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October 2003 - December 2003

Sales Disappoint; Stores Cut Prices
Chicago Tribune - Tribune News Services
December 23, 2003

Against a backdrop of disappointing sales over the weekend, major retailers including Sears, Roebuck and Co. and Federated Department Stores Inc. are cutting prices, analysts and merchants said Monday.

Many retailers, in addition to the discounts, are extending hours to attract procrastinating shoppers and salvage slower-than-forecast holiday sales.

No. 1 retailer Wal-Mart Stores Inc. said a last-minute pickup in holiday sales was not enough to make up for a sluggish start to December.

Analysts said they saw little reason to change their assessment of the holiday shopping season, which has not delivered on expectations for a strong rebound from last year's disappointing performance.

"It certainly is not going to be a barnburner holiday," said Robert Mettler, who heads Federated's Macy's West division. "We're seeing the continuing trend of buying closer to need. That's a bit nerve-wracking."

Analysts said anecdotal reports suggested weekend sales were good, but not great, across the sector. The Saturday before Christmas is usually the busiest shopping day of the year for retailers.

Retailers finally got a snowstorm-free weekend after back-to-back weekend white-outs in parts of the Northeast, but the U.S. Department of Homeland Security raised its color-coded terror alert level to orange on Sunday, its second-highest level, warning of a high risk of attack.

That may have kept some shoppers away from the major malls.

Wal-Mart said sales picked up as consumers bought electronics and toys and spent more per purchase. The retailer still expects December sales to be at the low end of its forecast.

The Saturday before Christmas was the biggest shopping day of last year, while the final week before the holiday brought in more than a third of the season's sales.

Holiday sales forecast

Sales at U.S. stores open at least a year in December are forecast to rise 4 percent to 4.5 percent, according to economist Michael Niemira, who tracks the results of about 76 chains for the International Council of Shopping Centers.

Moderate-income consumers concerned about their jobs and the economy have limited spending, hurting sales at discount chains.

Luxury-goods retailers such as Neiman Marcus Group Inc. and Nordstrom Inc. may lead the sales gains because their customers have benefited from rising stock prices and the economic recovery, analysts said.

"Customers are walking out of Neiman and Nordstrom, and they've got bags under their arms," said Britt Beemer, chairman of America's Research Group, a consulting firm.

"This season has been pretty squishy in the middle," he added.

Wal-Mart said that same-store sales so far this month were closer to the lower end of its forecast for a gain of 3 percent to 5 percent.

Target Corp., the second-largest U.S. discounter, said sales were less than forecast in the past week. Pier 1 Imports Inc. expects a decline in same-store sales.

U.S. Internet sales excluding travel and auctions rose 31 percent to $1.88 billion in the week ending Friday, according to ComScore Networks Inc., a Web research company.

ComScore forecasts online sales will rise as much as 30 percent in the November-December period.

Most retailers have kept inventories tight to avoid ending the season with too many leftover items, creating a need for steep price cuts after the holiday, analysts said.

That strategy suggests retailers' gross margins, or the percentage of sales left after subtracting the cost of goods, may hold steady.

"If they have been able to hold discounts in check, a mediocre selling season would be OK because margins are going to be strong," said Jennifer Zlimen, a high-yield analyst at Thrivent Investment Management in Minneapolis, which oversees about $60 billion in assets.

Longer hours planned

Merchants counting on last-minute shoppers are taking steps to lure customers and ring up sales until Christmas Eve. Target, Macy's, and Sears, the biggest U.S. department-store chain, are among retailers that plan to keep their stores open until 6 p.m. on Dec. 24.

Holiday sales of books, toys, home furnishings and general merchandise are forecast to rise 5.7 percent in the November- December period, from a gain of 2.2 percent a year ago, according to the National Retail Federation. The Washington-based trade group represents more than 1 million U.S. merchants.

Demand for Big-Screen TVs Almost Bowls Over Sears
By Becky Yerak - Chicago Tribune - Inside Retailing
December 23, 2003

Big-screen televisions were among the hottest-selling products at Sears, Roebuck and Co. early in the holiday shopping season, but by mid-December supplies of some brands were sold out at the Hoffman Estates-based retailer's stores.

Last July Sears doubled its inventories of plasma and liquid crystal display sets to ride the wave of rising consumer interest in TVs with better resolution and thinner screens.

The move made Sears the nation's third-biggest seller of big-screen TVs--right behind Best Buy Co. and Circuit City Stores Inc.

"Our first goal is to take out Circuit City," John Schlenner, home electronics merchandising manager for Sears, said Monday.

But by mid-December, Sears had sold out of Sony LCD "micro-projection" TVs, "the hottest segment in TVs right now," Schlenner said.

They're too bulky to be hung from a wall like flat-panel LCD or plasma TVs. But at $3,300 to $5,000, they're cheaper than plasma sets. And at 8 inches wide, they're slimmer than old-school TVs.

"It's the thinner look at a more affordable price," Schlenner said.

Sears has secured more Samsung and Hitachi LCD micro-TVs, but they're moving quickly out the door. It ran out of Sony LCD micro-TVs because of a shortage of TV screens--manufacturers are scrambling for another supplier.

But did Sears also misread demand?

"We didn't get as aggressive as we should have," Schlenner concedes, "but there are only so many" being made.

In addition, Sears didn't want to stock up further because the new technology carries a fairly high price.

For its part, Circuit City isn't "seeing any widespread inventory issues" in the category.

"Our buyers knew our customers would be interested in these products, so we invested heavily in them," Circuit City spokesman Steve Mullen said.

Sears' Schlenner maintains that it's not much easier to walk out with a micro-TV set from Circuit City. "It depends on what store, what day of the week," he said.

Sears expects to restock Sony micro sets in late January. That shouldn't be too late to catch the wave.

"January is one of the largest months of the year in projection TVs because of the Super Bowl," Schlenner said.

Sears did pick a hot sector to beef up its offerings. Consider:

- The Consumer Electronics Association says November was the biggest sales month ever for digital TVs--which include LCD and plasma sets--since their 1998 introduction. Sales rose 47 percent from November 2002. The group estimates 4.3 million units will be sold in 2003 and 16.2 million by 2007.

- The National Retail Federation said sales at electronics and appliance stores soared 14.3 percent in November, while overall merchandise categories saw a 4.8 percent rise.

Sears also has tripled its DVD player inventory to meet consumer demand.

"We should have bought more," Schlenner concludes.

The eight other items on Sears' top 10 hot-seller list: tools and tool storage, fitness equipment, grills, digital cameras, game tables, Sony PlayStation 2, Kenmore Mini-Ultra sewing machines and denim.

In other Sears news, the company has waived the expiration date for its gift cards. Holders previously had two years.

Customer conflicts: In a customer survey by Circuit City, more men than women want a new TV--23 percent versus19 percent.

Results were similar for home theater sound systems--17 percent versus 10 percent.

More women than men prefer music CDs, DVD movies and video games, 22 percent to 13 percent, the survey found.

Gift Cards Push Revenue into 2004
By Jennifer Waters, CBS.MarketWatch.com
December 19, 2003

Retailers pocket the cash, but can't count the sales

CHICAGO (CBS.MW) -- Americans will find fewer big boxes under the tree this year as more people give tiny gift cards instead, and that means a dramatic shift in holiday results for the nation's retailers.

The credit-card-like gifts, which essentially contain cash that can be spent later at a particular store, will create a post-Christmas rush of shoppers who will push "holiday sales" right past the holiday, sometimes well into February.

While the retailer collects cash when the card is sold, accounting rules say it's not a "sale" until a real product is delivered. That doesn't happen until the recipient uses the card to buy something.

That means a sizable share of holiday sales -- 8 percent or more -- won't show up as revenue in the traditional holiday retail season.

But Sears spokesman Bill Masterson doesn't mind. "From our standpoint these are win-win," he said. "Increasingly consumers are liking them more than presents."

Not just for the lazy anymore

Once shunned as a "no-thought" present, gift cards are among the hottest purchases at retailers nationwide this year. From Abercrombie & Fitch (ANF: news, chart, profile) to Zale's (ZLC: news, chart, profile), shoppers are bagging gift cards in record numbers, prompting the National Retail Federation to offer its first-ever estimate of holiday spending on the synthetic currency.

"They're no longer considered the 'lazy man's gift,'" said Tracy Mullin, president of the NRF.

A whopping $17.25 billion will be added to the 21/2-by-31/2-inch cards during the holidays, according to a survey NRF conducted with BigResearch. That would account for nearly 8 percent of all holiday sales this year. And some think that's conservative: Bain and Co., a consulting firm in Boston, pegged total 2003 gift-card sales at $45 billion.

Since 1998, gift-card sales have grown annually in double digits, with the biggest surge coming in the last week, sometimes the last day, before Christmas.

Big Lots (BLI: news, chart, profile) executive Al Bell said twice as many gift cards are sold in the seven days leading up to Christmas than in the prior week.

In fact, 70 percent of all holiday gift-givers said they will purchase at least one gift card this year, according to BigResearch. Unlike the paper gift certificates of old, gift cards are often reloadable, can usually be purchased in any denomination and are as easy to use in a store as a credit card. In many cases, they can also be purchased and redeemed online.

Retailers are hot to sell them:

At Best Buy (BBY: news, chart, profile), it's hard to find an aisle that doesn't flount them.

Sears (S: news, chart, profile) carries 15 different versions of them, including those Merry Christmas and Happy Hanukkah greetings.

The Neiman-Marcus (NMG.A: news, chart, profile) web site allows customers to purchase a virtual gift card.

J.C. Penney (JCP: news, chart, profile) introduced lenticular cards, three-dimensional-like cards that appear to have moving objects, and makes them available through the Internet or through catalogs.

"When you give a gift card, you're giving a shopping spree to that store," said Bill Kiss, vice president of Sears Promotions LLC, a subsidiary of Sears.

One card, two visits

The shopping spree comes not just from the value on the card, which averages $34 according to BigResearch, but from the "up-spend" that comes along with it. Each card generates two trips to the store. The first is by the gift-giver, who buys the card and often makes additional purchases while in the store. The second is by the recipient, who often will spend the value of the card plus a bit more.

Best Buy CEO Brad Anderson said gift-cards sales this year "are doing very, very well," but would not offer any numbers. He said, however, that he's got inventory ready to fill the shelves right after the holidays to accommodate the rush of people using gift cards.

Gift cards aren't just for "gifts." Wal-Mart (WMT: news, chart, profile) gift cards are available in denominations as low as $5 and as high as $5,000. "I've got a gift card I keep around all the time to buy gas," said Wal-Mart spokeswoman Sharon Weber. "Lots of parents get them for their kids when they're going off to college. When they run out of money, parents can just reload them."

While gift cards offer convenience for givers and recipients, they do create a bit of an accounting headache. Since the value of the card can't be booked as a sale until after the recipient has actually bought something, it must instead be listed as a liability.

Cards change sales totals

Wal-Mart highlighted the immediate impact earlier this week in its update on holiday sales. At locations open longer than a year -- a key industry benchmark known as same-store sales -- the company said results would fall to the low end of its previous forecast, which was for a 3 percent to 5 percent boost in sales, mostly because of the proliferation of gift cards.

That doesn't mean the sales are lost, only delayed. But it can impact margins.

While retailers such as Best Buy and Wet Seal (WTSLA: news, chart, profile) and Pacific Sunwear (PSUN: news, chart, profile) restock their shelves with new merchandise, many try to clear out the holiday inventory.

That can lead to discounts that impact margins if the cards are redeemed in late December or early January during the post-holiday sales. If recipients wait until February or even longer, they're more likely to be buying merchandise at full price.

What's more, an estimated 10 percent of all gift cards are never redeemed.

Even with the liability for unredeemed cards, companies still reap one strong benefit from getting the cash up front:

"It's a pretty good way to have cash sitting on the company's balance sheet," said Wedbush Morgan Securities analyst Adrienne Tennant.

Jennifer Waters is the Chicago bureau chief for CBS.MarketWatch.com.

After Huge Raid on Illegals, Wal-Mart Fires Back at U.S.
By Ann Zimmerman - Staff Reporter of The Wall Street Journal
December 19, 2003

Retail Giant Says It Believed It Was Helping Long Probe When Agents Struck

In a series of predawn raids on Oct. 23, federal agents rounded up 250 illegal immigrants working as cleaning crews in 61 Wal-Marts across 21 states. Twelve federal agents also descended on Wal-Mart Stores Inc. offices in Bentonville, Ark. Brandishing a search warrant, they made off with 18 boxes of documents from the company's operations department -- mostly records related to cleaning contractors dating back to March 2000.

The raids, dubbed Operation Rollback by Immigration and Customs Enforcement in a cheeky reference to the company's well-known price-cutting strategy, made the evening news and showed up on front pages across the country. It was a huge black eye for the world's biggest retailer. At the time, federal officials who declined to be named were widely reported saying that the government had wiretaps showing that Wal-Mart officials knew its contractors were furnishing illegal cleaning crews.

But now Wal-Mart is opening up a new battle with the government over the raids. Wal-Mart says managers at many levels knew about the problem of illegal workers in its stores, because they had been cooperating for as long as three years in federal investigations in both Pennsylvania and Chicago.

Wal-Mart says it was led to believe it wasn't a target of the investigations, and it says it didn't take action to sever its ties with the contractors because federal officials specifically asked it to leave the relationships in place.

"It probably sounds a little naive now, but we were simply trying to help our government and cooperated closely with federal agents for three years," says Mona Williams, Wal-Mart vice president of corporate communications. "Throughout that time they specifically told us we were not the target of any investigation and that we would be given a heads-up before any arrests were made in our stores. Instead, they conducted unannounced raids on our stores and created a well-planned media frenzy by saying they had proof that Wal-Mart executives knew what was going on. All we knew was what they had told us."

The federal prosecutors in Pennsylvania and Chicago declined to comment. But from the government's viewpoint, Wal-Mart may not have been doing enough to cooperate. "If Wal-Mart was cooperating, why would [the government] have gone ahead with the raids on 61 stores?" a person close to the investigation said.

The complex relationships between Wal-Mart, its contractors and subcontractors and federal officials are now being examined by a federal grand jury in Scranton, Pa. While the full story is still uncertain, the intriguing outlines are visible in police reports and court records. They depict an investigation that began with the arrest of a Russian teenager who had broken into an apartment in Honesdale, Pa., and spread out into a complicated web of cleaning subcontractors that used illegal immigrants at dozens of Wal-Marts.

At the center of the web is a little-known St. Louis businessman named Christopher Walters, who has financial ties to companies that won millions of dollars of Wal-Mart's business. Last week, the grand jury began reviewing evidence in the case to decide whether Wal-Mart should be indicted for violating federal immigration laws. The evidence is expected to include audiotapes of conversations made between Mr. Walters and a Wal-Mart middle manager.

Mr. Walters, 40 years old, learned the floor-cleaning business from his father, Dale, who invented a faster and more effective cleaning process and began taking on Wal-Mart Supercenters as clients. Dale Walters, speaking from his home in Bokeelia, Fla., said he left the business five years ago. By then, his son had set up more than 15 companies, with names such as Intensive Maintenance Care Inc., Comet Floor Care Associates, Precision Cleaning and Florida Floor Care. The companies were registered in Missouri, Illinois and Florida. The mailing address listed for the Florida company was his father's home. Dale Walters says his son didn't know his subcontractors were hiring illegal immigrants.

Christopher Walters's attorney, Jeff Demerath of St. Louis, says his client wouldn't talk about the government investigation, the wiretapping or his cleaning business, which he says Mr. Walters no longer operates. The status of the government's case against Mr. Walters is unclear. In April 2002, federal officials from Pennsylvania arrested Mr. Walters and seized some assets of his businesses. But the court records in his case have been partially sealed.

High Life

By the time the federal prosecutors had closed in on him, Chris Walters was a wealthy man. In 1999, bank records show, he had bought his wife a $20,000 Rolex watch. In addition to a $2.3 million home Mr. Walters bought in a leafy St. Louis suburb in 2000, another company he owned, Walters Property Management, purchased property in Fenton, Mo., with a $2.3 million cashier's check. Mr. Walters made that purchase in March, the month before the government seized his property.

Wal-Mart -- and its customers -- have prospered for decades from the retailer's virtuoso ability to keep its prices low. The nation's biggest private employer has always been aggressive about finding new ways to keep its labor and production costs in check. In recent years, Wal-Mart increasingly has turned to China for a portion of its goods, putting pressure on factories there to lower prices and stirring debate over working conditions.

Before and after the raids, Wal-Mart says it did what it could to ensure that its contractors were hiring legal workers. Antidiscrimination sections of the immigration code limit an employer's ability to investigate an employee's legal status, the company said. Indeed, in 1996, the INS filed a complaint against Wal-Mart for requiring prospective hires who weren't U.S. citizens to show more verification than required by law. The company paid a $60,000 fine. "Accordingly, our company was very hesitant to ask for more assurances about the status of our contractors' employees," says Ms. Williams, the Wal-Mart spokeswoman.

If Wal-Mart knowingly hired contractors who supplied illegal workers and had a practice of doing so, it could be found guilty of a criminal charge that carries a fine of up to $10,000 for each illegal worker hired. But such cases are difficult to make. Earlier this year, federal prosecutors suffered an embarrassing defeat in a case against food giant Tyson Corp., which it had charged with conspiring to smuggle illegal immigrants to work in its poultry plants.

The government was armed with secretly recorded tapes of conversations between midlevel factory managers and an undercover agent for the Immigration and Naturalization Service. The Tyson managers caught on tape testified that their supervisors were aware of their scheme. But the jury wasn't convinced that senior management knew what they were up to or that there was a corporate culture that encouraged managers to hire illegal workers. Both the company and three high-level managers were acquitted.

The Wal-Mart case sprang from an unlikely source: In the fall of 1998, an 18-year-old Russian was arrested for breaking into an apartment in Honesdale, a small rural town of 5,000, three hours north of Philadelphia. Police determined that the man had overstayed his visa and was working on an overnight cleaning crew at Wal-Mart. He gave the police the name and phone number of his employer, a man he knew only as Stan.

A year later, the police arrested another illegal worker in the Honesdale Wal-Mart cleaning crew for allegedly assaulting his former girlfriend. That worker, from Slovakia, was employed by a subcontractor named Stanley Kostek, according to an affidavit filed in a Pennsylvania federal court case against Mr. Walters. The worker said Mr. Kostek knew he was illegal because he had shown him an expired employment authorization card.

At the time, the Honesdale store manager told local authorities that he believed his floor-cleaning crew was made up of illegal workers, according to the affidavit. The store continued to contract with the same company for replacements, who also were working in the country illegally, the affidavit says.

Then, in February 2000, police arrested two night janitors at a New Jersey Wal-Mart on suspicion of theft. The workers, illegal Russian immigrants, had $25,000 in merchandise stolen from Wal-Marts in several states in their apartment. Shipping records showed the workers previously had sent large quantities of goods back home.

In 2000, after the spate of troubles with illegal cleaning workers, Julio Santana, a special agent with the Philadelphia Immigration and Customs Enforcement office, started connecting the dots. The U.S. attorney in Pennsylvania subpoenaed documents from Wal-Mart's Bentonville headquarters. Agent Santana, with help from the Pennsylvania attorney general's office, pieced together a web of contractors and subcontractors supplying illegal workers of mostly Eastern European descent to more than 80 Wal-Marts in a half-dozen states, according to court filings.

Miroslaw Dryjak, an illegal immigrant from Russia living in Virginia, supervised the crews, according to the federal criminal indictment filed against him. He took his marching orders from Mr. Kostek, who owned a New York cleaning company. Mr. Kostek, in turn, reported to an Illinois company, DJR Cleaning Enterprises, which is owned by Vincent Romano. Mr. Kostek didn't return repeated phone calls. Mr. Dryjak and Mr. Romano couldn't be reached for comment.

Court filings in the case against Mr. Walters, the cleaning-company magnate, show that bank records connected all the companies to St. Louis outfits he ran. Wal-Mart paid companies controlled by Mr. Walters $18 million in 1999, $29 million in 2000 and $37.4 million in 2001, according to the filings.

In March 2001, about the same time that Wal-Mart was tending to the subpoenas from Pennsylvania, two INS agents from Chicago met with members of Wal-Mart's loss-prevention department and a company attorney. They told the Wal-Mart representatives that they were working with the FBI and Department of Treasury and they wanted Wal-Mart to help with taping and other surveillance. They subpoenaed records related to several contractors, including one owned by Mr. Walters, according to a Wal-Mart letter to the Chicago INS office.

Big Debts

The agents told the Wal-Mart officials that the contractors recruited illegal immigrants through overseas ads and charged them $10,000 to come to America, which they then had to work off. "They are indebted to the groups that bring them over, and stealing is one of the ways they labor to pay off the debts," the agents told the Wal-Mart employees, according to a Wal-Mart memo chronicling the meeting.

The Chicago federal agents assured the Wal-Mart group that the company wasn't a target of the investigation and there would be no arrests at Wal-Marts, according to the memo. Mark Vogel, assistant U.S. attorney for the Northern District of Illinois declined to comment and said the investigation is still under way.

But in late March 2001, federal agents from Philadelphia arrested 27 illegal workers from Eastern Europe at Wal-Marts in four states. Federal agents also searched the workers' homes, where they found two illegal workers who were employed by Kmart. They also found a letter from a subcontractor saying their wages were being cut because Wal-Mart district managers had to tighten their budgets or take the cleaning service in house.

Wal-Mart employees asked the Chicago federal officials if they were working with the INS from Philadelphia. "We were told there were two separate investigations and there was a race to the courthouse," says Wal-Mart's Ms. Williams. Wal-Mart didn't tell the Pennsylvania federal agents it was cooperating with Chicago, because it was told to keep it quiet, Ms. Williams says.

In the fall of 2001, Philadelphia officials conducted more extensive raids, rounding up more than 70 undocumented employees in four states. They searched the hotels and apartment house where they were living and found a group living in a trailer park on the outskirts of Honesdale. The trailer had no lock on the front door, no furniture and no running water. Sleeping bags were strewn across the floor and the bathroom was "abnormally dirty," according to a government report.

In those raids, federal officials were hitting some stores for the second time. When Wal-Mart sought new workers, contractors had sent over more illegal crews, according to court documents. A Wal-Mart store manager said he had gotten a letter from one worker who had been arrested and deported, asking for money to feed and clothe his family in the coming winter. He said the contractors owed him and the other workers more than a month's back pay at the time of the raid.

After the fall raids, some Wal-Mart store managers switched contractors or asked the contractors to send replacement crews they were certain were legal. Several of the new crews, the INS determined, were still ineligible to work, according to court documents. The INS discovered that the new contracting companies were also owned by Mr. Walters. At one Kansas City, Mo., Wal-Mart, the replacement crews worked 12-hour shifts and slept in the back room of the stores, where they kept their personal belongings, according to court documents.

With Wal-Mart's cooperation, the investigators taped conversations between store managers and employees of Mr. Walters, according to an affidavit in the asset forfeiture proceedings brought against Mr. Walters. During these taped conversations, some contractors claimed to have paperwork for the workers and faxed over copies of I-9 forms -- worker eligibility documents required by the government for new hires -- with the workers' Social Security numbers. The INS determined many of the numbers were counterfeit or belonged to other people.

In March 2002, relying in part on Wal-Mart's help, federal officials in Pennsylvania indicted several subcontractors, who agreed to cooperate with investigators. In return, the prosecutors dismissed several charges. Mr. Dryjak pleaded guilty to one count of harboring and transporting illegal immigrants, and received a year's probation. Mr. Kostek's company pleaded guilty to the same charge and paid a $10,000 civil fine. In April, when Mr. Walters was also arrested, a lawyer for his companies told Wal-Mart that his crews would no longer work for the company.

Wal-Mart says that beginning in 2002, it once again began to end relationships with outside cleaning contractors. It did so not out of concern for the workers or its potential liability, but because it was cheaper than paying contractors, the company says. In a January 2003 company meeting, store managers were told the company estimated it could save $66 million if its own crews cleaned and polished its floors. By October, fewer than 700 stores, or 18% of Wal-Mart outlets, still used contractors, down from almost half the stores in 2000.

Ms. Williams says that Wal-Mart also adopted new written contracts in 2002 "that included a stronger contractual commitment by the outside contractors that they were complying with all federal, state and local employment laws."

Earlier this year, Mr. Walters met with a company manager in Bentonville to try to establish new cleaning crews at Wal-Marts. Wal-Mart says it rebuffed his effort. But the company says it unwittingly still may have been doing business with subcontractors connected to companies run by Mr. Walters.

After the raids in October, Wal-Mart says its internal investigation found that Mr. Walters and others had created layers of companies, all with separate corporate identities, and that some Wal-Mart contractors may have been related to Mr. Walters or some of his associates. However, his name didn't appear as a contact for any of those companies in Wal-Mart's records.

Mailed 'Wish Books' Let Americans Shop Beyond Their Needs
By Cynthia Crossen - Wall Street Journal
December 17, 2003

When Mary Price picked up her new buggy at a Jasper County, Ill., train station in 1896, dozens of people gathered around to watch it being unloaded and set up. The gawkers were "all looking at how nice and good it was," Miss Price wrote to the buggy's purveyor, Sears, Roebuck & Co. "When we get anything, we always try to get something that shows out right well."

In late 19th-century America, a mail-order buggy was a miracle, a spectacle and a milestone in history.

Two developments had recently united this far-flung country into a nation of shoppers. Railroads not only connected coast to coast, but also stopped at thousands of rural outposts previously inaccessible to many manufacturers. Then, the federal government decided the nation's farmers, however remote, should have free mail delivery.

The distribution system and mail service set the stage for two men -- A. Montgomery Ward and Richard W. Sears -- to revolutionize the way Americans bought and sold washing machines, undershirts, ribbons, plows and bust developers.

Before Sears and Ward, most Americans either made what they used or bought it at the general store. Their purchases were usually based on need, not desire. The general store had some advantages -- a stove, chairs, gossip -- but prices were high and inventory skimpy.

Montgomery Ward issued its first catalog in 1872; Sears Roebuck followed in 1895. Just two years later, the Sears catalog was advertising 6,000 items, from safety pins to canned oysters to three-piece bedroom sets. Almost all were illustrated with woodcuts. The Sears catalog quickly became known as America's "wish book." Many customers acknowledged reading the 780-page catalog cover to cover, even if they ordered only five pounds of gum drops or a Schmuck's patented Mop Wringer.

Initially, both Ward and Sears met stiff resistance from the public, particularly local merchants and their faithful customers, who pointed out that mail-order companies contributed nothing to the community. Sears was scorned as "Shears and Sawbuck" or "Rears and Soreback."

But without retail middlemen, Sears and Ward could offer almost irresistible bargains. Sears boasted of being "The Cheapest Supply House on Earth." In 1897, the company sold a gun for 68 cents; a perfume called New Mown Hay for 25 cents; a 49-pound sack of flour for $1.20; and a fishing rod for nine cents.

Montgomery Ward's 1895 catalog offered the game of Tiddledy Winks for 20 cents; a whisk-broom holder for 30 cents; and plays for amateur performers for $1.30 a dozen, including "Married Life (side-splitting all through)" and "Twenty and Forty (contains a frisky old maid)."

Richard Sears wrote much of the copy in his company's early catalogs. Usually it was folksy and earnest: the "Julia Marlowe" boot "CONFORMS in vital points to the shape of the foot instead of pressing the foot into the shape of the shoe" -- an obvious lie. Sears also tried the occasional hard sell, as with Maison Riviere's hair-removal preparation: "No worse affliction can befall a woman's face than to see a horrible growth of coarse hairs springing out like bristles, making it harsh and repulsive to the touch."

Both companies knew Americans would likely balk at paying strangers in advance for things they hadn't seen. So for many items, Ward and Sears demanded no money until customers had received the items and judged them satisfactory. Sears himself devised the pithy slogan that relieved the anxieties of so many prospective buyers: "Send No Money!"

One year, a menswear sale almost bankrupted Sears. So many people ordered suits, without deposit or obligation, that beleaguered Sears employees simply threw any suit, regardless of color or size, into any box and shipped it off. Then came the returns and letters of complaint -- so many that some were eventually disposed of by incineration.

Hundreds of items couldn't be shipped C.O.D., or cash on delivery. Buyers had to prepay for Laudanum (tinct. opium, the catalog explained) -- $3 for a four-ounce bottle -- and its antidote, Reliable Cure for the Opium Habit, 75 cents a bottle.

With no telephones, copiers or computers, Sears's huge Chicago headquarters was often in hectic disarray. All correspondence was done in long hand. Many customers were nearly illiterate, and some could communicate only in a foreign language. Each customer had to compute his or her own freight or mail charges.

Yet by 1915, Sears Roebuck, which began with $150,000 in capital, listed assets of more than $100 million. If every item wasn't perfect, it would usually do: ovens and bureaus were cheap, and if the stoves cooked and the drawers held clothes, there was little reason to complain.

"I have shown my wagon to all my friends," wrote Mrs. F.M. Barnum of Gale, Ore., to Sears. "Everyone says it is a cheap wagon, the paint is coming off the wheels, but that is caused by the alkali dust. I am well satisfied with my rig."

Sears Eliminates Gift Card Expiration Dates
Sears Gift Cards Are Good for Life
December 16, 2003

HOFFMAN ESTATES, Ill., Dec. 16 /PRNewswire/ -- Just in time for last-minute holiday shoppers, Sears  today announced it is eliminating expiration dates from all Sears gift cards issued beginning tomorrow.

"Sears customers have told us they want gift cards without fees or expiration dates," said Kris Crow, vice president of customer relationship management for Sears, Roebuck and Co. "While other retailers charge fees and enforce expiration dates, Sears has never attached maintenance fees to its gift cards and now our gift cards never expire." Previously, Sears gift cards generally expired two years from the date of purchase.

"Gift cards have been very popular this holiday season, and now there is another reason for Sears shoppers to purchase a gift card for family and friends," Crow said. Sears gift cards can be purchased in increments of $5-$500 and can be redeemed at all Sears store locations.

Squeezed by Health Costs
By Julie Appleby, USA TODAY
December 15, 2003

If you think your health insurance expenses are high now, just wait.

Costs for many workers are set to soar as employers remove the last key feature that helped hold down expenses for many consumers in the past two decades: lower out-of-pocket charges for such things as office visits, hospital care and prescription drugs.

A USA TODAY analysis shows that it was lower out-of-pocket costs — along with employers' willingness to absorb much of the increase in premiums — that shielded consumers from part of the rise in medical inflation.

Consumer spending on health care from 1984 to 2002, for example, rose at a slower rate than spending on mortgage interest and education.

But those days are gone.

Gone with them are the restrictive HMOs that pioneered lower out-of-pocket costs, promising $10 office visits, $5 prescriptions and no annual deductibles, in exchange for limits on what doctors, hospitals and treatments patients could access. But the public hated those restrictions, and tight-fisted HMOs fell out of favor.

Now, for the first time in a decade, many workers are seeing their out-of-pocket costs for health care go up.

Employers, stung by double-digit insurance premium increases during the past few years, are shifting more costs to their insured workforce.

"If you reject managed care, the only other way to basically control cost is to raise what you pay out-of-pocket," says researcher Jon Gabel of the Health Research and Educational Trust.

No one is sure if that will work, but many employers are giving it a try.

As employers present their health plans for next year, workers are seeing not only an increased monthly payroll deduction for their share of insurance premiums, but also higher annual deductibles, policies that cover 80% of charges rather than 90% or 100%, and higher charges for drugs and doctor office visits. Even many HMOs now have deductibles for hospital care.

There is no end in sight.

Insurance premiums rose nearly 15% this year and are forecast to rise about 12% next year. With the average family policy offered by employers now costing about $9,000 a year, even a 10% annual rise will mean that same policy would cost nearly $12,000 in three years.

The average percentage of premiums paid by workers for family coverage currently is 27%, according to a survey by the Kaiser Family Foundation. That means workers could pay $3,200 or more toward coverage in three years — just for premiums. On top of that will be annual deductibles and payments for doctor's office visits, drugs and outpatient care, all of which are rising. Some employers might also increase the percentage of premiums that workers must pay.

"What people are seeing is only the beginning of a long-term trend," says Glenn Melnick, a health care finance professor at University of Southern California. "It will explode in the next five years."

Workers say they are already feeling the pain. "In the past two years, my premium has gone up 21%, and the coverage has gone from a co-pay system to a deductible and co-insurance system besides," says Barry Weston, a researcher for Hartford Financial Services, who lives in Torrington, Conn. "Prescription costs have gone up 160%. Instead of paying a co-pay, I now pay 20% of the cost of the drug."

Managed care limited increases

Without managed care, health care might be even more expensive for consumers today. USA TODAY analyzed Labor Department data on health care spending by households from 1984 to 2002, a period chosen because 1984 was before the big transition to managed care and 2002 is the latest data available. (In the Labor Department data, households, or consumer units, are defined as averaging 2.5 people.)

Consumer spending on health care grew at a lower rate than overall health care inflation during this period mainly because of lower out-of-pocket costs and because employers absorbed the majority of the health cost increases.

The review, based on adjusting for inflation, showed:

• The average household's spending on health care after inflation rose 29%, or about 1.4% extra a year during that 18-year period. Meanwhile, consumer spending on mortgage interest and charges grew 37%; on education (primarily college tuition) grew 43%; and on entertainment grew 14%.

• The amount consumers spent on insurance premiums after inflation rose 82% from 1984 to 2002. Helping temper that increase was a 25% decline after inflation in the amount spent out-of-pocket for such things as office visits or hospital care, a direct result of lower charges for such services by HMOs and other managed care plans.

• Average consumers in 2002 spent almost as much on meals away from home, $2,276, as they did on health care, $2,350, the data show.

Not everyone saw out-of-pocket health spending decline.

"Averages do mask enormous misery at the fringes," says economist Uwe Reinhardt, a health economics professor at Princeton.

Those who buy their own insurance, for example, or work for companies that don't pick up the majority of the cost of health care, are paying far more because premiums have risen rapidly in the past few years. Retirees, those ages 65 to 74, saw their inflation-adjusted costs rise by 40% during the period, according to the analysis, fueled in part by an 86% increase in spending on drugs, which are generally not covered by Medicare.

Low-wage workers, those in the lowest 20% of incomes, spent about 17% of after-tax earnings on health care in 2002 — or went without coverage.

Employers say they cannot continue to absorb most of the rising cost of health coverage. Premiums are rising at their fastest clip in a decade as consumers use more medical care, new drugs hit the market and medical providers and insurers seek to bolster profits.

Some employers are moving away from managed care in favor of the idea that making consumers pay for more services will result in more judicious use of medical care and slow the growth in medical inflation. Managed care, they say, shielded many workers from the true cost of services. "Managed care was an economic success and a political failure," says researcher Gabel, who co-authored a study published in the journal Health Affairs in 2001 that showed a 23% decline in what patients paid in out-of-pocket costs from 1990 to 1997.

But critics fear that employers could go too far, shifting too much of the cost to workers, making them unable to afford coverage. Employers could also see their costs rise if younger, healthier workers opt out of coverage, leaving employers covering only older, more expensive workers.

Last year marked the biggest jump in the uninsured in a decade — up 2.4 million to 43.6 million. The increase was blamed partly on job losses because of the stagnant economy and partly on fewer workers taking coverage offered by employers as the cost of coverage rose. Since 1989, the percentage of workers covered by the health plans offered by their employers has dropped from 73% to 68%, according to surveys by the Kaiser Family Foundation, a research group in Menlo Park, Calif..

A survey of employers by the Kaiser Family Foundation reflects the changes. It found steep increases — in the 50%-to-60% range — in what workers pay toward health care since 2000. While the percentages are large, some of the dollar amounts are small: an office visit co-payment going from $10 to $15, for example. Others are more profound: Workers are paying an average of $793 more a year toward the premium for family coverage since 2000.

"This is a real problem," says Drew Altman of the Kaiser Family Foundation. "What people are paying is going up much faster than wages."

Health inflation isn't the only thing hitting the family budget. Costs such as housing and college tuition are up, too. Property taxes in many areas have soared along with property values.

"The problem is that people are just struggling as it is," says Albert Feliu, a project manager with a telecommunications carrier in Atlanta. "What's killing families are housing costs and health care costs."

A few years ago, Feliu paid about $25 a month toward his insurance. His employer picked up the rest. Like many employers, Feliu's company has passed on some of the premium increases. Next year, he'll pay $120 a month. Still, Feliu isn't complaining.

The insurance paid for brain surgery that saved his then-toddler's life about seven years ago. "We currently have a Cadillac health plan that is extremely competitive with any of the other health care packages that are offered in the Atlanta area," he says.

To entice workers to join HMOs, which were seen as the answer to a rapid run-up in health care costs in the late 1980s, employers offered HMOs without any deductibles or 20% cost-sharing payments. Patients paid $5 or $10 for a doctor visit or prescription drugs.

That contrasts with traditional insurance plans, popular at the start of the 1980s, which carried annual deductibles and a cost-sharing arrangement that typically required workers to pay 20% of doctor, hospital and drug costs, up to a set annual maximum.

Managed care backlash

For a while, managed care held down costs by limiting payments to doctors and hospitals, by reducing the amount of time patients spent in hospitals, by restricting patients' freedom to go to specialists or have expensive tests, and through underpricing by insurers eager to gain market share. But backlash against the restrictions of managed care led to looser forms with a greater choice of doctors and hospitals becoming popular in the late 1990s. Now, those plans are moving toward offering workers and patients more choices but having them pay more if they choose more expensive drugs or treatments.

"Managed care was a form of rationing," says Melnick. "The industry said, 'Pay us a fixed premium ... and we'll manage things.' The next wave will be, 'You can have what you want, but have to pay for it.' It will be a market test of what people are willing to pay for."

One question will be whether the industry sees a renewed interest in tightly controlled HMOs. A recent survey by the Center for Studying Health System Change found that 57% of those polled would accept more restrictions on their medical services in exchange for lower out-of-pocket costs. But 42% would not. One of the main differences between the two groups was income: Higher-wage workers generally did not want to make the trade, while lower-wage workers would.

While managed care did hold down costs for many, its restrictions irritated.

Doctors and hospitals complained as their revenues were squeezed by aggressive contracting. Patients were upset when their insurers required up-front approval for specialist visits or elective surgeries. Some workers now say they're relieved that the strict managed care era is over, even if it means higher costs.

Barb Maniuszko, a finance manager for American Express in Scottsdale, Ariz., says it's easier now to see a doctor or get a needed test. But she's paying more.

"On a relative basis, I think I'm getting a better deal now," she says. "It's almost like more bang for the buck."

Sears Canada Gets Federal Approval to Operate Banking Subsidiary
Steve Erwin - Canadian Press - National Post - Toronto
December 15, 2003

TORONTO (CP) - Sears Canada has won federal approval to run a bank, the department store chain announced Monday.

Sears said it has received authorization from the Office of the Superintendent of Financial Institutions to open Sears Canada Bank, a wholly owned subsidiary.

"The bank now enables us to build upon our Sears card and Sears MasterCard franchise to offer consumers nationwide the value and convenience of competitive credit card products," stated Sears Canada chairman and CEO Mark Cohen.

Sears Canada Bank, operating under the same rules as the established banks, will initially run the credit cards through the bank subsidiary, with possible future forays into such fields as chequing accounts and insurance.

For now, however, Sears plans to concentrate solely on its own department store card and Sears MasterCard, which was first made available to about 750,000 Ontarians in August 2002.

"At this point there's no plans to put tellers in the stores or have people open chequing accounts or savings accounts. None of that at all," Sears Canada spokesman Vincent Power said. "It's strictly just the two card products - the Sears card, which is our own proprietary card, and Sears MasterCard."

Sears MasterCard is being rolled out in Western Canada but to be made available throughout the country under one set of rules, Sears required federal approval of bank status, Power said.

"Banks have a status where it allows us to offer products and services consistently because they're regulated by federal rule," Power said.

Retailers such as Canadian Tire and Hudson's Bay Co. are also players in the financial services sector, boosting profits through the lucrative credit card business.

Sears Canada was forced to accelerate its plans for a banking arm when U.S.-based parent Sears, Roebuck decided to sell its credit operation and disband its own bank in the United States.

Sears Roebuck & Co. has a 55 per cent interest in Toronto-based Sears Canada (TSX:SCC), which runs 123 Sears department stores, 47 Sears Home stores, 144 dealer stores and 14 outlet stores.

Sears to Restructure, Maybe Cut More Jobs
By Becky Yerak, Tribune staff reporter - Chicago Tribune
December 15, 2003

Headquarters is targeted 3rd time

Sears, Roebuck & Co. has begun an internal review that could result in a reduction of jobs at its Hoffman Estates headquarters for the third time in as many years, officials confirmed Sunday.

In a memo distributed to employees last week, Sears Chief Executive Alan Lacy said a corporate restructuring is under way to give the department store chain a "more focused and efficient corporate structure."

Sears, which has sold its credit-card operations to focus on its retail business, is under pressure, as sales at its stores have declined. During the holiday season, Sears has been forced to lure shoppers with price reductions, which have reduced profit margins.

Job cuts aren't necessarily the goal of the restructuring, but "it's reasonable to anticipate possible reductions as a result of this project," spokesman Chris Brathwaite said Sunday.

"We're in a very competitive market, where highly efficient big-box stores are rewriting the rules of competition," Brathwaite said.

In November, sales at Sears stores open at least one year declined 3.6 percent. Analysts had expected sales to be flat or slightly higher.

Sears now has lowered its sales expectations for the entire fourth quarter.

Same-store sales are expected to be flat, or down by a low single-digit percentage, for the fourth quarter.

Sears also completed the sale of its credit card business last month, a move that resulted in the need for fewer workers at its Hoffman Estates headquarters.

Leading the restructuring review is Thomas C. Gorey, vice president of inventory management and merchandise operations.

Gorey is expected to make his final recommendations to Lacy sometime next month.

"The impact has yet to be determined," Brathwaite said. But in a "post-credit environment, we're a smaller new Sears."

The company has 4,800 headquarters workers, 9 percent fewer than the 5,300 it had at the beginning of this year. In early 2002, Sears cut about 1,300 of 7,000 jobs. In July 1999, former CEO Arthur Martinez ordered a 10 percent headquarters job reduction.

Sears to See More HQ Job Cuts
CRAIN'S CHICAGO BUSINESS
December 15, 2003

Sears, Roebuck and Co. plans to eliminate more jobs at its headquarters—-the third wave of cuts in as many years—-in a move to bring its high costs in line with those of big-box discount store chains.

In a memo to employees dated Dec. 8, Chairman and CEO Alan Lacy says he has commissioned a headquarters reorganization aimed at creating “a more focused and efficient corporate structure” in keeping with “what a new, smaller Sears needs.” Mr. Lacy says a report outlining the reorganization should be ready by the end of January.

The number of jobs targeted for cuts is unknown, but “it is reasonable to anticipate some reductions next year as a result of this project,” the memo says. Sears employs 4,800 workers at its Hoffman Estates headquarters, down from 5,300 at the start of this year, according to a Sears spokesman, who confirmed the review.

The move comes as Mr. Lacy looks for ways to maintain profit margins without Sears’ highly profitable credit card business, which had been contributing roughly two-thirds of the company’s total profits in recent years.

Sears sold the 94-year-old credit card division to New York-based Citigroup Inc. in November, leaving the company with only its stores to generate profits.

Without the cover provided by credit card profits, inefficiencies in Sears’ core retail operations are on full display.

One key measure of efficiency—sales, general and administrative expenses as a percentage of cost of goods sold—is 30% at Sears, compared with 21% at Arkansas-based Wal-Mart Stores Inc. Sears has to mark up goods an average 39% to cover its costs, compared with 27% at Wal-Mart, according to an analysis by ABN AMRO Asset Management in Chicago.

Pressure to cut costs is rising again at Sears after a brief turnaround in sales lost steam. Sales at stores open at least one year, a key measure of retail performance, rose in August and September, ending a long decline. But the slide soon resumed, as same-store sales fell 2.7% in October and 3.6% in November.

Mr. Lacy has backed off a prediction that same-store sales would rise in the fourth quarter, telling investors earlier this month that the figure will be flat to slightly down for the period.

All told, Sears has shed 55,000 jobs, or 19% of its workforce, since Mr. Lacy’s predecessor, Arthur Martinez, began reducing staff in 1997, according to Sears annual reports. About half of those jobs disappeared under Mr. Lacy, who took the helm in October 2000.

IN JAPAN: Wal-Mart Hopes It Won't Be Lost in Translation
By Ken Belson - New York Times
Kabane, Japan - December 14, 2003

It's 8:15 on a Friday morning and about 50 managers of the Seiyu supermarket chain are assembled on the second floor of their headquarters here, 30 minutes from downtown Tokyo. Surrounded by signs listing hot products, new promotions and performance rates, many of the chiefs have already been at work for an hour.

Powered by coffee, tea and Diet Coke, they begin their daily pledge of allegiance, just as their counterparts do in Bentonville, Ark., home of Wal-Mart Stores, which owns 38 percent of Seiyu.

"Give me an S!" a Japanese boss shouts.

"S!" comes the reply.

And so on, until the group spells "S-E-I-Y-U."

"Who's No. 1?" he asks.

"Customers!" they reply, punching the air with their fists.

The routine is one of the small ways in which Wal-Mart is revamping the struggling Seiyu, Japan's fourth-largest retailer. Unlike Toys "R" Us, Costco and other outside rivals that opened their own stores here, Wal-Mart has spent $513 million for a chunk of Seiyu, whose name still adorns its 400 stores.

The logic is simple: By working through a local partner, Wal-Mart is hoping that it can better navigate Japan's serpentine and costly network of suppliers, which has long frustrated other foreign investors. The company also avoids having to build stores and can take advantage of Seiyu's well-recognized brand.

But as it dips its toes into Japan, the world's second-largest economy, mighty Wal-Mart is confronting something it seldom encounters: skeptics who doubt that it can succeed. The retail market here is dominated by powerful manufacturers and wholesalers whose high prices have made the country an inhospitable place for foreign discounters. And Japanese consumers are famously finicky - as other American retailers who have simply imported goods with little regard for local tastes have learned the hard way.

Further complicating matters, Wal-Mart must repair a chain whose sales peaked a decade ago. Seiyu, which also sells housewares, appliances and general merchandise, has a debt-to-capital ratio that is more than twice the industry average in Japan. In the half-year that ended in August, the retailer lost 8.4 billion yen ($77 million) as sales slipped 3.9 percent from the period a year earlier. The company expects to lose 10 billion yen for the full year.

To Wal-Mart, though, Seiyu is a risk worth taking. Japan's dense supplier network and expensive labor and land give the American discounter a chance to cut costs and bolster profitability. The company's "everyday low prices" may also prove a hit with the increasingly bargain-conscious Japanese consumer, analysts said.

WAL-MART has a lot of work to do, but their timing to be in Japan is really good," said Hidehiko Aoki, a retail analyst at Goldman Sachs in Tokyo. "They can bring a new retail model to Japan."

To that end, Wal-Mart has unveiled a five-year plan to reduce the hours worked by full-time staff members by about 40 percent, partly through early retirement and by increasing the percentage of part-time workers to 85 percent from 70 percent. The company is computerizing operations, remodeling aging stores and trying to do what it has done so effectively in the United
States: persuade manufacturers and wholesalers to cut prices so Seiyu can pass along the savings to consumers.

If all goes well, Wal-Mart can use its option to raise its share in Seiyu to 50 percent by 2005 and to 66.7 percent two years after that, giving it further management control. It is then, analysts say, that Wal-Mart will consider opening stores under its own name.

For Wal-Mart to get that far, the company will have to do to retailing what Carlos Ghosn, the president of Nissan Motor, did to Japan's automobile industry: introduce Western-style pricing and smash entrenched and often costly corporate relationships.

Though Mr. Ghosn has been very much in the spotlight, Wal-Mart appears content to work in the shadows. In Seiyu's stores, few overt signs of the discount giant's presence can be found. Since raising its stake in Seiyu to 38 percent in December 2002, Wal-Mart has spent most of its time centralizing the retailer's operations. The changes include giving new product scanners to aisle clerks and creating databases that provide up-to-the-minute information on sales, inventory and prices.

The company is also teaching Seiyu's employees to sell the Wal-Mart way. That means using data to analyze sales, not just following store managers' hunches. To reinforce the lesson, Wal-Mart is putting store managers through weeklong training sessions and has flown hundreds of Seiyu workers to Arkansas.

"Japanese might think what we're doing is very tough, but they have to realize that this is the world standard," said Seiyu's chief executive, Masao Kiuchi, who, like many Wal-Mart managers, arrived at the morning meeting in an informal open shirt and no jacket.

After Mr. Kiuchi wrapped up the meeting, dozens of managers headed back to their desks to pore over spreadsheets on their laptop computers. Seiyu pools data from all of its stores so that everyone from clerks to suppliers can see what is on the shelves, what is selling and when.

The data also makes it easier for Seiyu to order only what it needs and to pool those orders for volume discounts. Suppliers, too, can anticipate what Seiyu wants, planning their production and shipments accordingly and cutting the prices they charge. Wal-Mart hopes to use the savings to reduce Seiyu's retail prices.

"Wal-Mart has to change the system from the inside out," said Seth Sulkin, president of Pacifica Malls K.K., which develops shopping centers in Japan. Mr. Sulkin said Wal-Mart had made the right decision to enter Japan through Seiyu because only the biggest Japanese stores have leverage with manufacturers. "If Wal-Mart did it themselves," he said, "they'd get nowhere.''

While the company is squeezing savings out of Seiyu's operations, it is also refurbishing the chain's older stores. Wal-Mart chose the three-story Futamatagawa store outside Yokohama as a test case, spending roughly $7 million to renovate the building. The entire first floor has been devoted to food; clothing and household goods have been moved upstairs. The aisles have been widened to allow two carts to pass, and a deli counter with prepared foods is now open until 11 p.m.

Bowing to local tastes, Wal-Mart has also installed a small fish market, where workers slice slabs of tuna for customers. Nearby, baskets of vegetables and fruit sit on casters so workers can roll them into and out of the storeroom instead of unloading boxes in the aisles.

The new layout appears to be a hit with customers. Food sales and traffic have risen 50 percent since the store was remodeled in June, taking business from three major supermarkets nearby.

Still, Wal-Mart has learned that the Japanese, like consumers elsewhere, are creatures of habit. The company had stopped stuffing mailboxes with circulars to publicize twice-a-week sales. Wal-Mart argued that because its prices were already the lowest every day, there was no need to have special sales.

But homemakers are addicted to circulars, using them to dart from store to store in search of deals. So, after some complaints, the circulars returned, to the relief of customers. "I only come here once a week," said Hisako Ito, a homemaker who heads to neighboring stores for other bargains. "I still go to cheaper places by car to get meat and other things."

More and more shoppers, though, seem to be warming up to the Wal-Mart-style bulk discounts, which are available every day. Soda is a case in point. One aisle in the Seiyu store is now a wall of Coke and Diet Coke, stacked with cans, six-packs and cases. All cans are 198 yen each, or about 15 percent below the suggested retail price. Soda sales have tripled since the discounts were introduced.

Other Wal-Mart tactics are translating well, even if the corporate lingo isn't. Few shoppers recognized the word "Rollback" - Wal-Mart's jargon for featured discounts. But big signs nearby were unmistakable: cans of Campbell's Soup were marked down 21 percent, to 195 yen ($1.75), with the prices posted in big letters.

"Customers don't know the name 'Rollback,' but they know that prices are being discounted," said Kazuo Funakoshi, 49, the store manager.

Mr. Funakoshi, acknowledging that shoppers in Japan, like those in the United States, fret about a flood of cheap imports, said that less than 1 percent of the 50,000 products in his store were imported from Wal-Mart's network. And those that were on display were getting a mixed welcome.

Some of the 46-ounce cans of grapefruit juice being sold under the "Great Value" name, for example, were dented and had labels ripped, a no-no in Japan, where presentation counts for a lot. The cans were also too big for most Japanese refrigerators, so shoppers were invited to buy clear thermoses, too. One customer, typical of the finicky, grumbled that she didn't "trust the English label."

SATISFYING local tastes is just one hurdle. While mothers with children strolled through the aisles, several men in blue suits - managers from rival stores, Mr. Funakoshi said - were snapping pictures of the store with their camera phones.

The corporate spies are symbolic of Japan's competitive retail market and the battle that Wal-Mart faces with rivals that have tried to replicate its no-frills pitch. Japan's two largest chains, Ito-Yokado and Aeon, have also had some success using their size to pressure suppliers to cut their prices.

Wal-Mart executives are aware of the challenge from incumbents like Aeon, whose sales are three times larger than Seiyu's. But they say that Japanese rivals cannot mimic the low-cost ethic that pervades Wal-Mart's ranks.

The company has dispatched 50 managers from Bentonville to teach Seiyu managers the Wal-Mart way. Workers also get a heavy dose of "culture training" to teach them to be more outspoken, upbeat and goal-oriented. During weeklong sessions, managers were forced to dance in front of the class if they broke the rules - showing up late, for example, or forgetting to turn off cellphone ringers. The tactics apparently helped the normally wary Japanese relax, and several students in one session cried when their trainers returned to the United States.

The Japanese, though, have a tough time adapting to the Wal-Mart practice of continually praising co-workers. Backslapping compliments are rare in a country where workers are taught to be humble and bosses often command respect through intimidation.

At the morning meeting, one sales manager reported brisk sales of Beaujolais nouveau and received a hearty round of applause. Minutes later, smaller groups of Japanese sat in near silence as their bosses held sway.

Like workers at most Japanese companies, Seiyu employees also have difficulty questioning their bosses, particularly foreign managers who often speak through translators. "People cannot even say what they want to their supervisor, let alone jump ahead to the next manager," said Tamae Kobayashi, who is in charge of the human resources group that trains Seiyu employees. Wal-Mart appears confident, though, that the Japanese workers are getting its message.

"Once they understand what you want them to do, you get follow-through," said Jeff McAllister, Wal-Mart's chief operating officer in Japan.

Mr. McAllister said the company was "on plan" in Japan. But Machiko Amano, a credit analyst at Standard & Poor's in Tokyo, said that even Wal-Mart might not be able to save Seiyu from "stagnant consumption, severe competition and shortened product cycles.''

Wal-Mart acknowledges that such threats exist, but it says its decision to enter Japan through a local partner is the right one, even if it requires more subtlety and patience than simply using its huge size and muscle to go it alone.

"People ask when we'll be done," Mr. McAllister said. "But it's going to take hundreds of little things."

Stores Hope Sales Will Give Holiday Shoppers a Nudge
By Becky Yerak - Tribune staff reporter - Chicago Tribune
December 14, 2003

Holiday shoppers were warned not to expect the usual slash-and-burn pricing this year.

But faster than you can say "50 percent off," sales are back, particularly at some department-store chains.

Sears, Roebuck and Co., the nation's biggest department-store operator, on Thursday announced unplanned discounts ranging from 20 percent on watches to up to 60 percent on jewelry.

"While some experts speculated that this holiday season might not be as promotional as in the past, the promotions are on and Sears is in the game," said Chris Brathwaite, spokesman for the Hoffman Estates-based retailer.

In November, Sears slashed prices more than its original game plan called for, but sales still fell 3.6 percent.

Now, two weeks before Christmas, Sears' new round of discounting, which took effect Saturday, also includes up to 50 percent off women's coats and boots. Also, for the first time this holiday season, Sears is offering specials on its Lands' End line. It is another acknowledgement that "people are looking for deals," Brathwaite explained.

Sears isn't alone.

Lord & Taylor, owned by May Department Stores Co. of St. Louis, has been doling out 15 percent-off coupons--and they seemed to work with one 25-year-old Woodstock resident.

Carrying an armful of clothing at Lord & Taylor at Woodfield Shopping Center in Schaumburg, Maria Kordopitoulas planned to use her coupon to make her severance benefits stretch while shopping for her fiance, brothers and father. The project manager was laid off Dec. 5.

"Every little bit helps," Kordopitoulas said.

Coupons have sprung up as sales at 10 department-store chains fell an average 1.1 percent in November, according to a Bank of Tokyo-Mitsubishi tally. That compares with a 3.6 percent rise in average sales at 74 retailers in the survey.

Upper-middle and middle-market department stores aren't expected to perform better until the labor market improves. In fact, of seven retail sectors, only two posted declines--footwear chains and department stores.

"Traditional department stores aren't doing as well as discounters and high-end retailers," said Diane Swonk, chief economist for Chicago's Bank One Corp.

Still, the National Retail Federation, a trade group, said that while some generous discounts are under way, it doesn't expect wholesale price-cutting. "We still don't anticipate storewide markdowns or discounts the week before Christmas," as occurred in 2002 and 2001, spokeswoman Ellen Tolley said.

Looking for shoppers

Carson Pirie Scott, owned by Saks Inc. of Birmingham, Ala., on Thursday offered newspaper coupons worth an additional 25 percent off any sales or clearance-priced clothing or accessory. The true test is whether the coupons lure in customers.

"I've noticed that there's not many people in the stores for Christmas," said Pat Lacriola, 54, browsing at the uncongested Carson Pirie Scott store at Woodfield late Thursday afternoon.

The Elgin resident had coupons from the newspaper and from mailings for discounts good for 15 to 30 percent off.

"They help, especially at this time of the year, with gifts and toys and jewelry," the retail worker said--emphasis placed on "jewelry" for the benefit of her husband, within earshot.

Quick turnaround

Jennie Detterbeck of Palatine was at Carson's late Thursday afternoon--less than 24 hours after spending about $125 at a "big sale" Wednesday night.

"I always try to shop the sales and get the coupons for the charge cards that come," said Detterbeck, a customer service representative.

Lord & Taylor, where sales fell 1.7 percent in November, also is in the coupon game.

Mary Masek, a Lake Zurich resident, used her 15 percent-off coupon toward purchases of women's Jockey socks and underwear.

"You always give socks and underwear as Christmas gifts, right?" asked the 47-year-old insurance company worker.

Masek said she squirrels away discount coupon mailings, like several who said they shop with coupons in hand or expect them before they head to the stores.

"I get a bunch of them, and I just sort of keep them on the counter in the kitchen," Masek said, noting that she's normally not a mall shopper.

Sears Canada Warns on Profit
By Nancy Carr  - Canadian Press - Toronto Star
December 11, 2003

Forecast cut more than 20 per cent  -
Chain credit rating turns negative

Sears Canada Inc. has reduced its 2003 profit forecast by more than 20 per cent, warning that lower than expected fourth-quarter sales will wipe at least $32 million off the bottom line for the full year.

The big department-store chain had "slightly negative" sales in October for stores open for more than a year, with November showing a "mid-single-digit decline," the Toronto company said in a release after stock markets closed yesterday.

Sears Canada dropped its earnings guidance to between $117.5 million and $128 million, or $1.10 to $1.20 per share. The previous forecast had been for an annual profit of about $150 million to $171 million, or $1.40 to $1.60 per share.

"The improved sales trend that we experienced in the third quarter slowed somewhat in October and more significantly in November," Mark Cohen, chairman and chief executive, said in a release.

"December sales to date are below expectations. Although sales could strengthen in the latter part of December, this will not cover the shortfall to date."

Cohen said clothing sales have been particularly weak, while big-ticket sales, such as appliances, have remained strong.

In response to the lowered guidance, Dominion Bond Rating Service changed its outlook on Sears Canada to a negative rather than stable trend.

UBS Canada analyst Jason Bilodeau said he couldn't tell whether Sears' warning meant that other retailers, such as Hudson's Bay Co., would follow suit and lower their forecasts.

"There's been a flurry of activity in the past couple days with respect to all these companies, and quite honestly, until I talk to Sears management, which I have not yet, I don't know whether this is a Sears-specific thing or a market thing," said Bilodeau.

He did predict, however, that Sears' stock would suffer today.

"When you take down your earnings guidance by some 25 per cent, one would expect the stock to respond," he said.

Yesterday, before the warning was released, Sears Canada shares closed 81 cents higher at $18.80 on the Toronto Stock Exchange.

Sears Canada has a network of 123 full-line department stores, 47 Sears Home stores, 145 dealer stores and 14 outlet stores. The company is 55 per cent-owned by Sears Roebuck & Co., a major U.S. department-store retailer based in the Chicago area.

Sears Canada earned a profit of $52.2 million on sales of more than $6.5 billion last year and employed more than 48,000 people at the end of 2002.

3 Analysts Cut Earnings Forecasts for Sears
By Sandra Guy - Business Reporter - Chicago Sun-Times
December 11, 2003

Santa has a lump of coal for Sears Roebuck and Co.: Three Wall Street firms have lowered their outlooks for Sears' earnings because of slow early-holiday sales at the Hoffman Estates-based retailer's stores.

The result: Sears is under pressure to offer deeper sales, which will hurt its profit margins.

Sears CEO Alan Lacy acknowledged his disappointment on Dec. 4, and said the company's fourth-quarter sales will fall flat, at best, or decline 1 to 3 percent from the same period in 2002. That was a darker assessment than Sears initially made in November, when it forecast fourth-quarter sales would range between flat and a 1 to 3 percent increase.

Wayne Hood, an analyst with Prudential Equity Group, on Wednesday lowered his fourth-quarter earnings-per-share guidance to $2.53 from $2.59, and his full-year 2003 estimate to $5.01 from $5.07 a share.

Sears forecast full-year earnings at $4.80 to $5 a share, excluding the sale of its profitable credit-card business but including a charge for selling its National Tire & Battery chain for $225 million to TBC Corp., and for closing three Great Indoors stores and ceasing development on four others.

Analysts at Merrill Lynch and Goldman Sachs have also lowered their outlooks based on reasoning similar to Prudential's Hood's.

However, Goldman analyst George Strachan said Sears may be able to buy back $1.2 billion more of its shares in the next 12 months than he previously expected. Strachan wrote to investors that his estimate was based on a closer look at Sears' debt paybacks and its cash-flow outlook. The extra share repurchases would take more of Sears' shares out of the market and bump up its share price.

Strachan and other analysts have less confidence in Sears' retail outlook based on recent sales results.

In October, sales at Sears' stores open at least a year declined 2.7 percent from the prior year. Analysts had forecast a 1.6 percent gain.

In November, Sears' comparable-store sales dropped 3.6 percent from a year ago, disappointing analysts who had forecast a 1 percent increase. Sales in October and November account for half of Sears' important fourth-quarter sales. The last-minute holiday rush in December makes up the other half.

Sears had raised investors' hopes by breaking a 23-month string of declining sales in August and September.

Two of Sears' rivals -- Kohl's and J.C. Penney -- saw November same-store sales drop 4.4 percent and 0.8 percent, respectively.

Sears' stock, which reached a 52-week high of $55.94 on Dec. 1, closed down $1.65 Wednesday, or 3.5 percent, to $46.

Why Sears and KMart Should Merge
By Bradley Johnson - Advertising Age
December 8, 2003

After All, They Have Stockholder Eddie Lampert in Common

Sears, Roebuck & Co. and Kmart Holding Corp. have two things in common: They've been beaten by Wal-Mart, and they have the same top shareholder. Financier Edward S. "Eddie" Lampert owns 45% of Kmart and 12% of Sears. The solution for these also-rans may be to merge.

Troubled retailers

To be sure, two troubled organizations could make for a troubled marriage. In this case, two wrongs could make a right.

When I visited a local Kmart, it was as if the store had died and gone to Target. I found style, selection and value (if not a lot of customers).

I take back almost all the mean things I've said about Martha Stewart, whose name appears on everything at Kmart except the Joe Boxer shorts. But Kmart still conjures up images of the dowdy Kmart of my youth. In the end, it can't compete with Wal-Mart on price and lacks the cheap-chic mystique of Target.

Reclusive billionaire

Mr. Lampert, a reclusive billionaire money manager and dealmaker, brought Kmart out of bankruptcy in May, emerging as chairman and lead shareholder. He's taken an active role, helping pick Grey Global Group to do advertising and even cold-calling some people he's wanted to consider for key management posts. Yet it's still Kmart. If it remains a stand-alone chain, I bet it will fail.

Enter Sears, where Mr. Lampert took a sizable stake in 2002. Sears sells the right stuff: Craftsman, Kenmore, Lands' End. But it cannot easily match discounters on price because its cost structure is too high. It's testing a new format, Sears Grand, with shopping carts and wide aisles. Early reports are mixed: a nice store that matches rival supercenters on selection but not necessarily on price. Sears has to change. As discounters stock better goods at lower prices, there's less reason for a fabled department store like Sears.

Sears Smart

Consider what could happen if Mr. Lampert produced a merger of his two big holdings. First, the name: Ditch "Kmart," which has too much baggage; keep "Sears," a resilient brand in search of a viable retail format. Maybe tweak the name to show this is something new -- Sears Smart, perhaps.

Then the cost cutting: Watch Mr. Lampert gut merged corporate staffs, slash marketing and close overlapping stores.

Now take Kmart's big boxes in the suburbs and think Target, but with a unique set of strong brands: Craftsman tools, Lands' End clothes, Martha Stewart home furnishings, Kenmore appliances. Take Kmart's older city stores
-- often far from newcomers like Wal-Mart -- and restage them with the best mix from Sears and Kmart, targeting multicultural groups where it makes sense. Add shopping carts and Kmart's soft lines to Sears' old mall locations.

There are big obstacles here. Turning a department store into a low-margin discount store would be tough. Then again, it could be risky for Sears and Kmart to remain as stand-alones while better retailers race ahead.

A $244 billion Goliath

Sears and Kmart were once the two biggest U.S. retailers. Sears is now No. 5 and Kmart No. 11, according to Forbes' math. A merger would make Sears No. 2. Sears has about 870 stores; there are 1,500 Kmarts. Wal-Mart Stores has nearly 3,000 U.S. Wal-Marts. Sears' and Kmart's sales last year were $41 billion and $31 billion, respectively. Wal-Mart sales (including Sam’s Club) were a bit bigger: $245 billion.

Sears succeeded by making radical moves at the right time. Richard Sears started by selling watches in 1886; he moved into catalogs to serve rural America. Sears opened its first store in 1925, bet right on the postwar boom and became the nation's No. 1 merchant till a small-town retailer, Wal-Mart, swept past it.

Sears can adapt, and Kmart could be the opportunity. Maybe Mr. Lampert should arrange a marriage.

~ ~ ~ Bradley Johnson Advertising Age editor at large.

Is Wal-Mart Good for America?
By Steve Lohr - New York Times
December 7, 2003

THE annual celebration of the American consumer economy — the holiday shopping season — is just underway, and Wal-Mart, the juggernaut of retailing, already seems to have claimed its first victim. The corporate owner of F.A.O. Schwarz stores said last week that it would file for bankruptcy. Bemoaning the news, analysts explained that the F.A.O. Schwarz formula of selling premium-priced toys in sumptuous surroundings could not withstand the steady advance of Wal-Mart into the toy business.

"Will Wal-Mart Steal Christmas?" asked a Time magazine headline.

The toy war is merely the most recent manifestation of what is known as the Wal-Mart effect. To the company's critics, Wal-Mart points the way to a grim Darwinian world of bankrupt competitors, low wages, meager health benefits, jobs lost to imports, and devastated downtowns and rural areas across America.

Yet there is a wider, less partisan view of the company, which perhaps more visibly than any other corporation marches to the mandate of the global capitalist economy.

"Wal-Mart is the logical end point and the future of the economy in a society whose pre-eminent value is getting the best deal," said Robert B. Reich, the former labor secretary and a professor of social and economic policy at Brandeis University.

To the company's supporters, Wal-Mart is an agent of economic virtue, using its market power to force suppliers to become more efficient and passing the gains on to consumers as lower prices. The enthusiasts say Wal-Mart is a big reason for the country's almost nonexistent inflation and impressive productivity gains.

There is a lot to be said for getting the best deal, economists say. Prices, they note, are essentially a yardstick of efficiency, translated into consumer terms. Prices are concrete and measurable, while other values of consumer and social welfare — say, product quality or job preservation — are often hard to quantify or require costly intervention like protectionism or subsidies.

Moreover, some economists note, lower prices for the kinds of basic goods on sale at Wal-Mart superstores, like food and clothes, are of the greatest benefit to the less affluent. Grocery prices, for example, drop an average of 10 to 15 percent in markets Wal-Mart has entered, analysts say.

"Wal-Mart is the greatest thing that ever happened to low-income Americans," said W. Michael Cox, chief economist of the Federal Reserve Bank of Dallas. "They can stretch their dollars and afford things they otherwise couldn't."

Wal-Mart is the largest American corporation in terms of sales, $245 billion last year. It is now the nation's largest grocer, toy seller and furniture retailer. More than 30 percent of the disposable diapers purchased in the country are sold in Wal-Mart stores, as are 30 percent of hair-care products, 26 percent of toothpaste and 20 percent of pet food. Wal-Mart has nearly 3,000 stores in the United States, and plans to add an additional 1,000 over the next five years. Increasingly, the company is taking its formula abroad; Wal-Mart is now the largest private employer in Mexico.

The prospect of Wal-Mart amassing even more market power does not worry free-market economists like Mr. Cox. Despite the company's gains, the retail industry is still not highly concentrated, he said, with Wal-Mart accounting for 20 percent of the sales of the 100 largest retailers. Its success has been built, Mr. Cox said, on mastering the use of information technology to streamline its operations — much like Dell Computer in the personal computer business. Inevitably, less efficient rivals will be winnowed, he added, and those that remain will compete aggressively for consumer dollars.

"With the new technology of the information age," Mr. Cox said, "we're moving to a new market structure in a lot of industries. And the optimal number of firms has gone way down."

Antitrust has traditionally been the tool for insuring competition and keeping a watchful eye on powerful companies. But the evolution of antitrust policy over the last 30 years — to emphasize price, not the number of competitors — has actually worked to the advantage of businesses like Wal-Mart.

In the past, antitrust policy assumed that more companies meant more competition, which was good for consumers. The Robinson-Patman Act of 1936 — sometimes called the anti-chain store act — was passed partly to protect small local retailers from the Great Atlantic & Pacific Tea Company, the Wal-Mart of its time. It prohibited price discrimination, or discounts, to different purchasers when the effect was to lessen competition. At the time, the drift of antitrust policy was to restrain big business and protect mom-and-pop stores.

The populist tinge to antitrust continued for decades. In ordering the break-up of the Aluminum Company of America in 1945, Judge Learned Hand of the United States Court of Appeals for the Second Circuit wrote that the purpose of antitrust was to "perpetuate and preserve, for its own sake and in spite of possible cost, an organization of industry in small units which can effectively compete against each other."

In 1966, the Supreme Court sided with the Federal Trade Commission in challenging a merger in the Los Angeles grocery market, Von's Grocery and Shopping Bag Food Stores, which together had only 7.5 percent of the local market.

But the intellectual tide shifted by the 1980's, especially under the growing influence of the so-called Chicago school of economics, which emphasized prices as the fundamental gauge of consumer welfare. Market concentration and company size meant little. If big companies raised prices, they were bad. But if, like Wal-Mart, they achieved greater efficiency from economies of scale and passed the benefits onto consumers as lower prices, they were praised.

"Has our thinking on antitrust driven us toward an economic world that Wal-Mart represents?" asked Andrew I. Gavil, a professor at the Howard University law school. "I would say that it has. The harder question is whether that is a good or a bad thing."

To keep cutting costs, Wal-Mart is tough on its suppliers. Selling to Wal-Mart, by all accounts, is a brutal meritocracy. Manufacturers have been forced to lay off workers after Wal-Mart canceled orders when another vendor cut its price a few cents more. Other suppliers have shifted to low-cost operations in China and elsewhere when squeezed by Wal-Mart to cut costs further.

Yet here again, many analysts regard Wal-Mart's practices as simply leading the way in the inevitable drive to making the economy more efficient. "Wal-Mart is tough, but totally honest and straightforward in its dealings with vendors," said Michael J. Silverstein, a senior vice president at the Boston Consulting Group. "Wal-Mart has forced manufacturers to get their act together and forced them to compete internationally."

There is some evidence that the company's zeal for efficiency has gone too far. Wal-Mart's detractors point to a trail of litigation over pinch-penny issues like unpaid overtime, and to a federal investigation into its use of poorly paid illegal immigrants as janitors. Wal-Mart insists that any problems do not reflect the culture of the company as a whole. "If there is valid criticism that comes from these cases, we will own up to it and made improvements," said Ray Bracy, vice president of international corporate affairs for Wal-Mart.

Wal-Mart's growing power has brought increased scrutiny from federal and state regulators. But as long as the company keeps delivering lower prices, they will most likely be reluctant to act, beyond prosecuting employment infractions. The classic behavior of a predatory corporation is to cut prices to drive out competition in order to raise them later. There is no evidence yet that that is the Wal-Mart strategy.

"Consumers get huge benefits from Wal-Mart as long as it has real competition," Mr. Reich said. "The worry is that it becomes so powerful that it can unfairly stifle competition."

Lawsuit Filed Against Sears Seeks Class Action
By Paul Ivice - The Business Journal of Jacksonville
MSNBC
December 8, 2003

Hundreds of Florida homeowners have been overcharged when they had vinyl siding installed by Sears Home Improvement Products Inc., a lawsuit against the company alleges.

The suit, filed recently in Duval County Circuit Court on behalf of Samuel D. Porterfield, seeks to establish a class action on behalf of all other Florida residents who have had vinyl siding installed since April 1999 by Sears Home Improvement Products, a wholly owned subsidiary of Sears Roebuck and Co. The subsidiary's Florida headquarters are in Longwood.

In the suit, Porterfield contends that a Sears Home Improvement Products representative estimated he would need 800 units of siding and insulation to cover his Leon County home. Based on that estimate, Porterfield bought 800 units of Sears Colonial Ivory vinyl siding for $4,480 and 800 units of insulation for $1,120.

But installers needed only 580 units of siding and 576 units of insulation to complete the job. The surplus siding and insulation was returned to the company's warehouse, but Porterfield was not credited for the unused units. The suit alleges that because the surplus exceeded an allowable 10 percent waste factor, Porterfield was overcharged $1,545.60, or about 28 percent of what he contends should have been his total bill.
Attorneys Allan Sigel of Los Angeles, R. Duane Westrup of Long Beach, Calif., and Ken Tomchin of Jacksonville represent Porterfield in his lawsuit. Tomchin deferred questions to the California attorneys, who did not return phone calls seeking comment.
But they allege in the suit that "SHIP's sales policies and commission structures encourage its sales representatives to overestimate and sell more materials than are actually needed to complete jobs on customers' homes" and that "SHIP routinely sells and charges customers for materials not needed for a particular job and then returns the unneeded materials to inventory for resale to other customers."

The plaintiff's attorneys contend that such practices by Sears Home Improvement violate the Florida Deceptive and Unfair Trade Practices Act.

Sigel said they also will be looking to see if the federal Truth in Lending law was violated, since Sears typically finances such improvements.

Although Porterfield's alleged damages do not exceed the $15,000 minimum required to file the suit in Circuit Court, his attorneys have filed for class action status and estimate that "affected Florida consumers number in the hundreds" and hope to use the discovery process to search SHIP's records to identify and locate other homeowners who potentially would join a class action.

A spokeswoman at Sears Home Improvement Products in Longwood referred all questions about the case to Sears Roebuck and Co. corporate headquarters in Chicago; officials there did not return a call seeking comment.

 

Wal-Mart Invades, and Mexico Gladly Surrenders
By Tim Weiner - New York Times
December 6, 2003

The company that ate America is now swallowing Mexico.

Wal-Mart, the biggest corporation in the United States, is already the biggest private employer in Mexico, with 100,164 workers on its payroll here as of last week. Last year, when it gained its No. 1 status in employment, it created about 8,000 new positions — nearly half the permanent new jobs in this struggling country.

Wal-Mart's power is changing Mexico in the same way it changed the economic landscape of the United States, and with the same formula: cut prices relentlessly, pump up productivity, pay low wages, ban unions, give suppliers the tightest possible profit margins and sell everything under the sun for less than the guy next door.

"This is the game that Wal-Mart has played in the United States," said Diana Farrell, director of McKinsey Global Institute, a policy research group run by the international business consultancy McKinsey & Company. "They've changed the name of the game in Mexico."

In the United States and Western Europe, Wal-Mart has been accused of driving down wages, introducing cut-throat business practices and bankrupting local companies.

But in Mexico's dreary economy, foreign investment, especially American investment, is about the only bright light, and many Mexicans know it. Cries of economic and cultural imperialism, rampant 10 years ago, when the North American Free Trade Agreement took hold, are more muted now.

"Part of globalization is adopting the methods and customs of another country," said Francisco Rivero, an economic analyst in Mexico City.

Though it came to this country only 12 years ago, Wal-Mart is doing more business — closing in on $11 billion a year — than the entire tourism industry. Wal-Mart sells $6 billion worth of food a year, more than anyone else in Mexico. In fact, it sells more of almost everything than almost anyone. Economists say its price cuts actually drive down the country's rate of inflation.

Last year, 585 million people — nearly six times the population of Mexico — passed through its check-out lanes. With 633 outlets, Wal-Mart's Mexican operations are by far the biggest outside the United States.

Its sales represent about 2 percent of Mexico's gross domestic product — almost the same as in the United States. Analysts say it now controls something approaching 30 percent of all supermarket food sales in Mexico, and about 6 percent of all retail sales — also about the same as in the United States.

Though Wal-Mart is not the only game in town, it is the biggest, and its bigness is crushing its supermarket competitors. Its methods are creating "a radical change" in the way business is done here, Ms. Farrell said.

"Wal-Mart has changed the retail market in Mexico," said Raúl Argüelles, a Wal-Mart vice president in Mexico City. "Every store manager has authority to lower prices if he sees the store across the street selling for less. If you have to lower the price, you lower it."

For Mexicans trying to compete with Wal-Mart, a new business culture is emerging, based on those hard-nosed, sometimes cut-throat tactics. For Mexicans with money to spend, a new consumer culture is rising, along with the sales of McDonald's hamburgers and Domino's pizzas (the three favorite toppings here are jalapeño peppers, ham and pineapple).

The marketplace is making Mexico look more like the United States, like it or not.

"From the commercial point of view, it's a total convergence," said Luis de la Calle, who was a chief Nafta negotiator. "If you go to a supermarket in Mexico, the type of products, the service they give you, it's just like you find in the United States or Canada, in terms of variety, quality and price."

Wal-Mart shoppers here have become attuned to the company's smiley-face logo and its mantra of "Everyday Low Prices." At a Mexico City shopping center, Plaza Tepeyac, José Carrillo, 36, wended his way through the aisles on a weekday morning, admiring how neatly the merchandise was displayed.

"Sometimes I go to the street markets and sometimes I come here," said Mr. Carrillo, an administrative aide, who lives three blocks from a Wal-Mart. "Sure, I know Wal-Mart is a multinational company, but what are you going to do? That's globalization, and Mexico has to play the game, right? Maybe some of the profit leaves Mexico, but Mexico gets back some foreign investment, right? That's how things work. It doesn't matter to me if I'm buying from a multinational company, as long as they give me what I want."

Wal-Mart opened its first American store in 1962 and started its international expansion in 1991, when it began to build and buy its way into Mexico. Half its Mexican operations now are here in the capital, the other half in cities across the country, from Tijuana to Cancún.

Its 81 Wal-Mart stores and 52 Sam's Club outlets now ring up close to $6 billion a year. Annual sales at its Superama and Bodega supermarkets approach $4 billion. Wal-Mart also runs 52 Suburbia department stores and 267 Vips restaurants, with close to $1 billion a year in sales.

Wal-Mart has also become the largest retailer in Canada, and has outlets in Argentina, Brazil, Germany, South Korea, Puerto Rico and Britain. The global expansion has helped make it the world's biggest company in terms of revenues, with $245 billion in sales last year — a sum greater than the economies of all but 30 of the world's nations. Nowhere outside the United States are its stores as numerous as in Mexico, where the scope and scale of its operations have grown to resemble its dominion in the United States.

Wal-Mart says that it treats its Mexican employees so well that the workers want no union, and that it pays its workers better than do its Mexican competitors.

However, in the United States, a unionized supermarket worker makes, on average, about $19 an hour. At Wal-Mart, where there are no unions, that worker makes about $9 an hour. In Mexico, for a newly hired Wal-Mart cashier, the pay stub reads about $1.50 a hour.

A Bright Shining Lie
Commentary: Medicare reform fueled by ulterior motives
By Chris Pummer cbs.marketwatch.com
December 5, 2003

SAN FRANCISCO (CBS.MW) -- Rarely in the annals of American politics have
Republicans and Democrats been as deceptive as our national leaders were in
passing the Medicare reform bill.

From Sen. Edward Kennedy's fear-mongering claims that the bill would dump seniors "into the cold arms of the HMOs" to President Bush's undeclared goal of privatizing the mother of all entitlement programs, the debate was riddled with half-truths born of posturing for the old-folks' vote in next fall's election.

America's seniors ultimately received their long-awaited Medicare drug benefit -- starting in 2006. Meanwhile, a financing system that worked efficiently will soon be encumbered with a host of horse-traded provisions -- insurance industry subsidies, aid to rural hospitals and health-care spending accounts among them.

"Almost nobody understood what the hell was going on (in Congress) and they're not going to like what they see when it's finally clear to them," said Yale professor Ted Marmor, author of "The Politics of Medicare." "We ended up with a bill that tries to do lots of things that are incoherent, under the rubric of dealing with the drug-benefit problem."

The Medicare battle, in truth, degenerated into an attempt by both parties to establish firmer ground for a future conflagration -- the certain looming debate over adopting universal health-care coverage.

The 38-year-old Medicare program is already much like a universal system, albeit for a "select" group of 40 million elderly and disabled recipients, or one in seven Americans. And it's proven more cost-effective than the 20-year dalliance with a managed-care option.

By offering billions in subsidies to private insurers to move Medicare recipients into managed care, the Bush administration is ignoring the failure of years of managed-care experiments in the belief full-blown competition will breed greater efficiency. The more recipients are shifted into managed care, the more that would complicate a future move toward socialized medicine.

Kennedy and his fellow liberal Democrats' motives, meanwhile, were more nefarious than protecting seniors from managed care. Their alarmist proclamations' aimed to preserve the existing program as a model for universal coverage, come the day the Democrats regain control of the White House and/or Congress.

Even though the bill provides prescription-drug subsidies for the low-income elderly, and sharply raises Medicare premiums for individuals starting at $80,000 in annual income, Kennedy made little of the subsidies and opposed the progressive premiums, despite both being liberal provisions. The reason: He didn't want the poor to pay less or the wealthy to contribute more, since it would undermine "universal" coverage.

Meanwhile, the country remains saddled with a publicly financed program whose present $276 billion annual cost is bound to soar under the strain of longer life spans and the drain 74 million baby boomers will begin placing on it early in the next decade.

Medicare may be administratively more cost-effective, but why should seniors enjoy a freedom of choice in doctors that most working Americans lost long ago? They believe they're entitled to the level of care they knew in the days of doctor house calls. Their anxious visits to specialists and demands for cutting-edge diagnostic testing and screening are putting an increasing strain on the federal budget.

"Sometimes denial of what people think they need is a good thing," said Paul Ginsberg, president of the Center for Studying Health System Change, a nonpartisan group funded by the Robert Wood Johnson Foundation.

Said Marmor: "The Republicans thought this bill would take Medicare off the table for the election of 2004, when in fact, it's now going to be a bigger issue." Chris Pummer is an assistant managing editor for CBS MarketWatch in San Francisco.

Holiday Shoppers Snub Sears
By Kelly Quigley - Crain's Chicago Business Online
December 4, 2003
Retailer sees sales slip in November, lowers outlook

The kickoff to the holiday shopping season failed to ring up expected sales for Sears, Roebuck and Co., prompting the beleaguered retailer to lower its sales guidance for the fourth quarter.

November is the second consecutive month Sears’ sales have faltered, after stores rebounded in August from 23 months of declines. Like other retailers, the department store chain had high hopes for the day after Thanksgiving—the traditional start to the critical holiday shopping season.

But many shoppers opted to splurge on luxury goods last week, rather than buy items from lower-end chains.

Still, analysts aren't ready to characterize November's weakness as the start of a downward trend for Sears.

"November was a rough environment for everyone in the moderate department store channel," said Jeff Stinson, an analyst with Ohio-based FTN Midwest Research, noting that rivals J.C. Penny Co. Inc. and Kohl’s Corp. also reported weak sales.

"I still expect to see some steadier results from Sears next year," he said.

On Thursday, Hoffman Estates-based Sears said same-store sales, or sales at locations open a year or longer, fell 3.6% last month, contrary to analysts’ forecasts for a 1% increase. Total sales for the four weeks ended Nov. 29 declined 3.2% to $2.46 billion from $2.55 billion a year earlier.

On top of weak spending, matters were made worse because Sears launched more holiday promotions than planned, Chairman and CEO Alan Lacy said in a statement.

"We are disappointed the results weren't stronger," Mr. Lacy said. Toys, tools and digital electronics went over well with holiday shoppers, but "overall spending at the beginning of the season has been more subdued than expected."

Sears wasn't alone. Wisconsin-based Kohl's, one of Sears’ top rivals in the lower-priced department store category, was among the worst performers with a 4.4% drop in same-store sales last month.

Analysts said Sears and other "middle market" retailers suffered because many shoppers traded up to pricier department stores like Marshall Field's and high-end chains like Nordstrom Inc. and Saks Inc. Others took their dollars to extreme discounters like Wal-Mart Stores Inc., which managed to hit the mid-point of its sales forecast.

"Middle market apparel is brutally competitive," said Bill Dreher, Sears analyst with New York-based Deutsche Bank.

Mr. Dreher applauded Sears’ changes to its department store format, which include wider aisles and centralized registers, but warned "it could take some time for Sears to get the word out.

"A lot of people still don't know that Sears has Lands’ End in all of its stores now,” he added.

Based on Sears’ tepid results for October and November, the chain cut its fourth-quarter guidance, saying sales will be flat or decline by the low single-digits. Last month, Sears' forecast flat sales to an increase in the low single-digits for the quarter.

Sears also said it would stop providing monthly sales guidance starting in 2004, though it will continue to report actual results. A spokesman said the change has nothing do with the company’s recent performance.

Sears Repair Techicians Have a New Tool: Wi-Fi
By Sandra Guy - Sun-Times Columnist - Chicago Sun-Times
December 3, 2003

Sears Roebuck and Co. service technicians are using Wi-Fi technology -- the kind found in Starbucks cafes and McDonald's restaurants -- to keep tabs on their assignments and to troubleshoot repairs on washers, dryers and refrigerators.

Though Sears has kept its service fleet outfitted with computer gear for eight years, the Hoffman Estates-based retailer is under new pressure to cut costs and keep customers satisfied, and is looking to Wi-Fi and other advanced technology applications for help. Sears is facing new competition from companies such as Maytag Corp., which is developing a repair division that, like Sears, will dispatch service technicians to work on any major brand of home appliance.

Sears has spent $65 million to outfit the trucks of its 10,000 technicians with Wi-Fi, a Global Positioning System and a third technology that keeps the wireless link from being dropped. The system rolled out this past summer.

Here's how it works:

A Sears technician wakes up to find his schedule for the day on a touch-screen laptop, which has received the information remotely in the middle of the night.

After the technician logs in, he receives new assignments as he goes. The schedule changes include customers who have requested service online at Sears.com.

A voice pipes up from the laptop, notifying the technician, "A service call has been added."

The laptop -- it's a woman's voice, but not as soothing as the one on the Star Trek computer -- also tells technicians when they have new e-mail messages.

Attached to the laptop is a hand-held scanner, which the technicians use to scan appliances' serial numbers (and often also their model numbers). The technician takes payment immediately after he repairs an appliance, and prints out a receipt on a small, mobile printer.

Jerel Harness, a Sears technician for 17 years, demonstrated to the Sun-Times how technicians can access owners' manuals, electrical schematics and drawings of an appliance's inner workings via the laptop's software. They can zoom in on a part for a closer look.

The technicians access a database to check whether they have the necessary part in the truck, and if not, check the cost and availability of the part at Sears' parts warehouse in Melrose Park.

The technology prevents typing errors and saves time because technicians no longer must dial a toll-free number and wait for someone at Sears' technical assistance center in Austin, Texas, to answer their questions.

Such cost savings are important because product-repair services generated $2.15 billion in revenues for Sears in 2002, or 5 percent of the company's $42.4 billion in revenues.

Technicians also can see on their laptops how many times Sears has tried to make a service call at a house, whether another technician has ordered parts, and how much the job is estimated to cost.

Sears no longer assigns each technician an identical set of parts. Now, the technicians get the parts they are most likely to use, so a repairman who fixes expensive refrigerators has a different set of parts than does a worker who services only washers and dryers.

Still to come are upgrades that will enable the laptop to verbally describe driving routes, and features that will update technicians on new appliances and sales promotions.

Harness describes the difference in today's technology and that of the rugged laptop he carried years ago as the difference between a computer and a calculator.

"The radio frequency (technology) was slow and unreliable," he said. "Quite often, it wouldn't work if you went into a basement, not to mention battery and printer problems."

Technicians get rated on their productivity, including how many trips they must make in order to repair an appliance, so the new system is a marked improvement, Harness said.

The technology also comes in handy as appliances themselves become more technologically sophisticated, and as more people buy expensive appliances made in Germany, Korea and Japan.

On ABC, Sears Pays to Be Star of New Series
By Stuart Eliott - New York Times
December 3, 2003

The ABC television network is making its biggest branded-entertainment deal to date, signing Sears, Roebuck & Company as the centerpiece sponsor of a reality series, "Extreme Makeover: Home Edition," that will have its premiere as an hourlong special tonight at 10.

The deal, estimated to be costing Sears more than $1 million, includes the placement of products like Craftsman tools, Kenmore appliances and Lands' End home furnishings in each of the six episodes. During the series - now in production for a regular run expected to begin in January or February - there could be scenes of trucks delivering merchandise from Sears, plumbers and other workers from Sears home-improvement services making repairs and visits to Sears stores by the show's makeover-team cast.

The deal between ABC and Sears, which will also buy commercial time during each episode of "Extreme Makeover: Home Edition," is emblematic of the recent trend of marketers' becoming intrinsically involved in shaping the content of entertainment programming.

The goal is to counter the growing abilities of viewers to zip, zap and bypass expensive commercials. Indeed, the trend is gaining such momentum that Mediapost.com reported yesterday that the Nielsen Media Research division of VNU is starting a service intended to help track product placements on TV.

Though ABC, part of the Walt Disney Company, has brought viewers numerous sponsored series before "Extreme Home: Makeover Edition" - from hits like "Who Wants to Be a Millionaire" to flops like "All-American Girl" - the agreement with Sears represents a deepening of the network's participation in the trend.

The attraction is that "advertisers can take advantage of the opportunity to showcase products in real-life situations," said Dan Longest, senior vice president for integrated marketing and promotion at the ABC television network division of ABC in New York.

Critics of the trend warn, however, that it runs the risk of confusing viewers by masking the role the sponsors play in determining what appears on screen between the commercial breaks. One advocacy organization, Commercial Alert, has even petitioned the Federal Communications Commission and Federal Trade Commission to regulate product placement.

The trade commission said it would review the complaints about the blurring of the line between advertising and entertainment, a practice that Gary Ruskin, executive director at Commercial Alert, called "an affront to basic honesty."

Commercial Alert wants what Mr. Ruskin called "concurrent, conspicuous and clear" disclosures to rectify the problem like acknowledgements of sponsorships to be superimposed on screen, in a so-called rolling scroll, as the placements occur.

Sears is sensitive to the intensifying criticism about sponsored entertainment, said Janine Bousquette, executive vice president and chief customer and marketing officer at Sears, which is based in Hoffman Estates, Ill. "We are extremely choiceful about what opportunities we pursue," she said, because "consumers are smart and want to be treated with respect."

"ABC will ensure that the series stays authentic and relevant and entertaining to the viewers," she added, "and we would not ask the network to do anything less."

The content of the series - showing the before, during and after elements of extensive house renovations - "makes it easy for Sears to be part of the show in a way that's authentic versus forced, integrated in a way that's truly relevant," Ms. Bousquette said. "I don't think you can force your way into a show and be considered seriously by the consumer."

Mr. Longest said ABC would "never take it to the point where it would seem like a bunch of logos slapped in a show."

"It's something we all have to police," he added, to ensure that the elements of the series involving Sears are not gratuitous and make sense.

"The story is not about Sears per se but about the family" in each episode, Mr. Longest said, "and Sears plays a role in the personality of the show." The families are being selected by the production company, Endemol Entertainment USA, as deserving of free home makeovers because of what are judged to be their hard-knock lives; for instance, in the episode tonight the youngest daughter won a battle with leukemia. (Endemol, part of the Spanish company Telefónica, is known for reality series like "Big Brother" on CBS and "Fear Factor" on NBC.)

ABC is exploring sponsorship roles for other advertisers on the series that would also include product placements, in categories like packaged foods, Mr. Longest said.

Executives at ABC and Sears are working together to develop additional tie-ins between the retailer and the series like displays in Sears stores. One already in place, Ms. Bousquette said, would be the appearance of "specific products in the show" on the Sears Web site after each episode is broadcast.

The ABC deal with Sears is separate from a venture between ABC and the MindShare division of the WPP Group to develop and produce programming aimed at family viewers that would include sponsored elements like product placements. That venture, described Monday in The Wall Street Journal, is just one of many examples of teaming up between media agencies and networks.

For instance, as part of a deal between the OMD Worldwide division of the Omnicom Group and the Sci-Fi Channel unit of Vivendi Universal, products of OMD clients are being written into the scripts of episodes of a mini-series, "Five Days to Midnight," to appear on Sci-Fi in the second quarter of 2004.

"Extreme Makeover: Home Edition" is the first broadcast-network entry in the hot category of home-improvement family reality programming, which has been led by cable shows like "Trading Spaces" and "While You Were Out." (In fact, Ty Pennington of TLC's "Trading Spaces" is part of the "Extreme Makeover: Home Edition" crew. And TLC, part of Discovery Communications, signed a branded-sponsorship deal with Home Depot for "Trading Spaces," replacing
Lowe's.)

The ABC series is a spinoff of a Thursday-night reality show on the network called "Extreme Makeover." Both programs offer overhauls to people deemed poor souls in a genre that dates back to the sob-story "Queen for a Day" show, which ran for almost three decades on radio and TV, starting in 1945. Coincidentally, ABC was one network that carried "Queen for a Day," as part of its daytime lineup from 1960 to 1964.

Bright season at Sears?

Executives hope Lands' End line, improved economy boost sales

By Lorene Yue and Susan Chandler, Tribune staff reporters.
Freelance reporter Ann Therese Palmer contributed to this report
Chicago Tribune - November 30, 2003

Claudia Miller is becoming a Lands' End junkie.

The 52-year-old resident of south suburban Homewood shelled out more than $360 on Lands' End's preppy apparel in a three-day period.

But she didn't pick up the phone. She traveled to Sears, Roebuck and Co. stores in Calumet City and Orland Park.

"I have always liked Lands' End products, but it's too hard to buy from a catalog. It's sizing. My husband is very particular about how his clothes fit," said Miller, who works as a librarian. Now that Sears carries Lands' End for men, she can pick up a few things for her spouse and return them without the hassle of a UPS pickup.

As the holiday season heads into high gear, stories like Miller's fill the hearts of Sears executives with hope that the Hoffman Estates-based chain can turn around an almost relentless two-year decline in sales.

A good holiday performance would be particularly welcome this year because for the first time in decades, Sears has only its retail business to count on. Its highly profitable credit card business was sold off this summer.

"I think this is a very important fulcrum to see what the new Sears looks like and what earnings it will generate," said Heather Brilliant, retail analyst with Morningstar Inc. in Chicago.

Aside from Lands' End throughout the chain and some new hip-hop apparel lines in a spattering of stores, Sears doesn't have all that much new to show customers this holiday season, retail experts say.

Instead, Sears is counting on more in-store KB Toys boutiques and an extensive inventory of DVD players--three times normal levels--to help it pull out a same-store sales gain in December, which would be the first in six years.

On top of that, experts add, it's not clear what Sears' longer-term strategy is. Does it want to nudge its merchandise and demographics slightly upmarket, a strategy that the nearly $2 billion acquisition of Lands' End plays into?

Or does it want to be a serious contender in the discount arena? That seems to be the game plan behind Sears Grand, the company's new free-standing store format, which mixes soda and chips with Sears' more traditional mix of casual apparel and appliances.

Either way, Sears Grand isn't going to provide a boost to Sears' top line this year or next because there is just one store open in a suburb of Salt Lake City. A second store is scheduled for north suburban Gurnee next spring, and by the end of 2004 there will be four stores, a drop in the bucket compared with Sears' nearly 870 mall-based department stores.

"It's an experiment they have a lot of hope for," said Sid Doolittle, retail analyst with Chicago's McMillan/Doolittle. "But let's say it's absolutely fabulous, it still won't make a dent in Sears' volume."

The best thing Sears may have going for it is a recovering economy.

A resurgence of hiring, rebounding consumer confidence and a lingering wealth effect from summer tax refunds should result in a spending spree that hasn't been seen in several years, economists say.

Holiday sales for November through January should rise a robust 6.5 percent to 7 percent this year, according to Carl Steidtmann, chief economist with Deloitte Research in New York.

The National Retail Federation, the industry's leading trade group, predicts a healthy sales increase of 5.7 percent in November and December.

Experts anticipate that industry leaders such as Wal-Mart Stores Inc. and Target Corp. will turn in strong performances. Expectations also are high for J.C. Penney Co., which is getting out of the drugstore business and generating some fashion buzz with new, less expensive lines by trendy Gen X designers Bisou Bisou and BCBG Max Azria.

Sears is playing its cards close to the vest, declining to give target numbers and saying it has a "cautious outlook" for the holidays.

Sears Chief Executive Alan Lacy is a little more forthcoming. "We have better products and better customer service. It's been a lot of hard work," he said in a recent interview. "I feel good about where we're positioned."

Lacy has some things to feel good about, retail experts agree.

Sears has cleaned up its private-label Covington classic clothing line, which didn't present a consistent fashion message when it debuted in September 2002.

The stores also are doing a better job of showcasing Lands' End's higher-priced apparel and conveying that it is a step up from Covington in quality and price. "Before, the assortment did not lead up to Lands' End," Doolittle said.

But other things continue to be worrisome, including customer service. In an effort to reduce overhead, Sears dramatically cut staffing and moved to centralized checkout counters last year, emulating the layout of Kohl's stores.

On her last visit to Sears' Golf Mill store, Helen Charchut of Park Ridge couldn't find anyone to help her. "I only saw one gal taking care of a rather large area that included women's as well as men's clothing. There was no one who would point out anything to me."

Charchut walked away without purchasing anything and said she wouldn't consider shopping there again.

It will be hard to judge Sears' progress by its year-end numbers. The company is in the process of revising its 2003 earnings outlook to reflect the loss of its credit card division, which will subtract roughly 40 percent of operating profit and 6 percent of revenue.

Wall Street analysts expect Sears to earn $4.74 to $5 a share in 2003, excluding one-time items, which is on par with Sears' current guidance. That would be a 10 percent increase from 2002 when Sears earned $4.29 per share. The numbers are mostly comparable because credit was still part of Sears until early November.

Investors' expectations are lofty.

Sears stock is trading around $56 a share, close to its 52-week high and far from its 52-week low of $18.25. Sears' shares began climbing after the company announced its plan in late March to sell its credit card business.

But the big challenge remains convincing younger customers that Sears has something new and exciting in the apparel section and persuading middle-age shoppers to give Sears a second look.

It's the same obstacle Sears has tried to overcome for a decade. Some see that as an almost insurmountable task.

"The joke is, if Sears is selling Armani suits for $200, people wouldn't go into Sears," said Dave Novosel, an analyst at Banc One Capital Markets in Chicago. "Sears is known for top-quality merchandise, not necessarily fashion."

Indeed, Sears hasn't made much headway in changing its stodgy image if Elizabeth Wilson is any guide. Wilson, an 18-year-old student at the School of the Art Institute of Chicago, shops at Sears' State Street store for electronics and small kitchen appliances but never for clothes or shoes.

"They're too dowdy. They don't have the latest trends," says Wilson. "For clothing, I shop at American Eagle, the Gap and Old Navy. They've got the styles and quality that I need--and the fit."

Lacy agrees that there is more work to do and promises his team will continue to tweak its apparel selection. "We're still doing a lot and we're still asking our organization to do a lot," Lacy said.

But he has won at least one convert. Miller said that before her Lands' End shopping spree, she hadn't bought clothes at Sears for four years.

"Sears had a staid, old-lady image to me. Polyester pantsuits don't make it today," she said. "With the addition of Lands' End merchandise, they've got clothing that speaks more to my style of comfortable casual. They're more my generation now."

Citigroup Takes Sears Space
Chicago Tribune - Nov. 26, 2003

Citigroup Inc. is negotiating a lease for about 70,000 square feet in the Hoffman Estates headquarters campus of Sears, Roebuck and Co., sources said.

The New York banking giant will use the space to house the credit card business it purchased from Sears Nov. 3.

Citigroup is a client of Chicago-based tenant representative Equis Corp. A Sears spokesman confirmed that negotiations were under way but said the amount of space had not been determined.

Citigroup could take space in Building G, which is being marketed by CB Richard Ellis Inc. as a multitenant building, or in Building E, he said.

Employers' Caps Raise Retirees' Health-Care Costs
By Ellen E. Schultz and Theo Francis - Staff Reporters
The Wall Street Journal - November 25, 2003

Limits Shield Many Companies From Rising Outlays for Coverage;
Passing Burden to Retired Workers

Although employers complain about the rising cost of providing retiree health benefits, many companies in fact face limited financial exposure to health-care inflation -- no matter how sick their retirees get or how long they live.

That's because at least half of the nation's major employers, including International Business Machines Corp., CSX Corp. and Aon Corp., have established ceilings on the amount they will spend each year on an individual retiree, according to a survey of 435 large companies by the Kaiser Family Foundation and Hewitt Associates. Once health-care costs reach the ceiling, the increases are passed along to retirees. As a result, retirees have seen their out-of-pocket costs skyrocket in recent years.

IBM, for example, in the early 1990s capped the amount it would spend on health-insurance premiums for retirees over age 65 -- $3,000 a year for eligible people who retired after 1992, and $3,500 a year for those who had retired earlier. IBM's cost of retiree health care reached the ceiling of $3,500 per employee in 2001; since then, all premium increases have been passed along to retirees.

Retired systems engineer John Kotson, 69 years old, paid nothing for his retiree health coverage when he retired in 1989 after 32 years with IBM. In 2001, his premiums were $91 a month, and they have tripled since then -- $312 a month for Mr. Kotson and his wife. With deductibles of $1,014 a year, plus $456 in the Medicare Part-B premiums (which cover doctor's visits) that IBM requires him to pay, plus paying 35% of the cost of their prescription drugs, the Kotsons' out-of-pocket medical-related costs are about $6,000 a year, or almost 25% of Mr. Kotson's annual pension of $24,900.

"It doesn't take a genius to see that pretty soon you can't afford the IBM coverage," he says. But while Mr. Kotson's costs will keep rising, IBM's won't. In fact, the amount IBM spent on retiree health care last year actually fell 8.3%, to $566 million from $617 million in 2001. Meanwhile the amount that IBM retirees paid spiraled 67%, to $119 million.

So poorly understood are retiree health benefits -- and costs -- that for all the talk about skyrocketing costs, few shareholders, retirees or lawmakers are aware that many companies face limited risk. But clues can occasionally be found in company filings. Halliburton Co.'s securities filings note, for example, said that the company's liability for some of its retiree medical plans "is not affected by the expected future health-care-cost inflation rate." That's because Halliburton established fixed, per-capita limits on what they would pay for participants. "Clearly, there is a health-care crisis in the United States that impacts everyone, including our current employees and retirees," a Halliburton spokeswoman says.

Similarly, General Electric Co. filings note that a one-percentage-point increase in health-care inflation would have an "insignificant" effect on GE's liability and annual costs for its 250,000 retirees and dependents. (A new collective-bargaining agreement this past summer changes the terms of the cap, which could affect the company's exposure.)

Retiree health benefits, which are provided by about 66% of companies in the Standard & Poor's 500, generally allow eligible retirees to receive health coverage from their employer until they reach age 65. At 65, when they are eligible for Medicare, some employers provide a supplement to Medicare, to pay some of the cost of prescription drugs, which aren't covered by the government program. Companies say caps allow them to provide health benefits to more retirees.

The Medicare drug-benefit legislation now being debated in Congress would give employers a sizable, tax-advantaged subsidy -- picking up the tab for 28% of each retiree's annual drug costs between $250 and $5,000 -- to keep companies from further cutting or dropping their plans.

But many retirees, in fact, are themselves already dropping their employer-sponsored benefits. When retiree Ron Pinard's share of his health coverage from IBM reached almost 40% of his monthly pension of $1,398, he dropped the plan and is going without medical coverage. "We're taking a chance," says the 57-year-old, who retired in 2001 after 32 years on manufacturing lines in Vermont. "But who knows what will happen next year?"

For retirees throughout the country, the caps could contribute to even more rapid cost increases of the plan, because the healthier retirees are also more likely to drop out. Lee Riggenbach, 64, who retired from IBM in 1992 after 30 years as a customer engineer, dropped his coverage last year; now, for less than half of what he paid for IBM's benefits, he has almost identical coverage from his current employer, Florida International University in Miami.

Similarly, Bert Moldow, 70, dropped his IBM supplemental coverage and got a policy with AARP, the advocacy group for older Americans. "It was a much better plan for a few bucks more," says the retired engineer, who lives in Westport, Conn.

IBM says about 6% to 7% of its retirees drop coverage "for various reasons" each year, a figure that has remained constant for several years. A spokeswoman also notes that the company offers a no-premium plan for retirees.

When companies have capped their exposure to retiree health-care costs, they have little incentive to negotiate lower prices with providers, retirees say. In fact, rising prices might encourage retirees to drop the coverage. The company then would no longer have to pay its portion for the retiree and can also reverse the liability it has already projected for covering the retiree for life.

In 1995, for instance, Sears, Roebuck & Co. capped its costs for pre-1996 retirees at the amount it would pay for them that year. For those retiring after Dec. 31, 1995, the company will never pay more in a year than it did during their first year of retirement. Only 55,000 of the 120,000 Sears retirees have chosen to remain in the plan, down from 60,000 in 2000.

A Sears spokesman acknowledges that it's possible "the cost was an issue" for some retirees but says that retirees may be dropping out for other reasons, such as getting jobs that provide health coverage. "Sears has worked very hard to maintain the affordability of the coverage," he says.

Sears Featured on A&E Biography
November 24, 2003

A one-hour program on Sears is scheduled for tonight (11/24/) on the A&E network ... 8 PM Eastern time, 7 pm Chicago time and repeats at Midnight ET
11 pm Chicago time.

“Shop Till You Drop” week kicks off on A&E with BIOGRAPHY:

Sears. Sears, Roebuck and Co. has been selling to America for more than 100 years. What began with one man and a box of pocket watches would become a retail powerhouse. With its catalogues and stores full of every conceivable item, Sears knew what we needed before we even knew it ourselves.

BIOGRAPHY: Sears begins in Redwood, Minnesota where in 1886 22-year-old Richard Sears worked as a railroad agent. Any item that passed through town first passed through him. So when a package of pocket watches were refused by a store owner, Sears bought them and turned them into a $5,000 profit.

The next year, Sears moved to Chicago and went into partnership with watchmaker Alvah Roebuck. By 1893 their burgeoning business had become Sears, Roebuck and Co. They had greatly increased their watch business with a mail order catalog that also featured silverware, rings, sewing machines, harnesses, bicycles – even revolvers. When Richard Sears couldn’t find a manufacturer to supply a product, his company manufactured it.

The Sears, Roebuck catalog homogenized America, providing country folk with items once reserved for city folk – at affordable prices. Although its famous catalog is long gone, in 2002 Sears made $31.5 billion in sales.

Today, Sears is still the nation’s fifth largest retailer, although with increasing competition, its future is uncertain. But its customers are rooting for Sears to come back on top – Americans don’t like to lose their institutions.

U.S. Retailers Vie for Electronics Holiday Rush
By Ellis Mnyandu - FORBES.COM
November 24, 2003

NEW YORK (Reuters) - With stacks of cut-price DVD players, digital cameras and big-screen televisions for sale, consumer electronics retailers are jockeying for what they expect to be a prosperous holiday shopping season.

The battle for a share of the American living room is turning fierce. While many retailers anticipate doing a brisk business this Christmas, some are tempering their optimism.

"We have a cautious outlook regarding expectations for the holiday season, but we do expect it to be better than last year," said Larry Costello, a spokesman for Sears Roebuck & Co. , one of the largest consumer electronics sellers.

Retailers, including the world's top discounter, Wal-Mart Stores Inc., are trumpeting bargains.

At best, analysts anticipate that the lure of lower-priced DVD movies, MP3 players, digital camcorders and VCR/DVD recorders will help boost not only store traffic, but will also entice shoppers to look on the Internet for holiday gifts.

"Consumer electronics are a good traffic driver, whether it's in the store or online," said Patti Freeman Evans, a retail analyst at Jupiter Research. But whether the increased customer traffic will translate into real profits is uncertain in the crowded $100 billion industry.

NEW COMPETITORS

Computer maker Dell Inc. recently entered the sector with offers of flat-panel TVs and digital music players, going head-to-head with rival Gateway Inc., which began selling home electronics much earlier to offset weak corporate demand for personal computers.

Long before the year-end shopping spree, prices of consumer electronics were falling just as quickly as manufacturers could crank out new products. That has raised fears of a squeeze on margins as almost every retailer markets aggressively.

"This holiday season we have a pretty significant level of price competition, with just a tremendous level of choice for the consumer," said Sean Wargo, an analyst with the Consumer Electronics Association.

BARGAIN HUNTING?

No product segment is expected to face more intense price competition than the market for flat-panel LCDs or plasma televisions.

Prices on these high-definition sets -- sized from 15 inches to 42 inches -- have declined as much as 25 percent from last year, partly as a result of competition among their mostly Asian-based manufacturers.

"A lot of retailers are paying attention to this category as a growth area. What's helping out is also the fact that supply is still tough in some categories," Wargo said.

For shoppers, finding a blockbuster deal could prove to be difficult, since some retail chains appear ready to squeeze out a few extra dollars from each sale.

For example, Wal-Mart is offering a 42-inch Sampo plasma monitor at $2,998 on its Web site. But Best Buy Co. Inc.'s online store offers the same set at $2,658.99.

Retailers are even offering free shipping and 18-month interest-free credit, as well as installation, on such televisions.

Wal-Mart, which last year broke new ground with a DVD player priced less than $40, is being undercut by Sears with a $36 one-disc Apex DVD player via its online store, versus Wal-Mart.com's $39.74 Norcent version.

Jupiter Research's Evans says such price differences will send shoppers to comparison-shopping Web sites. That could boost online sales, which are forecast to climb 21 percent from last year to $16.8 billion in the November-December period, excluding travel,

David Schick, an analyst at Legg Mason, said he expects retailers to be smarter on pricing even if they project the usual image of bargain-basement deals to entice shoppers.

"I think there will be better gross profitability in the consumer electronics business than it will appear from the circular advertising," he said. "No retailer is going to come out to say 'We've have raised prices.' But the pieces of the business they are working on are better-margin pieces."

Got a Gift Card? Better Read the Fine Print
By Donna De Marco - Washington Times
November 21, 2003

Gift-card recipients beware: Restrictions might apply on those convenient alternatives to paper gift certificates.

With a growing number of gift cards expected to be stocking stuffers this Christmas, more consumers might run the risk of losing out if they don't read the fine print.

Retailers have varying gift-card policies, according to the National Retail Federation (NRF). Some stores' gift cards expire after a certain time — usually after 12 months or more — and other cards depreciate each month after the card hasn't been used for a certain period of time.

Consumers are expected to spend about $17 billion on gift cards this season, which would account for nearly 8 percent of all holiday sales, according to the NRF's first gift-card survey released yesterday.

The survey, conducted from Nov. 6 to 12, found that nearly 70 percent of consumers plan to buy gift cards this holiday season.

"Gift cards are a great selection for the person who has everything," said Tracy Mullin, federation president and chief executive. "They are more convenient than the gift certificates of years' past, and they're no longer considered the 'lazy man's gift' — people love to get them."

Nearly 50 percent of consumers in an earlier NRF holiday survey said they would like to receive gift cards this year — up from about 41 percent last year.

However, those who receive the gift cards must pay attention to restrictions:
• Wal-Mart deducts a $1 service fee from its gift card after 24 months of nonuse. The card does not have an expiration date.

• Sears, Roebuck and Co.'s gift cards expire two years from the date issued except in California, Massachusetts and New Hampshire.

• Mall owner Simon Property Group Inc. has a $2.50 monthly fee deducted from its Bank of America-issued Visa gift cards after the first six months from issuance. The card expires on the date on the card.

The retail federation says the service fees are often a result of retailers using third-party companies to process and maintain their gift-card systems. The third-party companies usually charge the retailers for inactivity on the cards, which retailers pass on to consumers who are not using them.

Visa research shows most gift-card recipients spend the entire balance within the first three months of receiving the cards so the fees wouldn't affect them.

Some retailers, such as Target Stores and J.C. Penney Co. Inc., do not deduct fees if shoppers don't use their gift cards. J.C. Penney stopped its charging policy in April.
"Gift cards are really a customer service and not necessarily a huge revenue for retailers," said Christi Byrd Smith, a spokeswoman for the department-store chain. "It was in the best interest of our customer [to eliminate the service fee]."

J.C. Penney, which began offering gift cards in summer 1999, used to deduct a $1-per-month fee after 24 months of nonuse.

The company's research found that when consumers use their gift card, "the vast majority" spend more than the value of the card.

Wal-Mart Fires the First Shot In Holiday-Toy Pricing War
By Ann Zimmerman, Joseph Pereira and Queena Sook Kim
Staff Reporters - The Wall Street Journal
November 18, 2003

Wal-Mart Stores Inc. has launched the Great Toy War of 2003 and its top soldier is Hokey Pokey Elmo.

In late September, a full three months before Christmas, and a month before hot holiday items normally are promoted, Wal-Mart Stores slashed the price on Fisher-Price's newest dancing doll to $19.46 -- a stunning 22% discount to the Toys "R" Us price of $24.99.

Then, by mid-October, Wal-Mart had cut prices on more than a dozen toys. A survey of the prices for 15 popular toys conducted by Banc of America Securities found that Wal-Mart's prices were 12% cheaper than Toys "R" Us and 8% less than prices at discount retailer Target.

The steep and early price cuts are roiling the industry. Tuesday, Toys "R" Us acknowledged Wal-Mart's moves caught it by surprise and hurt its third-quarter results. Its stock price fell 5.4% Tuesday in New York Stock Exchange composite trading, after falling 11% Monday when company's earnings came out.

While parents may love the lower prices, other competitors are frustrated, saying they are hard-pressed to match prices below their costs. Yet they can't afford to lose more market share to Wal-Mart. And manufacturers fret that the discounting will cheapen their brand names, quash innovation and prompt consumers to buy only when toys are on sale.

Even toys in short supply are being discounted. Tom Kalinske, chairman of LeapFrog Enterprises Inc., Emeryville, Calif., says Leap Frog's Explorer Globe was reduced by one retailer to $89.99 from $99.99, although the item is hard to get. "We perhaps have conditioned the consumer to realize that prices are at their lowest from Nov. 15 to Dec. 25," he says. "That might accentuate the seasonality of our business."

For Wal-Mart, however, the issue is building its business selling toys, though most of its sales will come during the holiday season. In August, Scott McCall, Wal-Mart's divisional merchandise manager for toys, promised "an aggressive holiday season." In part, the Bentonville, Ark., retailer aimed to jump-start its own toy sales, which have suffered from other industry issues, such as the trend of children moving earlier from toys and dolls to computer games and other gadgets. "We have a 21% market share," he said, "and there is room to grow."

But many toy retailers say they can't afford to match Wal-Mart prices, particularly those below their cost. They note for example that Wal-Mart sells Barbie Swan Lake for $15.84 -- below the wholesale price of $17, according to a list of manufacturer prices viewed by The Wall Street Journal. Wal-Mart sells Hot Wheels T-Wrecks Play Set for $29.74, below its wholesale price of $42, and Sesame Street Hokey Pokey Elmo at $19.46, below its $24 wholesale price.

Though Wal-Mart is believed to pay the same as other large retailers for those goods, it may get other deals, such as advertising dollars or rebates, which lower its overall cost.

Deep discounting by Wal-Mart and others, often selling toys at below cost, is common practice around the holidays, Toys "R" Us spokeswoman Ursula Moran says. "This is the way the toy retailing game is played," she says. This year, however, Wal-Mart has come out of the blocks earlier than usual. "We would prefer that this wasn't the case," she adds, "but Toys "R" Us has developed and refined a strategy that we believe will work."

Although Toys "R" Us prices originally were much higher than Wal-Mart's, the No. 2 toy retailer has made some cuts. For example, the Wayne, N.J., chain sells Barbie Swan Lake for $16.99, the Hot Wheels set for $29.99, and Elmo at $19.99.

Closely held KB Toys' prices are higher at $19.99; $49.99; and $29.99, respectively. "We don't want to be embarrassed with much higher prices than our competitors, so we'll come down a bit in pricing, but we just aren't able to get down to Wal-Mart's pricing levels," said Michael Glazer, chairman and chief executive of the Pittsfield, Mass., toy chain.

Instead, toy retailers are trying to line up more exclusives rather than go head-on against Wal-Mart. KB Toys, for instance, features a line of toy Craftsman tools under a special agreement with department-store chain Sears, Roebuck & Co. Of the 3,000 toys sold at KB, Mr. Glazer estimates about 20% are exclusive to the mall-based chain.

Besides eroding retail profits, deep discounts can tarnish the image of a toy brand. That is why manufacturers of videogames and videogame systems commonly set a Minimum Advertising Price, or MAP. Under MAP, videogame makers can refuse shipments to retailers who discount, or they can withhold the advertising money they usually contribute to the retailers' advertising budget, which is why videogame prices don't vary much.

Toy makers fear that too much price pressure will drive down their profit margins and eventually hurt their ability to invest in niftier new toys.

The toy makers also worry that by targeting popular items for rollbacks, Wal-Mart is making the toys seem cheap. "There's an unwritten rule amongst major retailers that you don't want to cut prices unless you have to," says a marketing director of a Los Angeles toy company. "The general consumer thinks that a toy is on sale because it isn't selling well."

Indeed, Toys "R" Us has tried that argument itself. A senior toy-marketing executive recalls, "When I was at Toys 'R' Us, they started the meeting by asking me, 'Why are you selling with Wal-Mart? They're not watching out for you.' " But since Wal-Mart has three times as many stores as Toys "R" Us, the executive says, toy makers must sell to the retailing titan.

And while manufacturers and retailers may groan at lower prices, consumers appreciate them. "Parents are always going to shop for the lowest price," says Amy Severson, a Dallas mother of a son, age 12, and daughter, age 10. Still, Ms. Severson thinks the price battles have their drawbacks.

She says Wal-Mart's selection is too limited, and Toys "R" Us is too focused on big-name brands. She prefers "cool, little boutiques" with more unusual toys; but they've been squeezed out by retail behemoths.

 

Land's End Names Former Disney Exec to Post
The Business Journal of Milwaukee
November 18, 2003

Lands' End, Inc., has named David McCreight, a nationally regarded merchandising and retailing executive at Disney Stores Worldwide, to senior vice president of core merchandising. McCreight will join the company on Dec. 1st.

McCreight, 40, will lead the women's, men's, specialty apparel and footwear divisions, in addition to the company's quality/sourcing division at the Dodgeville-based company.

"David brings a wealth of merchandising and retailing experience to the Lands' End team," said Mindy Meads, executive vice president of merchandising and design, and executive vice president and general manager of apparel for Sears, Roebuck and Co. Lands' End is a wholly owned subsidiary of Sears.

Previously, McCreight worked for specialty cataloger Smith & Hawken and served in leadership positions at The Limited Stores, The May Company and Saks Fifth Avenue before joining Disney Stores Worldwide in 2001. At Disney, McCreight led the strategic re-direction of the company's merchandising at its 450 stores in North America.

The company also announced that Patti Simigran, current Lands' End senior vice president of core merchandising, is being promoted to senior vice president and general merchandise manager of women's apparel at Sears.

Lands' End is a direct merchant of traditionally styled clothing and goods for the home. it is the nation's largest specialty clothing catalog company and the biggest Internet seller of clothing in the U.S.

Sears Promotes Lands' End Apparel Executive
Simigran Joins Growing Team of Experienced Retailing Executives
PRNewswire  -  November 18, 2003

HOFFMAN ESTATES, Ill., Nov. 18 /PRNewswire/ -- Sears, Roebuck and Co. has promoted Patti Simigran, Lands' End's senior vice president of core merchandising, to the post of senior vice president and general merchandise manager of women's apparel.

The move is effective Dec. 1, and Simigran will report to Mindy Meads, Sears executive vice president and general manager, apparel, and Lands' End office of the president, executive vice president, merchandising and design.

"Patti's hands-on leadership and proven product experience will play a key role in guiding Sears' apparel strategy," Meads said. "She will invigorate our apparel offerings as we continue to raise the bar in quality, value and fashion for our customers."

Simigran, 43, will provide overall strategic leadership to the Sears merchant team for misses apparel, juniors and specialty sizes. Most recently, as senior vice president of core merchandising for Lands' End, Simigran oversaw the women's, men's, specialty apparel and footwear divisions, and the company's quality/sourcing division. Prior to joining Lands' End in 1999 as vice president and general merchandise manager, kids', Simigran held various merchandising positions at Burdines, Casual Corner, Weiner Stores and Ames Department Stores.

Simigran is the third new retailing executive to join Meads' team at Sears in recent months. Carrie Shigetomi, formerly vice president of design administration and product development for Calvin Klein, who held executive positions at Polo Ralph Lauren Leathergoods, Ellen Tracy and Cole-Haan, joined Sears as vice president of brand development in September. LuAnn Via, formerly senior vice president of product development for Saks, Inc., joined Sears as vice president and general merchandise manager of intimate apparel, women's accessories and fragrances in late October.

The Trouble with Wal-Mart: Maybe it's Just Too Big
By Dan K. Thomasson, Scripps Howard News Service
Naples, Florida Daily News
November 17, 2003

WASHINGTON -- It used to be that what was good for General Motors was good for the nation. At least that's what people said in the old days before the Japanese invasion when the industrial behemoth was running roughshod over the rest of the world's automobile manufacturers.

Now it seems there are those who would apply that slogan to Wal-Mart, the world's largest retailer. But is it an accurate assessment of the Arkansas-based giant's value to the free enterprise system? There are a growing number who would disagree, citing numerous instances where the Wal-Mart way -- and the way it built its business -- isn't quite the American way. In fact, it frequently appears to be the antithesis of fair competition, deriving its enormous selling power through an injection of questionable practices.

Substantiation of those allegations came recently when it was revealed that Wal-Mart was subcontracting its daily cleaning chores in many of its stores to companies that employed illegal immigrants at low wages and without overtime or benefits and apparently without collecting payroll taxes. Federal agents raided 60 stores in 20 states rounding up more than 250 illegal aliens and the company has been notified that it is the target of a grand jury investigation.

There are serious charges that Wal-Mart executives were aware of the practice, which by all estimations saved the company millions of dollars over what it would have had to pay otherwise. Not to have known is almost incomprehensible for a company that is tightly managed at all levels. One commentator noted that Wal-Mart is not the kind of place where they permit janitors to run around in their stores at night without some company supervision. Some of those janitors now have filed a class action suit against the company charging that it violated federal racketeering charges by conspiring with cleaning contractors to cheat them out of wages.

This is just the latest questionable event in the spectacular life of the late Sam Walton's brainchild. There have been charges of predatory practices almost from the company's humble beginnings, ranging from the sale of goods produced in foreign sweat shops to using its enormous buying power to sell near or below wholesale until its competitors are put out of business to low wages that destroy the prevailing local pay scales. In smaller communities a rule of thumb has been that five local businesses will fail during the first year after a Wal-Mart opens as the under pricing bites off an ever increasing percentage of sales of everything from groceries to drugs to dry goods and, in some areas, even haircuts.

In my hometown of 15,000 to 20,200 residents where there was once a wide array of retail stores, virtually only Wal-Mart and a few grocery outlets survive. For variety one must drive the 25 miles to downtown Indianapolis. Some of the town's retail demise can be blamed on the Interstate highway system that allowed easy access to a large urban area, but not all by any means. When Wal-Mart arrived the remaining vestiges of local retail businesses disappeared overnight. Now Wal-Mart can charge what it wants without fear of competition.

An entire cottage industry has grown up to coach smaller to midsize communities on how to avoid the Wal-Mart menace. Mainly it boils down to advising chambers of commerce to let them in at peril to their own existence, a strategy that obviously hasn't worked well given the company's incredible growth.

There is no better example of the Wal-Mart impact than the current battle being fought by 70,000 unionized grocery workers against three supermarket chains in Southern California over wages that the companies claim are too high in the face of Wal-Mart's plan to open 40 grocery-selling super centers in that part of the state over the next five years. Picketing workers carry signs that proclaim, "Don't Let Us Become Another Wal-Mart." The grocery workers now earn from $7.40 an hour for baggers after 30 months on the job to $17.90 for cashiers. Wal-Mart grocery workers reportedly earn $9 an hour average.

While GM was undoubtedly good for the country in many respects and so is Wal-Mart, which remains a symbol of one man's retail vision of providing ever increasing numbers with one-stop shopping, there also were downsides that caused complaints that General Motors, like Standard Oil of another time, had gotten too big and should be broken up. As it gobbles up more and more of the nation's retail business, Wal-Mart is going to face increasing criticism and with that more and more government attention. It's the American way. Perhaps there is such a thing as too big.

Dan K. Thomasson is former editor of the Scripps Howard News Service.

New Sears Lawyers in Defamation Suit
Tribune staff, wire reports - Chicago tribune
November 13, 2003

Sears, Roebuck and Co. and a former executive have until September to reach a settlement in a defamation lawsuit or the case goes to a jury trial.

Lake County Circuit Court Judge Henry Tonigan on Wednesday set a new trial date of Sept. 7 after Sears replaced its attorneys from Vedder, Price, Kaufman & Kammholz with a team from Mayer, Brown, Rowe & Maw.

The switch comes a year after Kevin Keleghan, former head of Sears' credit and financial division, filed a lawsuit claiming Sears Chairman Alan Lacy defamed him while trying to explain why the credit card unit incurred higher bad debt than expected last fall.

Lacy said Keleghan had withheld information about the state of the credit division, which has since been sold to Citigroup Inc.

Keleghan, who was fired on Oct. 4, 2002, is also seeking severance payments. Sears' attorneys agreed to comply with a request seeking financial documents from the retailer's independent auditors.

Keleghan's attorneys claim the records from Deloitte & Touche will show that Lacy was aware of problems in the credit department.

Sears Tower May Go on Market
By Thomas A. Corfman, Tribune staff reporter - Chicago Tribune
November 12, 2003

After 2 months, Metlife mulls sale

Barely two months after taking back Sears Tower to prevent a default on its massive mortgage, lender Metlife Inc. is exploring the possible sale of the prominent skyscraper.

The New York-based life insurance and financial-services company is interviewing real estate firms about potential strategies for the 110-story tower, a spokeswoman said.

"We are in discussions with real estate firms to work with us on the premier asset that Sears Tower is," she said.

The talks are "to work with us to position the building in the marketplace," she said, declining to comment further.

In recent months Sears Tower has regained some momentum in the leasing market after a dearth of deals since Sept. 11, 2001. Anxiety over a possible attack on the world's second-tallest building reduced its attractiveness to some tenants and many prospective ones.

On Aug. 29 MetLife gained ownership of Sears Tower after a complicated transaction in which Chicago-based Trizec Properties Inc. sold its controlling interest to MetLife for just $9 million rather than take title to the heavily leveraged high-rise.

Now, the mission is to sell the 3.7 million-square-foot tower for more than its book value of $700 million, or about $189 a square foot. The potential sales price could be boosted by revenue from Sears Tower's rooftop antennas and observation deck.

Yet the steps toward a possible sale come as the real estate investment market shows signs of cooling, particularly for office properties with large amounts of vacant space. Sears Tower is 12 percent vacant, according to real estate research firm CoStar Group. Two years ago, the vacancy rate was just 5 percent, not including sublease space.

When sublease space is factored in, more than 19 percent of Sears Tower is on the market, according to CoStar.

"You've got a poor economy that really has excess office space, employment is moving overseas, you've got a trophy building, and you've got vacancies," said Jack Cohen, chief executive of Chicago real estate investment bank Cohen Financial. "Trophy since 9/11 doesn't have the same meaning."

MetLife may be hoping that the flight of tenants from Sears Tower has ended. Last week, the building's sixth-largest tenant, Unicare Life and Health Insurance Co., which leases 151,000 square feet of space, extended its lease until 2014, after testing the market for a potential move. Bank of America, the building's fifth-largest tenant, may strike a similar deal.

Sources familiar with the interview process say MetLife executives are trying to gain a sense of market value while looking at possible exit strategies, which could include a sale, a joint-venture deal or some other financial transaction.

Firms being interviewed include Los Angeles based CB Richard Ellis Inc., New York-based Cushman & Wakefield Inc., Chicago-based Jones Lang LaSalle Inc. and Eastdil Realty, a unit of San Francisco-based Wells Fargo & Co.

About $109 million of Sears Tower book value is attributed to an unidentified third party, possibly New York Life Insurance Co., which participated in making the original loan in 1990.

Although the August transaction prevented a possible default on Sears Tower's mortgage, MetLife executives sounded upbeat last week about their latest property acquisition.

During a conference call with analysts, Lee Launer, MetLife's chief investment officer, said: "The tower is a terrific building and we very much enjoy the fact that we have control of the tower at this point, and can control leasing, marketing and the overall positioning of the investment going forward."

A Different Sears Looks a Lot Like Some of Its Rivals
By Constance L. Hays - New York Times
November 12, 2003

WEST JORDAN, Utah - Sears, Roebuck is a 117-year-old retailer wandering in search of its future. And the trail has led here, to this prosperous Salt Lake City suburb, and a month-old store called Sears Grand.

From the outside, the 210,000-square-foot store is a box like the other chain-store boxes lined up in a shopping plaza in one of the nation's fastest-growing regions; Wal-Mart, Sam's Club and Lowe's are all here, too. Inside, though, an evolving Sears personality is on display. Along with the usual array of Craftsman tools and Kenmore dishwashers, shoppers find merchandise Sears has not stocked before: racks of DVD's and music CD's; a grocery section with milk, eggs and frozen pizza; and a garden center, empty now ahead of the Utah winter but soon to brim with seedlings and fertilizer as well as rakes and hoses.

There is the usual Sears pledge of customer service, but it plays out differently. Shoppers can summon help from a sales associate by pressing a button at one of the bright yellow service kiosks around the store, an idea borrowed from technologically shrewd rivals like Target that helps keep the head count down. Instead of scattering cashiers all over the selling floor like a department store, Sears has gathered them in the front, like Wal-Mart Stores, and shoppers wheel their purchases up in carts, as in a supermarket.

Does it all add up to something that is recognizably Sears? Is it, finally, the concept that can revive the venerable retailer and stop the hemorrhage of business to other stores?

At the moment that Sears is trying to answer such questions, it is back to being a pure retail company, after selling off to Citigroup the credit card business that generated about 60 percent of its earnings. Its traditional stores, nearly all in malls, are flagging despite an expensive program of renovations. In stores open at least a year, sales fell 2.7 percent in October after two months of growth, a sign that "the improvements weren't anything sustainable,'' said Heather E. Brilliant, an analyst for Morningstar in Chicago.

For Alan J. Lacy, the chairman and chief executive, breaking out of the mall, where the excitement faded years ago, is critical to turning the company around. Selling the credit card unit was one big move. Buying Lands' End, the well-regarded clothing brand, for $1.9 billion last May was another. Now he is tinkering with the stores themselves, trying to create a shopping experience that will bring customers into Sears rather than its rivals.

"We are doing a good job with our customers who live close to our existing stores,'' he said. "The issue is the further away you get, the more customers have, nearer their homes, other acceptable choices.''

For Sears, in rapidly growing places like the Salt Lake City area, the customers most on its mind are the ones moving in to the big new homes springing up like weeds from the desert, with an average of 4.2 children to a family and enough cars, bikes and lawn mowers to fill the triple garage. The nonmall chains have gotten there faster, selling them power drills and washing machines and timepieces the way Sears used to, and now in Utah at least, Sears is joining the migration.

"I get lots of questions about, 'Do you not like your current stores?' '' Mr. Lacy said. "I like what we have. I just want more stores.''

Others are less sure that the Sears Grand hybrid, set to grow to five stores in the next few months, can deliver. "It's the kind of concept where it will be very difficult for them to make inroads,'' Ms. Brilliant of Morningstar said. "It's an area where Wal-Mart and Target are very much present, so Sears is coming up as No. 3.'' She added: "People will drive out of their way to go to a Wal-Mart. People don't drive out of their way for Sears.''

Mr. Lacy is keenly aware of the difficulty of trying to figure out a new direction for Sears at a time when its younger, brasher no-frills rivals show no sign of losing steam, and are still building their own new stores at a rapid clip. "This is not an easy situation, repositioning this company,'' he said. "We are three years into it. We have made a number of big decisions, and we have a number of big decisions to go.''

Shoppers interviewed on a recent afternoon under the bright lights of the Sears Grand seemed either delighted or ambivalent about the store. While it is sprawling, in the manner of a discounter, its prices are not necessarily low - something customers were quick to notice. "I like the convenience,'' said Darcy Fox, pushing her two daughters along in a shopping cart and referring to the groceries at the store's far end. "But you do pay more.''

Mr. Lacy's bet that Lands' End fleeces, slacks and sweaters on the shelves would bring in customers who had been avoiding Sears seemed to be paying off, at least where JoLane Chadwick of West Jordan was concerned. "I haven't shopped at Sears in a long, long time,'' said Ms. Chadwick, a grandmother of 14, saying that she usually bought at Nordstrom, Dillard's or Target. "I came because my children told me they had Lands' End.''

The Lands' End line, formerly available to most shoppers only by catalog or Internet order, seems to be doing well at Sears, Ms. Brilliant said, though it remains to be seen whether it will draw shoppers from one end of the store to the other. Expecting its appliance and hardware customers to roam into the apparel aisles in search of Lands' End, Sears spreads it around, displaying Lands' End merchandise alongside similarly styled items from less expensive brands; in a Sears in Murray, another Salt Lake City suburb, a red Lands' End Classic Squall jacket priced at $67.50 hung inches away from a Weather Tamer jacket, also in red, for $40.

Sears's attempt to branch out into groceries has some analysts concerned, given the presence of Wal-Mart and traditional supermarkets in that category, where margins are especially thin. "It's the biggest stretch for the company,'' said Kate Delhagen, a retail analyst for Forrester Research in Cambridge, Mass. "Sears is probably thinking, Well, we'll pick off a few shoppers who see that Wal-Mart parking lot is too crowded.''

Certainly, it was easier to find a convenient parking space outside the Sears Grand store than it was by the Wal-Mart a stone's throw away in the same Jordan Landing shopping center. A walk through the two stores' grocery sections found Sears beating Wal-Mart on some prices, but Wal-Mart determined to fight back, even if only symbolically. For example, DiGiorno frozen pizzas, a staple for the time-pressed, were priced at $4.99 at Sears Grand and $4.98 at Wal-Mart. Klondike ice cream bars were $3.39 for six at Sears Grand, while Wal-Mart was offering two packages for $5. A 100-ounce bottle of liquid Tide detergent, on special for $5.50 at Sears Grand, could be had at Wal-Mart next door for $5.27 under a sign that proclaimed, "Save on their sale price.''

Mr. Lacy said groceries were not a cornerstone of the Sears Grand concept, merely a convenience for customers. The real money is still in hard goods like the refrigerators that stand like stainless-steel sentries along several aisles of the store.

For decades, Sears helped drive sales of appliances and other big-ticket items with generous credit terms, including zero percent financing for its credit card holders, and it was slow to give up on customers who failed to make payments, usually waiting eight months before charging a delinquent account off its books. Mr. Lacy said the zero percent offers would continue now that Citigroup owns the credit card operation. Citigroup executives are talking about other changes to improve profitability of the card portfolio, like charging off bad accounts at six months. It also plans to offer its own A.T.M.'s in Sears stores and to sell financial products like insurance.

"This is a partnership with Sears's 2,700 business distribution points that we can use to get customers cheaply and effectively, much more so than direct mail,'' Todd S. Thomson, Citigroup's chief financial officer, said in a conference call with investors on Monday. Even so, one investor, who did not want to be identified, questioned whether anyone would be able to pull off the growth of four million new accounts a year that Citigroup envisions for the Sears business, even if the retailer's efforts at revitalization are a big hit.

For Sears, Mr. Lacy said, it all comes down to "a question of the right footsteps through the door - and the footsteps through the door are increasing.''

Investors have bid up Sears stock to $53.32 a share, from a low of $18.25 in mid-March, before it announced the sale of the credit card division. Sears has said that it will save $200 million a year, the cost of the zero percent financing offers now handled by Citigroup. In addition, the company estimates it will receive another $200 million a year for opening new credit accounts in its stores. But a spokeswoman for Citigroup, where the payments are called bounties, could not confirm that figure. "We did not put a number on that," said the spokeswoman, Maria Mendler, calling it "formula driven."

The Sears Grand concept was heavily researched, using focus groups and customer surveys to try to come up with a store that people said they wanted. Local tastes play a part. "This is a very strong holiday market,'' said Teresa Byrd, the new store's general merchandise manager. "They go all-out for Christmas, and all-out for Halloween.'' So the store stocks plenty of greeting cards, gift wrap, Halloween costumes and candy, she said.

However well it chooses its merchandise mix, though, Sears still must make up ground lost years ago. "When people ask me what I worry about most, it's time,'' Mr. Lacy said. "We've done a lot. We have a lot yet to do.''

Meanwhile, across the parking lot from the Sears Grand, a Kohl's is rising against the sky.

Maytag Fixing to Make its Repairmen Less Lonely
Goal to Service Brands of Rivals
By David Pitt - Associated Press - Chicago Tribune
November 10, 2003

DES MOINES -- When any of Susan Podgorski's appliances break, she calls just one repair service--she has a contract with Sears to fix all her appliances, including the Maytag refrigerator she bought three years ago.

But Maytag Corp. is betting that customers like Podgorski who have confidence in the company's appliances will learn to trust its repair workers to fix other brands too.

Maytag announced in August plans to create a new repair division that, like Sears, will provide service technicians to work on home appliances of any major brand.

The company that has capitalized off its "lonely Maytag repairman" ads for decades wants to increase business for its repair workers.

"What they want to do is capitalize on what is an extremely well-known name, that is, the Maytag repairman, and use that tremendous goodwill and brand-name recognition to likewise service and repair other people's stuff," said Anthony Sabino, associate business professor at the Peter J. Tobin Business School at St. John's University in New York.

It may take time for some customers to accept the idea. Podgorski said she has confidence in the Sears repair service but is unsure whether a Maytag repairman could fix a General Electric appliance.

"Sears I think of as an overall place with all different types," she said. "For Maytag, it's one brand name fixing another brand. That would be my question--would they know the other products?"

Maytag decided to expand its repair business after market studies showed a lack of trained technicians to care for what are increasingly complex appliances.

"We had seen indications that the historical service base was eroding," said Steve Benton, a Maytag vice president and general manager of Maytag Services.

"Technicians were aging and leaving the industry, and there wasn't sufficient activity in the industry to bring new talent in. We found that the consumer was in a situation where they were being underserved."

The market studies also indicated that consumers had confidence in the Maytag brand.

Maytag is looking to the repair division to bring in new revenue. The company has seen sales soften in some parts of its business amid a highly competitive home appliance market.

"Everyone is trying very hard to wring out costs and to basically make some kind of profit, let alone prosper," Sabino said. "Maytag is seeking to expand its line of business and its bottom line profitwise by going into what could be the very lucrative area of service."

The company launched the division in the Washington, D.C., area because it had a sizable number of repair workers there with experience handling other brands. The idea worked, and it was expanded to Baltimore, some Virginia markets and into Boston, Benton said.

A few months ago, Maytag workers in Atlanta and some Florida cities began servicing other brands.

"In the past year there have been some early indicators of success," Benton said. "It's too early to project a date when we would, or would not, roll it out nationally."

Sears began its repair service in the 1980s. Its product repair services group, which made 14.5 million service calls last year, brought in $2.2 billion of the company's $41 billion revenue, said spokesman Bill Masterson. That included sales of parts and installation of heating and air conditioning products.

The need for more technicians is increasing as consumers move to more sophisticated appliances loaded with features and find less time for repair calls in their busy schedules.

"Time is of the utmost importance. Meeting the customer's expectations is more than fixing the appliance, but being there when they want us there," said Mark Good, general manager of Sears' product repair services group.

Benton said Maytag intends to invest significant resources into hiring and training technicians and support staff and "obtaining the necessary technology to run the best-in-class services business."

The pilot projects are using Maytag employees, but Benton said in some markets the company may enter contracts with independent technicians to do repairs.

Dennis Anderson, director of the Center for Manufacturing Excellence, a service technician training center at Carl Sandburg College in Galesburg, Ill., said the new service division could help take some of the sting out of the increasing number of factory layoffs.

He said he has seen many former factory workers register for courses to be certified as repair technicians.

"They understand that service is big," he said. "Assembly lines are diminishing, the shop floors are getting smaller, and they're anticipating retraining themselves to hopefully get jobs in other markets."

Night of Terror: Jacobson Survived Long-Ago Nazi Atrocities
By Steve Crain - Special to the Pilot - Southern Pines, NC Pilot
November 8, 2003

Ralph Jacobson of Pinehurst was 10 years old and living in Germany when Nazis ravaged his neighborhood synagogue on "The Night of Crystal," or "Kristallnacht," Nov. 9, 1938.

"The first five years of my life were normal and perfect," says Jacobson, who was born in Onasbrueck, Germany, on Jan. 15, 1928. "We had Christian friends and Jewish friends. But Hitler ran for chancellor in 1932 and won in 1933."

Ralph Jacobson, 75, a retired lawyer, graduated cum laude from New York University Law School in 1953 before serving two years in the U.S. Army. He spent 32 years with Sears, Roebuck and Co., retiring in 1990 as that corporation's senior attorney. He and his wife Vivian, who have two sons and two grandchildren, lived in Chicago before moving to Pinehurst in 1990.

"Before Hitler's election, huge trucks drove through neighborhoods, blaring messages of anti-Semitism," Jacobson says. "They carried large signs condemning Jews and Bolsheviks (communist Russians). This was my first indication that something bad was going to happen."

In June 1933, Jacobson’s father, Dr. Ernst Jacobson, a "notar" (recognition as a "notar" indicated the highest ranking a lawyer could hold in Germany), received notice that he could no longer practice law as a notar.

"My father was considered the best lawyer in Onasbrueck and had an office with several Christian associates," Jacobson says.

Jacobson’s father, who was allowed to continue practicing law without the "notar" distinction, then received notice that he could not practice with his associates.

"Two uniformed SS troopers stood in front of his office to discourage clients," Jacobson says. "My father, however, continued representing Jewish people, but his court appearances were greatly limited."

Up until 1933, Jacobson’s best friend was Wolfgang Kreft, a Christian whose father was also a notar.

"As a young lawyer, Wolfgang’s father had gotten a start in my father’s office," Jacobson says. "He was a few months older than I, and we were the best of friends until Hitler was elected. Then we were told that we couldn't play or talk together. We were heartbroken."

Barred from attending public school, Jacobson, in 1933, started school in a one-room Jewish classroom next door to Osnabrueck’s synagogue. Dr. Trepp, the only teacher, instructed kindergarteners through eighth-graders.

"There could be 30 to 40 of us in that classroom," Jacobson says. "The number varied, because people who could leave Germany did so."

During Jacobson’s first week of school, Dr. Trepp showed the 5- and 6-year-olds a painting of the sun shining on a lovely farm and asked, “What time is it in this picture?"

Five-year-old Jacobson answered, "A better time."

Times Worsen

Children sometimes chased Jacobson and Elsa, his sister (4½ years older than he), and called them names, as the two walked 1½ miles to school.

Peter von Pels, a classmate who was two years older than Jacobson, and his family left Germany around 1936, hoping to gain safety in Amsterdam, Holland.

"Peter’s father went into business with Otto Frank," Jacobson says. "After Germany invaded Holland, the Frank family, the von Pels family and two other people hid above the former Frank-von Pels business quarters (they sold herbs and fruit) and lived there several years until the police received a tip. All died or were executed in concentration camps, except Otto Frank, who returned to Amsterdam. The secretary for his lost business had found his deceased daughter’s diary, which became the book ‘The Diary of Anne Frank.’"

Jacobson points to a 1931 photograph he owns. The photo includes images of three children: Peter von Pels, Jacobson and his sister. Jacobson presented a copy of the photograph to Amsterdam’s “Anne Frank House."

"In 1936, ‘No Jews Allowed’ signs began appearing on public buildings," Jacobson says. "Private stores — such as grocery and clothing stores — and soccer stadiums, movie theaters, and swimming pools, began putting up the same signs. Some stores continued doing business with Jews."

About 75,000 people lived in Osnabrueck in the 1930s. About 400 people, including children, made up the city’s Jewish community. Many Jewish residents owned businesses.

"The government began putting up signs identifying stores owned by Jews," Jacobson says. "The signs warned people not to shop there."

By 1936-37, the German government had confiscated, with little or no compensation, most Jewish businesses.

"One day you’d have a Jewish owner the next day, a Christian owner," Jacobson says. "Many stores were destroyed. Police would come to a looting just to keep order among the looters, not to stop them.

"One night my father and mother, whose name was Margarete, were out. My sister and I heard a great noise, and we looked out a balcony window and saw hundreds of uniformed SS troops carrying large, lighted torches. They were marching maybe 12 to 15 abreast, singing an anti-Semitic song and coming toward our house. We thought they might set our house on fire. But they passed our house and gathered to hear a speech at a nearby soccer stadium. They sure scared us."

Father Opposes Mayor

In 1937, Elsa turned 14 and graduated from the one-room school. A Catholic convent agreed to take her as a student.

"The nuns were wonderful to her, but the students were not," Jacobson says. "She left the school after a few months. In late 1937, she went to New York City to live with Mother’s brother and his family."

In 1938, Osnabrueck’s mayor, who also served as police chief, publicized his desire to acquire the town’s only synagogue. The synagogue stood next to a public building, which covered more than a city block. The mayor wanted to tear down the synagogue and construct an SS headquarters building.

"At that time, my father was the only practicing Jewish lawyer in the city," Jacobson says. "He was a trustee, a director and an officer of the synagogue. He opposed the acquisition and felt threatened."

On Saturday morning, Oct. 8, 1938, Jacobson attended the synagogue, but his father went to a garden he owned and locked himself inside. An 8-foot hedge with a gate surrounded the garden, located about a mile from the Jacobson home.

"At noon, I returned home," Jacobson says. "Mother was preparing lunch. She received a call from the hospital and went there. She came home and said, ‘Father is dead.’ She didn’t say how he died. Later she said he had a heart attack. In the last 10 years — Vivian has been to Germany five times and I’ve been four times — we have done research and determined that my 54-year-old father was murdered, because he opposed the mayor."

Synagogue Attacked

On Nov. 9, 1938, one month after Jacobson’s father died, “Kristallnacht” occurred. The event is called “The Night of Crystal” because of the breaking of windows and general destruction in all synagogues and 7,500 Jewish businesses in Germany.

Jacobson says that a young Jewish man killed a German diplomat in France on Nov. 9. The German government used that incident to justify destroying, either partially or totally, Jewish synagogues and businesses.

Jacobson and his mother were unaware of any destruction, but at 1 or 2 a.m., they heard a loud knock at their door. Five uniformed, brown-shirted Nazis stood outside.

"What do you want?" Jacobson's mother asked.

"We have to search the whole premises," one man said.

"What are you looking for?" she asked.

"We're looking for Jewish men."

"Why?"

"We're not going to tell you."

Two men watched Jacobson and his mother while three searched the Jacobson’s large, several-storied house. In 20 minutes, the searchers returned and declared that there were no Jewish men in the house.

One man pointed at Jacobson and asked, “How old is he?"

"He’s 10 years old," Jacobson’s mother said.

"That’s too young," one man said.

The men left.

Jacobson says he and his mother were puzzled. But the next morning, he walked to the home of a retired teacher who was helping him learn English to prepare him for school in the U.S.

"I knocked on her door," Jacobson says, "and she started to yell at me, ‘Go away, go away, go away!’"

"But I have a lesson this morning," Jacobson said.

She kept demanding that he leave, and he went to his school, which stood next to the synagogue.

"I saw the synagogue partially burned,” he says. “Its windows were all broken; prayer books, shawls and Torah scrolls were strewn on the ground outside and covered with water. The synagogue was not completely destroyed. They had set it on fire, but the fire department came and put out the fire, because the synagogue was next door to a major German government building, and they feared the fire would spread.”

Jacobson ran home, and his mother, who had by then heard of the destruction by phone and radio news, told him about Kristallnacht.

Surviving, Leaving

After Nov. 9, the Jacobsons, warned not to go out, stayed home. Some Christian friends shopped for them, secretly dropping items in the Jacobson’s backyard.

"That’s how we survived from Nov. 9 until Jan. 15, 1939," Jacobson says. "My mother did visit Dr. Kreft, so that we could continue plans to leave Germany. Dr. Kreft, knowing how close the families had been, was extremely kind to my mother."

When Jacobson’s father, under Nazi direction in 1933-34, had to release a legal assistant, he asked his friend, Dr. Kreft, to hire the assistant. In 1938, when Jacobson’s mother visited Dr. Kreft’s office, Kreft called her “honorable lady." After Jacobson’s mother left the office, the legal assistant told Kreft, "If you call her that again, I’m going to report you to the Nazi Party, and you will perhaps be disbarred."

Kreft told the assistant to do whatever he wanted and reminded him that he once assisted in the office of Jacobson’s father. Kreft reportedly said, "I treat Mrs. Jacobson the way I want to treat her; if you want to report me, go ahead."

Jacobson says, "My mother would go each time, and Kreft would call her ‘honorable lady.’ But the assistant never reported Kreft. This is the type of danger that existed — not only to Jews but to Christians, as well."

Jacobson and his mother prepared to travel to the U.S.

"There was a low quota of 10,000 to 12,000 Jews per year that could leave Germany to come to the U.S.," Jacobson says. "You just had to wait your turn, and you had to be sponsored by somebody in the U.S. My mother had her brother in New York."

The Jacobsons received word that they could leave Germany — but not until they had sold all properties: house, garden property, two real estate properties.

"Dr. Kreft, Wolfgang’s father, helped us sell our properties,” Jacobson says. "We were allowed to take very few possessions. Before leaving, we had to declare a ‘tax to flee the country." It was a short tax form — you listed assets; the tax was the same amount. You were allowed to leave with maybe 50 or 100 marks; you couldn’t transfer bank accounts or take stocks."

The War

Jacobson's childhood friend, Wolfgang (Dr. Kreft's son) told Jacobson years later that before Jacobson left Germany, they passed each other on the street.

"I knew you were leaving Germany," Wolfgang said. "I wanted to wave to you, to say goodbye, but I knew it was too dangerous. We couldn’t look at one another, so we passed each other and you were gone."

On Jan. 15, 1939, Jacobson’s 11th birthday, he and his mother sailed directly from Hamburg to New York City on an American ship.

"We had relatives in Germany," Jacobson says. "My grandmother, who was almost 90, lived with my father’s sister, who was over 65. There was no way we could do anything for them. Within two years, they went to concentration camps. My grandmother died at Theresienstadt, and my aunt went to Auschwitz and was killed there."

Almost all of Jacobson’s other relatives were killed in similar fashion, he says.

"My mother had several brothers who did escape Germany," he says. "My mother's sister and her family died in Germany."

After the war, the Jacobsons sent packages to the Kreft family and to the nuns at the school that Elsa had briefly attended.

"My mother remained in contact with Wolfgang’s mother until his mother died," Jacobson says. "Wolfgang and I have been corresponding for many years. He became a prominent attorney and notar. We are the best of friends again.

"On my first visit back to Germany in 1996, Wolfgang and I stood on the spot he says was the place we passed each other before I left Germany. He told me that the war didn’t end for him until 1996, when he and I stood at that spot and shook hands."

Judge Dismisses Charges Against Ex-Kmart Officials
A Wall Street Journal Online News Roundup
November 7, 2003

DETROIT -- A federal judge dismissed charges Friday against two former Kmart Corp. executives who had been accused of falsifying the books at the discount-store chain.

"The government believes that it is more likely than not that the evidence will not sustain a conviction," prosecutor Stephen Robinson said in asking U.S. District Judge Paul Borman to dismiss the charges. Judge Borman approved the request.

Enio A. "Tony" Montini Jr., 51 years old, and Joseph Hofmeister, 53, had been accused of securities fraud, making false statements to the Securities and Exchange Commission and conspiracy.

Prosecutors had said the two conspired to inflate the discount retailer's earnings through a multiyear contract with American Greetings Corp., in which the greeting-card company agreed to pay Kmart an allowance of $42.4 million in June 2001. They alleged the executives lied to Kmart accountants and improperly booked all the revenue in the fiscal quarter ended Aug. 1, 2001, understating Kmart's net loss by six cents a share. According to the government charges, the executives knew the money was subject to repayment under certain circumstances, and couldn't all be booked during that quarter. Kmart has since restated its results for that quarter.

Lawyers for the men said they were following Kmart's accounting procedures and the technical accounting issues were out of their hands. They also said a quarterly report filed with the SEC that is at issue in the case wasn't false.

At the time the charges were filed, legal experts said the Justice Department may have gone after the relatively low-level executives in the hope of gaining their cooperation in investigations against more senior officers regarding the company's liquidity problems.

Testimony began Tuesday in the trial, a day after opening statements.

Kmart Corp. closed nearly 600 stores and shed 57,000 employees after filing for bankruptcy protection in January 2002. It emerged from bankruptcy in May as Kmart Holding Corp. Company officials said it will return to profitability next year.

The case represented the first criminal charges from the federal probe into Kmart's finances. But Judge Borman granted a defense motion to exclude references to the bankruptcy in the trial.

In a statement Friday on behalf of Mr. Hofmeister, his lawyers said their client "finally has been vindicated. Today the government acknowledges that ... there is no case." A message seeking comment was left with a lawyer for Mr. Montini.

Details of Sears Credit Card Sale Boost Concern Over Store Sales
By Sandra Guy - Business Reporter - Chicago Sun-Times
November 6, 2003

New details about Sears Roebuck and Co.'s sale of its credit-card business heightened concern Wednesday about the strength of Sears' store revenues.

Sears expects to record an after-tax gain of $2.3 billion to $2.5 billion in the fourth quarter from the sale of its credit-card unit to Citigroup. The pre-tax gain totals $4 billion.

At the same time, Sears will incur an after-tax loss of as much as $630 million in the fourth quarter to pay for early retirement of $11.8 billion in debt and to reduce its outstanding unsecured commercial paper borrowings.

Sears could not give details about how these one-time items will impact its earnings per share in the quarter.

However, the figure that worried one analyst is the $7 billion in debt that the Hoffman Estates-based retailer intends to keep on its books after the sale is complete.

The interest that Sears will pay on that debt will wipe out most of the $200 million in annual savings Sears will experience after it hands over its zero-percent financing and other promotional expenses to Citigroup, said Morningstar analyst Heather Brilliant.

Sears has argued it will cost less to get rid of that debt if it waits a year or two.

Sears also has dropped the idea of giving investors a special one-time cash dividend, according to a quarterly financial report it filed Wednesday with the Securities and Exchange Commission.

Instead, the company will divvy up the $22 billion it will get for the credit-card unit sale as follows: $17 billion for retiring debt related to credit-card receivables; $4 billion to be returned to shareholders, of which $1.4 billion has already been returned in share buybacks; $1.5 billion on taxes and expenses from the sale of the credit-card business, and $500 million for corporate uses, including a contribution to its pension plan.

A spokesman said Sears will continue its aggressive stock buyback program to account for the remaining $2.6 billion reserved for shareholder benefit.

Doug Ragnow, managing associate at Auriemma Consulting Group in Westbury, N.Y., said he remained concerned about Sears succeeding as a stand-alone retailer.

In the 13 weeks ended Sept. 27, the credit-card business contributed $366 million in operating income, compared with Sears' total earnings of $242 million.

"It appears Sears would have lost money if not for the credit and financial products business," Ragnow said.

Though Sears' $2.5 billion gain in the fourth quarter will give it breathing room, Ragnow said the company is under pressure to turn around its retail operations.

He also questioned Sears' lofty stock price in light of the company's finances.

Sears' stock dipped 24 cents to end the day Wednesday at $52.49, but the stock has soared nearly 150 percent since Sears announced March 26 that it would sell the credit-card unit, setting new 52-week highs almost every week.

It traded as low as $18.25 on March 17.

Brilliant, the Morningstar analyst, voiced similar concerns about Sears as a retailer without credit operations.

"I don't expect Sears to do very well," she said.

All Eyes on Sears Sales Data
October Slips, Causes Some to Question Turnaround
By Kelly Quigley - Crain's Chicago Business Online
November 06, 2003

After two months of better-than-expected results, Sears, Roebuck & Co. on Thursday said sales slipped in October as unusually warm weather hurt demand for fall apparel and other seasonal merchandise.

The numbers were disconcerting to at least one analyst who didn’t expect to see Sears' sales falter so soon after rebounding in August from 23 consecutive months of declines.

"It's definitely a concern to see them go back to the negative trend so fast," said Heather Brilliant of Chicago-based Morningstar Inc. Hoffman Estates-based Sears said sales at stores open at least a year fell 2.7% over the year earlier, while total sales declined 2.2% to $1.9 billion. Sears CEO Alan Lacy said weak demand for seasonal items resulted in "a disappointing month across our apparel categories."

To Sears’ comfort, some of its rivals also had a tough month dealing with the warm weather conditions, Ms. Brilliant said. Sales at Texas-based J.C. Penny Co. Inc. declined, and Minnesota-based Target Corp. failed to meet its revenue expectations in part because of a 12% drop in sales at its Chicago-based Marshall Field's unit.

Given the retail sector's lackluster results overall, retail analyst Jeff Stinson of Ohio-based FTN Midwest Research said he doesn’t think October will be a trend-setting month for Sears.

"Sears has every bit of an opportunity to turn it around," he said, noting the coming holiday shopping season should easily surpass last year’s in sales volume.

Nonetheless, Ms. Brilliant said Sears’ poor showing last month shows the department store has more work to do before it can convince investors its retooled operations are in working order.

Retail sales are more important than ever for Sears; New York-based Citigroup Inc. on Monday closed on its $31.8-billion purchase of Sears’ credit card and financial products business, leaving the department store to rely solely on its merchandise for survival.

Ms. Brilliant said she’s not yet convinced the department store chain can make it as a pure-play retailer, as it remains to be seen whether it can consistently bring in higher sales of apparel, appliances and other goods.

"They've made the improvements and put the pieces together," Mr. Stinson said. "Success will depend on whether they can execute on the strategy they’ve put in place and become a more efficient retailer."

Looking ahead to the fourth quarter, Sears expects same-store sales to be flat or register an increase in the low-single digits.

Last month Mr. Lacy said Sears remains cautious going into the last months of 2003, but expects a much better holiday season than last year—one of the worst on record.

Analysts expect the company to post a profit of $2.64 per share, excluding charges, according to a Thomson First Call poll. That's down slightly from last year's fourth-quarter results of $848 million, or $2.67.

Julius Rosenwald 2d, 89, Civic Leader, Dies
By Gayle Ronan Sims, Inquirer Staff Writer - Philadelphia Inquirer
Nov. 06, 2003

Julius Rosenwald 2d, 89, one of several heirs to a vast fortune who dedicated his life to philanthropy, died of complications from dementia Sunday at home in Elkins Park.

As a young man, Mr. Rosenwald learned how to spend money prudently, hearing sage axioms such as "It is easier to earn $1 million than to spend it wisely" from his grandfather Julius Rosenwald. His grandfather made millions building Sears, Roebuck & Co.'s mail-order business and spent a good portion of his fortune building schools in the South for African Americans.

Born in Chicago and raised in Jenkintown, Mr. Rosenwald attended Episcopal Academy in Merion and prep school in Switzerland. Instead of pursuing a college degree, Mr. Rosenwald chose to begin his lifelong tenure on the board of Sears and live the life of a philanthropist.

After Mr. Rosenwald married Julia Kaufmann in 1937, they settled in Elkins Park and raised three children.

During World War II, Mr. Rosenwald enlisted in the Marines and saw action in the Pacific. He was discharged in 1945 as a captain.

Mr. Rosenwald devoted his life to civic and philanthropic causes in Philadelphia, including serving as a trustee of Lincoln University from 1950 to 1990.

Ivory V. Nelson, president of Lincoln University, said Mr. Rosenwald "was truly a devoted friend of Lincoln University who believed in our historic academic mission."

Marvin Wachman, president emeritus of Temple University and president of Lincoln University from 1961 to 1970, who affectionately called the elegant Mr. Rosenwald "Dooley," said: "He was a principled civic activist on the board of Lincoln University... . As chairman of the development committee, Mr. Rosenwald was well respected by students, not only because of his grandfather's reputation as a generous philanthropist for the education of blacks, but because Dooley listened to their concerns.

"Dooley not only helped raise funds to build a new computer center and science center in the 1960s, but he gave generously of his own money," Wachman said.

NAACP chairman Julian Bond said: "The Rosenwald family is a proud, proud family with a great deal to be very, very proud of."

Mr. Rosenwald also served on the boards of PSFS, March of Dimes, United Fund, Albert Einstein Medical Center, Blue Cross, and WHYY (radio and television) from its inception. He was one of the founders of the University City Science Center and was an advocate for disadvantaged residents displaced by that building.

A tennis player into his 70s, Mr. Rosenwald was also a photographer who took pictures all over the world. He was a devoted birder.

In addition to his wife, Mr. Rosenwald is survived by daughters Karen Gundersheimer and Linda Rosenwald; a son, Julius Rosenwald 3d; five grandchildren; and three great-grandchildren.

A memorial service will be held at a later date. Mr. Rosenwald donated his body to science.

Memorial donations may be sent to the Natural Lands Trust, 1031 Palmers Mill Rd., Media, Pa. 19063.

Stores Follow Wal-Mart's Lead in Labor
By Greg Schneider and Dina ElBoghdady Washington Post Staff Writers
Washington Post - Page 1  - November 6, 2003

Competitors Struggle to Match Savings From Non-Union Workforce

MORGANTOWN, W.Va. -- As a young man, Roy Bukrim found a job that seemed better than working in dangerous coal mines like his relatives: He hired on at the Kroger supermarket, where 27 years later he's head night stocker and supports a wife, two kids and a mortgage.

But Bukrim, 48, figures he wouldn't have that career option today. Young people who take a job there now get minimum wage and no health benefits, then leave after a few months. Bukrim said the future that he saw in grocery work no longer exists. "We've been the generation where that's all changed."

To Bukrim and other workers -- as well as Kroger Co. executives -- the juggernaut driving that change is the store's most-feared competitor, Wal-Mart Stores Inc.

"All we've heard is Wal-Mart this and Wal-Mart that," said Kroger cashier Victoria Marano. "They want to be like Wal-Mart so they can compete."

Wal-Mart, the world's biggest retailer and the nation's biggest private employer, has become so powerful that its practices reverberate throughout the U.S. economy. About as many people work for Wal-Mart -- 1.3 million -- as are on active duty in the U.S. military. Its most recent annual sales -- $245 billion -- are greater than the gross domestic product of Switzerland. It's no wonder the company has more than 3,000 stores in the United States; on Oct. 29 alone Wal-Mart opened 39 stores, and it once opened 47 in a day.

Because it wields enormous buying power, Wal-Mart influences the makers of virtually all household products, dictating everything from pricing to packaging. What's more, Wal-Mart's mania for selling goods at rock-bottom prices has trained consumers to expect deep discounts everywhere they shop, forcing competing retailers to follow suit or fall behind.

The Oct. 23 arrest of 250 illegal aliens working for outside cleaning crews at 61 Wal-Mart stores nationwide underscores another aspect of Wal-Mart's low-price formula: a fervent effort to hold down labor costs. This week the retailer said it has received a "target letter" from a federal grand jury in Pennsylvania, signifying that Wal-Mart itself is under investigation for its role in using illegal workers.

Part of the reason the chain is able to offer a microwave oven for under $30 or a 24-can package of Sam's Choice cola for $3.64 or a gas-powered lawn mower for under $150, for instance, is because it contracts with outside janitorial services -- some of which have questionable hiring practices -- and relies heavily on lower-paid part-time workers, say unions and competitors.

Wal-Mart's vast, non-unionized work force earns a typical wage of about $7 to $8 an hour. Unionized workers at Kroger, by contrast, said they were making between $11 and $13 an hour, with full health benefits. About 62 percent of Wal-Mart workers are eligible for benefits, but less than half of the workforce participates. Critics say the low participation is because Wal-Mart requires steep employee contributions.

As other retailers follow Wal-Mart's lead, workers without technical training are feeling a tightening squeeze. Low-skilled manufacturing jobs are vanishing at historic rates -- West Virginia's coalfield employment, for instance, plummeted from 59,700 jobs in 1980 to 15,700 in 2000. Untrained people entering today's workforce the way Bukrim did three decades ago have dwindling odds of reaching the middle class.

"These are jobs that have historically yielded a middle-class lifestyle. But with a much more lean and mean approach to services, many of those jobs are going by the wayside," said Jared Bernstein, an economist with the Economic Policy Institute.

Nowhere is that shift more evident than at supermarkets, such as Kroger, which have seen Wal-Mart rocket to the top of their industry in only 10 years. Bukrim and 70,000 other unionized workers at the Kroger, Safeway and Albertsons chains in several states -- including West Virginia, California and Kentucky -- are now on strike or locked out in a conflict over wage and benefits changes their employers say are necessary to compete with Wal-Mart.

Some economists argue that the Wal-Martization of the American workforce is simply the free-market system functioning as it should. Gary Stibel, founder and principal of the New England Consulting Group, said Wal-Mart has saved consumers more than $20 billion through its discount pricing. Figuring in Wal-Mart's pressure on other retailers to lower prices, savings top $100 billion, he said.

"In this day and age, the United States needs more companies like Wal-Mart to create jobs, even if not at the highest pay," Stibel said. "The company that makes its mark by taking the cost of manufacturing products and services up will lose, and the country that promotes that will lose."

Wal-Mart morphed from a single store in Rogers, Ark., in 1962 into a retail powerhouse by mastering the art of low pricing in a way that has transformed its competitors, its suppliers and the industries it now dominates -- including groceries, toys and apparel.

Founder Sam Walton pioneered the "supercenter" retail phenomenon. His use of technology such as bar code price scanners and his reinvention of the supply chain, with stores reordering stock only as needed instead of keeping mountains of goods in warehouses, changed the way businesses interact with one another and their customers.

Walton's method of expanding his chain was unique, too. The company emerged from what one analyst called "one of the most backward areas of America" and spread through the rural South by hiring people who were accustomed to farm work. Wal-Mart inspired fervent loyalty from customers by putting its stores in regions other retailers had ignored.

But it also drew condemnation for squashing smaller businesses in its path. Small-town business districts tended to empty out when Wal-Mart hit. Some areas responded by drafting anti-Wal-Mart zoning ordinances that keep out retailers of a certain size.

Today, "Wal-Mart creates its own weather," said John A. Challenger, chief executive of Challenger, Gray & Christmas Inc., a Chicago outplacement firm that tracks retail jobs. "It sets the standards in many ways for retailers throughout the country, which benchmark against them."

Kmart Corp., which dwarfed Wal-Mart only 15 years ago, filed for bankruptcy protection in 2002 and eliminated 57,000 positions in part because it tried to compete with Wal-Mart on prices and failed. FAO Inc., the iconic toy seller, filed for protection from its creditors in part because it did not try to compete with Wal-Mart on prices. Both retailers have since emerged from bankruptcy proceedings. And since Wal-Mart began aggressively expanding into groceries in the past decade, some national supermarket chains have gone bankrupt.

Wal-Mart's pressure to hold down labor costs also helps fuel the national market for undocumented workers, immigrant advocates say, as employers take advantage of laborers who are too fearful of being deported to object to substandard wages and conditions. Rather than hire illegal immigrants themselves, big chains typically turn a task such as janitorial services over to a low-bidding national contractor, which in turn farms the work out to smaller subcontractors. The subcontractors range from established firms that rigorously check workers' immigration status to one-man, fly-by-night operations that knowingly employ illegal workers, labor experts say.

Undocumented workers learn of the companies through word of mouth, foreign-language newspaper advertisements and Web sites. It was a Russian hostel owner in Brooklyn, for example, who directed 24-year-old Russian immigrant Misha Firer to a small company that cleaned a Wal-Mart in Pennsylvania. For two months, the undocumented worker lived in a trailer park and buffed the store's floors from midnight to 8 a.m. for $6 an hour -- $1 of which was seized by his boss, Firer said.

Even though Wal-Mart's roots are outside of food retailing, it's within the food sector that the non-unionized retailer is most affecting labor relations in this country, said Ira Kalish, a global director at Deloitte Research.

"The impact in terms of wage pressures is really in the supermarket industry because that's the one part of retailing that's heavily unionized," Kalish said. "Most others are not. For [a fashion retailer such as] the Gap, for instance, the issue is not so much labor costs as supply-chain efficiency, sourcing and rent."

But for supermarkets, which operate on razor-thin profit margins, labor is perhaps the highest cost of doing business, said Michael J. Silverstein, a senior vice president at Boston Consulting Group.

"The less you pay [for labor], the lower your prices can be," Silverstein said. "The grocery store is a war zone, and the weak are going down fast -- and with them go a lot of jobs."

Wal-Mart's supercenters have labor costs roughly 20 to 30 percent lower than those of unionized supermarkets, according to a study from consulting firm Retail Forward. As a result, groceries at Wal-Mart cost about 15 percent less than the competition, the study said.

Retail Forward concluded that for every Wal-Mart Supercenter that opens in the next five years, two supermarkets will close their doors. That means the supermarket industry could lose 2,000 more stores over the next five years, or 400 a year.

"It's unlikely that any other U.S. food retailer will catch up to Wal-Mart, even through a mega-merger," the report said. By 2007, the chain should capture 35 percent of supermarket industry sales and double the number of its supercenters to 2,250.

Wal-Mart is applying the same heavy pressure on grocery suppliers that it exerts on makers of other consumer goods, leaving them beholden to the retailing giant for a significant part of their revenue. Wal-Mart made up 30 percent or more of U.S. sales for Clorox Co., Gillette Co., Mattel Inc., and Procter & Gamble Co. in fiscal 2002, according to Fitch Ratings.

For retailers, competing with Wal-Mart means not just holding down wages, but curbing health care costs, which are becoming an increasing burden on employers nationwide.

A report by the AFL-CIO, which has tried and failed to organize Wal-Mart workers, said the retailer insures only about 45 percent of its workforce. Wal-Mart workers must pay about one-third of the cost of their health care premiums, while employees at other large companies typically pay 16 to 25 percent, the report said.

The result is that many Wal-Mart workers transfer the health care burden either to their spouse's employer or to government agencies, the report said.

Some employees at Minneapolis-based Target Corp., a non-union company once known for its generous employee benefits, say they believe price competition with Wal-Mart caused their employer to cut benefits as well.

In April, Target rolled out a new health care plan for 2004 that offered generous benefits, but only for employees who averaged more than 32 hours of work each week. Some Target employees say the company then hired more workers and reduced existing workers' schedules so they no longer qualified for the plan.

Wal-Mart workers have complained of similar strategies designed to keep them from qualifying for health coverage.

Lawsuits representing thousands of current or former Wal-Mart employees and focusing on wage and overtime pay as well as sex discrimination are on file around the country, along with dozens of complaints to federal labor regulators.

Wal-Mart defends its practices, arguing that its employees have generous access to insurance and that worker contributions to health care -- $57 per two-week pay period for a family plan -- are in line with the rest of the industry. The company does not quibble with AFL-CIO's wage numbers or health coverage statistics, "but they're only telling half the story," said Mona Williams, Wal-Mart's chief spokeswoman.

Forty percent of the employees who Wal-Mart insures had no medical benefits prior to joining the company, she said. "These are people who would have fallen through the cracks or been on public health rolls," she said, adding that some 62 percent of Wal-Mart's workers are eligible for benefits.

As for wages, Wal-Mart's entry-level jobs "are not designed for someone who is the sole support for a family" but for those looking to advance, she said. About two-thirds of Wal-Mart's managers were once hourly workers for the chain. Employee turnover is 50 percent, better than the 70 percent industry average, Williams said.

Maybe that's why union attempts to organize Wal-Mart employees have failed, Williams said.

"What we need to ask our competitors is: Can they be more efficient? Can they live more frugally?" she said. "Is paying people $15 to $17 [to stock shelves] realistic?"

Some analysts agree, saying Wal-Mart's strategies and success would not be possible without willing workers and the backing of penny-pinching consumers.

"You can't stay non-union unless you're giving people something. On balance it has to work out for employees," said Bernard Sosnick, an analyst at Oppenheimer & Co.

Kroger employees on a picket line this week in Morgantown, many of whom said they were making between $11 and $13 an hour, said they would never work at Wal-Mart. But most said they shop there. In the parking lot of the nearest Wal-Mart Supercenter, on a hilly cow pasture 19 miles south of Morgantown, Vivian Mullins and her daughter, Jennifer, wheeled out a cartload of groceries and said they have sympathy for Kroger workers. But they love their Wal-Mart.

"I applied to work there just the other day," said Jennifer Mullins, 18, currently working in a restaurant. "A lot of my friends I went to school with work there. They think it's great."

Staff writers Kirstin Downey and Michael Barbaro contributed to this report.

Wal-Mart's Sales Rose 4.5%, Beating Wall Street Forecasts
A Wall Street Journal Online News Roundup
November 6, 2003

Wal-Mart Stores reported that its sales rose in October, and that its overall results for the month showed an improvement over the same period a year ago.

The world's largest retailer said that sales at stores open at least a year grew 4.5%. In its flagship Wal-Mart division, same-store sales were up 4%, and its Sam's Club division saw growth of 7%.

Analysts had expected overall October same-store sales growth of 4.2%, according to those surveyed by Thomson First Call.

Wal-Mart, of Bentonville, Ark., reported that net sales for the month improved 11.8% to 19.07 billion, from $17.05 billion a year earlier.

The company forecast November same-store sales to grow by between 3% and 5%.

Meanwhile, J.C. Penney said that sales at its department stores open at least a year declined 2.3%, compared with a strong gain of 13.7% last year. Same-store sales at its Eckerd drug stores also slipped, falling 1.7%. The Plano, Texas, company forecast sales to be either flat or down slightly in November.

Sears, Roebuck & Co. said that revenue at its domestic stores open at least a year decreased 2.7% for the four weeks ended Nov. 1. Total domestic store revenue was $1.9 billion for October, down 2.2% compared with a year ago.

Sears, Hoffman Estates, Ill., said unseasonably warm weather during October slowed demand for seasonal items.

Target Corp. reported October retail sales increased 7.9% to $3.37 billion from $3.13 billion from a year ago. Comparable-store sales rose 1.6% from fiscal October 2002.

The Minneapolis retailer said sales were below plan last month, reflecting exceptionally weak sales at its Mervyn's and Marshall Field's units.

Sears October Same-store sales down
November 6, 2003

NEW YORK (Reuters) - Sears, Roebuck and Co., the largest U.S. department store chain, Thursday said October sales at stores open at least a year fell 2.7 percent as unseasonably warm weather slowed demand for seasonal items, mostly apparel.

The retailer, which in August reversed a 23-month string of same-store sales declines, said total sales for the month fell 2.2 percent to $1.9 billion from a year earlier.

Sears Could See 4Q Loss Of $450M From Retirement Of Debt
Dow Jones Newswires
November 5, 2003

WASHINGTON -- Sears Roebuck & Co. (S) said Wednesday if $11.8 billion of debt is retired through its cash tender offer, it expects to record an after-tax loss of $450 million in its fourth quarter ending Jan. 3, 2004.

As reported in a press release Oct. 17, the company began its cash tender offer to purchase its unsecured debt securities maturing after 2003, including 214 series of notes valued at about $11.8 billion.

Sears said its offer relates to various series of notes, including about $9.7 billion distributed mostly to institutional investors. Each offer is independent, not conditioned upon any other offer, and may be amended, extended or terminated individually. The offers are set to expire Nov. 14.

The company said in its quarterly report filed with the Securities and Exchange Commission that the $450 million after-tax loss will consist of the expected premium paid to retire the debt and the write-off of unamortized debt issuance costs.

According to the filing, Sears also plans to reduce its outstanding unsecured commercial paper borrowings, which would trigger the write-off of an accumulated derivative loss of $180 million recorded within accumulated other comprehensive loss in its condensed consolidated balance sheet at Sept. 27.

Citigroup Completes Acquisition of Sears Credit Card Business
November 3, 2003

NEW YORK--(BUSINESS WIRE)--Nov. 3, 2003--Citigroup said today that it has completed the previously announced acquisition of the Sears Credit Card and Financial Products business.

The purchase price of $31.8 billion, at closing, included a 10% premium on Sears private label and bankcard credit card receivables of $28.6 billion or $2.9 billion, and $0.3 billion for other assets, business facilities and employees.

Included in the purchase price was the assumption of $10.4 billion in securitized debt and other liabilities. Additionally, Citigroup and Sears have entered into a multi-year marketing and servicing agreement across a range of each company's businesses, products and services.

"Today is a very exciting day for Citi as we mark the beginning of our long-term relationship with Sears and their millions of customers," said Citi Cards Chairman and CEO, Steven J. Freiberg. "Bringing together Citi's market-leading card franchise with the breadth and retailing expertise of Sears, will result in a powerful consumer proposition driving accelerated growth for each of our respective businesses."

Citi said that there would be no immediate changes to the Sears card programs or operations. Customers will be provided with world-class customer service and can expect to receive the same features and benefits that they now enjoy. They should continue to use their cards in the same manner they do today.

"Partnering with one of the world's most respected and well-resourced financial institutions we believe will solidify Sears' position as the nation's leading broadline retailer," said Sears Chairman and Chief Executive Officer Alan J. Lacy.

"Through our strategic alliance with Citigroup, customers will experience uninterrupted levels of service and enjoy a broader array of financial products in the future. Sears' retail business will benefit from the continuation of credit availability for our customers and zero percent financing promotions."

With the addition of 64 million Sears accounts and $29 billion card receivables (prior to any FFIEC and other purchase adjustments), the acquisition enhances Citigroup's number one card market position, increasing its portfolio to 161 million accounts and $146 billion card receivables in North America, and 176 million accounts and $160 billion card receivables globally.

 

Kmart's Lampert Struggles to Bring Profit to Retailer
By Michael Peltz - Bloomberg News - Detroit News
October 30, 2003

NEW YORK -- On Friday, Jan. 10, billionaire investor Eddie Lampert was about to clinch one of the biggest deals of his career. Lampert, the majority debt holder in Kmart Corp., had finally hammered out a reorganization plan that would get the retailer out of bankruptcy and provide sorely needed cash. He was expecting to reach a verbal agreement, at least, with creditors and management by Monday morning.

Instead, as Lampert left for the day, two men pointed guns at him in the parking garage of his Greenwich, Connecticut, offices and forced him into a rented Ford Expedition driven by two accomplices. They drove Lampert to a Days Inn in Hamden, Connecticut, about an hour away.

His abductors -- the eldest of whom was 23 and who'd found Lampert's name on an Internet search for wealthy people living in Connecticut -- held him bound and blindfolded in a bathtub for 30 hours. Lampert, 41, persuaded the men to let him go on Sunday morning, promising to give them $40,000 in ransom.

Before any money was paid, the kidnappers were arrested: Police had been able to trace them because they'd used Lampert's credit cards.

Lampert was back at work within days of the incident. "Eddie never said a word about the kidnapping, and I never heard anyone raise it with him," says attorney Rick Cieri, who as head of the restructuring practice at Jones Day was hired as lead counsel for the bank creditors' committee.

Reorganization
Kmart filed its reorganization plan on Jan. 24, just two weeks after the kidnapping. The plan converted Kmart's debt into equity in a company called Kmart Holding Corp., of which Lampert's ESL Investments Inc. is the majority owner, with 51.3 percent. Lampert became chairman of the retailer, which exited from bankruptcy on May 6.

Such determination has helped Lampert, whose ESL manages more than $6 billion, win the business of wealthy clients such as media mogul David Geffen and the Tisch family of Loews Corp. He's kept them as customers by delivering an average annualized return of more than 25 percent after fees since he founded ESL in 1988, according to people familiar with the matter. That compares with an 11.6 percent average return for the Standard & Poor's 500 Index.

"Eddie is a very focused guy," says investor Michael Price, whose MFP Investors LLC of Short Hills, New Jersey, owns 228,382 Kmart shares. "I have as much or more respect for Eddie as I do for any other investor out there."

Kmart's Struggle
Kmart will test Lampert's focus and resolve. The Troy, Michigan-based retailer was struggling long before its recent bankruptcy, says John Champion, a vice president at retail consulting firm Kurt Salmon Associates in Atlanta. "Kmart has got to offer merchandise that consumers want to come in to buy, and it takes vision to do that," Champion says. "Eddie Lampert is a financier, and there isn't a long history of financiers' leading a retail revolution."

Lampert says Kmart has a lot in common with many of his investments. He seeks out companies with sustainable and easily understood businesses that he expects will generate good cash flow in the future. He buys shares when he believes they're trading at a deep discount to future cash flow. Lampert's discount shopping spree has left ESL with more than 90 percent of its assets in four consumer retail companies: AutoNation Inc.; AutoZone Inc.; Sears, Roebuck & Co.; and Kmart. Lampert sits on the boards of all of them except Sears.

The stocks of those companies were up an average of 76 percent this year through Oct. 29. The Bloomberg United States Retail Index was up 34 percent for the same period; the S&P 500 Index was up 19 percent.

Prominent Role
Lampert's ESL is a hybrid of a private equity firm and a hedge fund. Lampert charges the standard hedge fund's 1 percent management fee plus 20 percent of profits. Compared with other hedge fund managers, Lampert takes a prominent role in the companies in which he invests, by buying large stakes and sometimes demanding a seat on the board.

He requires investors to commit their capital for five years, which is longer than the quarterly or annual withdrawals hedge funds typically allow and shorter than the 10 years private equity funds demand.

Bringing Kmart back to profitability won't happen overnight, Lampert says. The retail chain has long been losing market share to rival discount retailers Wal-Mart Stores Inc. and Target Corp. Kmart accounts for about 6 percent of the $417 billion discount retail market in the U.S., Champion says, while Wal-Mart accounts for almost 50 percent of the market and Target accounts for 9 percent.

Montgomery Ward
Kmart could suffer the same fate as Montgomery Ward & Co., says Bill Brandt, CEO of Development Specialists Inc., referring to the Chicago-based retailer that was forced into bankruptcy in the mid-1990s, and like Kmart, emerged quickly and performed pretty well initially. "Montgomery Ward never found a merchandising method or a theme to bring in customers," Brandt says. Eighteen months later, it went back into bankruptcy and was liquidated.

Lampert says the history of retailers in bankruptcy is not a good one. "Most companies don't come out," he says. Still, he disagrees with Brandt's prognosis. He chose to invest in Kmart even as it entered bankruptcy with $7.8 billion of debt and a loss of $2.4 billion in the fiscal year ended in January 2002, because with its 2,114 stores and annual revenue of $36 billion, it could make significant money even if it's only marginally profitable.

Quick Exit
"If Kmart ultimately becomes successful again, an important factor will be because we got out of bankruptcy as quickly as we did," Lampert says. Kmart remained in bankruptcy for 16 months compared with 25 months for Montgomery Ward.

For Lampert, the investment is already successful: ESL paid about $600 million for old Kmart unsecured notes and bank debt, which were converted to stock when Kmart emerged from bankruptcy in May. ESL also injected $155 million in cash for more Kmart shares and a 9 percent convertible note. At an Oct. 29 price of $27.79, ESL's stake is worth $1.5 billion. Lampert, who as part of the investment agreement isn't permitted to sell more than 20 percent of his shares before next spring, says he has no intention of exiting soon. "From our perspective, we're just getting started," he says.

Lampert says he learned not to be afraid of taking on responsibility as a youth in Roslyn, New York, the middle-class Long Island suburb in which he grew up. When Lampert was 14, his father died of a heart attack. "It was probably the most significant thing that has ever occurred to me," he says. "I grew up very quickly." He took on a part-time job during his senior year of high school to help pay for college.

Goldman Sachs Intern
Lampert got his first taste of Wall Street when he was a summer intern in the sales and training program at Goldman, Sachs & Co. after his junior year at Yale University, at which he studied economics. Lampert was hooked.

A voracious reader of magazines such as Atlantic Monthly, and of biography, psychology and philosophy books, Lampert says he loved the idea that he could make a lot of money doing what he likes to do best: studying and thinking. This past October, he was reading "How Would You Move Mount Fuji?" which is a collection of questions that Microsoft Corp. interviewers ask prospective employees.

He parlayed the Goldman Sachs internship into a full-time job following graduation. In July 1984, he joined Goldman Sachs as a junior research analyst in its risk arbitrage group, which at the time was headed by then future Treasury Secretary Robert Rubin.

The group invested in mergers by buying the stock of the company being acquired and simultaneously shorting the shares of the acquirer. The idea was to lock in the spread between the current price and the final price if the acquisition were to go through, with the "risk" being that it wouldn't.

Strategy Forms
Lampert's investment strategy started to take shape at Goldman. "What was really interesting to me was, why would a company or a buyout firm pay $50 or $60 for a company that a week ago was trading at $30?" he says. "Either the company doing the acquiring had the ability to run the business that much better or the business was significantly undervalued."

Lampert says his need to understand why some companies are undervalued led him to study the shareholder letters of Berkshire Hathaway Inc. CEO Warren Buffett.

From them he learned the importance not only of looking at a company's stock price but also of analyzing the company's businesses and their industries.

Lampert says he decided to follow Buffett's advice and to invest in companies trading at a big discount to the present value of their future cash flow. Lampert uses a standard discounted cash flow model to determine that value, and he also looks at how companies have performed in the past during both good and bad economies. He then comes up with his own estimate of how much a company could earn if it were run better -- a process he says is somewhat subjective.

Share Buybacks
One of the keys lies in finding companies whose management is willing to use that cash to boost the share price either by buying back shares or by investing the money in the business.

The potential for gain, Lampert adds, is greater than it is in merger arbitrage, in which investors make money by taking stakes in lots of mergers. One of Lampert's bosses at Goldman was Robert Freeman, who in 1989 -- after Lampert had left -- pleaded guilty to insider trading charges and resigned from Goldman. Lampert wasn't implicated.

Lampert got his chance to test the investing lessons he learned from reading Buffett thanks to a powerful friend: investor Richard Rainwater. In 1987, Lampert met Rainwater, who'd formerly managed the Bass family fortune.

A year later, Rainwater, at the time 44 years old, staked Lampert, only 25, with much of the $28.8 million with which he started ESL. Lampert moved to Texas, where he became one of several young money managers in Rainwater Inc.'s offices. "Eddie was the stock market guy," Rainwater says through an assistant.

'Nurturing'
"Richard was a creative, nurturing type of guy," says shareholder activist Robert Monks, whom Rainwater asked in April 1989 to work with Lampert in a proxy fight against defense contractor Honeywell Inc. "He would invite people to come down to Fort Worth and take a desk. Eddie was one of his proteges."

Lampert wasn't comfortable in that role, says Monks, the founder of Institutional Shareholder Services, which provides proxy-voting assistance for institutional investors. "Eddie's view of Eddie was that he was entitled to prime time, and Richard thought he was still working for Richard," Monks says.

The management of Honeywell was trying to institute a staggered board and other antitakeover measures. After Monks enlisted the support of the California Public Employees' Retirement System and the Pennsylvania Public School Employees' Retirement System, he says, he and Lampert began cold-calling other shareholders to persuade them to vote against management.

"Eddie was never bashful about doing the work," says Monks. "He played an important part in winning that vote."

Split With Rainwater
Lampert and Rainwater split up in the fall of 1989, and Rainwater pulled out his money. Neither Lampert nor Rainwater would comment on their falling out. Lampert stayed in Texas until 1992, when he moved his firm to Greenwich at the suggestion of Geffen, who by then was his largest investor. That fall, Lampert got Geffen and the other limited partners to agree to lock up their money for five years. Geffen declined to be interviewed for this article.

In the late 1990s, Lampert made an investment that earned him the attention of Wall Street. In 1997, he started buying shares of AutoZone, a Memphis, Tennessee-based auto parts retailer that had fallen from favor with investors as its earnings growth stalled.

The company's shares were trading in the $20s, down from a high of $37.50 in April 1996. Lampert says he was attracted by the retailer's strong brand, which was well-known among do-it- yourselfers. By the end of 1998, ESL Investments owned 10.1 percent of the company.

Visit to Aspen
The stock continued to fall, reaching a low of $23.13 on Aug. 6, 1999. Lampert bought more, raising his stake to 14.6 percent by Aug. 13 and making him the largest shareholder. That summer, Lampert flew to Aspen, Colorado, to meet with AutoZone founder Joseph "Pitt" Hyde III at Hyde's ranch.

"Eddie certainly did his homework," says Hyde, 60, who now owns 0.5 percent of AutoZone. Hyde says Lampert had visited stores and spoken to managers. Lampert was pushing for AutoZone to increase the size and pace of its share buyback program. Hyde disagreed.

A month later, Hyde and the other directors asked Lampert to join AutoZone's board. In March 2000, over Lampert's objections, the board adopted a poison pill plan that would have permitted the company to flood the market with new shares if any group acquired 15 percent or more of AutoZone stock.

Lampert fought the poison pill, threatening to go straight to AutoZone shareholders and, in an ESL April 2000 filing with the U.S. Securities and Exchange Commission, accusing the board of possible insider conflicts. The board backed down that fall, and CEO John Adams announced his retirement.

Poison Pill
"We did away with the poison pill because Eddie and some others took exception to it," says Hyde, who cochaired the CEO search committee with Lampert. The replacement, Steve Odland from a U.S. unit of Dutch grocer Royal Ahold NV, has been buying back AutoZone stock, thereby reducing the shares outstanding by almost a third. On Oct. 29, AutoZone shares were trading at $101.65. Odland wasn't implicated in the accounting scandals that forced Ahold to restate its earnings in October.

Even as Lampert was battling to get his views heard at AutoZone, he had his eye on another auto-related retailer: AutoNation. In mid-2000, AutoNation shares were trading at about $7, down from their 1997 high of $38.58.

In August of that year, Lampert announced that he'd acquired 7 percent of the company. He says he was impressed with the CEO, Mike Jackson, former president of Mercedes-Benz of North America, who'd taken over in September 1999 from Wayne Huizenga, who remained chairman, and slowed the acquisition pace.

Spinoffs
Jackson announced that AutoNation would exit the used-car and rental-car businesses, spinning off Alamo Rent-A-Car and National Car Rental, so it could focus on its new-car dealerships. AutoNation had also begun a share repurchase plan, buying back $1.29 billion of its stock.

By mid-2001, AutoNation shares had reached $12, benefiting from strong new-car sales. Lampert bought 27 million more shares in October of that year, including 15 million from Huizenga. The price: $10 each. On Oct. 29, the company's shares were trading at $17.92.

Bet on Sears
Next, Lampert bet on another faded retailer: Sears, whose shares had fallen 64 percent in five months to $21 on Nov. 13, 2002, because same-store sales had declined for seven straight quarters and the department store chain was weighed down with $1.6 billion of bad credit card debt.

In October 2002, ESL disclosed it owned 7.2 percent of the Hoffman Estates, Illinois-based retailer, and by March of this year, ESL had raised the stake to 11 percent. The stock was trading in the low $20s, valuing the company at about $6 billion.

Lampert thought it was worth more because it was the fourth- largest U.S. retailer, with sales of $41 billion, and it was trading at about five times analysts' earnings estimates of $4.73 a share. That was less than half its historical price-earnings ratio of 12. Sears also had cash flow from operations of $803 million in the fourth quarter of 2002.

Credit Cards Sold
Sears shares started to rise when CEO Alan Lacy announced on March 26 that the company was considering the sale of its credit card business. On July 15, Citigroup Inc. agreed to buy the unit in a transaction that would net Sears as much as $4.5 billion after taxes. The next day, Sears shares rose 9.2 percent, trading at $38.20. On Oct. 9, they reached a 52-week high of $50.65, about double what ESL had paid for them.

Lampert's hands-on approach helped him play a decisive role in Kmart's bankruptcy. As the majority debt holder, he was able to push through in near-record time the restructuring he wanted. "Eddie hit the ground sprinting," says attorney Cieri, who's now at New York-based Gibson, Dunn & Crutcher LLP. "He aggressively pursued consensual deals with the banks, the bondholders and the trade creditors."

Henry Miller, chairman of Miller Buckfire Lewis Ying & Co., an investment bank that specializes in corporate restructuring and was hired by Kmart during the bankruptcy, agrees. "By buying as much as he did in the market -- bonds and bank debt -- he had the ability to block anybody else," Miller says. "Eddie held all the high cards."

Stores Closed
Lampert says his goal wasn't to get every last penny for ESL but to get Kmart out of bankruptcy quickly. Lampert paid the banks 40 cents on the dollar at a time when Kmart's debt was trading at 30-33 cents on the dollar, according to CRT Capital Group LLC, a Stamford, Connecticut, broker specializing in high-yield and distressed securities. The company emerged from Chapter 11 with no debt, a $2 billion bank revolving credit line and about $1.2 billion in cash. It closed 599 stores, leaving 1,513.

Now Lampert wants to improve the quality of the remaining stores, the merchandise selection and customer service. He says he's visited more than 100 Kmart stores, talking to employees, managers and customers.

Lampert and ESL President Bill Crowley sat alongside Kmart CEO Julian Day, a Sears veteran, and other senior Kmart executives in Aspen in late July to hear pitches from several ad agencies vying for the Kmart account and helped select Grey Global Group Inc. to replace Omnicom Group Inc.'s TBWA/Chiat/Day.

Lampert, Crowley and Day have hired a new operations chief, Bruce Johnson, formerly director of organization and systems at French retailer Carrefour SA, and a new chief creative officer, Lisa Schultz, who was formerly at clothing chain Gap Inc.

Kmart is also expanding its exclusive celebrity-linked brands. In August, it began selling a Thalia Sodi Collection of clothing accessories and home furnishings inspired and partly designed by the Mexican pop diva of the same name

Congress Ponders Ways to Collect Online Sales Levy
By Rob Kaiser - Tribune staff reporter - Chicago Tribune
October 29, 2003

Tax plan may beget Net effect

Legislation that would force Internet businesses to collect--and consumers to pay--sales tax on all online purchases is working its way through Congress again.

The latest bills, introduced in the House last month and the Senate two weeks ago, may have a better chance of passing than earlier efforts because of strong support from cash-strapped states and some of the biggest traditional retailers.

"I've talked to at least 10 senators who voted no last time and are voting in favor of it this time," said Staples Inc. Chairman Tom Stemberg, a proponent of the tax who expects the legislation will be approved this year or by early spring.

Diane Hardt, tax administrator for the State of Wisconsin and co-chair of a project to simplify online taxes, isn't as optimistic about the legislation making it through Congress, saying passage in 2005--after the next presidential election--is more likely.

The debate has taken shelter in the gray areas of the law since a 1992 Supreme Court decision stating catalog companies didn't have to collect local taxes because the task was too onerous.

Since then, there have been multiple failed efforts to pass a law forcing online retailers to collect local taxes, and scattered practices have emerged. Some retailers like Wal-Mart, Target and Staples collect them, while others, notably Amazon.com and eBay, don't.

Such inconsistent approaches have cost states $13.3 billion in tax revenue in 2001 alone, according to a study by two University of Tennessee professors. Illinois reportedly lost $533 million.

Using estimates of e-commerce sales from Forrester Research Inc., the professors figured tax revenue losses would soar to $53.5 billion a year by 2010.

The Direct Marketing Association, which represents catalog and online firms, disputes these figures, saying the professors overestimated the growth of e-commerce and that the 2001 figure is closer to $1.9 billion.

But whatever the figure, states don't want to leave it to chance anymore. And they're finding allies in brick-and-mortar retailers that long have complained of the pricing advantage online retailers hold since they do not have to charge sales tax on purchases.

"It's better to collect taxes already due as opposed to new taxes," said Stemberg.

But Internet-based retailers continue to fight efforts to make them tax collectors, saying they are more worried about the process of collecting taxes and distributing the money to states rather than losing customers due to the tax.

They say that collecting taxes remains too complicated, given localities' various tax rates and rules on what is taxable. Scarves, for example, are considered fashion accessories in some states, while others classify them as clothing, confusing the issue of what tax rates apply.

Amazon.com spokesman Bill Curry said his company wouldn't oppose collecting taxes if the system were "truly and fairly simplified."

But Curry said states have not restructured their tax systems enough to make Amazon comfortable with exposing itself to legal risks.

"There's a risk of not charging the customer the right amount, and there's a risk of not giving the state authorities the right amount of money," Curry said.

Quill case a landmark

The reason most Internet and catalog sales aren't taxed stretches back to the U.S. Supreme Court's ruling in the case of Quill vs. North Dakota.

The Lincolnshire-based Quill catalog company, which sells office equipment, won the landmark case in 1992 and was a champion of the no-tax issue until it was bought by Staples five years ago.

The high court found it would be too onerous for Quill and other catalog companies to keep up with all of the local tax rates and rules, saying they only have to collect taxes in states where they have physical locations, such as a headquarters office or warehouse.

Still, the court didn't completely shut the door on the issue, saying the taxes could be collected if states simplified their tax codes and Congress authorized the measure.

States cooperating

In 2000, the Streamlined Sales Tax Project was started to create common product definitions, simplify tax rates and address other issues that complicate the tax system.

Today, 42 of the 45 states that charge sales tax have joined the project, and 20 state legislatures have passed bills to simplify their tax codes.

Mark Micali, vice president of government affairs for the Direct Marketing Association, said the states were supposed to eliminate confusion by agreeing to common definitions.

"The streamline process has failed to do this," Micali said.

Most Internet and catalog companies expect adding sales tax will have little effect on their sales, particularly for low-cost items.

Like Quill, catalog company Lands' End underwent a change of heart on the tax issue after being acquired by Sears, Roebuck and Co. last year.

"We think it is important that there is a level playing field," said Don Hughes, chief financial officer at Lands' End, which previously opposed collecting the tax.

Since Sears has locations across the country, Lands' End had to start collecting sales tax from all its customers.

"We've seen some drop-off in sales, but it's been very minor," Hughes said. "I truly don't believe it's a big part of consumers' decisions to buy or not buy remotely."

SEARS TOWER:
Trizec Cuts Aggressive Rent Deals to Hold Onto Tenants
By Alby Gallun Crain's Chicago Business
October 27, 2003

Tower isn't sky-high

Source: Black's Guide

The Sears Tower is like an Armani suit that has been moved to the discount rack.

The 110-story tower on South Wacker Drive historically has commanded premium rents from image-conscious tenants captivated by its cachet, breathtaking views and broad selection of amenities. Yet, after losing high-profile tenants like Goldman Sachs & Co. in the wake of Sept. 11, leasing agents for the landmark building are offering bargain rents to entice more tenants to stay put, real estate sources say.

Some big tenants are at stake, including Bank of America Corp., which leases about 181,000 square feet in the skyscraper, and law firm Schiff Hardin & Waite, which leases 193,000 square feet. Both are scouting the downtown office market for new space.

Though the 3.5-million-square-foot Sears Tower is hardly the only downtown office building suffering in today's depressed leasing market, brokers say its rents have fallen more than rents at competing Class A buildings in the West Loop.

"I think it's safe to say that Sears Tower has to be aggressively approaching the market not necessarily because of 9/11 but because of all the tenants they have lost," says Robert Schmidt, managing principal in the Chicago office of Staubach Co., a Texas-based tenant representation firm.

Willing to cut deals

Indeed, Mr. Schmidt's client Chubb Corp. is one tenant Sears Tower's leasing agents don't want to lose. With an option to terminate its 100,000-square-foot lease next year, Chubb has been exploring its options, including a move to 3 First National Plaza in the Loop. Yet Trizec Properties Inc., the Chicago-based real estate investment trust (REIT) that leases and manages the Sears Tower, is making it hard for the New Jersey-based insurance company to leave.

"They've got a very, very attractive proposal on the table right now," Mr. Schmidt says, declining to provide specifics.

Trizec Senior Vice-president Stephen Budorick declines to discuss specific leasing transactions or to release any information about rental rates or concessions at Sears Tower. He denies, however, that Trizec is "inducing people to stay in the building with below-market transactions."

However, recent published figures and interviews with brokers suggest that Trizec is willing to cut deals — in some cases at prices more in line with a Class B building.

Leasing agents for the tower are asking $16 to $22 a square foot in net rent, which doesn't include taxes and operating expenses, estimated at $15.94 a square foot, according to the most recent Black's Guide, a publication that tracks the local office market.

That's down significantly — about 33% on the low end of the range and 27% on the high end — from asking rents of $24 to $30 a square foot in early 2001.

"It's (a Class) A building with a C problem that makes it B-plus," says one tenant broker.

At competing buildings, asking net rents haven't fallen nearly as much. Across the street, the 1.3-million-square-foot 311 S. Wacker Drive is asking $22 to $31 a square foot, down from $25 to $34 in early 2001 — a 12% drop on the low end and 9% on the high end, according to Black's Guide.

The neighboring AT&T Corporate Center generally leases space for about $4 to $5 a square foot more than the Sears Tower, but that spread has widened to $10 over the past two years, says one source.

To be sure, listed asking rents are only a starting point for negotiations and don't include incentives like tenant-improvement packages, a popular goodie in today's soft market. Yet brokers say that rents have plunged — and that tenants have gained the upper hand in lease negotiations.

After mulling a move out of the Sears Tower, law firm Tressler Soderstrom Maloney & Priess signed a 75,000-square-foot lease there in January for $12 a square foot and a one-time tenant-improvement allowance of about $35 a square foot, sources say.

Tressler's broker, Howard Ecker, president of the brokerage unit of Chicago-based Jupiter Realty Corp., declines to confirm those figures, but says Trizec was "very aggressive."

That also appears to be the case with other tenants, like Bank of America and health insurer Unicare, both of which have received proposals in the $12-to-$13-a-square-foot range, along with other incentives, brokers say.

Trizec's Mr. Budorick says those figures are too low, but declines to provide specifics. Bank of America and Unicare declined comment, as did Bank of America's tenant representative, Chicago-based Jones Lang LaSalle Inc.

By comparison, the Sears Tower had an average net rental rate of $21.30 a square foot in 2001, the last year Trizec disclosed such figures, along with average tenant installation costs of $19.10 for renewals.

Now, height's a minus

Only a few small tenants have moved into the Sears Tower since Sept. 11, 2001. In July, Trizec enticed law firm Linebarger Goggan Blair & Sampson LLP to move out of 311 S. Wacker Drive and into about 9,000 square feet on the tower's 40th floor. The firm looked "all over downtown Chicago," but the Sears Tower space was move-in ready and the price was right, says managing partner Scott Wylie.

"I could have (renewed) at 311, but the Sears Tower was a lot more negotiable," he says, declining to disclose the terms of the deal.

Trizec has been forced to become more flexible since the terrorist attacks on the World Trade Center ignited concerns that a similar attack could happen at the Sears Tower, the tallest building in North America and third-tallest in the world. Its height, once an asset, became a liability overnight.

Big tenants like Goldman Sachs (238,000 square feet), Merrill Lynch & Co. (102,000 square feet) and Fireman's Fund Insurance Co. (87,000 square feet) have already decided to move to other buildings. Even before those departures, the Sears Tower's occupancy rate has fallen to 89%, down from 96% in 2001.

By late last year, the building became a major burden for Trizec, which controlled it through ownership of a second mortgage, prompting calls from analysts for the REIT to walk away from the tower (Crain's, Oct. 21, 2002).

Trizec ultimately took Wall Street's advice, agreeing in August to sell the property for $9 million to its primary lender, New York-based insurance company MetLife Inc. A MetLife spokeswoman declined to comment. Trizec still manages and leases the building, so the pressure to retain tenants hasn't disappeared.

Says Mr. Schmidt, the Staubach tenant broker: "I don't think they can afford to have anyone else vacate the property."

Another Repair Project at Sears
By Sandra Jones - Crain's Chicago Business
October 27, 2003

Patchy contractors, revenues make home unit ripe for razing

Sears, Roebuck and Co.'s home services and repair business needs a little fixing up.

Pegged for growth by former CEO Arthur Martinez, the Sears unit that cleans carpets, installs windows, fixes dryers and performs other chores has fallen far short of the $10 billion in annual revenues Mr. Martinez envisioned. Revenues have headed in the other direction since he left, declining from roughly $3 billion in the late 1990s to $2.5 billion today, and successor Alan Lacy continues to whittle the unit down.

Mr. Lacy — who ran Sears' home services unit for a year before assuming the top job — is shedding ancillary businesses as he leads the Hoffman Estates-based company back to its retailing roots. He already has unloaded one of the service businesses and is reviewing another, according to company filings with the Securities and Exchange Commission.

That business, the $326-million home-improvement services operation, which encompasses everything from electrical work to plumbing, is ripe for dismantling, analysts say. The uncertainty of dealing with hundreds of small contractors nationwide has led to erratic service, and customers unhappy with the way a Sears contractor installs a bathroom sink or frustrated with the mess left behind isn't likely to shop at Sears again — for anything.

"It's an area that's got lots of potential potholes," says Philip Zahn, a retail credit rating analyst at Fitch Inc. in Chicago. "There's always the concern that it will sully the Sears name if the contractors don't do a decent job."

Sid Doolittle, founding partner of Chicago-based retail consulting firm McMillan/Doolittle LLP, says he experienced the frustrations of dealing with an army of contractors when he oversaw the window treatments business at defunct Chicago-based department store chain Montgomery Ward & Co. in the 1970s.

"You get your hands awfully dirty in these businesses," says Mr. Doolittle. "I wouldn't be surprised if Sears tried to get out of it. It's an extremely complicated business because you're depending on outside contractors, and if they're not dependable, it affects your reputation."

A Sears spokesman won't comment on the home improvement unit's future, but its past is checkered.

In 2000, when Mr. Lacy was running Sears' services operation, he ended an agreement with Diamond Home Services Inc. after the Woodstock-based roofing and fencing company — which has since shut down — failed to meet Sears' quality benchmarks. Sears had similar troubles several years ago in the carpet cleaning and pest control businesses.

As CEO, Mr. Lacy has taken more steps to fix the home services business, including selling the pest and termite control business to Downers Grove-based ServiceMaster Co. and converting the carpet and upholstery cleaning business from a licensed operation (where it had little control over contractors) into a franchise.

Mr. Lacy has separated the appliance installation and repair business from the rest of the home services business and earmarked it for growth.

Much work still needs to be done at the home services unit, a task that will fall to Mark Good — a relative newcomer to Sears who has worked in logistics and distribution at Westinghouse Electric Supply Co. and Gap Inc.

The business of installing and servicing appliances is profitable, according to the Sears spokesman. And it's critical to Sears' ability to sell $6.5 billion in appliances each year. The product repair unit differs from the rest of the home services operation in that Sears employs its own workforce of 10,000 technicians, rather than relying on outside contractors.

Sears won't say if the home improvement unit is profitable, and observers wonder about its value in a sale.

"They're probably not going to realize a lot of proceeds if they sell (home improvement services)," says David Novosel, managing director of investment-grade credit research at Banc One Capital Markets in Chicago.

Mr. Lacy has been peeling away ancillary businesses for the past two years in an effort to strip Sears down to its core retail roots. He has shed the National Tire & Battery automotive service business, sold Sears' stake in Advanced Auto Parts Inc. and HomeLife furniture stores, eliminated the carpet and cosmetics businesses from Sears' department stores and, in the most dramatic move, sold Sears' credit card business.

Under Mr. Lacy's predecessor Mr. Martinez, the home services business looked like a natural growth opportunity. A study done for Sears in the late 1990s suggested that if the company could grab a 5% or 6% slice — or $10 billion of the then-$160-billion market (now $170 billion) — it could churn out as much as $1 billion in operating income a year.

That didn't happen. And, in the meantime, competitors Home Depot Inc. and Lowe's Cos., which have already taken a chunk out of Sears' appliances business, are also plowing into home services.

There are few potential buyers for Sears' disparate home services business, which performs a laundry list of jobs — replacing entry doors, installing landscape lighting, refacing cabinets, cleaning out sewers, installing windows and siding, hooking up ceiling fans, fixing leaky faucets and just about anything a local handyman could do.

Sears may have no alternative but to make the best of what it's got, keeping the lucrative product repair and installation business and perhaps window treatments and siding, while letting the other service businesses wind down by allowing the agreements with their contractors to expire.

America's Most Philanthropic Corporations
By Ari Weinberg -  FORBES.COM
October 23, 2003

NEW YORK - Cash is king.

This sentiment is as true in the realm of charitable contributions as it is in the world of mergers and acquisitions. While many corporations give generously in terms of products and employee time--Microsoft, for instance, gave away $179 million in software last year--the real cost of donated time, products and services is debatable.

But there is no arguing the value of cash-giving. So to draw up our listing of America's most philanthropic companies, we looked at Forbes 500s firms and their cash donations for 2001. Data on cash contributions was provided by our friends at The Chronicle of Philanthropy.

Most companies budget their donations based on the previous year's income, so to determine which firms were the most generous we took 2001 cash giving and divided it by 2000 operating income. We also compiled a list of the absolute largest cash donations.

America's Most Philanthropic Companies

Sources: Forbes, Chronicle of Philanthropy

Top Corporate Cash Donations

Pinched at Penney's
By Amy Tsao  - Street Wise - Business Week Online
October 22, 2003

While investors applaud the retailer for taking a serious look at ditching its Eckerd drugstores, the problems go well past that.

Not so long ago, drugstore chain Eckerd was the primary attraction for J.C. Penney investors. Compared to the retailer's department stores, Eckerd chain was seen as the relatively higher-growth business. But of late, many experts have come to the painful conclusion that the drugstore business is no panacea for Penney (JCP ). Eckerd, with its older stores, has suffered as tough competitors opened new outlets in its core markets (see BW Online, 11/21/02, "The Two Sides of Penney").

The handwriting is on the wall: While top competitors Walgreen (WAG ) and CVS (CVS ) posted same-store sales growth in September of 12.9% and 6.6%, respectively, Eckerd's declined 1.1%. The Plano (Tex.)-based Penney admitted in mid-October that Credit Suisse First Boston is advising it on what do with Eckerd. A decision is expected by yearend.

Where does that leave Penney? Few doubt that the retailer, which had $32.3 billion in 2002 sales, would be better off without Eckerd. Talk of a deal to divest the chain has boosted the stock. It's up $3, or 13%, to $25 since the end of September, when chief exec Allen Questrom at an analyst meeting reaffirmed plans to review options for Eckerd. That's just off its 52-week high, and gives Penney a forward price-earning ratio of 20. Problem is, it's pricey compared to a Penney's competitor like Target (TGT ), which trades at a forward p-e of 17 and likely has more growth in its near-term future. Target was trading around $39 on Oct. 21.

"FLOPPING AROUND." Worse, many analysts don't think getting rid of Eckerd will do much to solve Penney's long-term challenges, which include increasingly brutal competition against discounter giants like Wal-Mart (WMT ) and Target. "It's a real positive to get rid of [Eckerd]. But what's left? It's still a bad story, even if it's not as bad as with Eckerd," says one analyst.

As a mature department store, Penney has shown no more than modest progress in its turnaround effort, says Morningstar analyst Heather Brilliant. "The results of its efforts haven't been very positive," she says. "Same-store sales are flopping around. It's very hard to claim that what they've done has had a substantive positive impact." She figures the stock would be worth considering at $13 and rates it a sell at current levels. (Brilliant doesn't own shares.)

Jeff Stinson, an analyst at Midwest Research, agrees. Even without its Eckerd woes, he says Penney has plenty of work to do to get back on a fast-growth track. "Right now, it's harvesting low-hanging fruit," says Stinson, referring to Penney's back-office improvements like centralized merchandise ordering and regional distribution networks. It has improved the department store's operating margins from about 1% in 2000 to 4% in 2002.

A three-percentage-point gain is hardly shabby. But "despite these improvements, we can't get excited about J.C. Penney's long-term prospects," says Brilliant.

FALL OF THE MALL. Analysts say that while those margin gains were significant, they came through relatively easy fixes and don't put Penney back into the same margin league as its rivals. Wall Street will likely demand that Penney achieve the more daunting task of differentiating itself from the likes of Sears (S ) and Kohl's (KSS ).

"That next leg is harder to do," especially as Penney probably won't add to its base of 1,040 department stores or expand the square footage of existing stores, says Stinson. He rates Penney stock a sell. (Stinson doesn't own the stock, and his firm does no investment banking for Penney.) The retailer didn't return calls seeking comment for this story.

Of course, Penney isn't alone in trying to confront the declining popularity of the mall. That's its main venue, and Questrom has made some laudable changes to improve store traffic, such as adding sought-after women's apparel brands like Bisou Bisou. But as department stores try to move up the retail value chain, "they face upscale retailers and [risk] distancing themselves from those who are value-oriented," says Lois Huff, senior vice-president at retail consultancy Retail Forward. Penney has to be "very careful how it differentiates from discounters," she adds.

HARD SELL. Meanwhile, even though Penney has decided to do something about Eckerd, profitably shedding the 2,710-unit chain may not be so easy in this environment. It paid $3 billion-plus for Eckerd in 1996, but considering how much the chain has floundered, the selling price may not be too far above that figure. Press reports of an asking price of $4 billion to $5 billion are too high, says J.P. Morgan analyst Shari Schwartzman Eberts. "We believe a more realistic price is $3.5 billion." She rates the stock underweight. (Shwartzman Eberts doesn't own the shares, and her firm has no investment-banking relationship with Penney.)

Penney has said it plans to create value from Eckerd, but analysts say that's wishful thinking at this point. "They would love to divest it and create value," says Eric Bosshard, who covers the Eckerd part of the company for Midwest Research. "They will have a hard time doing either." Bosshard sees a spin-off as the least financially beneficial but most likely scenario.

Selling Eckerd to one of the drugstore-chain leaders likely would take a depressed price and special structuring to avoid antitrust concerns. Besides the overlap in many markets, Walgreen's is unlikely to want Eckerd, considering an ongoing strategy of adding stores without acquisitions. CVS, though it is itself the sum of many acquisitions, isn't in the best financial position to make such a purchase.

With or without an Eckerd's divestiture, Penney's management needs to focus on improving the retail appeal of its department stores. It's one of many big retailers -- think also of Sears, Federated (FD), and May (MAY) -- trying to prove itself relevant in the face of tough competition from newer, savvier, and more cost-conscious players. That's true whether or not Penney gets a pretty penny for Eckerd.

 

Even at Giant Companies, Many Lack Health Benefits
By Vanessa Fuhrmans - Staff Reporter - The Wall Street Journal
October 22, 2003

Cost of Employee Contributions, Stricter Eligibility Criteria Keep
Low-Wage Workers Out of Plans

An increasing number of Americans lacking health insurance are turning up in unexpected places -- the factories and offices of the country's major employers.

Large companies have long formed the bedrock of the U.S. system of employer-sponsored health insurance. A company with more than 1,000 employees is much more likely to provide health coverage than a business of fewer than 25 people -- one reason many workers opt for jobs and the stability of benefits at the bigger employers. Nevertheless, between 1987 and 2001, the percentage of uninsured workers in large companies climbed to 11% from 7%, according to a new study from the Commonwealth Fund, a private research foundation.

Roughly one out of four people without health coverage in the U.S. -- about 10 million -- work part time or full time at companies with 500 or more workers, or are the dependents of these workers, the study's researchers say.

Few big employers have dropped health-care coverage. In fact, the percentage of large companies that do offer benefits has actually increased slightly, to more than 99% in recent years, according to U.S. government survey data. But as employers' health-care costs continue to soar, many are pushing benefits out of the reach of some low-income employees with stricter eligibility criteria and higher premium contributions for workers.

"Large firms really haven't stopped providing health coverage," says Cathy Schoen, vice president for health policy and research at the Commonwealth Fund, "It's that employee-participation rates are going down."

That is creating stark differences in workers' coverage, sometimes within the same company. Employers don't often discriminate among different classes of workers when it comes to health benefits. But companies' lowest-wage earners have been hit hardest by the rising costs. According to the study, 46% of all low-income workers in large firms, those earning less than 200% of the Federal Poverty Level, go without insurance for at least part of the year. That includes part-time workers and new employees who may still be waiting to become eligible for a company's health plan. "The end result is that you can have people working side by side, some people with reasonably comprehensive benefits and those who don't have anything," adds Ms. Schoen.

Behind the trend is a broader, longer-term shift in the labor market. The share of workers in manufacturing jobs, which traditionally have come with relatively generous benefits, has dropped 11 percentage points at larger companies since 1987, making room for jobs at retailers and other large service-industry companies. The labor forces at those companies tend to experience higher turnover, earn lower wages and consist of more part-time workers.

At Wal-Mart Stores Inc., for instance, new hourly workers must wait six months to sign up for benefits, and part-timers -- those who work fewer than 34 hours a week -- can join the plan only after two years on the job. About 10% of Wal-Mart's work force doesn't have, or has opted not to take, insurance; about half are on the Wal-Mart plan, and the remaining 40% have insurance elsewhere.

Retailers with similar policies say such waiting periods have been a cornerstone of their benefit rules for some time and are necessary because of their higher rates of employee turnover. Without such waiting periods, the administrative costs of employees joining and leaving plans would be out of control, they say.

Wal-Mart, based in Bentonville, Ark., says that of the employees on its health plan, about 40% had no health insurance at all before joining the company. "These are people who probably would have fallen through the cracks before coming to Wal-Mart," says Mona Williams, vice president of communications at the company.

Many companies with relatively generous benefits also have made more aggressive moves to control health-care costs. Costco Wholesale Corp., for instance, hadn't raised rates for health benefits in eight years. Recently, though, the Issaquah, Wash., company said it is making changes to the plan that will raise employees' contributions to about 8% of their health-benefit costs by 2007, up from 4.5% now.

Part-time employees will have a slightly more expensive plan than full-time employees, says Richard Galanti, Costco's chief financial officer. He adds: "But even with the extra cost involved, it's still a fraction of what employees at other companies are paying."

Even employers with traditionally strong health coverage are contracting out more jobs to companies that don't necessarily provide the same benefits, says Joe Martingale, a senior consultant at employee-benefits firm Watson Wyatt Worldwide. Barbara Fors, is a cook at Minnesota State University in Mankato, Minn., but her employer is a large food-service company. New employees have to wait until the company's annual open-enrollment period to join the health plan and work at least 32 hours a week to remain eligible.

Ms. Fors says she doesn't take the coverage for herself and her two sons because she can't afford the monthly premiums, which have risen to $700 since she began working there five years ago. "I just try to get by," she says. "When my tax return comes, that's when I pay my medical bills."

Workers Feel Pinch of Rising Health Costs
By Milt Freudenheim - New York Times
October 22, 2003

As health care costs head into a fourth consecutive year of double-digit increases, employers are shifting a growing share of the burden onto people who make the heaviest use of medical services.

The trend — evident as companies begin informing workers of their benefit choices for the coming year — takes the form of fast-rising co-payments and deductibles, higher payroll deductions to cover spouses and children and new kinds of health plans that give workers a fixed sum to spend.

On average, the annual out-of-pocket costs for employees of large companies have more than doubled since 1998, to $2,126 this year, according to Hewitt Associates, a benefits consulting firm. Hewitt is expecting a 22 percent jump next year, to $2,595.

Costs are up sharply, too, for workers who pay a monthly insurance premium but rarely see a doctor. However, employers have sought to temper those increases, so healthy workers are not tempted to drop their coverage, experts say.

"Employers didn't want to discourage the take-up of insurance," said Paul B. Ginsburg, an economist who is president of Health System Change, a Washington-based research center. "They have made a very conscious decision to increase the patient's cost-sharing rather than increase the employees' share in the premium."

Employers still pay the bulk of their workers' health care bills, but their contribution has slipped over the last five years, to 70 percent of total health care costs from 75 percent, according to Hewitt's latest survey of 300 employers with 5,000 or more workers, released last week.

And more workers are going without insurance, even at large companies. According to a report issued yesterday by the Commonwealth Fund, which studies health policy issues, 9.6 million workers and family members at companies with more than 500 employees did not have employer-provided health coverage in 2001.

At the nation's largest private employer, Wal-Mart Stores, only about half the roughly one million domestic employees are in a company health plan, said Mona Williams, a Wal-Mart vice president. Of the 500,000 others, half are ineligible because they were hired too recently; many depend on parents, a spouse or a government program for coverage, Ms. Williams said.

The figures for big companies reflect a broader shift in the American economy away from mechanisms that for decades have spread the burden of health care costs onto more shoulders.

Largely because of the booming cost of prescription drugs, for example, Medicare covers less of its beneficiaries' health care expenses than at any time since the program was established in 1965, according to Robert M. Hayes, president of the Medicare Rights Center, a patient advocacy group.

As a result, the elderly paid 22 percent of their average median income, or $3,757, for health care last year — a larger proportion than the 20 percent of income they spent before the advent of Medicare.

The number of Americans without insurance has, meanwhile, grown to 43.6 million at last count, the highest since 1998, according to the Census Bureau. Billions of dollars of their health costs are absorbed by hospitals or federal programs, and experts say that the uninsured skimp on care, compared with people who have workplace coverage. Still, uninsured families this year are averaging $772 in out-of-pocket spending, said Jack Hadley, a health care researcher at the Urban Institute, a policy research group in Washington.

All these trends fall most heavily on people who are sick or who otherwise are heavy consumers of medical services. They are also fueling national policy debates, like the push for a Medicare drug benefit, the campaign for loosened restrictions on imported drugs and calls for expanded public programs by most of the Democratic presidential candidates.

"Shifting costs to patients, particularly in the form of higher deductibles for hospital care, disproportionately affects the sickest Americans," said Karen Davis, president of the Commonwealth Fund. "It is not an acceptable response to rising health care costs to make care so expensive that those who need it fail to get it."

Some health care economists "and many insurance companies" argue that costs will never come under control until the users of medical services feel the financial sting. Generous coverage, they contend, long gave Americans and their doctors a perverse incentive to indulge in wasteful consumption of expensive drugs and diagnostic tests. In its more restrictive forms, managed care made patients jump through bureaucratic hoops to obtain treatment, but experts say it, too, did little to expose consumers to the true costs of health care.

"Employees who were paying $20 for a doctor visit had no idea that the average cost was really $93," said Liz Rossman, vice president for benefits at Sears, Roebuck & Company. In the current sign-up period, Sears is hoping that many employees will select new plans that require them to pay 20 percent of the full cost of doctor visits, hospitals and brand-name drugs, or 25 percent for going outside the Sears network.

Hewitt said that a few large employers were offering a new type of health plan, sometimes called consumer directed, that gives workers an unfiltered view of health bills — and often increases their costs. Employees get an allowance to spend on medical expenses. If they exhaust it, they use their own money until they reach a limit, typically $3,000 to $5,000, when the plan starts paying.

"The whole point is to change their purchasing behavior," said Kenneth Sperling, a consultant with Hewitt.

More commonly, some employers have shifted costs by offering limited basic coverage that employees can enhance by paying more in premiums.

But cutbacks in coverage can be brutal for some patients.

"I'm having to beg for my insulin," said Cathy Barkovich, 33, a diabetes patient in Harmony, Pa.

She said her husband's health plan stopped paying for her brand-name prescriptions in July; the American Diabetes Association says that no generic equivalent exists. When she applied to a manufacturer's free insulin program, she was told that only uninsured patients were eligible. Her husband, a $40,000-a-year interstate bus driver, is considering dropping their coverage so she can get the drug, Ms. Barkovich said.

Last year, shifting costs to patients — mainly in drug coverage — "probably took a percentage point off" the increase in the use of medical services, which has been rising at about 9 to 10 percent a year, said Mr. Ginsburg, the health economist. Almost two in three employers now require patients to pay higher co-payments for drugs not on a preferred list: flat rates as high as $30 per prescription, or sums as high as 29 percent of the actual cost.

"People view that as a success in discouraging the use of the most expensive drugs," said Gary Claxton, a vice president of the Kaiser Family Foundation, whose survey of employer health benefits was published last month. Whether recent increases in deductibles and co-payments for hospitals will also reduce the use of services is not yet clear, he added.

One in 20 self-employed workers dropped their coverage last year, according to the Employee Benefit Research Institute, a nonprofit research center in Washington. But almost all employers held onto their insurance, by shifting more costs to workers.

Precision Pattern, an aerospace industry supplier in Tacoma, Wash., with 135 employees was facing a 16 percent increase in premiums, said Bonnie Olson, the company's human resources director. Precision switched to a new provider, BENU, which offers small and medium-size employers a range of six health plans from Cigna Healthcare and Group Health of Puget Sound, a Seattle health maintenance organization.

The company's premiums rose less than 10 percent, she said, but now employees must either accept the restrictions of a basic H.M.O. at Group Health or pay more to maintain or exceed their former benefits.

The company pays the entire premium for about 50 employees who chose the basic plan; these workers then pay $15 for office visits, 20 percent of other costs and $263 a month to cover a spouse.

Most Precision workers chose a Cigna plan offering a broader choice of doctors through a preferred-provider network, at $359 a month for an individual and either a spouse or children. This option includes an $800 family deductible for services obtained outside the network, up from a $200 deductible in the old plan that applied only to visits to specialists.

"The huge rise in health care costs has to be paid by somebody," said Alain C. Enthoven, a health economist at Stanford University. "If some employers had to pay it all, it might push them into losing money."

New Problems in A Medicare Solution
By Stan Hinden - Special to The Washington Post
October 19, 2003

If Congress decides to pay for prescription drugs for people on Medicare, it will be good news for millions of seniors who have no prescription plan at all. But it may be very bad news for millions of other Medicare recipients -- including my wife, Sara, and me -- who may lose the retiree drug coverage we now get from former employers.

The downside for us and many others is that once Medicare begins covering prescriptions, a sizable number of employers are likely to drop their own retiree drug plans. If that happens, an estimated 4 million people would have to move to the Medicare drug plan, which is less generous and more complicated than most employer plans.

Senate and House negotiators are not blind to this issue and have been trying to craft a bill that contains financial incentives for companies to maintain the retiree coverage.

There is no way to know, of course, whether those incentives would work -- or for how long. So Sara and I are worried about the future of the retiree insurance we get from her former employer, General Electric Co.

At the moment, our insurance package looks like this:

As seniors, we are enrolled in Medicare, which covers most of our hospital and doctor bills. We each pay $58.70 a month, deducted from our Social Security checks. We also have two retiree medical insurance policies from GE. We pay $164 a month for a GE "medigap" policy for both of us. We need this coverage because Medicare generally pays only 80 percent of approved medical charges. The "medigap" policy pays the remaining 20 percent.

Our other GE coverage is the mail-order prescription plan. We pay $20 for a 90-day supply. This year, I figure, we will pay $800 for prescriptions that at retail would cost about $7,000. So the GE plan allows us to get our medications for about 11 percent of the retail cost.

If, on the other hand, we had to rely on the limited benefits proposed by Congress, our medications would cost nearly $5,000 a year -- or about 71 percent of retail.

While we cannot predict what will happen to our GE plans, we can see some of the forces and pressures that are shaping their future.

For instance, many members of Congress would like to help seniors pay for their medications so they won't have to choose between medicine and food. But Congress is trying to limit the cost of the drug program to $400 billion over 10 years. That sounds like a lot -- until you learn that the Medicare population will spend $1.8 trillion on drugs in the next decade.

And so, with "limited" funds, Congress has drafted a complicated drug plan that pays for an initial batch of drug expenses but then pays nothing more until seniors get to a "catastrophic" level of drug spending. The coverage gap has become known as the "doughnut hole."

Good or bad, a drug benefit is a drug benefit in the minds of some employers. As the Congressional Budget Office put it, "Some employers likely would see the enactment of a Medicare drug benefit as an opportunity to reduce the costs and risks of providing drug coverage." The CBO noted that there are about 12 million people on Medicare who have health coverage from former employers, and the agency predicts that a third of those people -- about 4 million -- will lose their coverage if, as it expects, their employers drop out.

But the strongest warnings I've seen came from Derek Hunter and Lanhee J. Chen at the Heritage Foundation, a Washington research group.

"Seniors who are dumped out of their current retiree benefits," Hunter wrote, "would lose both generally superior prescription drug coverage and thousands of dollars in deferred and future compensation."

Moreover, he said, "corporations that provide retirees with prescription drug coverage stand to gain tens of millions of dollars in savings by either dropping retiree coverage altogether or scaling it back to provide wrap-around coverage in Medicare."

Chen, in her memo, said: "Many employers, especially those with the greatest retiree health benefit liabilities, stand to gain from the enactment of a universal Medicare drug entitlement."

Chen cited a Wall Street estimate that passage of the Medicare bill "would reduce General Motors' annual drug spending by $150 million and overall unfunded health care liabilities by $2.3 billion." Ford Motor Co., she wrote, would save $55 million per year in drug costs and could reduce its overall unfunded health care liabilities by $1.2 billion.

An interesting clue to employer attitudes came from a survey conducted by Hewitt Associates for the Henry J. Kaiser Family Foundation last year. It found that 22 percent of large employers would drop their drug coverage despite proposed Medicare subsidies. Since the firms surveyed each had more than 1,000 employees, a 22 percent loss in coverage could hit a lot of retirees.

But even firms that keep their drug and other health insurance programs will save money. Dale Yamamoto, chief health actuary at Hewitt, said that by tying into a Medicare drug benefit, employers could save 15 to 40 percent of what they currently spend on drug coverage. Yamamoto predicted that most employers would try to "wrap around" any Medicare benefit. That can take various forms -- such as paying for a retiree's premiums, deductibles or co-payments, or accepting federal subsidies to help pay for program costs.

The pending legislation contains several sweeteners for employers who continue to offer drug coverage. One provision would pay employers 28 cents for every dollar that their retirees spend on prescription drugs between $250 and $5,000.

Yamamoto also noted that some employers' health insurance benefits are tied to union contracts and thus cannot be easily changed. Charles E. Welch, a veteran GE labor negotiator, told me that GE and its unions recently signed a new four-year contract specifying that no retiree health care changes can be made unless both parties agree to negotiate the differences.

Even so, if Congress creates a Medicare prescription benefit, GE will have to find a way to "wrap around" the new benefit. Inevitably, I guess, our present drug insurance will change somewhat.

Strong support for the drug legislation and for employer subsidies has been voiced by the Employers' Coalition on Medicare (ECOM), a group of 60 U.S. companies and associations. ECOM says it believes that the subsidies will enable employers to continue prescription drug coverage for retirees.

ECOM Chairman Edward J. Kaleta III, Washington manager for Caterpillar Inc., noted that the number of employers who offer health insurance to retirees has been declining steadily over the past few years as medical costs have risen. Figures from the Kaiser foundation show that the percentage of large companies (those with 200 workers or more) offering retiree health coverage was 66 percent in 1988 -- and down to 34 percent in 2002.

These employer benefits, Kaleta said, will continue to erode unless Congress passes the prescription drug bill with its sweeteners.

Perhaps the most controversial aspect of the legislation is the effort to shift Medicare's functions to private insurers.

Starting in 2006, Medicare recipients could get prescription coverage in one of two ways: through drug-only private plans or through full-service health care plans that include a drug benefit. Both would be voluntary.

Starting in 2010, Medicare would be required to compete with private insurers to slow its rising costs. The legislation foresees a major role for preferred provider organizations (PPOs) and other managed-care companies, which would be renamed "Medicare Advantage" plans. But many observers are dubious. They point out that the government has been relatively unsuccessful in relying on private insurers to serve Medicare recipients. Many Medicare HMOs and Medicare Plus Choice insurers have quit, saying government reimbursements were inadequate. Since 1999, more than 2.4 million people have been cut loose from Medicare private plans, according to the Medicare Rights Center.

Both the Senate and House drug plans have come in for substantial criticism because of the "doughnut hole" design.

Under the Senate bill, an individual would pay an upfront deductible of $275. The insurance would pay 50 percent of the cost of drugs between $275 and $4,500. After spending $4,500, there would be no coverage until the patient reached $3,700 in out-of-pocket expenses, or $5,813 in total drug expenses. After that, the insurance would pay 90 percent of the person's drug costs.

The House bill has an upfront deductible of $250. The insurance would pay 80 percent of the drug costs between $250 and $2,000. But it would pay nothing more until the individual reaches $3,500 in out-of-pocket costs, or $4,900 in total drug expenses. After that, drug costs are covered in full. This applies to individuals with incomes up to $60,000 a year. People with higher incomes would have to pay more out of pocket before they receive full coverage.

The real question, of course, is: How much financial help would retirees actually get under the pending bills? This is not easy to figure out, but I got some help from a health care expert, Patricia Neuman, a vice president of the Kaiser Family Foundation and director of its Medicare Policy Project.

The foundation's Web site, www.kff.org, contains a calculator that shows, based on your annual drug spending, how much you would have to pay out of pocket in the basic Senate and House versions.

For instance, if Sara spent $5,000 a year on medications, her out-of-pocket costs would be $2,887 for deductibles and co-pays under the Senate bill -- plus an estimated $420 a year in premiums -- for a total outlay of $3,307, or about 66 percent of the total cost of her drugs.

Under the House bill, her out-of-pocket expenses would be $3,500, plus $420 in premiums, for a total cost of $3,920. Here she would pay 78 percent of the cost of her drugs.

I suspect that many retirees will be disappointed by the limited financial help they would get under both congressional plans.

Barbara B. Kennelly, president of the National Committee to Preserve Social Security and Medicare, told me that on her trips around the country she found many who were "very disappointed" with the proposed benefits. "It is far less than they ever expected," she said.

The disappointment, I expect, would be felt most keenly by retirees who had been satisfied with their employer's drug plans. They will say: "I liked what I had. Why did you have to mess it up?"

That will be a hard question to answer.

One of the oldest rules of medicine is "First, do no harm." That would be a good rule for members of Congress to keep in mind when deciding how to provide America's senior citizens with the medical care they need and can afford.

Sears' Profit Down 22%
By Sandra Guy - Business Reporter - Chicago Sun-Times
October 17, 2003

Sears Roebuck and Co. on Thursday reported a 22 percent decline in third-quarter operating profit due to cutbacks at its Great Indoors home-decor stores, but its department store sales rose as shoppers snapped up bargains on clothes and appliances.

The Hoffman Estates-based retailer intends to pursue further cost-cutting to improve operating income results, Sears Chief Financial Officer Glenn Richter revealed during a conference call with Wall Street analysts. That further cutting would make total cuts higher than a previously stated goal of $1.1 billion.

The company intends to wring out what Richter described as "several hundred million dollars in additional gross productivity savings through 2005."

A Sears spokesman said the additional savings would come from simplifying Sears' organizational structure, but he could not say whether that would mean additional job cuts.

Sears has already slashed $800 million in annual costs in the last two years. In doing so, Sears has slashed one-third of its store and headquarters staff and now employs 275,000.

However, some of these cost savings are being offset by wage inflation and higher employee pension and benefits costs, Richter said.

During the third quarter that ended Sept. 27, Sears' revenues inched up 1.3 percent, to $9.79 billion from $9.67 billion a year earlier. Retail revenues rose 1.1 percent to $7.3 billion, largely due to a 1.2 percent increase in sales at stores open at least a year -- the first such increase in 10 quarters.

However, Sears had to discount prices on unsold goods and apparel, and that led to a decline in gross margins -- to 26.2 percent of sales from 27.5 percent in the year-ago quarter.

"The gross margin was a bit weaker than I was expecting," said retail analyst Heather Brilliant of Chicago-based Morningstar.

Excess inventory that failed to sell accounted for 0.9 percent of the decline in gross margin, Brilliant said.

Yet analysts credited Sears for turning around sales at its stores after two years of declines.

"Sears has been building some improvements in apparel," said Sid Doolittle, founding partner at McMillan Doolittle retail consultancy in Chicago.

Especially encouraging is the fit that Lands' End clothing appears to be garnering with buyers of Sears' tools, electronics and appliances, Doolittle said.

Lacy told analysts Thursday that Sears will continue to spiff up its fashion offerings and will introduce a line of men's clothing in fall 2004 using the Structure brand, which Sears acquired in September from Limited Brands Inc.

The last two months of improved same-store sales trends follow Sears' store remodeling campaign, nationwide rollout of Lands' End apparel, and an appliance department revamping in response to market share gains by rivals Lowe's and Home Depot.

The results from Sears' retail operations are critical because the company will sell its profit-generating credit-card business to Citigroup by year's end. The federal agency that regulates banks has approved the sale, Sears announced Thursday.

As part of Lacy's reworking of the chain, Sears is downsizing its Great Indoors home-decor and remodeling stores in favor of a big-box store chain called Sears Grand that will compete with Wal-Mart Stores Inc., Target Corp. and Kohl's Corp.

Sears took a $141 million pre-tax charge, or 32 cents per share, to account for its previously announced decision to close three Great Indoors stores, convert a fourth into an outlet store, and revamp marketing, product selection and inventory controls at the remaining 17 stores. The charge included $99 million in real estate-related writedowns and costs to cease developing four planned Great Indoors store locations; $29 million in inventory markdowns, and $13 million in costs to eliminate 350 jobs and exit contractual obligations.

The Great Indoors charge brought Sears' net income down to $147 million, or 52 cents a share, compared with the year-ago quarter's $189 million, or 59 cents per share.

Without the charge, Sears' profit would have surged 42 percent from the year-ago period to 84 cents a share, Richter said. That would have topped by 2 cents the 82-cent consensus estimate of analysts surveyed by Thomson First Call.

In the credit-card business, operating income jumped 29 percent to $366 million for the quarter, up $82 million from the year-ago period.

Delinquent credit-card accounts rose to 7.62 percent from 7.24 percent a year ago as more people used their Sears Gold MasterCard.

Credit-card receivables decreased 1 percent from the year-ago quarter, to $29 billion, thanks largely to lower interest rates and lower debt balances. Revenues dropped 4 percent, or $56 million, to $1.3 billion because of lower finance charges, lower delinquency charges and a shift in shoppers' balances to the Sears Gold MasterCard.

To further boost its standing, Sears has repurchased 20.6 million common shares for a total cost of $892 million, or an average price of $43.33 per share.

Sears shares fell Thursday, ending the day down $2.61, or 5 percent, to $48.80.

Yet Sears' shares reached a 15-month high on Wednesday and have more than doubled since Oct. 17, 2002, when Lacy shocked analysts by announcing that Sears had uncovered a surprisingly high amount of uncollectible credit-card debt.

Sears is being cautious about the crucial upcoming holiday sales season. Lacy said he expects the retail business' operating income in the final quarter of 2003 to increase 10 percent to 12 percent, with same-store sales growing 1 percent to 3 percent from year-ago levels.

Though Lacy anticipates a better holiday season than last year, he expects plenty of discounting, which reduces merchants' profit margins.

 

Sales Slippage Ends, but Sears Net Falls
By Robert Manor, Tribune staff reporter - Chicago Tribune Tribune news services contributed to this report October 17, 2003

The cost of closing three home-decor stores drove Sears, Roebuck and Co. profit down 22 percent in the third quarter, but the company said Thursday that it had snapped a long streak of declining sales at its stores.

The Hoffman Estates-based retailer said net earnings were $147 million, or 52 cents a share, compared with $189 million, or 59 cents a share, in the same period a year ago. Revenue edged up to $9.79 billion from $9.67 billion.

But the most recent results were affected by an after-tax charge of $89 million, or 32 cents a share, to close three of its Great Indoors home-decor stores.

"They did take a big charge on the Great Indoors," said Heather Brilliant, a retail analyst for Morningstar. "Without the charge, their earnings grew nicely."

"It's a good performance," said Bill Dreher, a retail analyst with Deutsche Bank. "One of the biggest reasons why analysts did not recommend the shares was the lack of sales growth."

Shares of Sears lost $2.61, to $48.80, but are still far above their 52-week low of $18.25. The stock has more than doubled since the start of the year.

Analysts said the stock's stellar performance led investors to cash in and lock up profit Thursday. Sears' stock price has been climbing for months because of investor enthusiasm over the sale of the company's credit card business and renewed focus on retailing.

Excluding the Great Indoors charge, retail and related services had an operating income of $56 million, up from $42 million in the same quarter a year ago.

"We are pleased with our return to sales growth following two years of a fundamental repositioning and restructuring of our core business," said Chief Executive Alan J. Lacy. "We believe the business is well-positioned for profitable growth."

Sears finally turned around a lengthy decline in sales at its stores open for a year or longer, also referred to as comparable or same-store sales. Same-store sales rose 1.2 percent in the quarter.

"It's been almost three years" since sales rose, said company spokesman Ted McDougal.

For years, Sears had earned much of its profit from credit card operations. But the company sold its credit unit to Citigroup in July to focus on its retail business.

Dave Novosel, a retail analyst with Banc One Capital Markets Inc., said Sears may carry through with its plans to buy back its shares, but he also said it may acquire other clothing retailers to boost apparel sales, as it did with the purchase of Lands' End last year.

"They need to find some retail concepts that work," Novosel said. He said he expects Lands' End to create significant revenue for Sears beginning in 2004.

But some analysts say Sears already is benefiting from Lands' End drawing new customers to its stores.

"The word is getting out there about Lands' End," said Carol Moreno, analyst with TCW Group. "Not only are people going there, but they're buying things when they're in the store."

Sears is famed for its home appliance business, which the company said showed improvement in the quarter. Sears has reduced some appliance prices to counter a sales loss to deep-discount home improvement and consumer electronic retailers.

The fourth quarter includes the critical holiday season, which can make or break the year for retailers. Executives predicted that this year will be stronger than the 2002 holiday season, but some industry analysts are more cautious in their predictions about fourth-quarter sales.

NPD Group, which provides sales information for retail and other industries, said this year may be no better than last year, in part because retailers don't have a slew of must-buy items for consumers.

"Consumers view shopping as an irksome chore to get through, rather than an exciting part of the overall season of goodwill and giving," said Marshal Cohen, chief industry analyst for the firm. "In the past, consumers were driven to stores early to find hot items. Lately, we've seen an absence of retailer-led product crazes."

For the first nine months of the fiscal year, Sears reported net earnings of $648 million, or $2.17 a share, compared with $528 million, or $1.64 a share, for the same period in 2002. Revenues were flat, at $28.87 billion.

Sears' Profit Falls 22% in Face of Restructuring
A Wall Street Journal Online News Roundup
October 16, 2003

HOFFMAN ESTATES, Ill. -- Sears, Roebuck and Co.'s net income fell 22%, stung by the costs of scaling back its home-decoration business.

The retailer on Thursday reported net income of $147 million, or 52 cents a share, compared with $189 million, or 59 cents a share, a year earlier.

Revenue inched 1.3% higher to $9.79 billion from $9.67 billion.

Sears took a pretax charge of $141 million in the latest quarter share for closing or reworking several of its so-called Great Indoors home-decoration stores. The charge was significantly higher than the $75 million to $100 million Sears predicted in late August when it announced the restructuring.

Largely because of the charge, Sears' main retail unit reported an operating loss of $85 million compared with operating income of $42 million.

Operating income rose 18% to $366 million for credit and financial products, however, despite a slight decrease in revenue due to lower interest rates.

The company said it is encouraged by its rollout of Lands' End merchandise to Sears stores, a process that was recently completed. Sears purchased the catalog retailer last year.

"Overall sales trends improved during the quarter, reflecting continuing progress against our goals of upgrading merchandise offerings, enhancing the customer experience and improving our marketing efforts," Sears Chairman and Chief Executive Alan Lacy said in a prepared statement.

Sears: 3Q Margins Hurt By Clearances Of Spring Apparel
By James Covert - Dow Jones Newswires
October 16, 2003

NEW YORK -- Sears, Roebuck & Co. (S) said Thursday its third-quarter profits were hurt by clearances of spring apparel that had sold sluggishly earlier in the year because of unseasonably cool weather.

The Hoffman Estates, Ill., retailer said its Lands' End and Covington apparel brands have performed well of late, having achieved a low-single digit increase in sales at stores open at least a year for the third quarter. Sales were relatively strong in women's, men's and children's apparel.

But Sears began the quarter with too much inventory, and steeper-than-expected markdowns cut the company's gross margins by a full percentage point from year-ago levels, Chairman and Chief Executive Alan J. Lacy told analysts in a conference call on the company's third-quarter earnings.

Gross margin was reduced by an additional $29 million, or 30 basis points, by liquidation sales at several Great Indoors stores that were closed during the quarter. Costs of closing the home-decorating stores, including clearances, asset impairment and exit costs resulted in a charge of $89 million, or 32 cents a share, for the quarter. Late August, Sears had said the closings would result in a charge between $75 million and $100 million.

The charge fueled a 22% decrease in earnings for the quarter. Sears reported net income of $147 million, or 52 cents a share, compared with $189 million, or 59 cents a share, a year earlier. Excluding the charge, Sears earned 84 cents a share, beating by 2 cents an analyst consensus by Thomson First Call.

Total revenue inched up 1.3% to $9.79 billion from $9.67 billion a year earlier. Revenue from merchandise sales and services came to $8.41 billion, up 2.1%.

Sales at stores open at least a year, or same-store sales, increased 1.2% for the quarter - their first such increase in 10 quarters. Same-store sales of fitness products increased by a percentage in the high-single digits. Home-appliance comparable sales improved in the low-single digits, and recorded a mid-single-digit increase excluding air-conditioner sales, which were hurt by unseasonably cool weather.

Comparable sales of household goods, however, declined by a percentage in the low-single digits, and consumer-electronics comps fell by a high-single-digit percentage, Lacy said.

Meanwhile, revenue from Sears' credit and financial products fell 3.1% to $1.39 billion. Sears said the business was hurt by lower interest rates, reduced late fees, and an increase in the size of the MasterCard portfolio. The yield for MasterCard is lower than it is for Sears' private-label card, the company said.

Looking ahead to the holidays, CEO Lacy said the company expects "a better season than last year." He cautioned, however, that the season will remain "promotionally intense."

As such, Sears still expects full-year earnings of $4.80 to $5 a share. In the fourth quarter, comparable-store sales are expected to increase in the low-single digits, and gross margins are projected to be flat.

The earnings view excludes any charges that may result from the previously announced sale of the credit and financial products business to Citigroup Inc. (C). The estimate does, however, include the charge related to the Great Indoors restructuring, and the impact of the expected sale of the National Tire & Battery business. Late last month, Sears announced an agreement to sell the business to TBC Corp. (TBCC), Memphis, Tenn., for about $260 million. Sears expects the sale to close by the end of the year.

Sears Hit by Great Indoors Closures/
Lacy Predicts 'Much Better Holiday Season'
Crain's Chicago Business Online
October 16, 2003

Lacy Predicts 'Much Better Holiday Season'

(Reuters) "Sears, Roebuck and Co., the largest U.S. department store chain, on Thursday posted lower quarterly profit after recording a charge to restructure its Great Indoors home decorating chain.

Without the $89 million after-tax charge for closing three Great Indoors stores and upgrading others, the earnings were slightly ahead of analysts' expectations on slightly higher revenue after nearly two years of lackluster sales.

"It's a good performance," Bill Dreher, a retail analyst with Deutsche Bank, said of Sears's earnings. "One of the biggest reasons why analysts did not recommend the shares was the lack of sales growth. Now we're actually seeing the top-line growth, but the shares are already above $50."

The shares, which notched a 52-week high on Wednesday, were down $1.97, or 3.8 percent, at $49.44 at midday on the New York Stock Exchange. The shares had climbed some 18 percent this month as better-than-expected August and September sales boosted third-quarter profit hopes.

Still, Dreher said the stock would probably hold up well for the near term because Sears has more than $3 billion to spend on share repurchases and can step in if the stock drops. The retailer bought back roughly $900 million worth of its stock in the third quarter.

Sears said quarterly retail revenue edged up 1.1 percent to $7.3 billion, while sales at U.S. stores open at least a year -- a retail measure known as same-store sales -- rose 1.2 percent.

The recently acquired Lands' End brand lifted apparel sales, while profit jumped sharply at its credit card division, which the retailer has agreed to sell.

The home appliances business, which accounts for the biggest chunk of sales, showed "solid improvement" during the quarter. Sears cut some appliance prices this year in a bid to win customers back from electronics and home improvement chains, which have expanded their offerings.

HOLIDAY SEEN BETTER THAN LAST YEAR
Sears, which is based in Hoffman Estates, Illinois, said it earned $147 million, or 52 cents per share, in the three months ended Sept. 27. That compares with $189 million, or 59 cents per share, in the same period last year. Excluding charges, earnings per share reached 84 cents in the latest quarter, ahead of the consensus forecast for 82 cents, as compiled by Reuters Research, a unit of Reuters Group Plc.

The retailer repeated its full-year earnings forecast for $4.80 to $5 per share, excluding any impact from selling its credit card operations.

Sears Chairman and Chief Executive Alan Lacy said on a conference call with analysts that fourth-quarter demand looked promising, but retailers continue to slash prices in hopes of winning customers, which may crimp profits.

"I think it's going to be a much better holiday season than the industry had a year ago," Lacy said, adding that consumer electronics will likely be a hot category as high-end items, such as flat-screen televisions, become more affordable.

Last year, the retail sector as a whole struggled through a disappointing holiday season that generated the smallest sales growth in more than 30 years.

In August, Sears reversed nearly two years of declining monthly same-store sales. Its apparel business started to recover from years of disappointing demand as it rolled out its Lands' End brand into all of its 870 full-line stores.

In the credit card division, which Sears is selling to Citigroup Inc., quarterly operating income hit $366 million, up some $82 million a year ago, when the retailer set aside a whopping $189 million to cover losses from people unable to pay their bills.

The huge allowance, which came shortly after Sears fired the head of its credit card operations, sent Sears shares to a 10-year low. The stock is up five-fold since then as investors cheered the decision to sell the credit card business.

Sears' 3Q Profits Off 22 Percent on Cuts
By Dave Carpenter - AP Business Editor
October 16, 2003

CHICAGO (AP)--Third-quarter profits fell 22 percent at Sears, Roebuck and Co. because of costly cutbacks to its Great Indoors home decor chain, but the retailer returned to sales growth in the quarter with results that beat expectations.

Net earnings for the three months ended Sept. 27 were $147 million, or 52 cents a share, down from $189 million, or 59 cents a share, for the same period in 2002.

Results included a charge of $89 million, or 32 cents a share, to close three underperforming Great Indoors stores and convert a fourth to an outlet store. That left operating earnings at 84 cents per share--2 cents better than the consensus estimate of analysts surveyed by Thomson First Call.

Revenues were $9.79 billion, up from $9.67 billion a year earlier.

The Hoffman Estates, Ill.-based company ended a 23-month sales losing streak during the quarter, recording higher same-store revenues in August for the first time since September 2001 thanks to stronger home appliance sales and an improving economy.

Retail revenues climbed 1.1 percent to $7.3 billion in the quarter.

The improvement comes after a two-year restructuring and comes at a critical time, as Sears has bet its future on retail following the sale of its profitable credit unit to Citigroup in July for $3 billion cash.

``We are pleased with our return to sales growth following two years of a fundamental repositioning and restructuring of our core business. While we have much still to do, we believe the business is well-positioned for profitable growth.''

He cited an improvement in overall sales trends and singled out strong performances from lawn and garden products and home appliances, along with progress from the company's new Lands' End and Covington brands.

For the first nine months, net earnings were $648 million, or $2.17 per share, compared with $528 million, or $1.64 per share, in 2002. Revenues were $28.87 billion, virtually flat compared with $28.85 billion a year earlier.

Sears Canada Ups Profit, but Warns of Tough Times
Reuters - October 16, 2003

TORONTO (Reuters) - Sears Canada checked out of the third quarter with a higher profit Thursday, but the department-store chain said competition and nervous consumers will make for a tough finish to 2003.

The Toronto-based company also said a week-long battle to restore power at its Ontario stores following a major blackout in August knocked revenues down by about C$15 million ($11.5 million) and net earnings by 3 Canadian cents per share.

"The consumer is still exhibiting some reluctance and the competitive environment remains problematic, which at the very least will likely put tremendous pressure on margins for the balance of the year," Sears Canada Chief Executive Mark Cohen said in a release.

Sears Canada said it earned C$13.4 million, or 12 Canadian cents a share, in the latest quarter, up from a profit of C$7.3 million, or 7 Canadian cents a share, in the same period last year.

Four analysts polled by Thomson First Call expected an average profit of 14 Canadian cents a share.

Revenue for the quarter fell 3 percent to C$1.43 billion from C$1.48 billion.

Shares of Sears Canada, which is majority owned by U.S.-based Sears, Roebuck and Co. , jumped about 10 percent in 2003 and opened unchanged at C$18.70 on the Toronto Stock Exchange Thursday.

Same-store sales, a measure of sales at stores open at least one year, rose 1.3 percent during the quarter.

Excluding non-comparable items, the company said its net earnings for the quarter were C$12 million, or 11 Canadian cents a share, up from C$10 million, or 10 Canadian cents a share, in the year-ago period.

Sears Canada cut back on profitable discount sales promotions over the past year to focus on regular-priced sales.

The company now expects operating earnings for 2003 to be in the range of C$1.40 to C$1.60 per share, up from operating earnings of C$1.30 in 2002.

($1=$1.32 Canadian)

Store Closings Dig into Sears Profit
Bloomberg News - October 16, 2003

October 16, 2003 Sears, Roebuck & Co., the largest U.S. department-store chain, said third-quarter earnings declined 22 percent because of costs to close three home-furnishings outlets.

Net income dropped to $147 million, or 52 cents a share, from $189 million, or 59 cents, a year earlier, Hoffman Estates-based Sears said in a statement. Revenue, including results from its finance operations, increased 1.3 percent to $9.79 billion in the three months ended Sept. 27.

Sears is closing three Great Indoors stores and eliminating about 350 jobs after failing to win over shoppers to the stand- alone dcor outlets. Sears is adding clothing lines such as Lands' End and selling its credit-card operations to focus on reviving sales at the department stores.

Costs to close the Great Indoors stores and clear out merchandise lowered profit by $89 million, or 32 cents a share. Excluding those expenses, Sears was expected to have profit of 82 cents, the average forecast of analysts surveyed by Thomson Financial.

"You see them tweaking what they do, and that's helped them in the long run," said Keri Spanbauer, an Appleton, Wis.-based analyst with Thrivent Investment Management, whose $60 billion in assets include Sears shares. "We're definitely seeing some early signs that are positive."

Brennan Resigns From Morgan Stanley Board
Associated Press
October 16, 2003

NEW YORK - Morgan Stanley said Wednesday that Edward A. Brennan resigned from its board.

Brennan's resignation, which went into effect Tuesday, comes after AMR Corp. named him executive chairman earlier this year. Philip J. Purcell, Morgan Stanley's chairman and chief executive, serves on the AMR board.

Brennan's decision avoids a situation in which the two companies would have their chairmen serving on each other's boards, the firm said in a press release.

Fort Worth, Texas-based AMR Corp. is the parent company of American Airlines. In April, AMR's board named Brennan, a longtime director at the company, as chairman.

Brennan is the former chairman and chief executive of Sears Roebuck & Co.

At Morgan Stanley, Brennan chaired the board's audit committee. He served on the board of Dean Witter, Discover & Co. at the time of its initial public offering in 1993 and continued on the board following the merger with Morgan Stanley Group Inc. in 1997.

Many People Must Rethink Benefit Choices This Year
As Firms Revamp Options
By Ruth Simon - Staff Reporter of The Wall Street Journal
October 15, 2003
Your Health Plan's New Math

For many workers, the benefit enrollment package that arrives this fall could be the most unpleasant piece of mail they get all year.

Stung by what is expected to be the fifth consecutive year of double-digit increases in health-care costs, many employers are aggressively revamping their offerings -- dropping old options, adding new ones and making subtle but important changes. Many workers will see their health-insurance premiums rise again. Some will also be hit up for a greater portion of the bill each time they fill a prescription or see a doctor.

But companies aren't stopping there. Many are undertaking what could amount to the biggest shift in employer-provided health care in a decade. The trend is away from health maintenance organizations, whose costs have been rising at a faster clip than medical prices overall, and toward greater choice -- but at a price.

Some companies, like International Paper Co. and Lockheed Martin Corp., are experimenting with new "consumer driven" approaches that give employees an annual cash allowance to spend on medical care. Others, like Sears, Roebuck & Co., are moving away from fixed-dollar copayments to arrangements that force workers to pay a percentage of each medical bill. And many companies are making it far more expensive to use brand-name drugs rather than generics.

The goal is not just to get employees to pay a bigger portion of the costs but to make them more sensitive to medical prices and become shrewder consumers. "We're working to change the way people think and behave," says Liz Rossman, vice president of benefits at Sears.

The upshot is that many people will find that automatically re-enrolling in the plan they had last year may not be the best move. In some cases, it may not be an option at all.

International Paper, for instance, is replacing two of its plans with two new consumer-driven options. Under one, a family of four would get a personal care account with $1,000 that can be used to partially offset a steep $4,000 deductible. Employees can go to any doctor they choose, but will pay 35% instead of 20% of the cost if they stray outside the plan network.

Lockheed Martin is introducing a plan that, for a single employee, includes a $1,000 deductible and a $500 health care fund that can be spent on doctors' visits and hospital services. It also includes new coinsurance charges for drugs, with the highest levies on brandname medications that aren't on the company's "preferred" list. "We're making people make some real hard economic decisions," says John Rust, Lockheed's director of group insurance-supplier management.

Deciding what plan makes sense is getting tougher because there are more variables than ever to consider. For many workers the most-noticeable hit will be in their paychecks. Employees are expected to pay, on average, $196 a month for family coverage, or 15% more than this year, according to Towers Perrin, a benefits consulting firm.

But it may not be wise to simply pick the plan that takes the smallest bite out of your wallet or the one that offers the richest suite of benefits. It's better to focus on total cost -- deductibles and co-payments or co-insurance as well as premiums. That means adding up both the amount you'll pay each month as a premium and what you are likely to shell out over the coming year for doctors' visits, prescription drugs and other medical services.

It also means reading the fine print of individual provisions to catch significant changes. Washington Mutual Inc. has doubled its co-payment for visits to specialists in its HMOs, and is increasing the out-of-pocket maximum on another one of its plans to $2,250 from $1,500 for in-network services and to $4,500 from $3,000 for those who go out-of-network. At AMR Corp., parent of American Airlines, nonunion employees who sign up for one plan will pay 40% of the cost when they go outside the plan's network, twice as much as in the past.

Workers "have more skin in the game" this year, says Tom Beauregard, a national practice leader with Hewitt Associates. "Employees need to slow down and make careful decisions." Here are some guidelines that can help in the benefits enrollment process:

Estimate how much you'll spend on medical care. Whether a plan is a good buy or a bad one will depend, in part, on your health-care needs. So your first step should be to estimate how often you and your family will visit the doctor, how many prescriptions you expect to fill, and other medical services you may need next year. You can often come up with a reasonable prediction by looking at how much you spent this year on medical services.

Check for differences in preventive care. At International Paper, for instance, employees can get up to $500 of preventive care at no cost under some plans, but will have to pay up to $20 per check-up in others.

If you use a lot of brand-name drugs or expect to go outside your plan's network, find out what it will cost you, and if you can do anything to cut those expenses. Mail-order programs can produce big savings on prescriptions you take regularly.

Rethink HMOs. Many people joined HMOs because they were cheaper or avoided them because of rules that limited access to specialists. But HMO costs have been climbing at a faster clip than medical care overall, while some of those knotty restrictions have been eased. So while HMOs aren't necessarily the deal they once were, they may allow more freedom of choice than in the past.

"It used to be that for the employee, the HMO had the best benefit for the lowest contribution," says Richard Ostuw, a principal with Towers Perrin. Now, he says, "it may or may not have the lowest contribution" but still can be a good value, especially for people who see doctors frequently.

Sears will offer just 35 HMOs nationwide next year, down from 53 in 2003 and about 220 five years ago. The company says that many HMOs no longer meet its standards for cost and quality but it thinks highly of those it still offers.

CHOOSE CAREFULLY

To get maximum benefits from your health plan this year, throw out conventional wisdom. Do the math: You can no longer just look at what you will pay in premiums, you need to look at the total cost of your medical spending. Rethink HMOs: Some HMOs aren't the bargain they once were, but many of these plans have fewer restrictions. Split up: It may no longer make sense to put your spouse and family on one company's plan since some big employers are raising premiums for family members. Shop for specials: Not everybody gets the same deal as some companies offer special incentives for people who fill out health assessment forms or don't use tobacco.

The bottom line: People need to examine the detail of each individual HMO for cost as well as quality.

Consider your risk tolerance. The collapse of the stock-market bubble made many investors think twice about how much risk they could comfortably accept. Now that same notion is rearing its head in health care.

Many companies now offer a range of options, from low-cost, bare-bones plans to ones that are more costly but offer richer benefits. At Verizon Communications Inc., for instance, nonunion employees can choose between plans with $200, $400 and $1,000 deductibles.

Take advantage of company-provided calculators. Some of the newest tools go well beyond simple number crunching. International Paper's calculator automatically plugs in estimates of the cost of preventive care when an employee enters his or her name, gender and geographic location. AMR is working on a calculator that will allow workers to model the costs of different plans based on the health claims they filed the previous year.

Many employers are also providing workers with information that can help them find the best care. Verizon is rolling out new online quality rankings of more than 620,000 doctors and 4,700 hospitals nationwide plus information about how to treat diabetes and other chronic illnesses. Washington Mutual is adding new online resources that employees can use if they or someone in their family has been diagnosed with a particular illness, including questions to ask doctors and the pros and cons of different protocols.

Consider whether it pays to split up. As costs climb, some big employers are sharply raising the premium for family members or are adopting financial incentives designed to nudge working spouses to other health plans. That means you need to look at both your own health plan and your spouse's plan before deciding whether you should keep the family together or split up when it comes to health coverage. At AMR, a worker who might pay roughly $25 for single coverage would pay about $49 to cover two people and about $74 to cover the whole family. At General Electric Co., an employee earning $100,000 will pay roughly $8 more a week to cover three people instead of two.

Enroll in a FSA. Flexible Spending Accounts allow workers to use pretax dollars to pay for many medical expenses their health plans don't cover. But the vast majority of workers don't use them because of rules that require employees to forfeit any contributions not used by year end. At GE, for instance, just 15% of eligible employees enroll in health-care FSAs.

But with out-of-pocket costs climbing, there's more reason today for workers to enroll in FSAs. The plans are also more attractive now, too, because of a recent decision by the U.S. Treasury Department that allows workers to use pretax dollars to pay for nonprescription drugs. That means you can generally tap your FSA to buy anything from aspirin to cough drops, provided you have an itemized receipt to prove you made the purchase.

Keep an eye out for special deals. Some companies are offering the carrot as well as the stick to keep costs from soaring further. If one of these rewards makes sense for you, grab it. Verizon workers pay $60 a year less in health-care premiums, for example, if they indicate that no one in their family uses tobacco products. Lockheed Martin will put an extra $100 in the health-care fund of workers who fill out an online health-risk assessment. The information is then funneled to "health advocates" who provide workers at risk of running up big medical bills with information about disease management programs and healthy lifestyles. Sears, meanwhile, has hired an outside company to scour medical claims information to identify gaps in workers' care and offer guidance.

Ed Donnell, Former Wards CEO
and Sears Executive, Dies at 84
By Sean D. Hamill, Special to the Tribune - Chicago Tribune
October 13, 2003

Despite his good health, Edward S. Donnell, former chairman and chief executive officer of Montgomery Ward & Co., decided earlier this year that he should write his own obituary.

In it, he included just one direct quote from himself, which referred to the closing of Wards in 2001--even though it happened 19 years after he retired.

"Wards had very good people, but like many department stores and mail order houses, suffered from the loss of market share to the discounters and large specialty retailers," Mr. Donnell wrote.

Despite his businesslike analysis of Wards' demise, the company's closing probably bothered him, said his youngest son, Mark.

"He didn't feel a sense that it was his fault," his son said. "He felt a sense of loss because he had gone through a great deal of personal expectations."

Mr. Donnell, 84, of Winnetka, died Saturday, Oct. 11, at his vacation home in Naples, Fla., two weeks after a stroke.

He left Wards in 1982 in the midst of one of many attempts to turn around the Chicago-based retailer. But Mr. Donnell was credited with pulling the company through one of its toughest times during the economic recession of the 1970s.

He led an effort to create regional clusters of stores for the retailer, reducing the number of supply points as well as the number of brands sold in stores.

"He left it in good shape," said his wife, Rose. "He was proud of that."

Mr. Donnell was born in Cleveland. His father died when he was a toddler, forcing him and his mother to move in with her parents.

His mother, May Bell Donnell, took a job as a bookkeeper at a manufacturing plant and started going to college at night, earning a master's degree in business.

"She was tough," Mark Donnell said. "And he definitely took after her."

Mr. Donnell, an avid baseball player, went to Duke University, where he majored in English. Though "he spent a lot of time on the bench," he never lost his passion for the game and later helped start a Little League in Mexico City when he lived there while working for Sears, Roebuck and Co., his wife said.

He and his wife, also a Duke graduate, married in 1941.

Mr. Donnell, who was ineligible to serve in World War II because of poor vision, began a career in retailing. He worked with B.F. Goodrich Co. for five years, then started a 16-year stint with Sears, rising to group manager of the retailer's West Coast group.

He and Edward Telling, who eventually became chairman of Sears, were good-natured rivals when they headed different zones for the company.

"He was a good friend, a good Sears man," Telling said. "He was a very private man but very genuine and likable. He was always there if you needed him."

Wards hired Mr. Donnell away from Sears in 1962. He was named chief executive officer in 1970 and chairman in 1974.

Mr. Donnell dedicated time to many causes, serving as chairman of the YMCA of Metropolitan Chicago. He also was a director of the Lyric Opera, Evanston-Northwestern Healthcare and the Hadley School for the Blind in Winnetka.

"He was a man of big shoulders who had a vision for how things should be," his son said.

Mr. Donnell is also survived by another son, William; daughters Ann Onderdonk and Sally Goldsmith; and five grandchildren.

Services will be private.

Upscale Appliances Gain Consumer Appeal
By Karen Jacobs - FORBES.COM
October 10, 2003

ATLANTA (Reuters) - Consumers may be worried about the job market, but they're not afraid to pay a lot more for a designer refrigerator or a faster-cooking stove.

Appliance companies are doing their part. In a flooded market for less expensive models, manufacturers are looking to innovative -- and pricey -- new products to drive growth.

"Right now the mid-to-low end of the market in major appliances is really saturated, so manufacturers need to look at what's going to turn a profit," said Daniel Lee, director of marketing and communications at the U.S. unit of LG Electronics Ltd. "It is higher-end appliances."

So far, the strategy seems to be working.

At Lowe's Cos., sales of higher-priced appliances are exceeding the home improvement chain's expectations.

"Customers are finding ways to make their life easier by spending a little more on some of these appliance products than they have in the past," said Bruce Ballard, a merchandising vice president.

Hot sellers include front-loading washing machines like Whirlpool Corp.'s Duet and Maytag Corp.'s Neptune. Both sell for more than $1,200, nearly three times the average washer price of $426 in 2002.

Front-loading machines use less water and energy and treat fine garments more delicately than top loaders, Ballard said.

APPLIANCES GET STYLISH
The newer appliances not only run more efficiently, but also look more attractive. Washers and refrigerators are available in colors like blue, black and gray, as well as the more traditional white and almond. Stainless steel is all the rage, even though it can add hundreds of dollars to the price of an appliance, retailers report.

Bill Lennie, senior vice president for decor at Home Depot Inc., says looks and style play a major role in the decisions of consumers who buy more expensive appliances. The retailer is seeing a rise in kitchen renovations, a trend that supports sales of upscale dishwashers, refrigerators and stoves.

"Times are tough," said Lennie, "yet we continue to see people willing to invest in their home."

Sears, Roebuck & Co. is aggressively marketing higher-end appliances under its Kenmore Elite line. For example, the Trio refrigerator, which is made by Maytag and sells for more than $1,500, has two side-by-side doors on top of a bottom pullout freezer. The HE3t front-loading washer-dryer duo manufactured by Whirlpool costs more than $2,100.

"The home appliance industry has not been known as a leader in product innovation," said Tina Settecase, Sears vice president and general manager for home appliances. "But over the last few years, there has been significant innovation that the customer recognizes as offering value."

Settecase said Sears is looking to capitalize on rising demand for products that use less energy. "With the blackout on the East Coast and problems in California a couple of years ago," she said, "more and more customers are recognizing that energy efficiency is not just a nice thing to have, but a need."

LONG-TERM TREND
Longbow Research analyst David MacGregor, who surveys appliance sales each month, cites a longer-term consumer move to the high end. "For a durable good that will last at least three or four years, people are prepared to pay," he said.

Despite concerns that U.S. housing growth may slow, appliance companies plan to keep investing in innovative products, saying that if they build them, buyers will come.

This year, South Korea-based LG began selling an Internet-ready refrigerator in the United States. The product, which features a 15-inch computer screen, has a suggested retail price of $7,999.

"People want to see more technology in appliances that they can use," Lee said.

Maytag is also banking on the higher end. Last month, it introduced the Neptune Drying Center, which combines a traditional tumble dryer on the bottom with an upper cabinet where clothes can lie flat or hang to dry. It will sell for about $1,200.

Kmart's Ten Deadly Sins
Kern Lewis - Forbes.com - Book Review
October 10, 2003

Kmart's cataclysmic collapse into bankruptcy offers a bracing reminder of how unchecked arrogance can undermine even the best-established brand. In Kmart's Ten Deadly Sins: How Incompetence Tainted an American Icon (John Wiley & Sons, $24.95) Marcia Layton Turner offers a long list of Kmart's failings, but the firm's basic problem can be boiled down to one word: hubris.

Turner effectively tracks the competition between Kmart (nasdaq: KMRT - news
- people ) and Wal-Mart Stores (nyse: WMT - news - people ). Kmart hit on a successful vision, but came to believe in its own infallibility and lost track of where it really stood in the marketplace. Wal-Mart also hewed relentlessly to its vision, but also carefully adapted to marketplace shifts and opportunities and implemented like crazy to see the vision fulfilled.

Lots of companies fail because they do not adapt to changes in the marketplace, so it isn't necessarily surprising that Kmart descended into bankruptcy due to a series of bad management decisions. What astonishes and perplexes the business community is how such a strong brand as Kmart's could be so completely devalued. How did management parley such a strong market position into nothing?

To fully understand how a company can waste a strong brand, we need to remind ourselves what a brand is. At bottom, a brand is a promise that a company makes to consumers to deliver a particular product or service at a certain level of quality. Over time, the brand becomes a summary of how well the company has delivered on that promise. It is also a promise that the experiences of the past will be fulfilled in the future. A brand that the consumer has anointed as "strong" provides a positive experience for the customer. A brand consumers consider weak has not consistently delivered its promise--or worse, it telegraphs a negative experience. Finally, a brand must constantly reinvent or reinvigorate itself to keep up with changes in consumer tastes and competitive activity. Standing still is not a good way to keep a business viable long-term. This last part of brand management is where Kmart failed.

To get a sense for successful brand management, consider what happened to the American Express Card brand in the 1990s. American Express (nyse: AXP - news - people ) had created an extremely strong card brand in the 1970s by delivering top-notch customer service and focusing on the well-heeled business traveler. So strong was this brand that even after Visa and other competitors sharpened their own brands, and after Amex began appealing to a wider audience to meet aggressive growth targets, it still took almost 20 years for the card's original sense of exclusivity to fade. Indeed, some of that 1970s stardust still clings to the brand today, because Amex continues to deliver on the promise of quality, value and customer service that was the foundation of its original success. [Full disclosure: I was an American Express marketing executive from 1985 to 1992.]

A different example might be Maytag (nyse: MYG - news - people ), which has spent a lot of money over many years to create the image of the Maytag repairman as the "loneliest guy in town," thus establishing the consumer promise that Maytag appliances never break down. That is a huge promise to keep, which Maytag must deliver on by not only maintaining the image of quality but the reality of quality: Their machines should not break. My wife and I bought into that vision when we purchased a washer/dryer from Maytag two years ago. Two months ago, to my amazement, the thing broke. I remember thinking as I called Maytag customer service, "I am about to talk to a Maytag repairman, the loneliest guy in town." Maytag rebounded nicely with a very pleasant and inexpensive handling of my problem, which was critical because their brand positioning is so strong. The mere fact that I had to get my machine fixed was a letdown, and the interaction with the famous Maytag repairman had to be top-notch to prevent further tarnishing of the brand. Unfortunately, after the good service experience, Maytag followed up with a letter pitching extended warranties. I thought, "Why do I need an extended warranty for a machine that isn't supposed to break?" Here was a disconnection between the brand image and consumer reality.

Still, the enduring success of Maytag's brand-management strategy was demonstrated last month when the actor Gordon Jump died. He once starred in the popular sitcom WKRP in Cincinnati, but some obituaries identified him first as the man who for many years portrayed the lonely repairman in Maytag's TV commercials.

So, what happened to Kmart? It stood still. As the first real player in the discount retailing space, its promise to the consumer was great prices on branded goods, with the tradeoff that service would be of lower quality than at higher-priced stores. At the time, this trade-off made sense to the consumer. The brand communicated what Kmart had to offer, customers responded favorably and Kmart did well. The marketplace, however, moved on. While Kmart settled into a comfortable pattern of expansion, its leaders failed to properly manage the brand to keep up with the competition. Its rivals, Wal-Mart in particular, upped the ante by offering great prices and great service. Kmart never responded to this shift, continuing to deliver a sub-par customer service experience.

Turner presents evidence that Kmart managers didn't think they had to respond. In their arrogance, they believed that they had invented discount retailing and they knew best what the marketplace wanted. The moment a company believes that it can dictate to the market rather than the other way around, that company has begun its slide down a troublesome slope. So it went with Kmart. Fewer and fewer consumers were willing to respond to the brand's promise. Turner offers a long list of examples demonstrating that even today, when their brand proposition is clearly failing in the marketplace, Kmart managers have never focused on the one strategy that could save the company: Delivering a quality customer service experience for the customers who enter their stores. About the only thing they did right was yoke their brand to that of Martha Stewart Living Omnimedia (nyse: MSO - news - people ), which turned out to be a considerable marketing coup. Turner provides evidence, however, that Kmart management failed to properly leverage even that coup to burnish the Kmart brand. Now, given Martha Stewart's current problems, the connection is worth less that it was.

Turner's book is repetitive in places, and some of the advice offered to Kmart is contradictory. She also leaves unexplored such interesting issues as how Wal-Mart came to be a rival of Kmart's when the former started out targeting rural markets while the later focused on urban markets. And the chronology that begins the book relates the steady growth of Wal-Mart but fails to provide comparable figures for Kmart so we can track the companies' relative success.

Still, Turner makes her case effectively, providing a useful cautionary tale for corporate executives who think they have their markets wired. Strong brands must be maintained. Arrogance is a ticket to eventual failure. That, apparently, is what happened to Kmart.

Kern Lewis is director of loan marketing at World Savings in Oakland, Calif. He holds an MBA in general business management from Harvard Business School.

Sears Plans to Buy Back $3 billion of Its Stock
By Lorene Yue - Tribune staff reporter - Chicago Tribune
October 9, 2003

Sears, Roebuck and Co. is shrinking--at least in the number of its shares on the New York Stock Exchange.

On Wednesday the Hoffman Estates-based retailer announced its fourth stock repurchase plan in less than three years.

The latest calls for the repurchase of $3 billion of its shares by the end of 2006. Sears said it is funding the buyback with part of the money its getting from the sale of its credit card division to Citigroup Inc.

Citigroup agreed to pay $32 billion for Sears' $29 billion credit card portfolio. The deal has yet to close.

Sears' stock will be bought in the open market, through privately negotiated transactions or through self-tender offers, the company said.

"We want to return value to shareholders," said Ted McDougal, a spokesman for Sears.

When a company repurchases its stock the result is typically a slightly higher share price thanks to the perception of demand and a lower number of common shares outstanding. Stock buybacks also boost earnings per share, which are calculated by dividing profit by the number of outstanding shares.

Some industry watchers have criticized Sears for boosting earnings per share through stock repurchase programs and cost cutting, not through sales growth. And they chastise Sears Chairman Alan Lacy for reaping hefty bonuses that are tied to improving earnings per share.

Investors may have to wait to see an uptick in stock price.

"I would be surprised if they buy any shares right now," said Heather Brilliant, an analyst with Morningstar Inc. in Chicago. "They are trading pretty rich right now."

Sears closed Wednesday at $48.73, down 41 cents. The stock has climbed steadily in the past six months, posting a gain of more than 160 percent since its 52-week low of $18.50 on March 14.

While the sale of Sears' credit card division will help fund the latest stock buyback program, most of the proceeds will be used to pay off roughly $27 billion in debt. None of the money will be used to reinvest in retail concepts such as the Great Indoors and the new off-mall strategy dubbed Sears Grand.

"Alan has said before that the company generates sufficient free cash flow to satisfy the need for reinvestment," McDougal said.

Meanwhile, the company keeps plugging away at buying back stock. In March 1999, the board approved a $1.5 billion repurchase program followed by a $1 billion program in August 2000. In December 2001, Sears' board authorized the repurchase of $1.5 billion in stock by the end of the next year. At the end of June, Sears had $200 million left to spend, according to its third-quarter financial report filed with the Securities and Exchange Commission. A month later, the company announced it would add another $1 billion to the repurchasing spree.

Sears September Same-store Sales Rise 3.2 pct

CHICAGO (Reuters) - Sears, Roebuck and Co., the largest U.S. department store chain, said Thursday its September sales at stores open at least a year rose 3.2 percent, driven by strong performances by the Lands' End and Covington clothing brands.

The retailer, which in August broke a 23-month string of same-store sales declines, said total sales for the five-week period ended Oct. 4 rose 3.5 percent, to $2.5 billion.

"Women's ready-to-wear and men's apparel posted significant gains, driven by strong performances by the Lands' End and Covington brands," Alan Lacy, chairman and chief executive officer, said in a statement.

Lawn and garden, footwear and fitness were also among the strongest categories for the month, while the key home appliances business showed a "solid increase" for the month, Sears said.

Sears said it expects October same-store sales to be flat or up slightly from a year ago.

Shares of Sears closed at $48.73 on the New York Stock Exchange on Wednesday, after reaching a 52-week high of $49.70 earlier in the day.