporate and Other segment is expected
to remain relatively flat with productivity savings being offset by higher
benefit and insurance costs.
Forward-Looking Statements
This release contains guidance on 2003 comparable
earnings per share, which is a forward-looking statement based on
assumptions about the future that are subject to risks and uncertainties,
such as competitive conditions in retail; changes in consumer confidence
and spending; changes in interest rates; delinquency and charge-off trends
in the credit card receivables portfolio; continued consumer acceptance of
the Sears Gold MasterCard Program; the successful execution of and
customer reactions to Sears' Full-line store strategy and other
performance improvement initiatives; Sears' ability to integrate and
operate Lands' End successfully; anticipated cash flow; the possibility of
increased hostilities in the Middle East; general economic conditions and
normal business uncertainty. In addition, Sears typically earns a
disproportionate share of its operating income in the fourth quarter due
to seasonal buying patterns, which are difficult to forecast with
certainty. While the company believes its forecasts and assumptions are
reasonable, it cautions that actual results may differ materially. The
company intends these forward- looking statements to speak only as of the
time of this presentation and does not undertake to update or revise them
as more information becomes available.
About Sears
Sears, Roebuck and Co. is a broadline retailer with
significant service and credit businesses. In 2002, the company's annual
revenue was more than $41 billion. The company offers its wide range of
apparel, home and automotive products and services to families in the U.S.
through Sears stores nationwide, including approximately 870 full-line
stores. Sears also offers a variety of merchandise and services through
its Web site, www.sears.com. In June 2002, Sears acquired Lands' End, a
direct merchant of traditionally styled, classic Lands' End clothing
offered to customers around the world through regular mailings of its
specialty catalogs and online at
www.landsend.com .
Kmart Will
Lay Off Up to 35,000 and Close 326 Stores
By Constance L.
Hays - Washington Post - January 15, 2003
Faced with fierce competition and sales that continue to
decline, Kmart will lay off as many as 35,000 workers and close 326 stores
around the country over the next three months.
The plan, which the executives described as necessary
for Kmart to become "a stronger company," was submitted yesterday to the
federal judge overseeing Kmart's reorganization, as was a financing plan
that includes an option to close 400 more stores.
But Kmart's president, Julian C. Day, said there were no
plans "at this time" to close more. The plans require approval from the
judge, who has scheduled a hearing on Jan. 28.
The cuts exceed those announced last March, when Kmart
shut 283 stores and cut 22,000 jobs. As part of the current round, which
includes shutting a distribution center in Corsicana, Tex., Kmart is
organizing a "customer relocation plan" in which shoppers whose local
Kmart disappears will be directed to another store.
"We want them to know that we are a competent and
forward-looking organization," Mr. Day said.
The closings, while widely expected, will presumably
affect the hundreds of manufacturers who sell their products through Kmart
as well as the employees who will be out of work. Among the stores that
will close are about 60 Super K stores, which have the highest sales
volume among Kmart stores. The number represents more than half of the
Super K's around the country, and indicate that the strategy of selling
groceries to compete with Wal-Mart, begun under previous management, has
been curtailed.
By April, when all the closings are expected to have
been completed, Kmart will have fewer than 1,500 stores — about
three-fourths the number it had when it filed for Chapter 11 bankruptcy
protection in January 2002.
And while some retail experts have said that it would be
more effective to close all stores in certain regions, Kmart's latest plan
calls for the same kind of scattershot approach used in last year's plan.
Asked whether the company had considered regional closings, Mr. Day said,
"We're thoroughly convinced that this is the right option."
A retail consultant disagreed. By closing stores in the
manner Kmart has, said Burt Flickinger III, a partner in the Strategic
Resource Group, "the capital overhead shifts to the remaining stores and
makes profitable stores marginal."
"And ultimately, marginal stores become unprofitable,"
he added.
Kmart also moved up its reorganization timetable, saying
it now plans to emerge from bankruptcy by April 30 and has secured $2
billion in loans that will replace the $2 billion of debtor-in-possession
financing that it currently uses. Management has said for months that it
expects the bankruptcy to conclude by July.
The company also announced that it posted a slim profit
for the first time since declaring bankruptcy nearly a year ago. For the
five weeks ended Jan. 1, the company said it earned $349 million on sales
of $4.7 billion. Sales in stores open at least a year were down 5.7
percent compared with the period last year, which did not include
Thanksgiving holiday weekend sales the way this year's figures did.
Company executives called the profit encouraging,
particularly considering the weak retail industry over all. "We're very
pleased to see that," said Al Koch, Kmart's chief financial officer.
Kmart will file documents on Jan. 24 that detail a
five-year business plan and the results of a company investigation into
the conduct of executives before the bankruptcy filing. Related inquiries
by the Securities and Exchange Commission and the Justice Department
continue.
Under the current reorganization plan, creditors would
receive shares of Kmart stock and current shareholders would receive
nothing for their equity, said Ronald Hutchinson, the chief reorganization
officer.
"A lot of people have been speculating about the future
of Kmart," said James B. Adamson, the chairman and chief executive. "I
hope they will recognize that there is a future."
Kmart
Store Closings to Cut As Many as 35,000
Positions
A WALL STREET
JOURNAL ONLINE NEWS ROUNDUP
January 14, 2003
DETROIT -- Kmart Corp. will close 326 stores and
eliminate 30,000 to 35,000 jobs, the company announced Tuesday.
Chief Executive James Adamson said the retailer plans to
emerge from bankruptcy by April 30. "We don't want to remain in bankruptcy
a day longer than necessary," he said in a conference call with reporters. Kmart is done with store closings for now, Mr. Adamson
said.
The store closings, which involve 44 states and Puerto
Rico, are subject to court approval. Kmart is scheduled to appear in U.S.
Bankruptcy Court in Chicago on Jan. 28. The Troy, Mich., retail giant now
operates roughly 1,830 stores.
The reorganization plan includes a five-year
restructuring program based on the company's traditional strategy of
promotional retailing, Mr. Adamson said. The plan has been approved by
board members, and under the reorganization plan creditors will receive
issues of new stock in exchange for their claims. Specific terms of stock
awards are still being negotiated.
Current Kmart equity holders will receive nothing for
their shares under the reorganization plan, Chief Restructuring Officer
Ron Hutchison said.
Some Kmart suppliers that fell victim to the company's
Chapter 11 filing will be entitled to two years of first lien on some
Kmart real estate, Mr. Hutchinson said.
Tuesday's announcement marks the second round of
closings in less than a year. Last March, Kmart closed 283 stores,
affecting 22,000 jobs. Analysts had predicted that the latest move would
shutter 300 to 600 stores.
The closings also include one distribution center in
Texas.
"We're all upset. I've been here since 1998. I helped
build this store up," said Sharon Knight, an employee at a Detroit Kmart
who learned Tuesday morning that her store is one of those closing. "It's
kind of a tremendous loss to me."
Ms. Knight, who works behind the jewelry counter, said
employees were told at a meeting that the store is planning to close
within 60 to 70 days.
Kmart filed for bankruptcy nearly a year ago after a
stock dive and disappointing 2001 holiday sales. The discounter needs to
close stores while under bankruptcy protection to allow it to get out of
leases.
Burt Flickinger, a retail analyst with Reach Marketing,
says while store closings are necessary, the company isn't going about it
the right way. Kmart is basing its closures on performance over the last
year "and should be looking at what the business will look like the next
12 months," Mr. Flickinger said.
Since Kmart filed for bankruptcy on Jan. 22, 2002, it
has lost an additional $2 billion and battled declines in same-store
sales, or sales at stores open at least a year. Earlier Tuesday, Kmart
reported $349 million in net income for the five-week period ended Jan 1,
6% lower than the same period a year earlier.
"As the company contracts, there's still no sign that it
can make any money," Mr. Flickinger said. "There's so much uncertainty in
what Kmart can do to solve its problems."
But Jordan Kaplan, a professor of managerial science at
Long Island University, said the store closings may buy some time for
Kmart. "Hopefully, it will stave off a complete liquidation of Kmart --
which of course is always a possibility," he said.
Kmart has yet to stanch its market-share losses to
discounting giants Target Corp. and Wal-Mart Stores Inc. Some analysts
have suggested there isn't room for Kmart unless it finds some way of
distinguishing itself and luring customers.
Other troubles plague the company beyond its business
plan. Just before its bankruptcy filing, Kmart began receiving anonymous
letters, purporting to be from employees, that suggested wrongdoing at the
company. The letters spawned an investigation into the way the company was
run under its former management. Congress, the Justice Department and the
Securities and Exchange Commission also are investigating Kmart's decline
into bankruptcy.
Sears
Deploys StorePerform Solution in Full-Line Stores
January 13, 2003
DENVER, Jan. 13 /PRNewswire/ -- StorePerform
Technologies announced that Sears, Roebuck and Co. (NYSE: S) will deploy
the StorePerform Workforce Productivity and Store Performance Management
Solution within all its full- line stores. The deployment is part of an
initiative designed to provide Sears' full-line store management with a
single source for role-based communications, task management, reporting,
and access to other key systems. Full rollout to Sears' approximately 870
full-line stores is on an aggressive schedule and planned to be complete
within the first quarter of 2003.
"Our experience with StorePerform has been positive, for
users at both our corporate office and in the field. It is an intuitive,
easy-to-learn product, and our field offices and stores appreciate having
all tasks arrive in one format, through one consistent channel," said
Michael Buxton, Sears vice president of store operations for full-line
stores.
At the corporate level, the StorePerform solution allows
users to track compliance and know when there are problems -- this assists
in the drive for consistent store-level execution and increased
productivity. "We believe these capabilities will support our key
strategic imperatives, including cost reduction and revenue enhancement,"
Buxton said.
"The software installation process has been smooth and
timely, and the product is stable and fits well with our technology
environment," added Steve Junk, Sears vice president of information
technology.
More details on the rollout will be shared at a seminar
during the National Retail Federation's Big Show on Tuesday, January 14,
2003 at 4:30 pm in the Jacob Javits Center, New York City. The seminar is
entitled "Performance Chain Management - Execute Superbly to Grow
Profitably", and will feature Michael Buxton, Steve Junk and Srikant Vasan,
as well as Greg Girard from AMR Research, Inc.
StorePerform's Intranet-based solution helps retailers:
a) reduce store communication costs, labor costs, and training costs, b)
increase revenues, speed-to-floor and store management floor-time, c)
execute consistently across stores, and d) provide visibility for
above-store management into the status of process execution at each store,
allowing them to manage by exception.
About StorePerform Technologies, Inc.
StorePerform Technologies, Inc., with headquarters in
Denver, Colo., offers the first comprehensive workforce productivity and
store performance management solution in the retail market. StorePerform's
software helps retailers improve their store operations by combining task
management, performance monitoring, and process-driven analytics.
StorePerform can help optimize a wide range of retail business processes,
such as task management, store communications, standard operating
procedures, store feedback, store openings/closings/remodels, and workload
optimization. For more information, please visit http://www.storeperform.com,
or email info@storeperform.com.
About Sears, Roebuck and Co.
Sears, Roebuck and Co. (NYSE: S) is a broadline retailer
with significant service and credit businesses. In 2001, the company's
annual revenue was more than $41 billion. With headquarters in Hoffman
Estates, Ill., the company offers its wide range of apparel, home and
automotive products and services to families in the U.S. through Sears
stores nationwide, including approximately 870 full-line stores. Sears
also offers a variety of merchandise and services through its Web site,
www.sears.com. In June 2002, Sears acquired Lands' End, a direct merchant
of traditionally styled, classic Lands' End clothing offered to customers
around the world through regular mailings of its specialty catalogs and
online at www.landsend.com.
Retail Consultant Says Kmart Will Seek to Close 312 Stores
By Constance
Hays - New York
Times
January 11, 2003
The Kmart Corporation is expected to file a plan with
the United States Bankruptcy Court next week seeking to close at least 312
stores, a retail consultant said yesterday.
The consultant, Burt Flickinger III of the Strategic
Resource Group, said that the filing, which could come as early as
Tuesday, would ask the court's approval for the closings, as well as for
an option to close 122 more stores.
Kmart has been evaluating its 1,800 discount stores for
several weeks to decide on possible closings.
A spokeswoman for Kmart, Lori McTavish, would not
confirm the numbers. But she said that "we expect to complete our
evaluation of the store base in mid- January,"
in time for a hearing scheduled Jan. 28 before a bankruptcy judge in
Chicago.
Kmart, which is based in Troy, Mich., filed for Chapter
11 bankruptcy protection last January. It closed 283 stores and laid off
22,000 workers last March. The company has sought to revive its fortunes
by carrying exclusive brands and increasing its advertising to minority
shoppers as well as by cutting costs. Still, it has been unable to reverse
declining store traffic and sluggish sales.
"This means that the company wasn't able to stop the
bleeding with the 283 stores they closed last year," Mr. Flickinger said.
Ms. McTavish said employees would be notified about
store closings before any public announcement.
Kmart had a loss of $383 million in the third quarter of
2002. Sales in November at stores open at least a year were down 17.2
percent, to $2.47 billion. Sales were $6.73 billion in the third quarter.
In the third quarter of 2001, Kmart had sales of $8.02 billion. The 2002
November sales figures do not include the Thanksgiving holiday.
Sears to
Pay $125,000 to Settle
Discrimination Suit
Bloomberg News
Posted on January 10, 2003
Sears, Roebuck & Co. agreed to pay $125,000 to settle a
lawsuit claiming the retailer discriminated against a blind employee, the
U.S. government said.
The largest U.S. department store chain failed to
provide a specialized computer and other equipment to accommodate Carl P.
Davenport's disability, the U.S. Equal Employment Opportunity Commission
said. Davenport was hired in 1999 as an asset management assistant at the
retailer's credit facility in Greensboro, North Carolina, though he never
went to work, the EEOC said. Sears denied violating federal law.
As part of the settlement, Sears will continue training
its supervisors about the Americans With Disabilities Act, and will
designate a manager at the facility responsible for disability issues, the
EEOC said. The company also will monitor applicants who request a
disability accommodation, the government said.
The government is "encouraged by Sears's commitment to
comply with the ADA," said Michael Whitlow, acting director of the EEOC's
Charlotte office. "Every individual deserves the freedom to compete in the
workplace on a level playing field without being subjected to
discrimination."
Sears spokeswoman Peggy Palter said the company denied
violating the ADA and that it has been recognized for its efforts to
accommodate disabled people. The company settled to put the issue behind
it and to avoid litigation costs, Palter said.
The suit was filed in federal court in Greensboro in
June 2001. The settlement requires a judge's approval.
Shares of Hoffman Estates, Illinois-based Sears rose
$2.24 to close at $27.29 in New York Stock Exchange composite trading
today.
J.C.
Penney Unveils Job Cuts
As Restructuring Continues
A WALL STREET
JOURNAL ONLINE NEWS ROUNDUP
January 10, 2003
J.C. Penney Co. unveiled plans to cut 2,000 jobs and
close three offices related to its catalog business and said it expects to
take charges of about $40 million, or 10 cents a share, to cover the
costs.
The Plano, Texas, catalog and department-store retailer
will shutter its catalog fulfillment center in Atlanta and telemarketing
offices in Atlanta and Lenexa, Kan, in the first half of the year. Some of
the job cuts will made at its remaining fulfillment centers. The company
currently employs 250,000 people.
The cuts are part of a long-running restructuring at the
retailer, which will have closed 17 outlet stores, four telemarketing
centers and two catalog fulfillment centers since January 2000. The hope
is to reduce its reliance on catalog sales and better balance catalog,
Internet and department-store sales.
The charges will be split, with $20 million in the first
quarter and the remainder in the second. Pending real-estate transactions
could cut the sizes of the charges.
Penney expects the move to generate annual savings of
about $30 million, or seven cents a share, starting in 2004.
Chairman and Chief Executive Allen Questrom said the
change is partly the result of productivity gains. "In the last two years,
[the catalog division] has made significant strides in improving its
profit contribution by eliminating unprofitable sales, improving inventory
management and reducing expenses," he said, cutting the need for space by
about 40%.
The retailer was one of the few to report strong holiday
sales, with a same- store sales increase of 4.7%, ahead of its forecast of
a 4.5% gain. Aided by deep, widely advertised weekly discounts, Penney
said it saw particularly brisk sales of children's apparel, fine jewelry
and home furnishings.
The company has seen improvement in its earnings lately,
crediting more fashionable merchandise, better pricing and more appealing
store layouts.
Sears Senior
Debt Rating
Cut by Fitch
Reuters -
January 9, 2003
Fitch Ratings on Thursday (1/9/03)
cut its senior unsecured debt ratings for Sears, Roebuck and Co. and its
Sears Roebuck Acceptance Corp. and Sears DC Corp. units.
Fitch lowered the ratings one notch to "BBB-plus," its
third lowest investment grade, from "A-minus," and affirmed its "F2"
commercial paper rating, its second lowest investment grade.
The downgrade was based on heightened competitive
pressures facing the company's retail operation, challenges with executing a
new full-line store strategy, concerns surrounding the overall retail environment and
Fitch's revised internal capital allocations for the credit business.
Fitch said its rating outlook is "negative," reflecting
weak operating trends and uncertainty surrounding the timing of a turnaround
of the retail businesses. A negative outlook means another cut is more
likely than an upgrade.
Sears had $12.2 billion of domestic senior debt and $4.3
billion of domestic commercial paper outstanding as of Sept. 28, 2002, Fitch
said.
Copyright 2003, Reuters News Service
Wal-Mart Dec.
Sales Rise 2.3
Percent
CNBC
- January 9, 2003
Mega-retailer meets lowered
same-store forecast
Wal-Mart Stores Inc. , the world’s biggest retailer, on
Thursday said December sales at stores open at least a year rose 2.3
percent, meeting its lowered forecast.
A LAST-MINUTE JUMP in holiday sales came too late to
make up for a slow start, it said. The retailer said total sales in the
five-week period ended Jan. 3 rose 9.5 percent from a year earlier, to
$31.6 billion.
Wal-Mart said on Dec. 26 it expected same-store sales
for December to be up 2 percent to 3 percent. It initially forecast a gain
of 3 percent to 5 percent.
Maltbie's Mix
Long: Michaels Stores; Short: Sears
Robert Maltbie
- CFA - Forbes.com
January 6. 2003
NEW YORK - Each week Robert Maltbie, money manager and
chief executive of Stockjock.com, selects a pair of stocks--one he
recommends investors to go long on and the other that they should short.
The Long
Michaels Stores (nyse: MIK - news - people )
Recent price: $32.50
Target price: $40
The Short
Sears, Roebuck (nyse: S - news - people )
Recent price: $24.50
Target price: $18
The Thinking
Robert Maltbie
Since early November, after pre-announcing that profits
would fall short of estimates, shares of Michaels, the nation's largest
arts and craft retailer, have tumbled more than 35%. External events
combined with a seasonal shift in the retail environment and waning
consumer confidence have caused retailers nationwide to modify sales and
earnings expectations. Worries about the economy, the stock market and
possible war with Iraq will depress spending and make for more modest
retail sales in the months ahead.
While Michaels certainly will be affected by these
factors, the impact on secular retailers should be less than that on
general retailers. The fundamentals and health of the arts and crafts
industry haven't changed, and neither has Michaels' leadership position.
After discounting for this seasonal slowdown in sales, at recent price
levels Michaels is undervalued. After considering its long-term growth
rate of 20% and price-to-earnings multiple of 15, the shares are
undervalued by 23%, with a price target of $40.
Weak retail sales over the holidays clearly reflect the
current mood of U.S. consumers and overall confidence, as it fell to 80.3
in December from a revised 84.9 in November. Expect sales and profit
warnings from retailers in the weeks ahead. Among the leading retailers,
Sears faces a declining sales trend and heavy debts. Last quarter it
reported net income of 59 cents per share, 28% below consensus estimates
of 82 cents per share, due to a whopping $603 million addition to bad loan
reserves. Sears doesn't expect to fulfill its 2002 profit estimate.
Aside from modest sales gains, the company also faces a
massive and troubled credit arm. Its credit business accounts for more
than 60% of its profits and finances some 40% of its sales. If sales
continue to decline and credit delinquencies rise, Sears would have
difficulty meeting its debt requirement in the months ahead. The company
has many terminal issues. Considering its earnings growth potential of
9.5% and credit risks, we value Sears at $18.
Disclosure: Maltbie's firm is long Michaels and short
Sears.
CEO Lacy in Act 3 of Sears
Saga
Dramatic sales results
needed to fix retailer
By Susan Chandler,
Staff Reporter Chicago
Tribune
January 5, 2003
Sears, Roebuck and Co. Chief Executive Alan Lacy was
riding high seven months ago. The company's credit card business was
cruising along nicely, stores were being remodeled, and Sears' stock hit a
four-year high of nearly $60 per share.
But now Sears' chief has his back against the wall.
Sears' retail business is losing market share. Its credit card business is
struggling with higher delinquencies and investors have headed for the
exits. Sears' shares fell below $23 this fall, the lowest level in more
than a decade.
Lacy, who is in his third year as CEO, hasn't run out of
rope yet, but he needs to show some dramatic improvements in the coming
year, retail experts say.
"You don't get five years. You get three years for
sure," says Sid Doolittle, partner with McMillan/Doolittle, a Chicago
retail consulting firm. "This is a very big year for Alan Lacy. He is not
going to get much more out of cutting costs. You better get some sales,
Bub."
George Whalin, president of Retail Management
Consultants, believes Lacy deserves more time to see his changes take
hold, but he agrees investors' patience may be wearing thin. "The board
will essentially give him some time. The question is will Wall Street?"
Adding to Lacy's headaches, J.C. Penney Co., a major
Sears competitor, is showing new signs of life in the apparel business,
and home centers like Home Depot and Lowe's Cos. are making a major push
to steal some of Sears' dominant share in the appliance business.
Boosting sales next year is definitely on his agenda,
Lacy says.
"In the second half of 2003, top-line growth needs to
show through," he said in an interview last week.
But he is hardly apologetic about Sears' 2002 mixed
report card. "We are going to have a record year in terms of profitability
for the company, driven by substantial improvement in our core business."
Lacy is sticking with Sears' October guidance to
analysts that the company will post earnings per share, excluding one-time
items, of $4.86 for 2002. That's a 15 percent increase over the $4.22 per
share racked up in 2001, but it is less than the $5.15 per share Sears was
predicting before it restated earnings to add $300 million to its
provision for bad credit card debt.
His watchwords for 2003 are simple and concise: Stay the
course.
Certainly, Sears' 870 department stores underwent a
dramatic amount of change last year. New departments for closet
accessories and big-and-tall menswear were added. Casual apparel from
Lands' End Inc., which Sears acquired in the summer, was rolled out to
stores in 10 markets. And Covington, a new private- label classic apparel
brand, was introduced in the fall.
While all that was happening, Sears' sales fell every
month through November, sometimes by double digits, and the company
predicts they will be down by about 5 percent in December.
The shrinking top line wasn't as big a surprise as it
could have been because Lacy had promised investors he would be focused on
improving profit margins, not increasing sales, last year.
But now, Sears needs to demonstrate a payoff for all
that remodeling dust, retail experts say. New departments had better show
sales gains. Centralized checkout registers, intended to get shoppers out
the door faster, should be yielding better customer satisfaction scores.
And Lands' End's clothing--Lacy's nearly $2 billion
investment--should be flying off the shelves.
"Sears' investors will want to see stores where the new
format has produced dramatic improvements in sales and profitability,"
says James Drury, who heads his own executive search firm and chairs the
Directors' College, a two-day program for executives and directors about
corporate governance trends and practices at the University of Chicago's
Graduate School of Business.
Although it is too soon to have an accurate read on
Lands' End, early signs and anecdotal evidence are promising, Sears says.
"Lands' End has been a major win," Lacy said. "It has
performed better than we anticipated at the time of the acquisition."
Lands' End khakis and sweaters appear to be
accomplishing what Lacy had
hoped: bringing well-heeled customers to Sears and introducing them to new
offerings like motorized treadmills and plasma-screen TVs.
Before Christmas, Lands' End President David Dyer
encountered a Sears shopper who had just purchased a $3,000 projection TV.
The man hadn't been in Sears for years, and the only reason he had come
that day was his wife, a loyal Lands' End shopper, had dragged him to the
store.
Such tales are encouraging, but they aren't enough to
convince skeptics that Lands' End's higher prices and better-quality
apparel will dovetail with Sears' increasing focus on value.
Market share shrinks
Lacy acknowledges the retail side of Sears is far from
fixed, and he vows it will continue to be his major focus during the
coming year. As it should be, critics say, because Sears is continuing to
lose market share to more nimble competitors like Kohl's Corp., Target
Corp. and Wal-Mart Stores Inc.
"If you don't sell anything, you don't have any credit
and you don't make any money," Doolittle said.
While Lacy is trying to rev up Sears' sales, he has
another challenge ahead: regaining credibility with Wall Street.
When he was promoted to the top job in October 2000,
Lacy made a good impression on retail analysts by taking a conservative
approach. He didn't put forth a dramatic new vision of Sears, as his
predecessor had. Instead, he offered a plan to make Sears' sprawling
organization more efficient and its department stores easier to shop.
He also promised that Sears' credit business, which
generates the majority of operating profit, was in good hands. Despite a
weak economy and growing unemployment, bad debt and delinquencies were
being kept under control by sophisticated software and an aggressive debt
collection effort, Lacy said.
But in October, Lacy fired the head of Sears' credit
business, saying he had not been getting good information about mounting
levels of delinquencies. Then, Sears lowered earnings estimates twice in a
10-day period.
Analysts left wondering
Now, some analysts say they don't know what to believe.
Bill Dreher, an analyst with WR Hambrecht & Co.,
recently advised investors against picking up Sears' shares at bargain
prices, citing "extremely limited visibility" at the company.
In late October, Roz Bryant, an analyst with Morningstar
in Chicago, said she was troubled by the evidence that "management doesn't
have a good handle on its primary profit driver--its credit business." She
added that Sears "has lost its retail identity" and that Lacy's strategy
"will lead to anemic sales growth at best."
Lacy says he isn't surprised at the skepticism.
"Whenever you revise your outlook twice in 10 days, you create
uncertainty," he said. But Lacy believes that when Sears delivers its
year-end earnings with no additional bad news from its credit business,
some faith will be restored.
But fixing its credibility issue may be easy compared to
Lacy's biggest ongoing challenge--figuring out what Sears stands for today
and what its competitive edge is.
"It's not clear to me what their strategy is," says
Robert Blattberg, retailing professor at Northwestern University's Kellogg
School of Management.
"Sears has no cachet," he said. "Look at what Target and
Kohl's have been able to do. They're just so much better in merchandising
and marketing. They beat Sears in every dimension."
Alan Lacy's challenges
- Increase sales at Sears' department stores.
- Control rising delinquency rates in the credit card
business.
- Boost the stock price, which lost more than half its
value between June and November.
- Introduce the Lands' End apparel brand to all of
Sears' 870 department stores.
Copyright © 2003, Chicago Tribune
Can Wal-Mart Get Any Bigger?
(Yes, a lot bigger... Here's
how)
By Bill Saporito - Time Magazine
January 5, 2003
The aisles are clean, the store is brightly lit, and
"associates" in red polo shirts provide friendly service to customers who
flock there for the low prices and the wide range of products offered.
Throughout the store the image of a kindly old man appears in posters and
photographs. His slogans and philosophy have been internalized by all
employees, and they can tell you the story of his long march from humble
rural roots to become a great leader.
And by the way, would you like us to skin that frog for
you?
Welcome to Wal-Mart in China, where the late Sam Walton
has a new image: the Mao of retailing. There, as in Walton's home state of
Arkansas, having the right merchandise is paramount. So the store in
Shenzhen, just north of Hong Kong, is crowded with tanks of crabs, fish,
frogs and shrimp, which can be taken home wiggling or be expertly gutted
and cleaned on the spot. Wal-Mart's push into China?and Brazil and Germany
and deeper into California and New York? offers a hint of why the world's
largest retailer seems unfazed by this stinker of a holiday shopping
season. Wal-Mart's sales in stores open at least a year were up only about
3% compared with the same period last year?at the low end of its
expectations. But many other retailers were hurt much worse. Wal-Mart just
keeps gaining market share, not only from bankrupt discounter Kmart but
also from grocers like Kroger, drugstore chains like CVS and electronics
sellers like RadioShack. Wal-Mart is mounting an audacious expansion that
could double its sales within just five years, to $480 billion. Some of
that growth will come in new markets abroad, where 1,200 stores in nine
countries already account for about 16% of the chain's total sales. But
even more growth will be won as the chain insinuates itself into more U.S.
neighborhoods and invades more product categories.
If you think Wal-Mart already sells just about
everything, think again. Think PCs, ceiling fans, more fashionable
clothing, gasoline and even cars.
"Their goal is to have a 30% share of every major
business they are in," says Linda Kristiansen, a retail analyst for UBS
Warburg Equity Research.
If there's no Wal-Mart store near you, just wait. If you
shop at Wal-Mart, expect your store to get bigger or a new store to open
even closer. The chain plans to expand from 3,400 U.S. locations
today?half of them in the South?to a nationwide network approaching 5,000
stores in five years.
Wal-Mart has 1,300 Supercenters, many of them converted
from standard discount stores, offering everything from hardware to
groceries and drugs. In some areas, it is placing these 180,000-sq.-ft.
monsters as close as 5 miles apart. And in the spaces between, it's
tormenting local grocery and convenience stores with Neighborhood Markets
(call 'em Small-Marts). Wal-Mart is building its first urban Supercenter,
in downtown Dallas. And without fanfare it is testing used-car sales
alongside one of its Houston stores. "It's surprising how much room we
have for growth," says Robson Walton, 58, Sam's son and the company's
nonexecutive chairman. "I'm not trying to be flippant," adds Lee Scott,
52, Wal-Mart's ceo. "But simply put, our long-term strategy is to be where
we're not." Yet for Wal-Mart to get where it isn't is going to be a lot
harder than it was to get where it is. Even with sales expected to grow to
about $240 billion for the fiscal year that ends Jan. 31, price wars in
its grocery business narrowed Wal-Mart's profit margin to its lowest level
in four years. The company plans to fatten profits by becoming more of a
producer and even designer of its goods, especially clothing. It's making
blouses in China and towels in India that it intends to sell everywhere
from Berlin to Beijing and Boston. But fashion is a notoriously fickle
business.
And by diving deeper into the manufacturing of more of
its products, Wal-Mart is braving a path that has brought grief to some of
history's biggest retailers, such as A&P and Sears. Wal-Mart's
centralization of power at its headquarters in Bentonville, Ark., could
produce agitation among the managers of its stores, who have traditionally
been granted considerable independence in stocking what locals want. And
consumers get bored by one-size-fits-all merchandise. Says Ira Kalish, an
analyst for consultancy Retail Forward, in a mostly bullish report on
Wal-Mart: "Excessive size could breed bureaucracy as well as failures in
the areas of merchandising and customer relations."
Whether?and how?Wal-Mart meets these challenges will be
of vital importance to its customers, its 1.3 million worldwide employees,
the owners of its widely held stock and even the U.S. economy. According
to an independent study by McKinsey & Co., Wal-Mart's efficiency gains
were the source of 25% of the entire U.S. economy's productivity
improvement from 1995 to 1999. "When you become No. 1 and as big as we
are, business has a tendency to complicate if you don't do things to force
yourself to keep it simple," says Tom Coughlin, head of Wal-Mart's store
operations. As simple as keeping the right products in stock?a huge
problem for Kmart. And maintaining a smooth checkout system. "We call it
Take the Money," says Coughlin. What's the point of low prices if
consumers can't pay for their items quickly? Wal-Mart's operating mantra
has been "a store at a time," meaning that no one can manage thousands of
stores; it has to be done locally. Long before it was fashionable,
Wal-Mart pushed responsibility and information to the lowest ranks.
Managers of departments such as sporting goods or women's apparel still
get detailed reports of sales and profits in their areas, and they have a
say in which products are stocked. Store managers can still buy locally
and ask headquarters to adjust inventory of company brands that it has
asked them to stock. Coughlin says Wal-Mart will not stray far from the
locals-know-best model, even as more information and merchandise flows
through Bentonville. At headquarters, management focuses on the top 20%
and bottom 20% of its stores, as measured by sales and profitability. It
wants to know who has been naughty and who has been nice and why. The rest
are largely on their own.
Sam Walton used to visit all his stores using a
propeller-driven plane. Now it takes a fleet of 20 jets just to keep
management in touch. Its headquarters force, 10,000 strong, lately
includes a group of artists whose sole function is to design logos and
labels and fulfill other graphic needs. That's quite an indulgence for a
company so comically cheap that it still puts tin coin boxes next to its
coffee pots, demanding 10(cent) a pop.
Wal-Mart's Supercenters are able to underprice their
supermarket competitors about 15%, according to analyst Kalish, in part
because they are more efficient but also because the discount giant uses
nonunion labor. Wal-Mart matches the union pay rate in union markets, but
the average wage at Wal-Mart nationally is less than $10 an hour before
bonuses. The two most frequent complaints made by Wal-Mart employees to
Time?low wages and morale-killing store managers?recently factored into a
labor case the company lost in Oregon. A jury found Wal-Mart guilty of
requiring associates to work unpaid overtime?even locking them inside
stores. The company plans to appeal the verdict and says workers were
locked into stores only late at night, for security reasons. Some 40 other
lawsuits are pending, most of which similarly accuse Wal-Mart of requiring
hourly employees to work "off the clock." Since September 2001, Wal-Mart
also has been the defendant in 28 complaints brought by the National Labor
Relations Board (NIRB) over alleged antiunion activities, including firing
employees suspected of being friendly to organized labor. "The company is
dragging wages and benefit levels back to 19th century standards," says
John Sweeney, president of the afl-cio, which is sponsoring an organizing
effort at the company's stores.
That campaign has borne little fruit, in part because
Wal-Mart's wages are competitive with those paid by rivals such as Kmart
and Target. Wal-Mart offers health benefits, and its stock plan has been a
wealth builder for many lower- level employees, at least until the market
crashed. Still, Wal-Mart is regarded as offering ample opportunities for
advancement. Charlyn Jarrells Porter, who heads the Wal-Mart division that
deals with personnel issues, says two-thirds of its managers come from the
ranks of store associates, which is what Wal-Mart calls all employees.
This year the company will enroll 5,500 people in its management-training
program. "If the jobs are so bad," she asks," why are so many people
working for Wal-Mart?" The company denies any of the wrongdoing alleged in
the lawsuits and NIRB complaints and insists that managers who violate
policy are disciplined. Being viewed as a good place to work is vital to
Wal-Mart, because it will need to add some 800,000 employees in the U.S.
alone over the next five years.
As it tries to leverage its size overseas, Wal-Mart may
find it difficult to export one of its biggest advantages. Its expertise
in managing high-volume inventory and supply networks doesn't work as well
in Europe and Asia, where the highway systems aren't as good and stores
typically are smaller. So Wal- Mart has to become better at buying,
reaching further back into the supply chain to purchase at the factory
such products as hardware and apparel that it now obtains from outside
vendors and importers. "We realized that, as we continue to expand
internationally, the need to leverage international and domestic buying
power was key, and the only way to do it effectively is to do it
ourselves," says Ken Eaton, who heads global procurement. The idea is to
buy goods universally for all stores where feasible, so the 20 locations
in Brazil can get the same price as the 3,400 Wal-Marts in the U.S. The
company ended its relationship last year with its longtime outside-buying
organization and hired hundreds of that firm's employees to start rounding
up fruit and salmon from South America and $6 billion a year in goods from
China?everything from clothing to televisions to fans. Wal-Mart has opened
21 offices around the world to oversee its factories.
By becoming contractor, importer and wholesaler,
Wal-Mart expects not only to save money on the buy but also to cut down on
inventory by speeding up the supply lines. Wal-Mart gets most of its
towels from India, and today it reorders once a month. If one pattern gets
hot and sells out early, sales are lost. In going direct, however,
Wal-Mart will make the factories in India part of its Retail Link system.
That allows vendors like Sara Lee (Hanes underwear, Bryan bacon) to dip
into Wal-Mart's computers and track sales and replenish supplies
constantly. By the same token, Wal-Mart will be held more responsible for
these factories' social and environmental policies. As the folks at Nike
can tell you, this carries its own risks.
Wal-Mart figures to take 20% of the cost out of
procurement over the next five years and improve gross-profit margins by
nine percentage points worldwide on general merchandise it buys directly.
In retailing, this figure is astonishing. Think about that $6 billion
worth of goods from China. Multiply by .09. Take to bank. Global sourcing
can provide the ammunition Wal-Mart will need to wage price wars against
such powerful retailers as France's Carrefour, Holland's Royal Ahold and
Germany's Makro. Each of these European companies got to foreign markets
long before Wal-Mart did. At ASDA, the British chain Wal-Mart bought in
mid-1999, the company was selling men's jeans for about $24 after paying
$14 per yd. for 50,000 yds. of material to make them. Then the buy was
moved to Bentonville, and the conversation went something like, "We'd like
6 million yds., please.
Now what's your price?" Try $4.77 per yd. As a result,
ASDA slashed its retail prices in half and upped its annual jeans sales to
1 million, from 174,000. ASDA is acquiring some 2,000 products from
Wal-Mart's global network and has become Britain's leading seller of kids'
clothes. The traffic is not all one way. ASDA's George brand of apparel is
one of the most popular private-label lines in Britain, and Wal-Mart
recently launched it in the U.S. "We're selling apparel anyway," says
Claire Watts, Wal-Mart's fashion boss. "Would it kill us to be a little
more up to date?" Designers from ASDA and from Wal-Mart headquarters now
go on trend-spotting trips together, an exercise associated more with hip
brands like Nike, and one that sounds perilously outside Wal- Mart's core
competency. Watts insists that her group isn't trying to move Wal- Mart
into haute couture. The focus is fashion basics at low prices.
When the team creates a new blouse, all the product
specifications?colors, patterns, fabrics?are controlled by Watts'
designers in Bentonville. Then Eaton's group tells the factories what and
how much to make. No samples have to be made and sent back and forth
across oceans because the company uses high-end computer color rendition
and printing. Changes can be made quickly. The motive is speed as much as
price. From the factories, garments can be sent to Newcastle, England, or
New Castle, Del.?and therein lies the trap. This kind of centralization
always makes sense in the beginning, when cost savings are easy and the
staff is lean. But history shows that the buying organization eventually
becomes bloated, as it did for Kmart, and tries to force merchandise
through the system whether or not local managers and their customers want
it.
Wal-Mart's expansion has gone well in Mexico, where it
is the country's largest retailer. And the company just completed a deal
to crack the Japanese market by acquiring 34% of Seiyu, a well-positioned
but struggling retailer. But Wal-Mart has stumbled badly in some
countries, particularly Germany. "We could write a training manual about
our experiences in Germany," Scott says. "We really did more things wrong
than right." There, Wal-Mart faces tough competition from well-established
chains, especially among grocers. The German managers Wal-Mart brought on
board through two mergers resisted American help. "We've been trying to
get the Germans culturalized; we bring them to Bentonville," says John
Menzer, head of the international division. But Bentonville also had to
learn a few things about Berlin. German shoppers found Wal-Mart's door
greeters appalling, and they regarded the ever helpful clerks as an
intrusion on their private space.
From Wal-Mart's point of view, it's the Chinese who have
turned out to be the best capitalists. At the store in Shenzhen, local
managers hold Ping-Pong tourneys, stage fashion shows and have clerks hawk
products like paper towels in front of a large display. And that's just on
Tuesday. The store even has its own fight song ("My heart is filled with
pride .. I long to tell you how deep my love for Wal-Mart is ...").
Wal-Mart is increasing this year, from 25 to 40, the number of stores in
China. The company introduced the Walton Institute, a program to teach
local managers the master's Three Basic Beliefs (respect for the
individual, service to our customers, and to strive for excellence), the
10- Foot Rule (always greet a customer when she gets within 10 feet of
you), the Sundown Rule (any employee or customer request must be addressed
before sundown) and other cultural foundations. In China's three main
cities, according to a McKinsey study, increasing wealth will support 250
Supercenters among the competing retailers, each selling $24 million to
$36 million annually. That's good. But a U.S. Supercenter sells four times
as much.
Walking into a Wal-Mart Supercenter in Fort Worth,
Texas, CEO Scott recalls that when Wal-Mart was an underdog, "you could
really go after a competitor." Now the company no longer shows
comparison-shopping baskets to demonstrate that Wal-Mart has lower prices
than competitors. "It just looks like we're picking on people," he says.
To be sure, Wal-Mart has to keep finding new people to
pick on. Over the past two years, Kmart filed for bankruptcy, and Ames and
Bradlees, once East Coast powerhouses, closed up shop. Wal-Mart is quickly
adding scalps in the grocery industry too, the venerable Grand Union among
them. Safeway, Albertsons and SuperValu have all slashed their earnings
estimates in the past few weeks. Before getting into groceries, starting
in 1986, Wal-Mart figured that a typical store needed a potential customer
base of at least 150,000 people. But add groceries, and more of the
available shoppers show up; each store needs a smaller area to support it.
So Wal-Mart can situate Supercenters less than 5 miles apart in many
suburban areas. It is also deploying a cut-down grocery- convenience store
called the Neighborhood Market between the superstores. At the same time,
Wal-Mart is adding merchandise categories, such as gasoline, Linux
computers and flat-screen TVs, in which it can take prices down
significantly. There's no escape. ceo Although Wal-Mart's stores may look
identical, the company is pinning some of its growth prospects on the idea
that what goes into them won't be. Wal-Mart's next competitive weapon is
advanced data mining, which it will use to forecast, replenish and
merchandise on a micro scale. By analyzing years' worth of sales data?and
then cranking in variables such as the weather and school schedules?the
system could predict the optimal number of cases of Gatorade, in what
flavors and sizes, a store in Laredo, Texas, should have on hand the
Friday before Labor Day. Then, if the weather forecast suddenly called for
temperatures 5 degrees hotter than last year, the delivery truck would
automatically show up with more.
The company calls the program the "store of the
community." The principle is as old as shopping: customers differ
significantly depending on where they live, what they earn and other
factors. But the differences are far subtler than anyone ever imagined.
The company has been analyzing every purchase made over the past 10 years,
looking at the relationships between the items people buy and hundreds of
other variables such as time of day and price. The data miners are
constantly searching for exploitable relationships?say, between sales of
cameras and atlases. Consider: a slow-selling line of chicken pieces was
slated for discontinuation at Sam's Clubs. But the software noticed that
the customers who did buy the product were huge spenders on other
merchandise. So the item wasn't necessarily a loser if it helped keep
those customers coming. One can think of Wal-Mart as a huge pipe organ
with thousands of stops that executives constantly pull and push. Early on
the day after Thanksgiving 2001, one of the busiest shopping days of the
year, the system was reporting slow sales of a boxed computer-and-printer
combo for which merchandisers had had high hopes. But one location was
bucking the trend. A quick call from headquarters determined that the
store manager had cut open one of the stacked cartons so shoppers could
see they got both machines for one price. Soon a message went to all other
stores: open a box. Sales began to move immediately.
Sell a buck. Save a buck. Repeat. It's that cycle of
high-powered logistics engineering and nickel-squeezing huckstering that
remains retailing's most potent weapon. UBS's Kristiansen sees no reason
why Wal-Mart, which has trounced the Dow over the past five years, will
not sustain 15% earnings growth. Scott, who earns less than most other
Fortune 500 ceos, was leaving a store not long ago when he stopped to chat
with one of the many senior citizens who work as greeters. They are a
fearless lot, and the old gent teased the boss with a question: "Did you
give everyone a big raise?" Scott returned a look of mock horror. "Are you
kidding me?" he said. "This is Wal-Mart!"
With reporting by William Boston/Berlin, Neil
Gough/Shenzhen and Rita Healy/Denver
From the Jan. 13, 2003 issue of TIME magazine
Big Headaches
for Big Store
By Sandra Jones
- Crain's Chicago Business
December 31, 2002
Sears, Roebuck and Co. soared into 2002 on a wave of
potential, but ended the year in disarray.
Before the year began, Chairman and CEO Alan J. Lacy
unveiled a grand plan to drop the Big Store's worn-out department store
format.
The fallen American retail icon pulled the best ideas
from rivals Target Corp., Wal-Mart Stores Inc. and Kohl's Corp. "which
have been luring away Sears shoppers for years" and launched an
$800-million, 867-store makeover.
It widened aisles, dropped 192 brands, cut cosmetics
departments, introduced its own Covington clothing line and slashed
thousands of jobs.
The store best known for Craftsman tools and Kenmore
appliances made its most dramatic move in June, with a $1.8-billion deal
for Lands' End Inc. of Wisconsin. Mr. Lacy predicted that putting the
cataloger's apparel into Sears stores would attract more affluent
shoppers.
Wall Street agreed. The stock climbed to $59, its
highest point since 1998. Investors began to believe that this time, the
turnaround would work.
By October, all bets were off. Sears shocked investors
when it increased reserves for its credit card business to cover
higher-than-expected chargeoffs. An accounting restatement, plus an
executive shake-up, sent the stock below $20, its lowest point in almost a
decade.
The card business had accounted for two-thirds of Sears'
profits last year and bought Mr. Lacy time to fix the stores. At the core
of the trouble: an aggressive plan to convert private-label credit card
customers to the general purpose Sears Gold MasterCard — a plan hatched
more than two years ago, when Mr. Lacy was chief financial officer.
Now, Mr. Lacy, who once ran the credit card business,
put new management in charge of the unit and hired a string of senior
executives to take over store operations so he can focus on fixing the
credit side.
"I don't know if I'm standing up here as a banker or a
merchant," Mr. Lacy said in a speech at the Executives' Club's annual
dinner this fall, shortly after Sears' troubles became public.
If he's unable to restart the turn-around, by next year,
he may be neither.
This story originally appeared as part
of Crain's feature on the top stories for 2002, published in the Dec. 16
issue.
U.S.
Retailers May
Face Trying
Times in 2003 - S&P
By Jonathan Stempel
- Reuters - December 31, 2002
U.S. retailers straggled through a difficult 2002
holiday sales season. Some may have greater difficulty paying their debts
in 2003.
Standard & Poor's, the credit rating agency, on Tuesday
said its outlook for retailers is "cautious."
"Worries about the economy, the stock market and
possible war (with Iraq) are depressing spending," said S&P director Mary
Lou Burde in an interview. "Retailers need to execute on their business
plan, which includes providing consumers with a good in-store experience,
good pricing and decent service."
S&P said credit rating downgrades for U.S. retailers
should outpace upgrades in 2003, as they have in the prior two years.
Forty of 133 rated retailers have "negative" rating
outlooks. Five, including Sears, Roebuck & Co. (nyse: S - news - people)
of Hoffman Estates, Illinois, are on review for a downgrade, it said.
In contrast, 17 have positive outlooks and just one is
on review for an upgrade, S&P said.
Retailers' prospects suffered a body blow on Tuesday
when the Conference Board, a private business research group, said its
Consumer Confidence Index fell to 80.3 in December from a revised 84.9 in
November. The drop was a surprise; economists expected an 85.5 reading.
"Weak retail sales over the holidays clearly reflect the
current mood of consumers," said Lynn Franco, director of the board's
Consumer Research Center. "Until there is an improvement in labor market
conditions, there is not likely to be a significant upturn in confidence."
The Board's Present Situation Index, which measures
consumers' current attitudes about the economy and their finances, sank to
69.9 in December, the lowest since January 1994, from a revised 78.3 in
November.
Burde said: "Consumers clearly are not optimistic about
the near-term future and are holding on tight to their purse strings."
PACE OF DOWNGRADES SLOWS
S&P said retailer downgrades outpaced upgrades by
2.5-to-1 in 2002, down from 5- to-1 the year before. Dollar General Corp.
(nyse: DG - news -
people) and Gap Inc. (nyse: DG - news - people) became "fallen angels,"
sliding into "junk" status from investment-grade, and Kmart Corp. <KMRTQ.PK>
filed for bankruptcy protection.
Heading into 2003, even stronger retailers such as
discounters Wal-Mart Stores Inc. (nyse: WMT - news - people) and Target
Corp. (nyse: WMT - news -
people) face a trying sales environment.
Wal-Mart, based in Bentonville, Arkansas, cut its
December sales growth forecast just after Christmas, and Target, based in
Minneapolis, said December growth is lagging its forecast because of weak
apparel and sporting goods sales.
Wal-Mart carries "double-A" credit ratings and Target
"single-A," all solidly investment-grade.
Last-minute shoppers helped drive retail sales up 2.1
percent from a year ago for the week ending Saturday, according to the
Bank of Tokyo-Mitsubishi Ltd. and UBS Warburg. The rise, though, may not
have been enough to keep holiday sales growth from being the lowest since
at least 1970.
S&P said retail subsectors that should outperform retail
as a whole include the big discounters, auto parts, drug stores and home
improvement centers.
Subsectors that should underperform, it said, include
apparel and shoes, department stores, food wholesalers, office products
and restaurants. Drug wholesalers generally have a stable outlook, while
supermarkets will need to fend off Wal-Mart's supercenter expansion, it
said.
Soft spending may push some retailers to fire employees.
"Companies may want to reduce staffing in order to increase profits," said
Richard Hastings, an economist at CyberBusiness Credit in New York.
Sears
Wish Book Now Inspires Memories,
Even Bids On Ebay
By Cynthia Schreiber - Dow Jones Newswires
December 26, 2002
NEW YORK -- In the summer of 1962, Rose Jansen sold
tomatoes from a little red wagon to earn enough money to buy a toy car she
saw in a mail-order catalog.
Jansen, then 9, asked her mother if she could order one
"dashing, streamlined car of the future" for a list price of $2.99 -
without batteries - as advertised on page 463.
Page 463?
Indeed. The catalog was Sears, Roebuck & Co.'s (S)
legendary Christmas Wish Book.
Millions of boys and girls across America based their
Christmas wish lists on the giant Sears catalog, making it one of the most
successful direct-marketing strategies in U.S. business history.
Introduced in 1933 and officially named the Wish Book in
1968, the inches-thick catalog's popularity peaked in the mid-1970s, then
faded amid an onslaught of retailing competition, specialty stores and
shopping malls.
Today, the Wish Book is enjoying a revival of sorts -
not in millions of mailboxes, but in the hearts, minds and wallets of
people who've come to see the book as a piece of Americana. Take a look on
Ebay Inc. (EBAY) - the Internet auction site - and you'll find Sears Wish
Books fetching bids as high as $65.
"The Wish Book was everything you could imagine," said
Jansen, now 49 years old, recalling the starched pages and square corners
of a brand-new Sears Wish Book that constant page turning left soft and
dogeared by Christmas. "I could take it to bed with me and hold it and
just dream."
Tom Holland, editor of "Girls' Toys of the Fifties and
Sixties: Memorable Catalog Pages from the Legendary Sears Christmas
Wishbooks," paid $500 for a copy of the 1965 catalog years before online
auctions existed.
"In a way, they're the ultimate collectibles because
they were so disposable in their day," says Holland. "People threw them
out. They're in short supply."
To be sure, both supply and demand for the vintage
catalogs are difficult to gauge. Ebay spokesman Chris Donlay says the
online auctioneer doesn't track sales histories of the 12 million items
listed on its Web site, including the 43 Sears Wish Books recently for
sale. "It would really be the sellers who know the volume," he said.
Roger Lovelace, an environmental health inspector in
Athens, Ala., said he's sold all but four of the 45 vintage catalogs given
to him "practically for free" by a family friend cleaning out the house.
"They went like hotcakes," says 40-year-old Lovelace,
who took bids ranging from $3.99 to $28 for catalogs dating from the early
1970s to the early 1980s. "I didn't realize they were such a hot
commodity."
Loren Farr, 39, a mill operator in Quincy, Ill., just
sold a 1970 Sears Wish Book for $41 on Ebay that he picked up at a yard
sale for 50 cents. Farr said he got four G.I. Joe dolls and "a big jeep
that was listed in the catalog" that same year for Christmas.
"That Wish Book was like a high of our life," added
Charlie Grose of Long Neck, Del., who recently auctioned a 1974 Sears Wish
Book on Ebay for $24.50.
"We sat down and played Operation, Chutes and Ladders or
Monopoly. It was a family affair," says the 65-year-old retired paper
maker who raised four children with his wife, Dot. "They knew Santa Claus
and Sears and Roebuck worked hand in hand."
The first Christmas items to appear in the catalog
weren't toys. Wax candles for trees were sold in the general-merchandise
book of 1896, followed by artificial trees in 1910, says Sears corporate
historian Dennis Preisler. Electric tree lights were first sold in 1912.
"We get people calling up who remember little Lionel
train sets and Barbie dolls sold through the Wish Book," Preisler said,
adding that a caller once asked the price of a Dick Tracy wristwatch.
"It's a curiosity type of thing. A lot of happy memories."
For John Thompson and his five brothers - Norm, Mike,
Brent, Don and Todd - the Sears Wish Book brings to mind the Christmas of
1967, the day before brother Gary was born.
"I just remember the entire month of December," says the
45-year-old information-technology professional of Bedford, N.Y. "My
mother, who was very pregnant, did nothing but sit in her big easy chair
with the Sears Wish Book in one hand and the phone in the other."
"I remember being really disappointed when I got to the
first page with a doll on it," he added. "The whole world of what I wanted
for Christmas was contained in a half-inch section of a catalog."
Although the Sears Wish Book went online in 1998,
circulation of this year's 188-page print catalog was "in the millions,"
said Sears spokeswoman Ann Woolman. It features "My First Craftsman" toy
chainsaws, power tools and work benches.
But people say it's what's in between the pages of an
old Sears Wish Book -- memories of a toy, a child, a parent -- that has
helped sell 10,000 copies of Tom Holland's books and the vintage catalogs
on Ebay -- mostly to post-war baby boomers, like Rose Jansen, who still
have wishes.
"I never got to say thank you," Jansen said, referring
to her mother and father, now gone. "That would be a wish."
Wal-Mart Cuts Sales Forecast
Dec. 26, 2002
Wal-Mart said it saw the greatest strength in electronics, seasonal items,
cosmetics, jewelry and toys. The weakest segments were men's and boys'
apparel and small appliances. Wal-Mart confirmed that same-store sales at
its Sam's Club membership-warehouse unit were negative, a forecast it
originally issued earlier this week.
Wal-Mart's December reporting period runs from Nov. 30 to
Jan. 3. The company plans to report December sales on Jan. 9 and plans to
report fourth-quarter and full-year results before the market opens on Feb.
18.
Despite a better-than-expected sales surge following
Thanksgiving, customers have been reluctant to spend during this year's
holiday-shopping season, uninspired by the lack of must-haves and stymied by
worries about the economy and jobs.
Other major retailers, including Target Corp., J.C. Penney Co., and
Federated Department Stores Inc. -- which operates the Macy's and
Bloomingdale's chains -- also have said that the hoped-for sales momentum
failed to materialize.
"No matter what the stores do, they still seem to not be
able to stimulate spending," said Burt Flickinger III, managing director of
Reach Marketing, a retail consulting company.
The compressed season -- which was six days shorter than a
year earlier -- also had an impact on consumers, who never quite recovered
from the lateness of Thanksgiving and seemed to delay their gift buying even
more than usual.
Downsizing Could Have a Downside/
Sears Move to Self Service Cited
By Daniel Altman - New York Times
December 26, 2002
Even as the economy shows some signs of emerging from the
doldrums, several leading companies — like Goodyear, Humana and Verizon —
are cutting thousands more jobs.
They plainly believe that lowering labor rolls now will
help them perform better in the long term. But experts on corporate
strategy and human resources are not so sure.
Some argue that layoffs, combined with a careful
revamping, can set the stage for growth. Others, however, contend that
companies that avoid cutting jobs reap huge benefits in loyalty and
productivity.
In a quest for the most productive companies in the
world, Jason W. Jennings, a consultant and author of a recent book on the
subject, settled on 10 businesses that had never made a layoff.
"Not only have they never had a layoff," Mr. Jennings
said, "but each of them has a written or well-understood covenant with the
workers that the corporate checkbook, or management missteps and misdeeds,
are never going to be balanced on the backs of the workers."
Mr. Jennings, who chose the companies using a
combination of elementary financial criteria and on-site research,
conceded that he could not prove that a no-layoffs policy led to profits
and growth for the group. But he did see something valuable in the
strategy of the 10 companies, which included innovators like Nucor Steel,
the minimill operator, and Ryanair, the low-cost European airline.
"They know that if they use layoffs," he said, "they're
going to end up with a work force that's going to be more concerned about
themselves than about increasing productivity."
But the picture is not so simple, according to Peter
Cappelli, a Wharton School professor who runs the Center for Human
Resources at the University of Pennsylvania.
"If you look just broadly at whether companies that lay
off do better, the answer appears to be no," Professor Cappelli said. But,
he added, "the ones that lay off the most are already the ones that are in
the most trouble."
In the past, manufacturers responded to cyclical
downturns in sales by making temporary layoffs, usually concentrated among
blue-collar workers. Often members of unions, the workers were usually
rehired for the same jobs when business turned up again.
Many other companies, except those about to collapse,
often chose to retain their workers on the theory that layoffs and
rehirings were both costly.
Absorbing the expense of wages and benefits allowed the
companies to remain ready to take advantage of orders for new business.
But increased competition and investor demands have made
companies more aggressive about cutting costs. At the same time,
structural changes in the economy — among them, declines in unionization
and the rise of information technology — have made the labor market more
fluid, a trend Professor Cappelli expects to continue. Starting more than
a decade ago, with waves of layoffs that also aimed for white-collar
workers, many companies began to reconsider the traditional thinking.
The trade-off is a serious matter at the Goldman Sachs
Group, whose financial businesses are people intensive. "You want to cut
enough excess capacity in down markets to be cost effective, but you don't
want to cut so deeply that you can't respond when markets turn up" a
Goldman executive said. "Management has certainly been aware of how fine a
balance it is."
The company has interspersed at least seven rounds of
cuts with several spurts of job growth in the last 15 years. Early this
year, the company anticipated trimming about 5 percent of its work force.
When business conditions continued to sour, Goldman decided to reduce its
numbers by 13 percent, including layoffs and voluntary terminations — its
biggest cuts ever.
Though Mr. Jennings' group of productive companies may
not make use of layoffs, those that have done so recently appear to
perform no worse than the market. According to news reports, 38 publicly
traded companies based in the United States all made more than 1,000
layoffs in the fourth quarter of 2001. From January of this year through
last week, their share prices dropped by 22 percent on average — exactly
the same loss suffered by the Standard & Poor's 500-stock index.
In some industries, making job cuts is not a choice.
More airlines and telecommunications companies, faced with a steep drop in
demand, might have failed if not for hundreds of thousands of layoffs in
the last two years. And for many companies outside those hard-hit
industries, cutting jobs has always been an important component of
strategic change.
The long-troubled Sears, Roebuck & Company — which has
steadily lost ground for years to Wal-Mart and other discounters — has cut
jobs several times. In the late 1980's, it pared down its bureaucracy. In
1993, it cut about 50,000 positions and wound down its catalog sales unit.
"Most of the downsizing has been predominantly due to a
shift in business model, rather than directly related to the economy," a
spokeswoman for Sears, Peggy A. Palter, said. About a year ago, the
company announced thousands more job cuts as it transformed its sales
floors.
"Our customer has told us that she's not willing to pay
for a higher level of service," Ms. Palter said. "So we've changed our
service level in the stores, moving more towards self-service in the
smaller ticket items."
Though a slumping economy may not have caused of all
Sears's cuts directly, she added, it still played a role. "Obviously, the
economy is one of the factors that changes our customers' perception of
what they want from the retailer."
While several experts endorsed downsizing as part of a
strategic plan, as Sears has, they differed on the merits of making
layoffs simply to cope with temporary slackness in demand. Even with a
faster-moving labor market, hiring good people back may not always be
easy.
"We don't think that it's a good idea to focus a very
high percentage of your organization on leveraging the flexible labor
market," said Mark W. Womack, an executive vice president for Celerant
Consulting Group. "It's definitely a superior strategy to figure out where
your company wants to be in the next couple of years," he said, "and build
the right organization, processes and system that align together to take
you towards your mission."
Xerox, another long-troubled company that has been
repeatedly battered by foreign competitors, has tried to follow that
model. The company made 9,000 layoffs in 1998, predicated on a massive
revamping, and announced another 2,400 last month in an effort to save
money.
"In the past two years, we've been in the process of a
pretty major turnaround," a spokeswoman for Xerox, Christa B. Carone,
said. "Part of that strategy was looking at ways that we could streamline
our business model, which did mean exiting some businesses and eliminating
some redundancies. The net result of that is the company did return to
profitability, and we've had improving operations over the past couple of
years."
Professor Cappelli echoed the principle of Mr. Womack's
argument: "If the cuts are part of a restructuring plan where you're doing
other stuff as well," he said, "then it's more likely to help." But
Professor Cappelli's research on the subject found that companies that
reduce their work force for strategic reasons reap fewer benefits than
those that lay off workers to deal with excess capacity. The latter type
of job cut, he said, "clearly seemed to help."
Mr. Womack advised caution, especially in industries
where talented employees are still a scarce commodity, like
pharmaceuticals. His firm recently advised a multinational drug
manufacturer. "They have to be quite careful about who they let go," Mr.
Womack said, "and what's their recruitment plan and what's their retention
plan."
In fact, attracting the most skilled workers may be more
difficult in economically uncertain times than in booms. In the past
decade, Professor Cappelli explained, companies looking for top talent
often sought to hire from outside rather than promoting or training their
own. Yet these days, a valuable worker may need significant inducements to
leave another position.
"If you're offering me a job — and even if it's a
slightly better job than I've got now — if I think the economy is going to
go down, I would absolutely rather stay put," Professor Cappelli said.
That hiring problem may worsen, if demographic forecasts
hold true. "We're simply not generating the kind of labor force growth
that we have in the past," said Sylvester J. Schieber, director of
research at Watson Wyatt, a supplier of professional services. Though the
"attract and retain" philosophy may have suffered some blows lately, he
predicted that it would return to prominence as higher economic growth led
to tighter labor markets.
Xerox is already anticipating that return. While the
company cut positions, both in the tight labor market of the late 1990's
and in the weaker recent climate, some employees urged management to save
more jobs by cutting everyone's pay equally. But Anne M. Mulcahy, Xerox's
chief executive, insisted on maintaining salaries and bonuses for the most
productive workers.
"The labor market has changed," Ms. Carone said, "but
our strategy for keeping our best people, even during tough times, has
not."
Sears
Seeking 76% Increase
in Sales for Lands' End Brand
Susan Chandler - Inside Retailing - Chicago Tribune
December 25, 2002
Sears, Roebuck and Co. has high hopes for its
acquisition of Lands' End Inc., the casual apparel catalog company.
Although Lands' End down vests and turtlenecks are
available in Sears stores in only 10 markets, Sears is planning to almost
double Lands' End sales in the next two years.
In fact, if it doesn't, Lands' End's managers, who now
are covered by Sears' long-term incentive plan, won't be getting any
long-term bonuses.
That's because Lands' End sales must increase to $2.77
billion by the end of 2004 to meet one requirement of the long-term
incentive plan, according to Sears' third-quarter 10-Q statement.
That's a big increase--76 percent--from 2001 sales of
$1.57 billion.
Although the target is aggressive, it's not impossible,
Sears says. Lands' End sales will rise naturally as the apparel becomes
available in Sears' 870 department stores around the country, which should
occur by November, in time for next year's holidays.
And when Lands' End is available throughout the chain,
Sears can use national advertising to promote the brand. Despite all the
ink that has been devoted to Sears' bold acquisition of Lands' End in May,
many consumers still aren't aware that the brand is available in selected
Sears stores.
Of course, some retail experts continue to doubt the
wisdom of Sears' nearly $2 billion investment in Lands' End, whose
customers are more highly educated and have higher household incomes than
Sears' shoppers. It's possible they won't shop the rest of Sears just
because they decided to stock up on some Lands' End corduroys and chino
shirts at the nearest mall.
And Lands' End's higher prices may produce sticker shock
for regular Sears shoppers, who aren't used to paying anything like $83
for a cotton twin set or $62 for a pair of men's trousers.
Sears has plenty of reason to hope the doubters are
wrong.
The nation's third-largest general merchant paid a
premium price for the Dodgeville, Wis.-based catalog company. Of the $1.8
billion Sears plunked down for Lands' End, $1.55 billion went on Sears'
balance sheet as intangible assets (mostly trademarks) and goodwill,
according to revised estimates in Sears' third-quarter 10-Q.
Under new accounting rules, Sears will have to test
those assets annually to see if they have declined in value. If the assets
are worth less in coming years, Sears would have to take a writedown.
But if Sears can maintain the value of Lands' End, it
won't have to do anything, accounting experts say.
"As long as Lands' End maintains its cachet, Sears will
be OK," says Roman Weil, accounting professor at the University of Chicago
Graduate School of Business.
Kmart
Lost $383 million in 3rd Quarter
By Jim Miller,
Tribune Staff Reporter
- Chicago Tribune
December 24, 2002
Discount retailer Kmart Corp., hurt by promotional
pricing intended to entice shoppers back into its stores, reported Monday
that its net loss for the fiscal quarter ended Oct. 30 swelled to $383
million, from a $249 million deficit in the year-earlier period.
The chain also said holiday-season sales were lackluster
but reaffirmed its expectation to emerge from bankruptcy reorganization by
next summer. Asked about speculation that Kmart intends to close hundreds
of additional stores, company President Julian Day said that decision will
be made in January "once we're able to take stock of holiday performance."
Long battered in the marketplace by mega-retailer
Wal-Mart, Troy, Mich-based Kmart filed for Chapter 11 protection 11 months
ago, after a weak Christmas season. The case is being handled in federal
bankruptcy court in Chicago.
Kmart has since closed 283 of its worst-performing
stores but continued operations at roughly 1,800 outlets. Its crisis
hasn't eased, however. Kmart's profitability has been hurt by clearance
sales at stores set for closure, as well as by hefty discounts employed to
draw consumers to its remaining stores.
On a per-share basis, Kmart's third-quarter loss was 76
cents, compared with 50 cents a share in the year-ago quarter. Excluding
bankruptcy-related items and other unusual factors, the loss widened to 78
cents a share from 31 cents.
Sales in the latest period fell 16 percent, to $6.73
billion from $8.02 billion a year ago.
In part, the decline reflects the reduction in the
number of Kmart stores that remain open. But even on a "comparable store"
basis--defined as stores open at least 12 months--sales declined 7.6
percent, the company reported.
For the month of October, comparable-store sales were
down a relatively modest 3.9 percent, Kmart said, noting that the drop was
the smallest recorded by the company since the bankruptcy filing.
In addition to reporting third-quarter results, Kmart
Monday provided an update on sales trends during its current fourth
quarter. The news was mixed: For the four weeks
ended Nov. 27, comparable-store sales tumbled 17 percent, but the company
noted that, because of the calendar, last year's results for the same
period were fattened by the post-Thanksgiving weekend holiday sales. This
year's period didn't benefit from such sales.
Day said Kmart's performance over the latest
Thanksgiving weekend "was encouraging." But sales in the last two weeks,
he disclosed, "have been softer than we had anticipated."
Morningstar Inc. analyst Mike Porter said the
third-quarter sales decline at Kmart was in line with his projections. But
November's sales drop, Porter said, was substantially worse than expected.
Release of Kmart's third-quarter results was delayed
because the company has been conducting an examination of its earlier
accounting practices. The company this month disclosed that it was
restating results for the first two quarters of this year and for prior
years because of questionable accounting procedures the review had turned
up.
Last week, the New York Stock Exchange delisted Kmart's
stock. In "pink sheet" over-the-counter trading Monday, Kmart shares
closed unchanged at 30 cents.
Home Depot
Shoppers Check
Out Self-Service
Scanning
Stations a First for
Retailer
By Harry R. Weber
- Associated Press
December 23, 2002
The Home Depot's do-it-yourself clientele can now do it
themselves at the checkout counter as part of a technology upgrade the
company promises will make for shorter lines and faster service.
The touch-screen checkout counters have been used in
supermarkets since 1995, but they'll be a first for a home-improvement
store chain.
"It should add a lot of value to the company because it
will reduce the need for additional personnel and increase their ability
to service their customers faster," said Nathan Lewis, an analyst with
Jackson Securities Inc., in Atlanta.
The technology also could help Home Depot with a
proposal it announced earlier this year to shift more employees from
full-time to part-time status, Lewis said. Sixty percent of Home Depot
staffers are full time.
Four self-service checkout terminals are being set up in
about 800 city locations to replace two or three employee-operated
stations.
The company also is buying performance software to
assess cashiers' skills.
Company spokesman Don Harrison said the retailer's move
to self-checkout is not an attempt to cut staff.
"Nobody is losing a job or being displaced as a result
of this," he said. "We can always use help back in the aisles waiting on
customers. Will it mean a shift toward more part-time work? I don't know."
The nation's largest home improvement store chain has
partnered with NCR Corp. for the equipment and Microsoft for its Windows
software. The technology is called FAST, for Front-end Accuracy and
Service Transformation.
The Home Depot self-checkout terminals walk customers
through the process, with computerized voices talking to them as they scan
their items. Customers can choose between English or Spanish.
At one Atlanta Home Depot store, restaurant manager Mike
Clark, 35, used the self-checkout to buy a snow shovel and a rake in less
than three minutes.
"I look at it like you are getting four machines for the
price of one employee," Clark said. "It's very efficient."
Nationwide, more customers are embracing self-scan
checkouts at grocery and discount stores, prompting big chains to increase
the number of do-it-yourself registers.
Optimal Robotics Corp. of Montreal sold the first
self-checkout scanner in 1995, and has since put more than 5,000 units in
grocery and retail stores.
Sears
Retools Circulars
Chicago
Tribune - Jim Kirk Column
December 17, 2002
New Sears, Roebuck and Co. chief
marketing officer Janine Bousquette continues to make her presence
felt at the retailer.
She's ordering up new ad ideas from
both of her advertising agencies--Ogilvy & Mather, Chicago, and
Young & Rubicam, Chicago--to replace the current "Sears. Where
else?" campaign. But first she's tinkering with the company's
all-important newspaper circular, sources said. The circular has
long been the fiefdom of Sears' various softline and hardline units,
but Bousquette wants to remove its clutter and change its look and
feel. Sears spends tens of millions of dollars a year to advertise
in the circular.
Also, the retailer sharply denied a
front-page report in Advertising Age Monday that said Sears has
contacted other agencies--specifically BBDO, New York--to pitch some
ideas along with its current agencies. Bousquette worked with BBDO
while at PepsiCo earlier in her career. A BBDO spokesman said the
agency had not been contacted by Sears.
Kmart Shares
Fall Sharply on News of NYSE Delisting
Dow Jones
Newswires - December 16, 2002
Kmart Corp.'s common stock and trust convertible
preferred securities will be delisted from the New York Stock Exchange
prior to the market opening on Thursday.
The NYSE on Monday said Kmart had fallen below the
continued listing standard regarding average closing price of a security
of less than $1 over a consecutive 30-trading day period and was unable to
demonstrate the ability to cure this noncompliance.
In addition, the exchange cited Kmart's restatement of
prior fiscal years for the delisting. In July, the NYSE notified Kmart
that it wasn't in compliance with the NYSE's continued listing
requirements and that its common stock could be subject to delisting.
In 4 p.m. composite trading, Kmart shares were a penny
higher at 58 cents. The bankrupt retailer's shares fell 16 cents, or 28%,
to 42 cents in after hours trading, according to Island ECN.
In a separate press release, the discount retailer said
its stock will begin trading on the over-the-counter Bulletin Board
Thursday.
Kmart also delayed 10-Q filing for the third quarter
ended Oct. 30. Kmart currently expects to file its third-quarter 10-Q and
its monthly operating reports for October and November by Dec. 23.
According to a Securities and Exchange Commission
filing, the third-quarter loss will be wider than the year-ago loss of 27
cents a share.
On Dec. 9, Kmart disclosed it would restate financial
results for prior fiscal years as well as for the first two quarters of
2002 to reflect out-of-period adjustments identified in its review of
accounting practices and procedures. The company said the adjustments will
narrow its loss for the six months ended July 30 by less than $100
million. The company had posted a loss of $1.83 billion, or $3.63 a share,
for the period.
Waltons to
Sell Shares for Charity
FORBES.COM -
December 16, 2002
NEW YORK - Many market watchers take large insider sales as a
sign to short or get out. But when it comes to the Walton family selling 1%
of its Wal-Mart shares, that indicator goes the other way.
Shares of Wal-Mart Stores were up 98 cents, or 1.9%, to
$51.52 at mid-day. This move comes despite a morning release from America's
largest retailer that December sales were expected to grow 3% to 5%, at the
low end of its monthly guidance. Apparently traders were looking past that
news to two regulatory filings by Wal-Mart on Dec. 13.
The Bentonville, Ark.-based company filed a shelf
registration for up to $10 billion in long-term debt. Wal-Mart plans to use
the debt to repay commercial paper, and long-term, debt as well as financing
acquisitions. For example, Wal- Mart will spend
roughly $420 million on Dec. 27, the day it expects to exercise options on
Japanese retailer Seiyu. Wal-Mart, which first bought 6% of the company in
May, will control more than 34% after the exercise.
But Friday's announcement that Wal-Mart would register 16
million shares for sale by Walton Enterprises, which controls the 38% of
Wal-Mart held by the family of founder Sam Walton, perhaps provided more
impetus for the move higher. Walton Enterprises beneficially owns shares
held by Walton's widow Helen and their children: Wal-Mart Chairman S.
Robson Walton, Wal-Mart director John T. Walton, Jim C. Walton and Alice
L. Walton.
The regulatory filing said that Walton Enterprises plans
to distribute the shares over the next six to 12 months to fund charitable
programs such as a recently announced $300 million gift to the University of
Arkansas. At today's price, the Waltons would be selling just over $824
million of their $86 billion stake in Wal-Mart, one of Forbes' Most
Philanthropic Companies.
So, why could the Waltons plans be a buy signal? In the
true spirit of giving, we'd like to think that they would be passing off the
stock now on the bet those shares will appreciate for their causes.
Wild Cards --
Defaults are Rising at Target's
Credit Operation
Sales Growth
Could be Slowing,
Too
By Andrew Bary - BARRON'S
December 16, 2002
Target can get touchy these days when talk turns to the
health of its credit-card program. During a recent conference call, chief
financial officer Doug Scovanner scolded a hedge-fund manager for
questioning the future profitability of the fast-growing card portfolio.
"Your analysis is ridiculous and flawed," he said. Yet concerns about the
retailer's credit-card program may be warranted. The company's card
portfolio has swelled 80% in just the past year, to $5.2 billion, and
defaults are rising. Cards aren't the only worry, either. Investors and
analysts are also concerned about slow sales gains in Target's core
division, a controversial push into groceries with Super Target stores,
and lackluster trends at the company's smaller Mervyn's and Marshall
Field's units.
The Minneapolis-based retailer is unaccustomed to being
the object of such anxiety. For years, it has been a Wall Street darling,
and for good reason. The chain stands practically alone among big
retailers for crossing paths with Wal- Mart Stores and not ending up as
roadkill. Just look at the others. Kmart and smaller-scale discounters are
in bankruptcy, while former retailing champ Sears Roebuck is struggling.
Target has thrived in recent years. Thanks to a keen
fashion sense that has spawned a strong private-label apparel and
housewares business, the company has succeeded in attracting more affluent
shoppers who wouldn't be caught dead in a Wal-Mart. Target's earnings have
risen at a brisk 21% annual clip in the past five years and are set to
increase 16%, to $1.82 a share, in its current fiscal year, which will end
in January.
Target's stock, down 20% this year to 33, already
reflects some concern about the growth outlook. Target trades for 18 times
projected 2002 profits and 16 times projected 2003 earnings of $2.08 a
share. Both Wal-Mart and Kohl's, another top retailer, trade for around 30
times projected 2002 earnings (see table). Wal-Mart, at 51, is off 10% in
2002 and Kohl's has declined 11% to 62.
Tables: Trouble Ahead?
Target's loss rate on its profitable, high-growth
credit-card portfolio rose to 7.3% in the latest quarter, worse than the
default rate for many major credit-card issuers...
Net Charge-Offs Portfolio
Source: company reports
While Target is best known for its signature discount
stores, the company's credit-card operation is becoming increasingly
important. It now contributes 10% of the company's profits, and that
figure is expected to rise to 12% in 2003, making Target's earnings
vulnerable to any shortfall. Target now earns an impressive 4% after-tax
return on its credit-card portfolio, way above the levels attained by
credit-card specialists such as MBNA, which has a solid 1.5% return on
assets.
If Target's critics are correct and rising credit losses
reduce the retailer's credit-card profit margin to an MBNA-like 1.5% in
2003, Target's earnings would be cut by about 15 cents a share. That risk
probably isn't factored into Target's stock price.
Target's credit losses ran at a 7.3% annualized rate in
the third quarter, up from 5.1% in the first quarter, and above the
default rates at such major card lenders as MBNA and Citigroup, which are
around 5% (see table). Target skeptics say the loss rate could top 10% in
2003 because current losses probably reflect only modest defaults on
Target's major initiative, a co-branded Target Visa card that was rolled
out in 2001 and now accounts for 60% of its card receivables. Until the
Target Visa card, Target's credit-card offerings were limited to in-store
cards, like the Target Guest card.
Credit cards have been a minefield for several
retailers, most notably Sears, whose stock price has been halved in recent
months, largely due to problems in its credit-card division. Sears, like
Target, moved from in-store merchandise credit cards to a co-branded,
general-purpose Sears MasterCard. Visa cards and MasterCards involve more
risk than merchandise cards because they generally have much higher credit
lines.
Target dismisses the credit-card concerns; Scovanner
told Barron's that "robust financial results" are likely to continue. "I'd
assign a very low probability to the bearish case that we have a
substantial credit-card problem looming on the horizon," he said. Target
says some increase in credit losses is already baked into its forecasts.
Stepping back from Target's credit-card business to its
larger and more important retailing operations, the big Street fear now is
that the company is "stuck in the middle" between Wal-Mart on the low end
and the rapidly expanding Kohl's.
Salomon Smith Barney retailing analyst Deborah Weinswig
says her worry is that more "consumers are going to Wal-Mart for food and
the basics and Kohl's for name-brand quality apparel." She rates Target a
2, or in-line (the equivalent of hold), and carries a 1, or outperform,
recommendation on Wal-Mart and Kohl's. Target stores are critical to the
company because they account for about 80% of earnings (see table) and
most of the company's growth.
A.G. Edwards retailing analyst Robert Buchanan has been
critical of what he calls Target's "lack of focus," especially its food
retailing foray and credit-card push. "We
question the need for a grocery store operating in between the strata
occupied by mainstream folks like Safeway and such gourmet food retailers
as Whole Foods," Buchanan said in a November client note.
Buchanan also would like to see Target sell both
Mervyn's, a Macy's-like chain that he calls an "also-ran purveyor" of
clothes, shoes and housewares, and Marshall Field's, which he terms "just
another conventional department store." In the past, Target's stores have
scored with what he calls an "artful and incessant" creation of
proprietary merchandise that has allowed it to "cultivate a true niche in
the Wal-Mart biosphere."
Yet Target's comparable-store sales -- those at stores
that have been open at least a year -- have weakened recently, in part
because of the sluggish retailing environment. Sales at Target stores open
a year rose 0.4% in September and 2.1% in October before falling 5.7% in
November. December sales are expected to be stronger, with Target
projecting a zero to 2% gain in comparable-store sales. But Target's
comp-store sales growth continues to lag that of the always innovative
Wal-Mart (see graph).
Kohl's, which has just 457 stores, against 1,476 for
Target, is expanding rapidly. It plans to enter the important Southern
California market in 2003, posing a greater threat to Target and Mervyn's,
whose base is in the region.
Target -- its fans have given it the faux-French moniker
"Tarjay" -- offers such brands as Mossimo, Cherokee and Merona. These are
hardly household names, while Kohl's has succeeded by selling name brands
like Levi's, Adidas, and Docker in an attractive format. In the household
segment, Kohl's offers well- known brands like KitchenAid and Krups.
Target's in-house housewares designers include noted architect Michael
Graves and Todd Oldham.
Apparel and other soft goods account for roughly a third
of Target's sales but a far greater percentage of profits because gross
margins on clothing typically are double that of food and hard goods, like
consumer electronics. Target lost market share in apparel during the third
quarter, while Wal-Mart, the top apparel retailer, and Kohl's both gained,
according to NPDfashionworld.
Target, for its part, sees no slackening in its growth
prospects. Scovanner said the company's financial goal is 15% annual
growth in earnings, or better. "We remain quite confident in our ability
to achieve that goal," he told Barron's.
If Target is indeed "stuck in the middle" between
Wal-Mart and Kohl's, Scovanner says that would not be such a bad place to
be because all three retailers are growing smartly and are taking market
share. While Mervyn's and Marshall Field's aren't big growth engines,
Target likes owning the stores because they are reliable cash generators,
he said.
Target, meanwhile, decided in 2001 to expand from its
Target Guest merchandise credit-card to the Target Visa as a way to
solidify its relationship with Target shoppers (or "guests" in Targetspeak),
increase promotional opportunities and capture more credit sales. Target
now has 8 million Target Visa cards outstanding and projects that its
total credit-card portfolio will rise to about $6.5 billion by the end of
next year.
Target's stores ring up just 10% of their sales on its
credit cards. Given the modest operating margins in retailing, the
so-called interchange fee that retailers pay to credit-card companies of
about 1.7% is significant. If a retailer captures more sales on its own
credit cards, it avoids paying that fee.
Target has sought to limit its card risks by focusing
its marketing efforts for the Target Visa card on Target shoppers,
avoiding costly direct mail efforts and not going for such risky come-ons
as low teaser interest rates. Target says its low marketing costs are a
prime reason for its credit division's high profitability.
The big question with Target is the eventual peak level
of its credit losses. As noted above, losses ran at a 7.3% annualized rate
in the third quarter. But for fast-growing portfolios, analysts often
apply a lagged loss test. That is, they take current-period losses and
divide by total loans outstanding 6 or 9 months earlier to arrive at a
projection of future losses, which invariably is above current levels. The
reason is that consumers don't typically default immediately after running
up a tab on their cards. Target, for instance, writes off delinquent loans
after six months unless a cardholder bankruptcy occurs earlier.
The six-month lagged loss for Target's program is 8.7%
and the nine-month lagged loss is 10.3%. Target's Scovanner argues that a
three-to-six month lag test is appropriate while Target's critics say a
nine-month lag is a better measure.
Whatever the appropriate lag period, Target's
credit-card losses are high and moving in the wrong direction, potentially
jeopardizing the Street's 2003 earnings projection. And if the core retail
operations are maturing faster than the company believes, "Tarjay" could
lose a good measure of investor élan.
A Retailing
Mix: On Internet, in Print and in Store
By Saul
Hansell - New York Times
December 14, 2002
In 1999, as online sales were beginning to take off,
Lands' End decided that it could mail fewer catalogs and encourage
customers to shop on the Internet. Sales lagged, and by the next year it
was mailing as many catalogs as ever.
By this year, the Internet will represent 30 percent of
Lands' End's holiday sales, up from 25 percent last year. And the company,
now owned by Sears, Roebuck, is still going to mail 270 million catalogs.
Many customers, it turns out, buy from each at different times and for
different reasons.
Over all, online sales have grown 19 percent so far this
holiday season, according to comscore Networks, far faster than the online
population. But the fastest growth appears to be coming from retailers
that have mastered how to use the Internet in conjunction with catalogs,
stores or both.
Best Buy, for example, has more than doubled its online
sales this year, a faster pace than last year, said Barry Judge, the
company's vice president for marketing.
"I've been surprised that our growth has accelerated
when you would expect it to slow down," Mr. Judge said. "I think at first
people put us in a box as a bricks-and-mortar player and thought of the
pure-play Internet companies when they wanted to shop online. As time went
on, people are not thinking about that anymore, and they just want to
shop."
The Internet's effect is far greater than that. Best
Buy's surveys show that more than half of its customers check its Web site
before coming into its stores, up from one-third last year.
It wasn't always that way.
For the first few years of Internet retailing, Web sites
were rogue players in many large retailing groups. They were off competing
with upstart dot-coms and in many cases were set up as separate
subsidiaries in hopes of an eventual public stock offering.
"Two years ago it was all about chasing Amazon.com,"
said John Fleming, the chief executive of Walmart.com. "Now we know our
customer is the Wal-Mart customer and everything we do is about deep
integration with the store."
Walmart.com has sharply scaled back the number of items
that it stocks, from 25,000 to 4,000. It focuses on merchandise that
complements rather than duplicates what is offered in Wal-Mart's stores.
For example, it sells mattresses online but not in stores. And it has
agreements with distributors to ship 500,000 book titles and 100,000 music
titles on its behalf, a far greater selection than it carries in its
stores. But no longer does the site sell smaller, less profitable items,
like $5 bottles of vitamins.
The two biggest online retailers — Amazon.com and eBay —
are still creatures almost exclusively of the Internet. But both are
increasingly creating marketplaces that allow traditional retailers to
offer their wares online. Amazon's new apparel section, for example, is
dominated by catalog companies and by mall retailers. Amazon.com also
recently created a service that lets customer pay for purchases on its Web
site and then pick them up in Borders bookstores.
J. Crew now uses the same photographs and graphic images
on its store posters, on its Web site, on its shopping bag and on its gift
cards. Every time that a new catalog is sent, the Web site imagery changes
to match. The company tries to keep prices the same, too, although it can
mark down slow-moving goods online and in its stores faster than it can in
the catalogs, said David Towers, the vice president for e-commerce
operations.
This year for the first time, Internet sales at J. Crew
have edged past catalog sales. For the 42 weeks ended Nov. 30, 18 percent
of the company's sales were online and 14 percent came from its catalogs.
For the equivalent period last year, 15 percent were online and 17 percent
were through catalogs. Two-thirds of the company's sales remain in its
retail stores and outlet stores.
"The catalog is not going away," Mr. Towers said. "We
have found that the catalog and the Internet have synergistic effect. We
have customers that shop in just one channel but many shop in all three
channels."
Hanover Direct, which runs catalogs like the Company
Store and Domestications, is mailing somewhat fewer catalogs as it
increasingly uses e-mail marketing to reach repeat buyers, said Thomas
Shull, the chief executive. But it finds that including a catalog in a box
of goods ordered online results in subsequent orders that are three times
the amount resulting from sending out a catalog with orders not placed
online.
Over all, more than 20 percent of Hanover's sales will
come from the Web, up from about 16 percent last year, Mr. Shull said.
As retailers become more adept at multichannel selling,
they are learning how to use each opportunity. The Internet is especially
useful for presenting detailed information about a product. REI, the
outdoor goods purveyor, has 45,000 pages of product information on its
site.
"A 45,000-page catalog would cost a lot of money," said
Joan Broughton, REI's vice president for online and direct sales.
But paper is still better for browsing and displaying
photographs. As a result, Lands' End, and other sites, find that solid
colors sell better online, while prints and patterns do better in
catalogs.
"Print can make something look so gorgeous you want to
cry," said Bill Bass, the vice president for electronic commerce at Lands'
End. "We can't do that on a computer screen."
Wal-Mart Will
Raise Stake In Japan's Seiyu to 34%
Wall Street Journal - December 12, 2002
TOKYO -- Wal-Mart Stores Inc., which made its first
investment in Japan in March by partnering with a supermarket chain, is
raising its stake in the retailer to 34% from 6%.
The deal announced Thursday will make Wal-Mart the top
shareholder in Tokyo- based chain Seiyu Ltd. on Dec. 27, both sides said.
Wal-Mart will invest ¥52 billion ($420 million) in new shares in Seiyu,
exercising the first in a series of options under the alliance.
Under Japanese corporate rules, Wal-Mart is now the
controlling shareholder in Seiyu.
Wal-Mart International Chief Executive John Menzer said
its studies of Seiyu show it "has the potential to grow and become more
profitable for its shareholders."
"Seiyu is a good fit for our business model," he told
reporters at a Tokyo hotel. "It is a sound foundation to build on."
He promised to bring lower prices to Japan, a nation
infamous for high prices, and help cut living costs for Japanese
consumers.
Wal-Mart, based in Bentonville, Arkansas, has been eager
to add the world's second largest consumer market to its global reach.
Wal-Mart already has stores in Argentina, Germany, the United Kingdom and
Mexico.
Wal-Mart -- the world's biggest retailer with more than
2,700 discount stores in the U.S. -- is making a detailed study on how to
set up shop here, a notoriously difficult retail market.
Wal-Mart has an option to raise its Seiyu ownership to a
two-thirds stake by the end of 2007.
Some analysts say Wal-Mart's aggressive discounting
formula might catch on in Japan, which is undergoing a long economic
slowdown. But there is no doubt it will face heavy competition as domestic
retailers also slash prices to woo buyers.
Two major retailers have failed, and another one is
struggling. Japan's top two retailers, Ito-Yokado Co. and Aeon Co., have
proved to be durable survivors with a knack for reading the trends among
finicky Japanese shoppers.
Seiyu said its stores will be "reborn" using Wal-Mart's
expertise. "We are delighted that Wal-Mart highly values Seiyu and the
future of our company," said Seiyu President Masao Kiuchi.
Wal-Mart's biggest advantage is its global scale, which
dwarfs Japanese retailers. But it is unclear how the advantage of size
will play out in a market like Japan where retail distribution has tended
to be tightly controlled.
Some American brands, such as Coca-Cola, McDonald's and
Disney, have caught on while others have failed here. Japanese shoppers
are famous for being particular about quality.
The Wal-Mart team has been inspecting the more than 400
Seiyu stores in Japan this year to assess possible changes in
merchandising and store management. Wal- Mart is introducing its
inventory-monitoring methods and system of electronic links with
wholesalers and suppliers to raise efficiency.
Wal-Mart's partnership in Japan also includes Sumitomo
Corp., a major trading house.
Sears Finance Unit
to Sell Debt to
Individual Investors
by
Heather Landy - Advertisement
Chicago Sun Times - December 10, 2002
Sears Roebuck Acceptance Corp., the
finance unit of the largest U.S.
department- store merchant, will sell as much as $2 billion of debt
in $1,000 increments to individual investors.
Banc of America Securities LLC and
fixed-income underwriter Incapital LLC will manage the sale of the
debt, called Internotes, which are offered with a variety of
maturities and interest rates, Sears said Monday.
The Sears, Roebuck and Co. unit,
which typically raises money from institutional investors, joins GE
Capital and CIT Group Inc. in starting Internotes programs within
the past five weeks. By targeting individual investors, companies
can diversify their sources of funding and often borrow at lower
rates.
DaimlerChrysler AG and Dow Chemical
Co. are among the nine companies that sell Internotes. The
offerings, which total more than $1 billion a month, are priced on
Mondays. Investors have a week to buy the debt at the posted price.
Sears' notes will be distributed through brokers including A.G.
Edwards & Sons Inc., Banc One Capital Markets, Merrill Lynch & Co.,
Morgan Stanley, UBS PaineWebber and U.S. Bancorp Piper Jaffray.
Sears Roebuck Acceptance and its
parent carry investment-grade credit ratings of Baa1 at Moody's
Investors Service and A- at Standard & Poor's.
Sears
in Trouble?
By Christopher
Byron - New York Post - December 9, 2002
ALL of a sudden everything seems to be a mess again.
November's Wall Street rally has petered out, and stock prices are once
again falling. Unemployment has leaped to an eight-year high, the dollar
is sliding, gold is rising, United Airlines is poised to go Chapter 11,
and the holiday shopping season is turning out to be a dud.
To all of which we may now add yet another thing to
start worrying about: the outlook for Sears Roebuck & Co. This company is
sick, folks - really sick - and if things keep going the way they have
been lately, the nation's largest department store chain, and
third-largest merchandise retailer, will sooner or later be joining Kmart
Corp. in the retailing sector's final checkout line.
To be sure, the threat of a Sears bankruptcy is by no
means imminent. Even today Sears remains a huge business, with $40 billion
in annual sales, a payroll of 310,000 employees, and balance sheet equity
of more than $6.2 billion.
But the company also has more than $20 billion in
long-term debt on its books, and by now derives nearly all its earnings
from a vulnerable credit card business that finances the sale of Sears
merchandise to customers with doubtful credit histories, at sky-high
interest rates. This is exactly the sort of activity that can get hit hard
in the current economic climate, and the business is already starting to
take blows.
Nor is any of this likely to change. If anything, it'll
just get worse.
Ultimately, the company's problems boil down to
demographics. When the country was young and the population was migrating
west, Sears' mail-order business was the most efficient method for
distributing merchandise to distant customers. But when the company began
opening actual retail stores in the 1920s, it became captive to America's
changing landscape.
Rivals like Wal-Mart and Home Depot have dealt with such
changes by building stores that amount to little more than enormous
corrugated steel warehouses, and locating them on cheap real estate out of
town.
Sears has gone the opposite route, and has tried as much
as possible to stay put, selling everything from stocks and insurance to
lawn mowers and women's lingerie through expensive, urban and
mall-centered stores that should have been shut down years ago. As a
result, Sears today collects just $319 in revenues per square foot of
floor space in its stores, whereas Wal-Mart brings in $390.
LATELY, a feeling of irreversible decline has taken over
the company's financials, especially with regard to merchandise sales, the
heart of the business. Revenues from merchandise sales have been falling
steadily for the last two years. And last week the company released some
of its grimmest news yet, reporting that sales in November had plunged
10.9 percent from November 2001 levels for stores open at least a full
year.
And December promises to be hardly any better, with the
company now saying it expects sales during the month to register yet
another decline, this time in the "mid-single digits" range.
If so, that will be the 16th straight month of decline
for the company, and frankly, folks, it looks like a trend to me.
The truth is, Sears is not much of a retailer at all
anymore - at least in terms of the company's bottom line. Viewed
realistically, and with the proper sense of detachment, the company's
entire retailing operation is now being run as little more than a
loss-leader in order to generate interest income from customers who buy
the merchandise on credit.
A year ago, the company's credit card operation already
accounted for roughly 70 percent of operating income; now the credit
business accounts for nearly all the operating income the company reports.
THE business is profitable for Sears, thanks to the
eye-popping rates the company charges its customers: a staggering 21.4
percent for a plain vanilla Sears charge card, and a seductive 2.9 percent
for a Sears Gold Mastercard (which jumps automatically to as much as 21.9
percent after six months).
Sears gets away with charging these rates because of the
weak credit histories of the borrowers, and it is these very borrowers who
are among the first to default when the economy turns south. The company
has already resold more than $17 billion of these credit card debts via a
widely used marketing gimmick known as securitization, and the delinquency
and default rates on the paper is rising.
A report last month by Goldman Sachs & Co. says that
nearly 7 percent of Sears' borrowers are now at least two months behind in
their payments, and that losses on the loans are running at close to 5.75
percent.
SO, what's the company worth, really? Maybe not a lot -
and certainly not as much as it wants to be.
As of the end of the third quarter, Sears' balance sheet
showed equity of $6.2 billion, or roughly $19 per share. So, with the
company's stock having plunged in the last year from a high of nearly $60
to a current price of barely $26, the market is saying in effect that the
entire business, as an operating entity, is really worth no more than
about a $7-per-share premium over the book value of the company.
But this is a business that is now generating no cash at
all, so it is hard to make an argument for any kind of premium over the
value of its assets. Even an earnings-based valuation looks shaky.
To begin with, the company has already reported just
$2.24 per share in earnings through the end of September - and it's
actually a mere $1.64 if you give effect to certain accounting changes. In
any case, that $26 market price reflects Wall Street's expectation that
full-year earnings for the company will still come in above $4.77 - and
that expectation now seems almost impossible, whatever numbers you use.
CONSIDERING that Wall Street's track record with Sears
has hardly been great (it over-estimated the company's July-September 2002
earnings by an average of 28 percent), there's reason enough to suspect
that more over-estimating is going on now.
If so, and if earnings in the fourth quarter come in at
the low end of the range - say, $1.65 per share - instead of the mid-range
$1.90 per share that firms like Bear Stearns are now forecasting,
full-year earnings will total at most only about $3.90, suggesting a stock
that could quickly be selling for less than $22.
And it could get worse even than that. Factor in some
additional charges for the company's growing number of consumer deadbeats
($500 million in 2003 hardly seems out of the question); jettison some
$940 million in worthless goodwill; and give a modest 5 percent haircut to
inventories if the holiday season turns out to be the mess it promises to
become.
At that point balance sheet equity drops to not much
more than $4.5 billion
- which puts a market price for the stock at not much more than $13 per
share.
Want to get it down to single digits? Then factor in
even a moderate rise in interest rates over the next year, and billions
more would have to be wiped off the value of those credit card assets.
All in all, it's quite a mess - and one that, for now at
least, few folks if any are even thinking about. Happy Holidays.
November
Sales a Real
Turkey for Sears
By Kelly Quigley - Crain's Chicago Business
December 5, 2002
Sears, Roebuck and Co., on Thursday reported a drop in
sales in November-marking the ailing retailer's 15th consecutive monthly
decline.
The Hoffman Estates-based department store chain said
sales at stores open at least a year fell 10.9% during the four weeks
ended Nov. 30. Total sales dropped 8.7% to $2.6 billion, from $2.9 billion
a year earlier.
"Sales were in line with our expectations for the
month," Chairman and CEO Alan Lacy said in a statement. The retailer
predicted a low double-digit sales decrease for November, citing six lost
holiday shopping days due to a late Thanksgiving.
In a recorded sales message, the company said home
fashions and kids apparel were among the weakest performers in November,
with sales falling in the 20% range. Sears said sales of sporting goods
were particularly strong at its full-line stores.
The lackluster performance comes despite Sears' efforts
to attract customers. Last month, the retailer rolled out its newly
acquired Lands' End clothing line in the Chicago-area and unveiled newly
remodeled stores with wider aisles, centralized check-outs, and a more
customer friendly layout. So far, the changes are having little effect on
sales.
Sears expects December same-store sales, which are
considered to be the best measure of a retailer's health, to post a
percentage drop in the mid-single digits.
Most national retailers are forecasting only modest
gains this holiday shopping season, despite the rush of shoppers who
flooded their stores in the days after Thanksgiving.
Minneapolis-based Target Corp., which also includes
Marshall Field's and Mervyn's department stores, reported a 6.7% drop in
same-store sales last month, and said it expects December results to be up
only 3% to 5%. And after reporting flat department store sales in
November, J.C. Penney Co. Inc. is forecasting a slight percentage gain in
the low-single digits for December.
"The most important information for the month will
relate to post-Thanksgiving sales," said Shari Eberts, retail analyst with
J.P. Morgan. "Early indications are that Friday was strong but momentum
slowed into Saturday."
"The jury remains out on the holiday season as a whole,
with the late Thanksgiving and shortened holiday season likely to keep
retailers and investors guessing until the very end," she added.
November and December account for roughly a quarter of
retailers' annual sales, and are even more crucial for prime gift shopping
destinations like electronics retailers and clothing stores.
Another
Class Action Lawsuit - the Third on this
Matter?
PRNewswire - December 4, 2002
Wolf Haldenstein Files
Shareholder Class Action Suit
Against Sears, Roebuck & Co.
Wolf Haldenstein Adler Freeman & Herz LLP has filed a
class action lawsuit in the United States District Court for the Northern
District of Illinois, Eastern Division, on behalf of purchasers of the
securities of Sears, Roebuck & Co. ("Sears" or the "Company") [NYSE: S]
between January 17, 2002 and October 17, 2002, inclusive (the "Class
Period"), against defendants Sears and certain of its officers and
directors.
The case name and index number are Market Street
Securities v. Sears, Roebuck & Co., et al. and (02C-8707). A copy of the
complaint filed in this action is available from the Court, or can be
viewed on Wolf Haldenstein's website at: http://www.whafh.com.
During the Class Period, the defendants materially
mislead the investing public, thereby inflating the price of Sears common
stock, by publicly issuing false and misleading statements and omitting to
disclose material facts necessary to make the defendants statements not
false and misleading.
The defendants statements were false and misleading by
overstating the profitability of Sears' credit business, by (a)
under-reserving for uncollectible accounts; (b) falsely stating the
allowance for uncollectible debts was adequate; (c) falsely describing the
strength and future prospects of growth of its credit business; (d)
falsely stating the risk of the credit business, including the delinquency
rate; (e) falsely stating the reasons for and circumstances of Kevin
Keleghan's firing; and (f) making false statements to hide the
deterioration of credit risk during the Class Period.
In response to the revelations in a press release and a
subsequent meeting with analysts, the price of Sears stock plummeted,
falling from a close of $33.95 per share on October 16, 2002 to close at
$23.15 on October 17, 2002, on more than 36 million shares traded.
If you are a member of the class described above, you
may, not later than December 17, 2002, move the Court to serve as lead
plaintiff of this case. A lead plaintiff is a representative party that
acts on behalf of other class members in directing the litigation. In
order to be appointed lead plaintiff, the Court must determine that the
class member's claim is typical of the claims of other class members, and
that the class member will adequately represent the class. Under certain
circumstances, one or more class members may together serve as "lead
plaintiff." Your ability to share in any recovery is not, however,
affected by your decision whether or not to serve as a lead plaintiff. You
may retain Wolf Haldenstein, or other counsel of your choice, to serve as
your counsel in this action.
Wolf Haldenstein has extensive experience in the
prosecution of securities class actions and derivative litigation in state
and federal trial and appellate courts across the country. The firm has
approximately 60 attorneys in various practice areas; and offices in
Chicago, New Jersey, New York City, San Diego, and West Palm Beach. The
reputation and expertise of this firm in shareholder and other class
litigation has been repeatedly recognized by the courts, which have
appointed it to major positions in complex securities multi-district and
consolidated litigation.
If you wish to discuss this action or have
any questions, please contact Wolf Haldenstein Adler Freeman & Herz LLP at
270 Madison Avenue, New York, New York 10016, by telephone at (800)
575-0735 (Fred Taylor Isquith, Esq., Gregory M. Nespole, Esq., David L.
Wales, Esq., Michael Miske, George Peters, or Derek Behnke), via e-mail at
classmember@whafh.com or visit our website at http://www.whafh.com. All
e-mail correspondence should make reference to Sears.
Labor
Board Director Rules In Allstate's Favor on
Agents
By
Chad Btay - Dow Jones Newswires
December 2, 2002
A regional director of the National Labor Relations
Board in Chicago ruled Monday that Allstate Corp.'s exclusive agents are
independent contractors and can't form a union.
The ruling comes after the Office & Professional
Employees International Union asked Allstate to recognize it as the sole
collective-bargaining representative for its exclusive agents -- an offer
the insurer rejected. The union also petitioned the NLRB for an election
among Allstate's agency force.
"Allstate is pleased with the decision," the company
said. "The decision is consistent with decisions and determinations of
federal courts and other government agencies, including the Internal
Revenue Service."
Kevin Kistler, the union's director of organization and
field services in New York, said the union hadn't yet seen a copy of the
ruling. "We're going to read it and then we're going to decide whether to
appeal," Mr. Kistler said. "I suspect we will."
In its filing with the NLRB, Allstate had argued its
exclusive agents were independent contractors and, in many cases,
supervisors.
On Monday, Elizabeth Kinney, NLRB's regional director in
Chicago, found the agents were independent contractors under the National
Labor Relations Act, but couldn't be classified as supervisors under the
act.
"In particular, [exclusive agents] have substantial
entrepreneurial opportunity for gain or loss and have a proprietary
interest in their work," Ms. Kinney said in the ruling. "EAs hire their
own employees, determine their own advertising strategies and decide the
amount and type of work they will engage in on behalf of their agencies."
She noted that exclusive agents are compensated solely on commission, with
no guaranteed minimum compensation and are permitted to engage in
noncompeting businesses in addition to their Allstate sales.
Allstate announced in 1999 it was reorganizing its
in-house agency force, offering its nearly 6,500 exclusive agents the
choice of becoming independent contractors or leaving the company. The
company hoped the move would boost sales of Allstate products and improve
its profitability as more insurers moved to independent distribution
networks.
About 4,000 exclusive agents stayed on as independent
contractors. The insurer now has about 12,500 agents in total, all of whom
are independent contractors.
However, some agents objected to the way the
reorganization was carried out and challenged it in court, including a
requirement that they sign a release preventing them from suing the
company with regards to their employment in exchange for additional
benefits.
The Equal Employment Opportunity Commission also has
taken issue with Allstate's move, saying its tie to certain financial
benefits constitutes retaliation under various federal employment laws.
Allstate has maintained it didn't do anything wrong and
disagrees with position of the EEOC and those agents on the release.
The union's efforts at Allstate come after it in June
narrowly lost an election to organize nearly 2,000 Prudential Financial
Inc. agents. The union is challenging the results of that election. There
were 811 votes against union representation, 748 pro-union and 41 votes
were challenged.
Sears Fills
Strategy Post
Crain's Chicago Business - December 1, 2002
Sears, Roebuck and Co. has hired Sara LaPorta, a former
vice-president at Boston Consulting Group (BCG), as senior vice-president
and chief strategy officer, effective Dec. 9, according to an internal
announcement to employees. Ms. LaPorta, who led the retail and consumer practice
group in BCG's Boston office, will report directly to
Chairman and CEO Alan J. Lacy.
She replaces Michael Tower, 43, who
left the Hoffman Estates-based retailer as senior
vice-president of strategy in May, a Sears
spokeswoman says. Ms. LaPorta is the third outsider to join Mr. Lacy's
senior management team since October, following the appointments of a chief
marketing officer and a president of department stores, a new post.
Wal-Mart
Reports $1.43
Billion Sales Friday
Reuters -
December 1, 2002
Wal-Mart Stores Inc., the world's biggest retailer, on Saturday
reported record one-day sales on Friday, the day after Thanksgiving
that retailers hope will jump-start sluggish sales.
Wal-Mart said its U.S. stores racked
up $1.43 billion in sales on Friday at its thousands of U.S. stores,
which includes Sam's Clubs. That compares to day-after Thanksgiving
day sales of $1.25 billion last year. That represents the biggest
single-day sales figure for the retailer.
Retailers have been forced to trim
expenses all year to make up for slack sales and analysts are
expecting a mediocre holiday season, as consumers fret over layoffs
and a likely war with Iraq.
Sears Opens
Shelves to Lands' End
By Theresa Howard, USA
Today
November 29, 2002
Sears bought Lands' End in May for $1.9 billion, and
faster than you could say, "Thank you for shopping Lands' End," plans were
underway to put the catalog and Internet brand into Sears stores.
In time for the holidays, a selection of at least 104
top-selling apparel items from Lands' End — a brand with a reputation for
good quality, moderate prices and customer service — is in 183 Sears
stores in this and nine other markets. Sears hopes to lure more clothes
buyers with Squall Parkas, Fine Gauge Cotton Twinsets and other items
priced from $12.50 to $185.
Sears hopes to lure Lands' End loyalists, who'll now be
able to touch and try on the products before buying.
More important, it hopes to draw shoppers who don't
think of Sears for apparel, in part by promoting Lands' End Pinpoint
Oxfords and All Weather Mocs in the auto, electronics, appliance and tool
departments. It might seem an odd way to sell clothes, but Sears research
found that about 70% of shoppers for those "hard lines" don't shop Sears
for soft goods. They are, however, the kind of folks who buy apparel from
Lands' End.
The cross-promotion, also to be pushed in TV ads, will
try to boost Sears' sales this year past the $31 billion in 2001.
Same-store sales were down 5% for the first 39 weeks of the year and 10%
for October as rivals in the "value" department store segment — such as
upstart Kohl's and a revitalized J.C. Penney — were on a roll. Kohl's was
up 18.3% and Penney, 13.7%, in October.
The intense competition and continued economic slump,
along with troubles at Sears' credit card unit, have sent shares tumbling
about 54% from its 52-week high. Sears recently cut its full-year earnings
outlook per share to $4.86 from $5.15.
Industry watchers estimate the Lands' End brand, which
tallied $1.6 billion in direct sales in 2001, could boost Sears' $5.4
billion apparel business by up to 20% once it's in all locations. In this
first phase of Lands' End testing, 15 of the 183 stores got a bigger
presence with 59 more items, including home fashions. Results will
determine how Lands' End will be brought into Sears' other 687 stores in
2003.
"This holiday season, we'll be learning how our
customers respond to Lands' End's best-selling products," says Kathryn
Bufano, Sears executive vice president and general manager of soft lines.
"We're testing a variety of merchandising and marketing strategies and
will continue our rollout based on those results."
Lands' End comes in as Sears is in the midst of a plan
to make over all its full-line stores by the end of 2004, with changes
including central checkouts and shopping carts. About 50 are done, and
Sears is spending about $800 million this year. Some changes already have
come to all stores: Cosmetics and eight weak-selling apparel brands are
out; Covington, a new private-label line of classic apparel, is in.
At the Sears in Paramus, 15% to 20% of the apparel
square footage has been dedicated to Lands' End products, which arrived
about two weeks ago. "At present, we're one of the top three stores in the
country for Lands' End sales," says store manager Linda Longo. "Word of
mouth has been phenomenal. We're so excited, because customers had been
asking when we're getting it."
Key components of Sears' test for holidays:
Location. Lands' End items
are getting "priority" locations, such as near mall entrances and
escalators.
Cross-sell. To recruit apparel shoppers from its
"hard lines" departments, signs featuring Lands' End products are placed
among the tools, tires and other goods. In small appliances, for instance,
a "Toaster" sign has a photo of a woman's turtleneck with the words:
"Dress warmly." In automotive, a "Snow Tires" sign shows the soles of a
pair of All Weather Mocs and reads: "Walk this way."
Each store selling Lands' End merchandise has about four
catalog kiosks with direct lines to a Lands' End operator. Meanwhile, the
Lands' End catalog mailed in November promoted the presence of the brand
in stores in the 10 test markets for the holidays.
And product-oriented Lands' End ads airing in selected
markets promote the Lands' End toll-free ordering number and also "Now
available at Sears" stores.
In addition, there's a special 16-page in-store catalog.
The Lands' End
blue- and-white logo and visuals from that catalog are on shopping bags
and on signs around stores.
Customer service. Sears associates are getting
three hours of training to enable them to deliver the same level of
product knowledge for which Lands' End associates are known. Lands' End
employees also are being stationed in stores for the holidays.
Atop the Lands' End displays, Sears has cards with
catalog-page-style information, including photos and product details.
It remains to be seen how much all this will pump up
Sears' store sales. But it seems already to be boosting staff morale.
"It's been fun for myself and the associates," Longo says. "They're just
as thrilled as the customers about Lands' End hitting stores."
Florence Kreisinger is sold. The 78-year-old Clifton,
N.J., resident made a special trip to the Paramus Sears for a blue ribbed
cotton sweater. It was out of stock when she tried to order through Lands'
End. The operator directed her to the store.
"It's wonderful," Kreisinger says. "You can see the
merchandise. I didn't realize they had so much stock."
Tax
Regulations Frustrate
Many Workers
Over Age 70
By Sandra Block
- USA Today
November 29, 2002
Don Bogdonas, 70, a purchasing manager in Greenville,
S.C., has worked for more than 50 years, and he's not about to stop now.
Already past retirement age, Bogdonas plans to continue
working as long as his health is good. "I like what I do, and I get paid
for it," he says. "There's only so much hunting, fishing and gardening I
can do."
If the shuffleboard courts in your town look deserted,
it's probably because most of the senior citizens are working. The number
of workers over 65 rose 22% from 1990 to 2000, to 4.2 million. That figure
will jump an additional 30% by 2010, to 5.4 million, the Labor Department
says.
Baby boomers with skimpy pensions, rising health care
costs and portfolios mauled by the bear market fully expect to work in
their retirement years — 71% of them, a recent survey by Allstate says.
Nearly half said they expect to keep working because they'll need the
income.
Yet many workers who stay on the job past age 70 are
smacking into a series of laws and regulations that may boost their taxes,
deplete their retirement savings and erode the value of their Social
Security benefits. Some say the federal government seems determined to
penalize them for continuing to work.
"I can't think of anything I'd rather do than what I'm
doing," says Max Solis, 73, a Plainfield, Conn., small-business owner.
"But Congress thinks I should go home."
Giovanna Trachtenberg, 75, a part-time actress from
Brooklyn, N.Y., says she was surprised two years ago when income from a
commercial for Southwest Bell triggered taxes on her Social Security
benefits.
"I thought when you hit age 70, you could make all the
money you wanted, and you didn't have to pay taxes," she says.
Not exactly. A record 10.7 million tax returns reported
taxable Social Security benefits in 2000, up 12% from 1999, according to
the IRS. That number will grow, because income thresholds that trigger the
taxes aren't indexed to inflation.
Older workers don't have to earn much for taxes to kick
in (see chart, right). An unmarried worker with benefits of $20,000 a year
would have to earn only an additional $15,000 to trigger taxes. In the 15%
tax bracket, she'd pay $1,500 in taxes on Social Security benefits alone.
Higher earners can pay taxes on as much as 85% of their
benefits. If that same unmarried worker earned $25,000, she'd pay $2,550.
It "really punishes them for continuing to work," says
Chris Butler, spokesman for The Seniors Coalition, a conservative advocacy
group.
A proposal in the House to ease that top-tier tax faces
tough budget constraints. Even the AARP is ambivalent, because the money
helps shore up the Medicare trust fund.
"The budget picture now makes that kind of change more
difficult," says David Certner, the group's director of legislative
affairs.
The tax bite has forced some older workers to cut back
on their hours. Trachtenberg still enjoys auditioning and has appeared as
an extra on The Sopranos. But she tries to keep her acting income below
the threshold that triggers the tax.
Workers in their 60s can avoid the taxes by delaying
benefits, which will result in larger payments when they turn 70. But if
you don't take them after age 70, "You're just losing money," says Mark
Hinkle, spokesman for the Social Security Administration.
Edmund Wahlstrom, 74, of Paxton, Mass., loves his job as
a bank customer relations manager. He says many older customers are more
comfortable dealing with him than "some 25-year-old who's thinking about
Saturday night."
Wahlstrom resents paying taxes on his Social Security
benefits after paying into the system for years. Making matters worse,
like most workers, he continues to pay into Social Security. "That's not
just double taxation," he says. "That's taxes on taxes on taxes."
Why they work
The threat of Social Security taxes probably won't slow
the growth in the number of older workers. Contributing to the aging
workforce:
Rising health care costs. Only 34% of large companies
offer retiree health coverage, down from 66% in 1988, according to the
Kaiser Family Foundation. Medicare, available for individuals age 65 and
over, doesn't cover many medical costs, such as co-payments and
prescription drugs. Avis Johnson, 73, of Coulter, Iowa, works part time at
the local post office and sells crafts on Geezer.com, a Web site for older
artisans. She started selling her crafts several years ago when her
husband fell ill. "I need something to keep busy, and we need the extra
income I can bring in," she says.
A better quality of life. Many older workers say they
could survive without a job, but it wouldn't be much fun. "I could afford
to stop, but my standard of living would be much lower," says Delores
Marier, 75, a mental-health therapist in Medford, Ore.
Stock market losses. Retirees' savings portfolios
declined by about $678 million from early 2000 to July 2002, according to
the Institute for Social Research at the University of Michigan. Arnold
Breuer, 73, of New York says the demise of his retirement portfolio
contributed to his decision to return to work after just three months in
retirement. A former small-business owner, he now sells commercial real
estate.
Breuer says he could probably get by on Social Security
and what remains of his savings, but he wouldn't be able to travel or
drive a nice car. Now, "If I want to go to a gambling joint in Costa Rica,
I can do that," he says.
Going into withdrawal
Unlike younger investors, Breuer and other retirees
don't have decades to recover investment losses. Making matters worse,
many are required to make annual withdrawals from retirement accounts,
even if it means selling stocks and stock mutual funds at a loss.
The requirement can be particularly costly for older
workers. Hardest hit:
IRA owners. Once they reach 701/2, owners of individual
retirement accounts are required to start taking minimum withdrawals and
start paying taxes on that money. Many IRA owners drop into a lower tax
bracket when they retire. But those who continue working past age 70 can
find themselves paying steep taxes on money they were forced to withdraw
and don't really need to live on.
A recent report by Congress' Joint Economic Committee
says mandatory withdrawals are particularly hard on women, who have longer
average life expectancies, start saving later and often can't afford to
retire at age 701/2.
"If you're going to live to be 100 years old, you
shouldn't be forced to begin taking distributions from a retirement plan
until you actually need the money," says David Wray, president of the
Profit Sharing/401(k) Council of America.
Wray says many IRA owners want to preserve their savings
until the last years of their lives, when they'll need the money for
medical and health care costs.
The bear market has heightened worries that nest eggs
won't last, especially because yearly mandatory withdrawals are based on
IRA values at the end of the previous year. After three years of declining
stock values, IRA owners find the forced withdrawals represent a much
larger percentage of their savings.
For example, a 75-year-old with an IRA that was worth
$100,000 on Dec. 31, 2001, would be required to withdraw about $4,300 in
2002, or 4.3% of the IRA's year-end value.
But suppose the IRA has since declined to $60,000. The
owner would still be required to withdraw $4,300, but it now represents
more than 7% of the IRA's value.
In response to pressure from older constituents,
lawmakers are considering relaxing the mandatory withdrawal rules. With
Republicans in control of Congress, there's a good chance that a bill
relaxing the rules will pass, Wray says.
Rep. Jim Saxton, R-N.J., chairman of the Joint Economic
Committee, supports legislation to repeal mandatory withdrawal rules
altogether. An early version of a bill that would eliminate mandatory
withdrawals attracted more than 30 co- sponsors, says Christopher Frenze,
spokesman for the Joint Economic Committee. But a bill that would raise
the age for mandatory withdrawals to age 75 appears to have a better
chance of passage.
Saxton has received a torrent of mail from IRA owners
unhappy with the withdrawal rules, Frenze says. The market downturn has
increased pressure for change, he adds.
Even before the bear market shrank many retirement
accounts, "We heard about people getting a knife stuck in them," he says.
"Now the knife is being twisted, and we're hearing new squeals of pain."
Small-business owners. Most workers can postpone
withdrawals from their
401(k) plans as long as they're still working, even if they're over 701/2.
Older workers can also continue contributing to 401(k) plans. But there's
an important exception. Employees who own at least 5% of their companies
must start taking minimum distributions from their 401(k) plans even if
they haven't retired, says Martin Nissenbaum, national director of tax
planning for Ernst & Young.
Solis, chief executive officer of BST Systems, a
manufacturer of specialty batteries, only recently became aware of the
rule. He has since learned that he faces taxes and penalties on two years'
worth of required withdrawals. He estimates he'll end up giving 88% of the
distributions to the federal government. "I feel like taking the whole
thing and just telling them to keep it," he says.
Solis points out that several prominent members of
Congress are over 70 and says they should have to live with the same
restrictions he does. "Otherwise," he says, "I want some of those old
coots to go home."
Solis says he'll keep working full time as long as he
can, a view shared by many older workers. While they chafe at paying taxes
on their Social Security benefits and resent having to withdraw money from
their retirement savings, they say the alternative is worse.
"I meet so many people who can't get by," says Rita
Fruge, a 77-year-old accountant in Freeport, La. "As long as I can work, I
will."
Sears Makeover
Faces Holiday
Test
By Dave
Carpenter - Chicago Sun
Times
November 29, 2002
Donna Lucy strolled past a colorful display of Lands'
End sweaters just inside the main entrance of the Sears' store in West
Dundee, and surveyed the other changes at a retail chain where she has
shopped for years.
''It's brighter, it's more wide open and they've got
better-quality clothing,'' the suburban Chicago resident said approvingly.
''And they've finally got shopping carts to help you out.''
Sears, Roebuck and Co., the one-time star of American
shopping malls turned dowdy, is taking the first wraps off a makeover of
its U.S. department
stores-- in time for the holiday shopping season.
Initial reviews from retail analysts and customers such
as Lucy are positive. But whether the restructuring can help troubled
Sears regain lost retail glory and market share is a question that won't
produce a neatly packaged answer by Christmas.
''Big retail organizations can't be turned around in a
year,'' said George Whalin, president of Retail Managements Consultants in
San Marcos, Calif. ''They seem to be on the right track. But they're
probably in for a very tough holiday season, and I think they are going to
struggle for a while.''
Struggles are nothing new for Sears. Since being
dethroned by Wal-Mart as the nation's leading retailer in 1991, the
116-year-old company has been buffeted by a series of competitive and
financial threats and hasn't been able to shake its image as stodgy and
old-fashioned.
Discounters Kohl's and Target have siphoned off shoppers
from its 870 department stores, specialty retailers have eroded more sales
and shopping mall traffic has tailed off. A '90s campaign focusing on
Sears' ''softer side'' fizzled, taking away business from its strengths in
hardline goods such as tools and home appliances--a market it still
dominates. Apparel sales have fallen for 22 straight months in comparison
with the previous year's total.
Most recently, after working for two years to iron out
the weaknesses in apparel, CEO Alan Lacy this fall disclosed unexpected
problems in the credit business. That unit, generating a $1.53 billion
profit last year, has been so successful recently that Sears has been
dubbed a credit-card company with stores.
Sears acknowledged failing to anticipate the extent of
skyrocketing delinquencies and bankruptcy filings in a customer base it
boldly expanded in mid-2000 by introducing its own gold MasterCard. The
world's No. 2 MasterCard issuer, with nearly 25 million such accounts, was
forced to set aside an extra $222 million in the third quarter for
uncollectible bills.
Coupled with the fragile economy, the credit woes
further clouded Sears' recovery efforts and slashed two-thirds of its
stock's value between early June and Nov. 13, when it dived to a 20-year
low.
To investors, Sears' national advertising
slogan--''Sears: Where Else?''--might just as well have been ''Sears: What
Next?''
Credit issues aside, the overhaul of stores appears to
give the Hoffman
Estates- based chain its best chance in years for a comeback. Sears is
cashing out its traditional department-store model to become more like a
discount store, addressing customers' quest for easier, faster shopping,
while simultaneously upgrading its goods.
Only 50 of the more than 600 full-line stores to be
remodeled have been made over so far. The revamp, which is costing Sears
$800 million this year, won't be completed until the end of 2004. But
changes already are on display in all Sears' stores.
For starters, Sears has cleared the racks of eight
weak-selling apparel brands and removed cosmetics as the first department
shoppers encounter as they enter.
Showcased instead, in 184 stores by year's end, is
upscale casual apparel from Lands' End, which Sears bought in June for
$1.9 billion. Nearby are clothes from Covington, its new private-label
line of classic apparel, available in all stores.
''What we're saying to customers by positioning them
near the main doors is that Sears is in the apparel business in a big
way,'' spokeswoman Peggy Palter said on a tour of the redone store at
Spring Hill Mall in West Dundee.
She predicted that in a few years, Covington will bring
in as much revenue as DieHard batteries, one of Sears' three longtime
blockbuster brands along with Kenmore appliances and Craftsman tools.
Self-service is a key part of the revamp--nearly 6,000
store sales jobs have been eliminated in shoes and several other
departments. Also involved for many or most stores: expanded home decor,
Tool Territory departments with workbenches for testing out the wider
variety of brands, Big and Tall men's departments, new ''plasma''
departments to showcase flat-screen TVs and closet shops featuring wooden
hangers and clothes racks.
As striking as any new brand or product, however, are
the wider aisles, open design, simplified signs and centralized checkout
stations, a strategy employed successfully at other chains.
''It looks nicer,'' said Frances Reynolds of Elgin,
another veteran Sears shopper, who was picking out hosiery to load into
her shopping cart. ''It's more inviting.''
Retail analyst Roz Bryant said the new format is not
only an improvement, it might have kept Sears from following in the
footsteps of Montgomery Ward--a similarly venerable Chicago retailer that
went out of business last year.
Falling Prices Put Fed on Guard
By Steven
Pearlstein Washington Post Staff Writer
November 29, 2002
Policymakers Talk About
Dangerous Dynamic for Economy
After half a century of trying to prevent prices from
rising too fast, economic policymakers have a new concern: Prices aren't
rising fast enough.
Government statistics show that average prices for
products have declined in the past year, including those of cars,
clothing, computers, furniture, gasoline and heating oil. So, too, have
the prices for services such as telephones, hotel rooms and airplane
tickets, even as costs for other services such as health care, housing,
education and cable television continued to rise.
The broadest measure of prices in the economy shows they
rose less than 1 percent during the 12 months that ended in September, the
smallest increase in 50 years.
Until now, the slowdown in overall inflation has been a
boon to the American economy, giving consumers more for their money and
allowing living standards to continue to rise even during a period of slow
economic growth.
But economists warn that if disinflation turns into
deflation -- a broad and sustained decline in prices -- it would create a
dangerous dynamic that could drag the economy into a nasty recession from
which it could be difficult to escape.
"If you had asked me a year ago, I would have said it
was ridiculous to worry about deflation," said Alan S. Blinder, a
Princeton University economist and former vice chairman of the Federal
Reserve. "But the prospect of deflation is now sufficiently probable --
I'd say 15 to 20 percent -- that it's now worth talking about."
There has been quite a bit of talk about deflation
lately.
In recent testimony before the Joint Economic Committee
of Congress, Federal Reserve Chairman Alan Greenspan said that while the
economy is not yet "close to a deflationary cliff," he and his central
bank colleagues are watching it closely and taking it very seriously. Last
week his fellow Fed governor, Ben S. Bernanke, followed up with a
deflation speech titled, "Making Sure It Doesn't Happen Here."
Corporate executives complain that price competition is
so fierce, they are forced to cut prices even as wages and other costs
continue to rise.
And on Wall Street, declining long-term interest rates
in the bond market signal that investors are not much concerned about
renewed inflation.
Deflation, like cholesterol, comes in good and bad
varieties.
The good kind, such as many of the price declines over
the past few years, happens when companies find ways to produce goods and
services more cheaply, usually by making use of new technology or new ways
of doing business. In varying degrees, these productivity gains are passed
on to consumers as lower prices, to workers as higher wages and to
shareholders as higher profits. That makes almost everyone better off.
By contrast, the bad kind of deflation occurs because
there are too few customers chasing too many goods and services, resulting
in repeated rounds of competitive price cutting that leads to layoffs,
falling wages, and a decline in business investment and consumer spending.
During bad deflation, consumers and businesses --
knowing that prices are likely to be lower tomorrow than they are today --
hoard cash and put off buying things, making the recession worse and
driving prices and wages down further.
Households and companies with lots of debt suddenly find
that they have to make fixed monthly payments out of deflated wages and
revenue. Some file for bankruptcy; some are forced to cut other spending
to meet their debt service.
That was what happened in the early 1930s, triggering
the Great Depression. Something similar has taken hold in Japan, where
prices are falling about 1 percent a year.
What worries some economists is that in both of those
bad episodes, the deflationary spiral occurred after a huge investment
bubble burst, leaving the economy with too much debt and too much capacity
across a broad range of industries.
Stephen S. Roach of Morgan Stanley argues that some of
those dynamics are now at play in the U.S. economy after the worst stock
market losses since 1929.
"The risk of deflation is higher than at any time in the
past half century," Roach said.
Americans can already see a few early signs of bad
deflation taking hold in a number of industries -- Wall Street, commercial
real estate, much of the technology and telecommunications sectors.
Perhaps no industry shows it more clearly than the airlines.
Take the example of United Airlines, which is cutting
expenses in hopes of getting federal loan guarantees and avoiding a
bankruptcy filing. As demand for air travel fell, United was forced to
reduce fares by roughly 4 percent in the past year, offering more and
deeper discounts to fill empty seats. More recently, a war over
business-class fares threatens to slash ticket prices by as much as 40
percent.
With sales that depressed and prices that low, UAL
Corp., United's parent company, is likely to lose more than $2 billion
this year. It has already cut 18,000 jobs and plans to trim 9,000 more in
the next year, for a cumulative payroll reduction of more than 25 percent.
Moreover, the employees who remain have been asked to accept wage and
benefit cuts that would save the company $5.2 billion over 51/2 years, or
an average of about $12,000 per worker. Pilots have agreed to pay cuts of
18 percent, with a 10 percent cut imposed on management personnel.
Machinists, though, rejected pay cuts of 6 to 7 percent.
Now deflationary forces have spread to major suppliers.
United has canceled or deferred delivery of 68 new airplanes, with none to
be delivered until 2005. Such actions by United and others led Boeing Co.
to cut its payroll by 30,000, with an additional 5,000 layoffs announced
earlier this month. At the same time, Boeing is in a fierce price war with
Airbus SAS to snare what few remaining orders there are.
Although other industries have experienced declining
prices and shrinking payrolls, they have not led to the declines in
employment and wages that most economists believe are necessary to create
and sustain a broad deflationary spiral. That could change, however, if
the current recovery falters and the economy dips back into recession.
"If we have a double-dip [recession] and consumption and
investment both weaken again, then that is the road to deflation," said
John H. Makin, an economist at the American Enterprise Institute.
The Federal Reserve was worried enough about that
prospect that it lowered interest rates this month by half a percentage
point. In recent speeches, Fed officials emphasized that there is plenty
they can do to prevent a deflationary spiral even if they push the federal
funds rate down to zero and need still more monetary ammunition.
Fed officials have been thinking about how to conduct
monetary policy in a deflationary environment since the fall of 1999, when
the Federal Reserve Bank of Boston hosted a conference on the subject in
Woodstock, Vt. Late last year the Fed's research staff, in a paper on
Japan's experience, concluded that a deflation spiral was so difficult to
forecast, and so difficult to stop after it began, that the Fed should
move aggressively before inflation hits zero. According to its minutes,
the Fed's policymaking body took up the subject this past January and at
its meeting in September.
"The Fed takes this very seriously," said Adam S. Posen,
a senior fellow at the Institute for International Economics. "They will
do what it takes. But the truth is it won't be needed because deflation is
not going to happen here."
In explaining his confident view, Posen noted that the
two instances in which deflationary cycles developed in the 20th century
-- the Great Depression in the United States and Europe and Japan during
the 1990s -- central banks were too timid about using their money-printing
powers. In both cases, the bursting of a financial bubble rendered the
banking systems effectively bankrupt, drying up new credit for businesses.
In contrast, U.S. banks today remain profitable and well
capitalized, in spite of their significant post-bubble losses and
write-offs, Posen said.
Back at Morgan Stanley, however, Roach warned of the
dangers of refighting the last war and expecting things to unfold here
just as they have in Japan.
Already, the rate of disinflation since the peak of the
boom years is running about five times that of other recent recessions,
Roach said, with no sign that the deceleration is abating.
And this time the deflationary pressures are coming not
just from within the U.S. economy, but increasingly from low-cost
countries that export a wider range of goods (auto parts, furniture and
computers) and a growing number of services (computer programming and
telemarketing).
In such a global economy, Roach said, the Fed's ability
to boost prices by printing unlimited amounts of money is matched against
the ability of countries such as China and India to deploy virtually
unlimited numbers of workers to burgeoning export industries. That makes
deflation a problem not only for Japan or the United States, but also for
the rest of the world.
"The endgame of global deflation cannot be dismissed out
of hand," Roach said.
Will Wal-Mart Take Over the
World?
By Amy Tsao
- Business Week
November 27, 2002
First it gobbled the mom-and-pops, then mauled discount
department stores. What's the insatiable chain's next target? You name it
In the old days, there were shops of all kinds --
bakeries, shoe stores, pharmacies, and the like. Then came Wal-Mart. And
the fear that the giant all-in-one store would come to small towns and
squash mom-and-pop operations turned out to be real. American consumers
find the Bentonville, (Ark.)-based discounter, which topped $226 billion
in revenues in 2001, irresistible for its convenience, selection, and low
prices. As local stores have continued to close, Wal-Mart has grown to
2,780 outlets in the U.S. alone. And that breakneck expansion shows little
sign of slowing, despite the rough economy.
Now, Wal-Mart (WMT ) is outmuscling big-name retailers.
The outfit's incomparable efficiency already has sounded the death knell
for second-tier discount retailers like Ames (AMESQ ), Caldor (CLDRQ ),
and Bradlees (BRADQ ). Kmart's (KM-T ) future is looking iffy after the
company filed for bankruptcy protection earlier in 2002. And Wal-Mart is
eyeing new categories to dominate, says Ira Kalish, chief economist for
Retail Forward, a retail consultant. "Wal- Mart's aggressive rollout of
[retail gas] stations could be followed closely with the company selling
used cars, financial services, home improvement, and food service." The
retailer also says it is considering adding a new section to its stores to
compete more vigorously with so-called "dollar format" retailers such as
Family Dollar (FDO ).
HAPPY CUSTOMERS.
The implications of such moves are enormous. Because of its buying power
and savvy technology, Wal-Mart is a highly cost-efficient operator in a
business with tight margins. And customers couldn't be happier. "These
innovations allowed the company to pass its savings on to customers,"
writes Brad Johnson with McKinsey Consulting in a recent report, "The
Wal-Mart Effect." Wal-Mart succeeds on two counts: Being such a huge
buyer, it can negotiate the best wholesale prices. And it is such a huge
seller that it can offer customers the lowest prices and make up the
difference in volume.
Meanwhile, less-efficient competitors selling the same
goods must ask higher prices to earn the same profit. Still, competitors
do slash prices, hoping, often in vain, that increased sales will make up
for lost margins. "What has happened to the discount department-store
segment over the past decade will now play out in food over the next
couple of years," says Carl Steidtman, retail-
sector economist at Deloitte Research. Translation: Expect big grocery
chains to consolidate or disappear. The pain is being felt by all
competitors. In just a few short years, Wal-Mart has nabbed the top spot
in grocery sales, beating out the Kroger (KR ) supermarket chain, the
long-time leader.
All this explains why many investors are bullish on
Wal-Mart. At around $53, shares are down about 6.5% year-to-date, but
that's considerably less than the 15.5% hit the shares of retailers as a
group have endured. In part, Wal-Mart has fared better because of the
outfit's reliable performance, no matter the health of the economy. With
analysts projecting double-digit earnings growth for the next several
years, they see it remaining a stable holding for the long- term.
PLAYING MONOPOLY.
It's hard to name a retail segment that's immune from
Wal- Mart-inspired pressures. For instance, Wall Street recently
cheered strong quarterly results from Toys "R" Us (TOY ), but the good
news may be short- lived. Toys "R" Us "will face
great promotional pressures this year in its overwhelmingly important
fourth quarter," Jefferies & Co. analyst Don Trott warned in a recent
report. The long-term problem for the toy retailer, which is No. 2 in
market share to Wal-Mart, is that its rival is much more nimble. While
Toys "R" Us must stock toys, -- highly seasonal products -- throughout the
year, Wal-Mart can pull back or step up inventory and shelf space as
demand dictates.
Other Wal-Mart targets of opportunity are likely to be
apparel and consumer electronics. On the clothing front, the chain this
fall unveiled a line of women's career clothing under the label George,
which it acquired in its acquisition of U.K.-based retailer ASDA. And it
has also signed a deal with Levi's to sell $30 jeans. If Wal-Mart succeeds
in convincing shoppers to view it as a destination for fashion needs, the
impact will spread quickly. Among the first likely to feel the heat are
department stores, teen clothiers such as Abercrombie & Fitch (ANF ), even
"shabby chic" discounter Target (TGT ).
Consumer electronics is in for similar treatment.
Wal-Mart has been taking sales away from consumer electronics retailers
for years -- mainly on lower- priced products. These days, the price of
hot products falls so fast that Wal- Mart can
afford to jump in and handle them much earlier in the product cycle, says
Colin McGranahan, retail analyst at Bernstein Research. This means Best
Buy (BBY ), Circuit City (CC ), and higher-end stereo-equipment retailers
like Tweeter (TWTR ) have a shorter window in which to charge a premium
for the latest gadgetry, says McGranahan.
SHARPENING THE EDGE. All this is a boon for consumers --
and for U.S. productivity in general. Wal-Mart is the nation's largest
single importer and a major force in lowering the price of apparel and
general merchandise, says Deloitte's Steidtman. Its general-merchandise
market share soared from 9% in 1987 to 27% in 1995, says McKinsey's
Johnson.
Wal-Mart's aggressive adoption of information technology
to improve logistics and back-office efficiency has also been a major
driver of productivity. While suppliers scrambled to meet Wal-Mart's
demands, competitors big and small followed the retailer's lead and
ratcheted up productivity by 28% from 1995 to 1999, Johnson says. But
because of its early adoption, Wal-Mart reaped the most gains and
continues to enjoy an edge over competitors.
There are plenty of other ripple effects, too. For
instance, the difficult economy of the last two years has been a major
factor in the traffic fall-off at shopping malls. But there's little
question Wal-Mart has picked up long-term market share from the malls as
well, says Michael Baker, director of research at the International
Council of Shopping Centers. The mass migration to Wal- Mart effectively
takes shoppers away from venues that contain dozens of specialty apparel
outlets and mall-based department stores. "Mom-and-pop stores are gone,
regional chains are gone, and the national retailers are thinning out,"
says Al Norman, anti-sprawl activist and author. "We're left with only the
very big players at the top now that Wal-Mart has chewed right up the food
chain."
SURVIVAL TACTICS.
How can other retailers survive the Wal-Mart juggernaut? The answer is,
and has always been, differentiation. Baker cites the good job Target has
done setting itself apart with marketing and merchandising that attracts a
more affluent demographic. He also lauds Safeway's (SWY ) efforts to
attract wealthier consumers. Best Buy's solution, according to
spokeswoman Julie Keslik, is educating its salespeople about the
gadgets and accessories it carries, as well as keeping them on top of the
innovations that most interest customers.
Brave strategies one and all. But it's clear that big
retailers of all kinds are facing the same perils that have wiped out a
lot of mom-and-pop stores over the last 25 years. That's good for
consumers and good for the economy. And it's best of all for Wal-Mart and
its shareholders.
In Weak
Economy, Workers Have to Pay More for Benefits
By Ron
Lieber and Barbara Martinez - The Wall Street Journal
November 26, 2002
If you aren't healthy, wealthy and wise, the rising
costs of employee benefits will hit you squarely in the wallet next year.
Faced with meager profits and a sputtering economic
recovery, a growing number of companies are asking workers to take a hit
on the two most valuable benefits: health insurance and retirement
accounts. Because of higher premiums and co-payments, workers already are
paying 27% more for health-care coverage than they were in 2001, according
to the Kaiser Family Foundation, a health- care philanthropy in Menlo
Park, Calif. Meanwhile, Goodyear is about to suspend its matching
contribution to employees' 401(k) plans altogether, joining companies such
as Ford Motor and DaimlerChrysler that have already taken similar steps.
In other cases, companies are scaling back benefits that
they added in better days. Wal-Mart Stores, the world's biggest retailer,
will stop covering employees' visits to chiropractors next year. Acuity
Brands, a maker of lighting fixtures and specialty chemicals, will no
longer cover in vitro fertilization.
The pared-back benefits underscore how quickly labor
priorities have changed for U.S. corporations. In the booming 1990s, their
biggest worry was attracting and keeping good workers in a tight labor
market. Now, with the economy limping along and unemployment up,
corporations are turning their focus to slashing labor costs. Benefits
typically represent about 27% of total labor costs, according to U.S.
Department of Labor statistics.
The cutbacks are a rude awakening for many American
workers. Although small companies often trim benefits in slow times, most
big companies have continued to improve their benefit packages until
recently. Now the tide may be turning, starting with companies in
industries that are under relentless pressure to reduce costs.
Despite the difficulty of switching jobs, employees
aren't taking all the proposed cuts quietly. General Electric recently
jacked up health-insurance co- payments for workers and certain retirees. Some GE workers were so
upset that they gave their union authorization to strike if necessary.
Workers at Wal-Mart have declined the company's offer to redirect some of
their retirement-plan contributions to pay for health-insurance increases.
The tough benefits picture makes it increasingly
important for workers to understand how to maintain the best possible
safety net. In the case of health care, employees who have access to
flexible-spending accounts can save money by contributing pretax dollars
to pay for co-payments and other medical expenses their insurance doesn't
cover. On the retirement front, workers should take advantage of rising
amounts they are now allowed to contribute to both 401(k)s and individual
retirement accounts.
Below, a round-up of how employers are passing
health-insurance costs to their workers and curbing their contributions to
retirement accounts. And there is a look at some relatively cheap
benefits, like pet insurance, that companies are adding to placate workers
upset over other benefit cuts.
Health care: "Pass it on" has become the new mantra when
it comes to controlling exploding health-care costs.
Nationally, the average deductible for a
preferred-provider organization, a popular type of health plan that lets
you pick your own doctor, increased 37% to $276 this year, according to
Kaiser. The average monthly worker contribution for family coverage has
more than tripled in the past 14 years; it is now $174 vs. $52 in 1988.
Companies are also targeting retirees, who can't go on
strike, and who are living longer thanks in part to better, more expensive
medical care. "Health-care costs are rising year
after year at alarming rates," reads a letter sent last month by General
Motors' chief of human resources to retirees from salaried jobs. "To
address these increasing costs," the letter reads, these retirees and
surviving spouses can expect to pay "an increase in the monthly GM health
care contribution ranging from $9 to $51."
GM spent $4.2 billion last year to provide health care
to 1.2 million employees, retirees and their families. Prescription drugs
alone cost GM $1.3 billion. Starting next year, retirees using a
mail-order pharmacy will pay $50 for a three-month supply of certain drugs
instead of $20.
"We're seeing double-digit increases in
prescription-drug costs," says a GM spokeswoman, because of drug-price
inflation, increased usage and an aging demographic base. She notes that
even though the co-payment for certain
brand- name drugs was increased, the co-pay for generic drugs is staying
the same.
At GE, enrollees in its "Health Care Preferred"
health-maintenance organization will see co-payments for visits to medical
specialists rise to $25 from $15 next year, while emergency-room
co-payments will go to $50 from $30. Co-pays for brand-name prescription
drugs are also climbing. And families and individuals will have to pay a
new $150 co-payment for the first two times a member is admitted to the
hospital each year.
The company figures that the average annual cost per
employee will go up by about $200. Larry Mucklow, an electric-motor
repairman for GE who lives in Tucson, Ariz., is willing to walk a picket
line over the issue. The 50-year-old father of two has already been to the
emergency room four times in the past two years for chest pains that mimic
a heart attack. "As much belt-tightening as we've had to do this year, I
really think that the company has pushed just a little too far this time,"
he says.
A GE spokesman says, "Under the current contract, which
runs out next spring, we have the right to make changes in these payments
and they have the right to strike if they so choose."
DuPont said last month that it was requiring its 81,000
retirees to shoulder more of the cost increases for their coverage
beginning next year. Retirees 65 years and older will see their monthly
premium for a family of two more than double to $87 from $37 next year.
Payouts for the 20,000 retirees under the age of 65 will see a 39% rise to
$127 from $91.50 monthly.
The cutbacks also are hitting workers at small companies
hard. In 2002, 61% of small businesses offered health coverage to their
workers, down from 67% only two years before, according to Kaiser.
Some companies have tried borrowing from one benefit to
pay for others. This year, Wal-Mart tried to make a 30% rise in
health-care premiums less painful by giving employees the option of using
the funds Wal-Mart contributes to their 401 (k) accounts to offset the
rising costs of health insurance. But robbing Peter to pay Paul didn't
prove to be a popular strategy, so the company is dropping the option next
year, a spokesman said.
Retirement Plans: The market swoon already has erased
big chunks of many employees' retirement savings on its own. That is why
workers get particularly frightened about companies reducing their
contributions.
Goodyear used to match 50% of employees' contributions,
to as much as 6% of their salary. Now, workers will get no match at all.
Goodyear plans to restore its 401(k) match when the profit picture
improves. Ford is in a similar situation, having suspended its match in
January.
Then there is GM, which changes its retirement
contribution according to company performance. In January, GM cut its
match to 20% of an employee's contribution from 60%. Now, with GM doing
better, the auto maker announced it will raise the match to 50%, effective
Jan. 1.
The automobile companies and many other large companies
like GE still maintain traditional pension plans, which often provide more
retirement income for long- time employees than 401(k)s do.
Many smaller companies don't offer pensions, yet they
still tend to vary their matching contributions to 401(k) plans. David
Wray, who runs the Profit Sharing/401(k) Council of America trade group,
notes that about half of all companies that have 401(k) plans don't match
employee contributions with a fixed percentage of money. That means
they're free to lower or eliminate their match during tough economic
times. "I don't think people recognize how high that number is," he says.
The writers at U.S. News & World Report, the struggling
magazine owned by
real-estate magnate Mort Zuckerman, are a case in point. They didn't
receive a match from the company on their 401(k) contributions this year,
although the magazine hopes to restore it in 2003.
Still, other companies have been less quick to cut the
401(k) match. A Hewitt Associates study from April reported that 92% of
companies won't or are unlikely to reduce their matching contributions,
while 11% said they had increased them for 2002.
Another way that companies cut 401(k) costs is by
matching employee contributions with stock instead of cash. Many companies
are wary of this tactic in the wake of Enron's collapse. Many employees at
the energy company suffered devastating losses to 401(k) accounts stuffed
with Enron shares.
The emerging compromise: Employers will match with stock
but reduce the old restrictions on when employees can sell that stock if
they want to diversify their 401(k) holdings.
Other Perks: To salve the wounds of employees
bruised by higher health- insurance premiums and slow-growing 401(k)
accounts, companies are adding an array of benefits that appeal to smaller
groups of employees. More and more companies are letting employees invest
in tax-advantaged college savings plans, such as 529 plans, through
payroll deduction. Hyperion Solutions, a software company in Sunnyvale,
Calif., added a 529 option this year and also signed up with Wells Fargo
to offer special banking services to employees.
Other benefits are designed to help people save time.
Last week, for instance, Baylor Health Care System in Dallas announced it
had hired a company in Boston called Circles to offer a "Baylor Butler"
service. Harried employees can call on the butler for a range of tasks,
from picking out gifts to finding someone to clean their house.
Other companies figure that the way to employees' hearts
is through their pooches and parakeets. For as little as $8 a month,
employees of Pillsbury Winthrop, a law firm, will be able to buy pet
insurance next year.
FADING BENEFITS
As companies slash costs, many benefits are being scaled
back.
• Health insurance: Expect higher co-payments. Many GE
workers will pay $50 per emergency-room visit, up from $30.
• Retirement plans: Your company could be opting to
reduce its 401(k) contributions. Goodyear is about to suspend its 401(k)
match.
• Other perks: To make up for cutting back, some
companies are adding relatively cheap perks. Pillsbury Winthrop workers
can now get pet insurance.
SHARING THE PAIN
• With medical costs soaring and corporate
profits hurting, many companies are cutting back on the two key employee
benefits: health-care and retirement plans. Here's a look at the moves
some firms are making.
COMPANY BENEFIT
Acuity Brands
Employees will pick up about 20% of their total
insurance costs instead of about 18%. Won't cover in vitro fertilization
anymore.
DuPont
Health-insurance premiums for employees rising
13% and for retirees soaring up to 135%.
Ford
Its year-long suspension of a 401(k) match will
continue indefinitely.
General Electric
Raising co-payments for many prescriptions and
several medical treatments.
General Motors
Retirees will pay a $50 co-payment on
three-month supplies of certain drugs, up from a $20 co-payment. However,
GM is improving its 401(k) match, partially reversing cuts in recent
years.
Goodyear
Temporarily stopping a 401(k) match for
employees. Asking employees to pay part of health-insurance costs for the
first time.
Wal-Mart
Pulling back from unpopular initiative that
allowed employees to forgo the company 401(k) match and instead use that
money to help pay for rising health
care costs.
New Jersey
Sues Sears, 3 Other
Companies
Bloomberg News, with
Sandra Guy contributing
November 27, 2002
Jersey Gov. James McGreevey said the state would seek to
recover $150 million in pension fund losses from Sears Roebuck and Co. and
three other companies he said inflated financial results through irregular
accounting.
The state attorney general's office will file lawsuits
against Sears, Tyco International Ltd., Electronic Data Systems Corp. and
Qwest Communications International as part of an effort to recoup some of
the $1 billion they say was lost in the past two years because of
corporate misconduct.
The state identified 26 target companies in August,
saying the companies were responsible for the investment losses because of
mismanagement or misleading information, according to the attorney
general's office.
''These are the first four cases we've analyzed,''
Attorney General David Samson said. ''More will come, so stay tuned.''
Hoffman Estates-based Sears is being sued for damages
stemming from a loss of shareholder value caused by alleged malfeasance by
management led by CEO Alan Lacy. The lawsuits allege Sears failed to tell
investors that its reserves for uncollectible credit-card debts were short
by "at the very least hundreds of millions of dollars," and that its
earnings growth statements were inflated.
Sears' announcement Oct. 17 that it had uncovered
surprising new losses in its future uncollectible credit-card debt came
two weeks after the retailer fired the head of its credit-card business
and the head of its risk management operation.
New Jersey bought 500,000 shares of Sears stock this
year.
Sears spokeswoman Jan Drummond said the claims made in
the news release issued by the New Jersey governor's office Monday "lack
merit, and we plan to defend the company against them vigorously."
New Jersey also has filed a suit alleging Sears cheated
customers at its auto
repair centers through such practices as charging for unnecessary work.
The state said in October it has uncovered more than 350 instances
involving violations of its Consumer Fraud Act and regulations regarding
automotive repairs.
Pension-Plan 'Crisis'
May Be False Alarm
By
Ellen E. Schultz and Anne Marie Squeo
Staff Reporters of The Wall Street Journal
November 27, 2002
Investors have been flinching at bleak disclosures about
the failing health of pension plans this fall. But the supposed pension
crisis isn't something most shareholders need to be concerned about.
There certainly have been some scary announcements:
International Business Machines Corp. said it might need to pump $1.5
billion into its pension plan. Boeing Co., too, said it could take a hit
in the fourth quarter to its shareholder equity of as much as $4 billion.
And General Motors Corp.'s announcement that its U.S. pension plans could
be short $23 billion triggered a debt-rating downgrade.
Sure, pension plans have lost billions of dollars this
year, and a group of chronically deficit-ridden pension plans -- mostly
auto makers, airlines and steel companies -- are in worse shape than ever,
which will likely sap cash flow and in some cases raise their cost of
borrowing.
Still, most large company pension plans aren't even
close to being in peril. "The sky isn't falling," says Jack Ciesielski,
who publishes the Analyst's Accounting Observer, and who has been
analyzing pension expenses since the early 1990s.
For one thing, merely being underfunded doesn't
automatically mean that companies must dump money into their pension
plans. "People jump out of their skin when they hear that a pension plan
is X-billion underfunded," says Jeffrey Applegate, former U.S. market
strategist at Lehman Brothers. "There's this notion that the company is
going to have to write a check in the next nanosecond." Companies,
following a web of complex government and accounting rules, typically have
years in which to make the required contributions.
During that time, the underfunding can vanish. Back in
1993, companies in the Standard & Poor's 500 stock index collectively
posted a shortfall in their pension plans. Then came the bull market and
year after year of strong investment returns, leading to vast overfunding
just two years ago.
Then, the continued market decline shrank the assets in
pension plans, while declining interest rates boosted the plans'
liabilities (lower interest rates increase the plans' liabilities, because
if one assumes the assets have a lower return, more money must be set
aside to meet future obligations). This one-two punch melted the surplus
for companies in the S&P 500 to $4 billion in 2001 from $235 billion in
2000, according to a July report by Morgan Stanley.
Boeing's surplus, for example, shriveled to $1.1 billion
in 2001 from almost $14 billion in 2000, and the company expects the plan
to end the year with a deficit. "The absolutely dismal performance of the
stock market, combined with interest rates coming down very significantly,
makes the situation a 'perfect storm,' " says Walt Skowronski, Boeing's
treasurer. "But like any storm, it can clear very quickly."
While many don't believe that interest rates and the
stock market will rise soon, a Merrill Lynch report this month found that
companies in the S&P 500 won't exhaust their pension assets for another 12
years, and that is with no further asset appreciation or company
contributions.
Why the sudden pension obsession? For one thing,
although most analysts ignored pension plans when they were pumping
billions into earnings in the 1990s, now that the situation has reversed,
they have gone to the other extreme. A bumper crop of pension reports in
the last six months dissected the ways pension-plan losses can hurt
balance sheets and earnings.
For the most part, the media focused on scary paragraphs
about the most severely underfunded plans, so unless shareholders
scrutinize the actual reports -- many of which are actually very helpful
-- they might easily conclude pension plans as a group are going over a
cliff. And they overreact to pension news they don't understand.
PENSION SCORECARD
Some large U.S. companies' pension plans in 2001, in billions.
