Oct-Dec '05

HARTFORD, Conn., November 29, 2005 Aetna today announced that its pharmacy mail service subsidiary, Aetna Rx Home Delivery®, has begun mailing prescriptions from a brand-new mail-order pharmacy in Pompano Beach, Fla., launching a state-of-the-art operation that will more than triple the company’s capacity to meet the growing needs of its customers.

Aetna’s second mail-order pharmacy will be able to fill 20 million prescriptions annually and will employ more than 800 people in the Broward County region within the next three years. The pharmacy was built to accommodate the tremendous growth of Aetna Pharmacy Management, Aetna’s pharmacy benefits management unit, and Aetna Rx Home Delivery, the health care benefits company’s mail-order prescription delivery operation. The company’s first mail-order facility outside of Kansas City, Mo., is running at near full capacity.

"The delivery of our first prescriptions from the new facility is a special milestone for us," said Eric Elliott, head of Aetna Pharmacy Management. "With the advent of the Medicare drug plan and the growth of our home delivery pharmacy, the start-up of the Florida pharmacy represents the continuation of Aetna’s strategy for delivering world-class mail-order prescription service."

The pharmacy, housed in a 114,000-square-foot building in the Pompano Business Center, will be the regional headquarters for Aetna Rx Home Delivery’s mail-order distribution operation and its national mail-order customer service call center. Additionally, the expanded capacity will help Aetna to support several new business initiatives, like the 2006 Medicare drug benefit expansion. In late September, Aetna was approved as a national provider of the new Medicare prescription drug plan.

Aetna has been actively recruiting and hiring for a variety of positions in the new pharmacy, including:

order entry technicians
physician call technicians
member call technicians
accounts receivable and billing technicians
shipping and packing clerks
automation repair technicians
call center representatives
telemarketing representatives
pharmacists

"This new pharmacy is a first-rate operation, and we are very pleased and excited about it," said Aaron Crosson Sr., head of Aetna Rx Home Delivery. "With this new facility, we will be positioning ourselves to better serve our members and providers, while also providing a host of job opportunities for the region."

Mail-order business continues rapid expansion

Aetna launched its mail-order delivery business in February 2003, by purchasing a facility located in Kansas City from Eckerd Health Services. At the business launch, Aetna Rx Home Delivery was filling 67,000 prescriptions per month. The mail-order operation is now filling more than 600,000 prescriptions monthly, a nearly nine-fold increase.

The Pompano Beach site was chosen following a national search. Factors leading to the decision include the fact that Florida has four well-respected pharmaceutical schools that should serve to provide a pipeline of highly qualified and trained workers. In addition, Aetna has more than one million health members and more than 800,000 pharmacy benefit members in Florida and the proximity will help reduce shipping time to those members.

Second facility serving Aetna members in Florida in the past year

Aetna and Priority Healthcare Corp. announced last spring that their joint venture, Aetna Specialty Pharmacy, opened a 63,000-square-foot distribution center in Orlando, Fla., just west of Orlando International Airport. On October 26, 2005, Aetna then announced its intention to purchase Priority Healthcare’s stake in the joint venture, which is expected to be completed by the first quarter of 2006, pending federal antitrust regulatory approval.

The specialty pharmacy features a state-of-the-art compounding setting and an automated fulfillment system that provides efficient preparation and delivery of these specialty medications. The Orlando distribution center, which provides member support 24 hours a day, 7 days a week by pharmacists, registered nurses and patient care coordinators, has been distributing specialty pharmaceuticals and biomedical therapies for the chronically ill since March of this year. Aetna Specialty Pharmacy will have approximately 280 employees in the new specialty pharmacy by year end.

As one of the nation’s leading providers of health care, dental, pharmacy, group life, disability and long-term care benefits, Aetna puts information and helpful resources to work for its approximately 14.65 million medical members, 13.03 million dental members, 9.34 million pharmacy members and 13.68 million group insurance members to help them make better informed decisions about their health care and protect their finances against health-related risks. Aetna provides easy access to cost-effective health care through a nationwide network of more than 700,000 health care professionals, including over 418,000 primary care and specialist doctors and 4,231 hospitals. For more information, please visit www.aetna.com <http://www.aetna.com/> . (Figures as of September 30, 2005)

Seniors Are Slow To Sign Up on Own For Drug Benefit
By Jane Zhang – Staff Reporter – The Wall Street Journal
December 23, 2005

WASHINGTON -- Medicare officials announced that 21 million people -- nearly half of those who are eligible -- have enrolled in the government's new prescription-drug program, but only about one million have signed up individually.

Many of the seniors were enrolled automatically because they are currently in Medicare HMOs or are beneficiaries of both the Medicare and Medicaid programs. Others are getting drug coverage through their former employers, which are collecting new federal subsidies to offer drug coverage as part of their retiree health-care benefit. Some are members of the military or former federal workers.

U.S. health officials expect as many as nine million more to sign up for drug benefits in 2006. The government anticipates two spikes in enrollment -- one in January when many health plans start a new cycle, and the other shortly before the enrollment window closes on May 15.

"We're seeing a lot of momentum in the right direction," Health and Human Services Secretary Michael Leavitt said at a news conference yesterday. "While we have a lot of work still to do, we're encouraged by the early results."

The new drug benefit, which takes effect Jan. 1, aims to close the biggest hole in Medicare, the federal health program for 43 million elderly and disabled. The drug program, estimated to cost most than $700 billion over 10 years, relies on private insurance companies to administer the benefit, which is subsidized and regulated by Medicare.

The fact that the program is actually going into effect is notable in itself. As recently as several weeks ago, some Republicans argued the program should be repealed because of its projected costs. Meanwhile, some Democratic critics said it should be overhauled so that the government directly administers the benefit, rather than private companies. Those arguments haven't gained traction, at least for now, because of a consensus that even a flawed drug program is better than none.

Nearly 91% of seniors take prescription drugs regularly, and prices continue to outpace inflation. Further, in about five years, the first wave of baby boomers will turn 65 years old and become eligible for Medicare. By 2030, the number of beneficiaries is expected to nearly double to 71 million.

By encouraging private competition, the drug program offers dozens of plans for each participant. The choices can be bewildering, and the government has established an 800 number, opened a Medicare Web site and, in the last four weeks alone, held more than 2,400 community events to explain the program to seniors.

People will have until Dec. 31 to sign up for benefits that start on Jan. 1, and can sign up with no penalty anytime before May 15. Those enrolling after that date, however, face higher premiums. Those with comparable drug coverage through programs such as an employer's retiree plan can join later without any penalty.

To the government's relief, 11.1 million Medicare-eligible retirees are retaining drug coverage through their employers, said Mark B. McClellan, administrator of Centers for Medicare and Medicaid Services, the agency that runs Medicare.

However, Dan Mendelson, president of Avalere Health LLC, a health-care advisory company, estimated that there are still 16.2 million eligible people who must sign up individually. But he and others have called the process daunting. "It takes a long time to get people to enroll in a government program," Mr. Mendelson said. "Right now, [government officials] need to be focused on getting the word out and getting people enrolled."

Underscoring that many seniors will need personal help in establishing their benefits, Mr. Leavitt said the holiday season is a good time for sons and daughters to help their parents sort through the options.

Sears Argues It Can Pay To Keep the Lights On
By James Covert and Jon Kamp – Dow Jones Newswires – Wall Street Journal
December 23, 2005

Sears Holdings Corp. may have persuaded some savvy hedge funds on Wall Street to bet on its financial prospects. Now the giant retailer is working on its local utilities.

The company's Sears and Kmart chains are in a series of disputes over whether they should be required to put down millions of dollars in deposits against potential defaults on power bills. Utilities, which lost millions after Kmart entered bankrupt proceedings in 2002, cite Sears's poor credit ratings and Kmart's shrinking sales. The retailer counters that utility demands have been arbitrary, and that its lofty stock price and massive cash hoard should be enough to establish its credit.

Driving the latter point home, Kmart noted in a Feb. 22 letter to the City of Lakeland, Fla., that its $3.4 billion in cash and credit lines as of late 2004 were more than ample to cover the municipal power system's request for a $50,000 cash deposit.

"That Kmart is able to pay the deposit 68,000 times over is the very fact that amply demonstrates that no reasonable person could conclude that any such deposit should be necessary," Kmart attorney Rodger Kershner wrote.

Utility deposits are a fact of life for millions of home-owners and businesses, and disputes over waivers typically are low-profile affairs resolved in accounting offices. In court filings and legal correspondence reviewed by Dow Jones Newswires, however, Sears has shown fierce resistance to making the required cash outlays, with a few disputes making the unlikely escalation to appeals before state regulators.

A person familiar with the matter says Kmart has won a handful of victories worth more than $15 million since it emerged from bankruptcy proceedings more than two years ago, and that tens of millions more could be at stake.

The sums at issue aren't huge for a company Sears' size, but Chairman Edward S. Lampert in the past has gone to extraordinary lengths to save cash. Kmart has won a few battles with utilities both in and out of court. In September 2004, Kansas regulators blocked Topeka-based Westar Energy Inc.'s demand that Kmart turn over $202,445 to supplement its existing deposit of $174,567. Westar, which lost more than $280,000 in the Kmart bankruptcy, argued unsuccessfully that Kmart was a new company once it emerged from Chapter 11, and that its poor credit rating and lack of credit history warranted a bigger deposit.

Last month, dozens of Sears and Kmart stores in southern Florida received shutoff notices from Florida Power & Light Co.'s automated computer billing system after the retailers failed to respond to late-September demands for $1.3 million in deposits on top of $1.1 million already on hand from Kmart.

The retailers have filed for an emergency order to keep the lights on.

The retailer's toughest dispute may be with New Orleans-based Entergy Corp., which serves stores in Louisiana, Mississippi and Arkansas. Entergy lost money in Kmart's bankruptcy and failed to comply with a federal judge's order to return security deposits when the chain emerged from Chapter 11 in May 2003. Entergy has demanded the $244,000 it has retained be increased to $450,000.

But Kmart points to its recent track record of timely payments on electric bills and says Entergy's credit policies are vague, hinting the utility may be aiming to recoup bankruptcy losses.

"I'm not sure where to begin with the shams and accusing," Entergy attorney Chris Neel responded.

Enrollment in drug plans hits 1 million
By Julie Appleby - USA Today
December 23, 2005

At least 1 million people have joined new stand-alone prescription drug plans offered by insurers, Medicare officials said Thursday, a month into what some have criticized as a confusing enrollment process. Supporters of the new program said the enrollment figures show strong progress in the biggest expansion of Medicare since its inception in 1965, while critics called the number "abysmally low."

"One million people took the time to learn their options and actually make a decision," Mike Leavitt, secretary of Health and Human Services said. "And more are coming every day."

Overall, Medicare officials said, more than 22 million seniors and disabled Americans will have some kind of drug coverage starting Jan. 1. Leavitt said the program is well on its way to having the projected 28 million to 30 million members by the end of 2006.

But critics said the figures are misleading:

• About half — 10.6 million — are retirees, from government, military and private-sector employers, most of whom already had drug coverage.

• Another 6.2 million are low-income seniors and disabled people who were automatically switched into Medicare from state drug programs.

• 4.4 million are in Medicare Advantage managed care plans, most of which already had drug coverage.

"It seems virtually all the 21 million have drug coverage now," says Tricia Neuman of the Kaiser Family Foundation, a non-partisan research group. "It's unclear if the enrollment number represents a major improvement in coverage."

Robert Hayes of the Medicare Rights Center in New York, an advocacy group, called the enrollment numbers "abysmally low."

Rep. Henry Waxman, D-Calif., said the 1 million enrollment figure represented about 10% of the 10 million that Medicare projected would sign up independently by the end of 2006 and could mean "the complicated and confusing nature of the benefit may be resulting in lower-than-anticipated enrollment."

Waxman and others have said that people have been confused by the large number of choices and complicated rules.

But Medicare chief Mark McClellan defended the program, saying 1 million new members in 28 days is a good start. Also, fewer employers dropped retiree coverage than critics had feared, he said.

About a half million more people are expected to enroll in January, he said, and enrollment will continue until May 15.

Jeanne Ripley, a vice president at Halleland Health Consulting, a health care consulting practice, says the enrollment looks good.

"If some critics are saying a million isn't very many, I would say it's a million who probably didn't have coverage before," Ripley says. "How can anyone say that's not a good thing?"

Medicare has 43.1 million beneficiaries. Of those, estimates vary on the number who don't have some kind of drug coverage. The Kaiser foundation says nearly 14 million don't have coverage, while Avalere Health, a for-profit research group, says about 17 million do not.

"One million out of 17 million is about 6% of the way there," says Daniel Mendelson, president of Avalere. "They have a way to go."

Wal-Mart's Entry Likely to Reshape Warranty Game
By Steven D. Jones – Dow Jones newswires – Wall Street Journal
December 23, 2005

Rivals May Have to Slash Prices of a Major Cash Cow to Compete, Experts Say

As anybody who has ever bought anything at a major electronics chain knows, you are apt to be pitched an extended warranty before you have even decided on a brand, although most retailers still allow you to get inside the store before the spiel starts.

Here is why: Up to 90 cents of every dollar in warranty revenue that retailers don't pass on to service providers and insurers flows right to the bottom line, industry experts say.

Warranties covering defects on wares up to four years after purchase have become a mainstay of the business at Best Buy Co. and Circuit City Stores Inc. and, to a lesser degree, the Sears unit of Sears Holdings Corp. Now Wal-Mart Stores Inc. is chasing those fat warranty profits. In October, the Bentonville, Ark., retailer began offering warranties on higher-priced electronics, and it appears the world's biggest "big-box" chain intends to apply its super-discount strategy to warranty pricing.

Shoppers have become steady buyers of warranties as they snatch up personal computers, plasma televisions and other increasingly high-tech gear, even though advocacy groups have pointed out that warranties are often not a good bang for the consumers' bucks. Extended warranties have allowed retailers to turn quality problems into profits. But Wal-Mart's entry threatens to remake the battlefield.

Eric Arnum, editor of Warranty Week, an industry newsletter, calls Wal-Mart's warranty-pricing strategy "a radical difference." Mr. Arnum saw for himself just how radical while doing some comparison work at four major retailers on the East Coast. Brands varied between retailers, so Mr. Arnum standardized his search by shopping for a midprice, 42-inch plasma-screen TV.

He said Sears sold such a screen for $1,520, and the accompanying warranty was $400, or 26% of the purchase price. Best Buy offered a comparable product for $1,615 and also sold the warranty for $400, or 25% of the purchase price. Circuit City priced its model at $1,600 but charged $260 for a warranty, or 16% of the purchase price. Wal-Mart's TV was $1,648, but the warranty was $149, or 9% of the sticker price.

Mr. Arnum also shopped for computers and found Best Buy, Circuit City and Sears pricing warranties between 13% and 19% of the selling prices, while Wal-Mart's warranty was 6% of a laptop's purchase price.

Bottom line: Even though specialist retailers can very much compete with Wal-Mart on electronics prices, they will likely have to push down their warranty prices.

Not all retailers release details on warranty revenue. Circuit City discloses the amount in footnotes to its financial statements. Best Buy and Sears don't. As noted, Wal-Mart only began its consumer-electronics warranty business in October.

Retailers traditionally retain about 50% of the value of a warranty as revenue and pay the rest to the service provider and insurer. What is left is almost pure profit because there is little sales expense associated with it; the salesperson is already selling you the TV, and the warranty is just a few moments more of his time.

In its second quarter ended in August, Circuit City reported that extended-warranty revenue totaled $97.4 million, or about 4% of sales. The retailer's net income for that period was $1.3 million, or a penny a share. In other words, Mr. Arnum said, "what they're really saying is they would have reported a $96 million loss were it not for extended warranties."

Circuit City reported third-quarter results Monday, showing net income of just over $10 million on sales of $2.9 billion. Warranty revenue totaled $104.7 million, again nearly 4% of sales.

Circuit City spokeswoman Amanda Tate said the overall business generates profits and said that an uptick in warranty revenue from last year is the result of "better execution in the stores." She declined to comment on whether Circuit City is experiencing new competitive pressure in warranty pricing but said that the company has priced "competitively" and would continue doing so.

Circuit City's warranty-service provider is the Assurant Solutions unit of Assurant Inc. of New York. Assurant provides warranty services to a number of consumer-electronics retailers, including RadioShack Corp., but doesn't serve Sears, Wal-Mart or Best Buy in the U.S.

"At this point we wouldn't expect to experience any pricing pressure on our end," said spokesman James Sykes, because Assurant provides wholesale services to clients under long-term contracts. Pressure from Wal-Mart pricing wouldn't appear until Assurant negotiates new contracts, which vary from client to client, he explained.

Luis Padilla Named Chief Executive Officer
of Kuhlman Company
Business Wire
December 22, 2005

MINNEAPOLIS---Kuhlman Company, Inc. (OTCBB: KHLM) today announced that Luis Padilla, a highly recognized, seasoned retail executive who recently joined the Company's board of directors, has agreed to join the Company as its Chief Executive Officer, effective immediately. Scott Kuhlman will remain as the Company's Chairman of the Board and Chief Creative Officer.

Mr. Padilla has more than thirty years experience in the apparel industry. He was most recently the president of merchandising at Sears. In this role, he led and integrated all merchandising and marketing across the company's broad product and brand portfolio. Prior to joining Sears, Mr. Padilla was with Target Corporation from 1982 to 2004, where he served in key leadership roles with the company.

Scott Kuhlman, commented, "It is rare to have an executive of Luis' caliber in any organization. We are both proud and pleased that despite a compelling host of other career options, he has decided to join the Kuhlman Company. The level of energy that his involvement in our company generated as a board member was inspiring. Now, with his role as our Chief Executive Officer, we are moving into the future with an incredible level of drive and enthusiasm. We have believed since our inception that we have an incredible opportunity to create one of the country's best specialty retailers. Luis' expertise and experience not only in merchandising, but also with regard to operational concerns, will prove invaluable to us as we build our store base and our capabilities. We are looking forward to what lies ahead for our Company with confidence and intend to flow tremendous value to our shareholders as we build this business."

Luis Padilla, Chief Executive Officer, commented, "Kuhlman's occupies a niche that is highly underserved, has a brand that can attract a wide audience, and has a product offering with unquestionably strong appeal for both men and women. I share Scott and Susan's vision of what this company can become and relish the opportunity to help make that vision a reality. While there is obviously much work to be done, I am confident that we will prove equal to the task and will demonstrate for the retailing community that Kuhlman, as a brand, as a company and as an investment, is something truly special."

The Company also noted that its business has been strong through the key holiday retailing season and that the Company continues to be on plan with respect to sales and margins. It noted that its recent store openings were performing very well had occurred in time to contribute materially to its fourth quarter results.

Also today, the Company announced that it had opened 5 new stores since the beginning of December. One of these stores, located in the prestigious Wisconsin Avenue retailing district in Washington, DC, is a relocation. The Company also opened two new stores in St. Louis, including one on North Euclid Avenue and one on The Boulevard, as well as two new outlet locations, one at the North Georgia Premium Outlet project near Atlanta, and one in upstate New York at the Waterloo Premium Outlet project. Each of the new stores incorporates both men's and women's product. The company continues to plan to open at least 25 new stores during fiscal 2005.

About Kuhlman Company, Inc.

Kuhlman is a specialty retailer and wholesale provider of both men's and women's apparel, offered under the Kuhlman brand through company-owned retail stores and under private labels through other large retailers. Kuhlman opened its first retail store in July 2003 and now operates fifty three (53) retail stores in 19 states and in Washington D.C. Kuhlman's growth strategy includes offering men's and women's product at all opening stores. Kuhlman has approximately 220 employees and its corporate office is located in Minneapolis, MN.

Holders OK Sale of Maytag to Whirlpool
By David Pitt, AP Business Writer - Associated Press
December 22, 2005

NEWTON, Iowa (AP) -- Shareholders of Maytag Corp. on Thursday approved the sale of the company to rival appliance-maker Whirlpool Corp. for about $1.79 billion in cash and stock.

Preliminary totals show that of 80.3 million outstanding shares, 54.98 million shares, or 68.5 percent, approved the merger. The company said 97.8 of voted shares approved the deal, according to preliminary tallies.

If the transaction is cleared by the U.S. Department of Justice early next year, it will mark the end of the iconic Iowa-based company as an independent appliance manufacturer.

If approved the government, Maytag shareholders will receive $21 a share, payable half in cash and half in a fraction of Whirlpool stock. The exact amount Maytag shareholders will get in stock depends on the value of Whirlpool shares when the deal closes. Maytag will become a wholly owned subsidiary of Whirlpool.

Newton-based Maytag was founded in 1893 by Fred Maytag, a maker of farm tools, who introduced a wooden-tub washing machine 14 years later. His innovative designs swept the nation and the company has remained a home-appliance leader for a century.

The vote was a grim result for longtime Maytag workers and retirees.

"I feel like I attended a funeral today," said Judy Mulbrook, of Milford, Iowa, who retired from Maytag in 2003 after 32 years. "I feel like the death happened in the past year and this is putting everything to rest."

Ed Trost, 79, of Newton, said the merger is the only future for the company. He said Maytag was slow to react to the softening appliance market and increased foreign competition.

"It's heartbreaking," said Trost, who worked for Maytag for 35 years before retiring in 1988. "You go through life thinking it's going to be here forever, but that's not materializing now."

In recent years, however, Maytag's profitability has languished as competitors improved efficiency by outsourcing parts and moving production to low-cost factories. Maytag was slow to adopt cost-saving measures and fell behind as competitors wooed consumers away with new appliance designs and features.

Maytag, the nation's third-largest appliance manufacturer, became the target of a bidding battle when a New York-based investment group offered to buy the company for $1.13 billion in May.

In June, Chinese appliance-maker Haier America stepped in with a $1.28 billion offer, but it was withdrawn when Whirlpool offered $1.37 billion.

Whirlpool increased its offer three times until Maytag agreed to consider the deal.

Whirlpool, based in Benton Harbor, Mich., also will assume Maytag's debt of $977 million.

Maytag CEO Ralph Hake credited employees and loyal customers for more than a century of success for the company. He said if regulators approve the merger, Maytag as a company will cease to exist.

"We have to have an ending to have a new beginning," he said.

Shares of Whirlpool rose 19 cents to $84.07 in afternoon trading on the New York Stock Exchange, where Maytag shares rose 5 cents to $18.82.

Morgan Stanley Loses 3 Directors In Latest Exodus
By Randall Smith – Staff Reporter — The Wall Street Journal
December 22, 2005

Three more Morgan Stanley directors who served under former Chief Executive Philip Purcell announced resignations, in a year-end coda to the battle over the Wall Street firm's future that ended with the return of John Mack.

The latest directors to step down are Miles Marsh, the lead outside director; Edward Brennan, the former chief executive of Sears, Roebuck & Co. who had the strongest ties to Mr. Purcell; and John Madigan, former chief executive of Tribune Co.

Messrs. Brennan and Madigan were among a group of Midwest-area directors, several from Chicago, who generally backed Mr. Purcell in previous clashes that triggered Mr. Mack's departure from Morgan Stanley in 2001.

The resignation of Mr. Brennan, who rejoined the board in December 2004 after it became apparent that Mr. Purcell faced a possible challenge, takes effect Jan. 16, when he reaches the retirement age of 72.

Mr. Purcell had led the diversification of Sears into financial services alongside Mr. Brennan, who served on the board of Dean Witter, Discover & Co. after it was spun off from Sears and then merged with Morgan Stanley in 1997.

After a group of dissident Morgan Stanley alumni demanded Mr. Purcell's ouster last March, Mr. Marsh, the former chief executive of paper-products company Fort James Corp., emerged as a leader who helped the board end the battle in June by ousting Mr. Purcell and hiring Mr. Mack.

Since then, Mr. Mack, a North Carolina native, has recast the board, bringing in four outside directors, two of whom have North Carolina ties as well. Roy Bostock, an advertising executive, like Mr. Mack graduated from Duke University and has served as a trustee. Erskine Bowles is president-elect of the University of North Carolina.

Three former Purcell-era directors left the board in September. With yesterday's resignations, only four remain from the group of 10 outside directors elected at the annual meeting in March.

They are Laura D'Andrea Tyson, dean of the London Business School; Sir Howard Davies, a former top securities regulator in Britain; Robert Kidder, former chief executive officer of Borden Chemical Inc.; and Klaus Zumwinkel, chairman of the management board of Deutsche Post AG.

The other Mack-era additions are former Morgan Stanley banker Griffith Sexton, a finance professor at Columbia business school, and Charles Noski, the former chief financial officer of the former AT&T Corp. The lead directorship remains open, and one or more new directors may be added next year to the total of nine, said one person familiar with the firm.

Former Kmart HQ sold to Washington-based firm
By Brent Snavely - Crain’s Detroit Business
December 21, 2005

Washington-based Madison Marquette Realty Services L.P. said Wednesday that it has acquired the former Kmart headquarters at the corner of Big Beaver Road and Coolidge Highway in Troy, Michigan.

“Madison Marquette is looking forward to building a dynamic new destination for the Troy community,” David Brainerd, managing director of investments of Madison Marquette, said in a statement issued to Crain’s. “The company has preliminary plans to develop a mixed-use urban village featuring residential, retail, entertainment, lodging and office components.”

Madison Marquette also said that the agreement to purchase the 40-acre property provides Sears Holdings Corp. with a 12-month lease and option rights to extend that lease. It was not immediately clear how Sears could remain on the property if Madison Marquette plans to demolish the building.

The sprawling former Kmart headquarters is largely empty but continues to house several hundred Kmart employees.

The building was Kmart Holding Corp.’s headquarters until March of this year when Kmart acquired Sears Roebuck & Co. and moved its headquarters to Hoffman Estates, Ill.

Real estate experts have said that while the building doesn’t lend itself to renovation, the property is extremely valuable, in part because it is across the street from Somerset Collection, one of the nation’s top malls.

“We hope to create a unique live/work/play environment that complements the elegance of the Somerset Collection,” Brainerd said in a statement.

Madison Marquette declined to disclose the purchase price.

"We are looking forward to working with the new property owners on a project that will benefit the city of Troy economically and functionally for its residents and private-sector components," said Troy City Manager John Szerlag.

Szerlag said the area is currently zoned for office use and said that Madison Marquette will need to apply for a zoning change and would likely need to apply for approval as a planned-unit development, which is a zoning designation that can accommodate several different uses of the same property.

Szerlag also said the city is unlikely to support a heavy retail component.

"Our primary criteria is to determine the ultimate best use of the development," Szerlag said. "I'm not sure how much major retail the city could support there, and the city needs to be cognizant of the market's needs."

Chris Brathwaite, director of media relations for Sears Holdings, declined to comment on any aspect of the sale.

Madison Marquette said its first priority is to create a detailed development plan. Earlier this year Troy officials expressed disappointment with Madison Marquette’s initial plans to include between 300,000 to 500,000 square feet of retail space.

Extra 10% Off at Sears Stores Tuesday, December 27
From Sears Holdings
December 20, 2005

We're Saying "Thanks" to Our Active and Retired Associates…
With an Extra 10% Off All day December 27, 2005
in Sears, Sears Essentials and Sears Grand stores

On this day all active and retired associates with a valid Sears Associate Discount Card will receive an extra 10% off regular, sale and clearance prices throughout the store. The savings will be automatically activated when the discount card is scanned so no coupons or shopping passes are needed.

· The extra 10% discount is in addition to the regular associate discount.
· The extra 10% discount on Lands' End merchandise applies only at Sears Full
Line Stores (not applicable to LandsEnd.Com sales).
· Regular coupon exclusions will apply.

Season's Greetings and a Happy New Year!

~~~~~~~~~~~~~~~~~~~~

And from NARSE we would like to wish you a very
Merry Christmas and Happy New Year!

Deadline in 2009 Is Set For Digital-TV Switch
By Amy Schatz – Staff Reporter – The Wall Street Journal
December 20, 2005

On Feb. 17, 2009, some U.S. consumers could be in for a surprise: Their televisions may go dark.

Budget legislation approved by the House early yesterday set that date for the U.S.'s conversion to digital-only TV broadcasts. That means TV sets won't work for those who don't subscribe to cable or satellite service, don't own a new digital-ready television or haven't purchased a set-top converter box.

Lawmakers say the switch to all-digital transmission will improve emergency response and homeland security by freeing up radio spectrum for police, firefighters and other first responders, who currently share a limited number of channels. Digital signals are more compressed than traditional analog channels so they will take up only a fraction of the spectrum space now given to broadcasters.

Some of the spectrum cleared during the transition will be set aside for emergency responders and the rest will be auctioned to wireless companies. Lawmakers estimate the auctions will bring in about $10 billion, $7.4 billion of which will go to cutting the deficit.

Details of the digital-TV deadline were hammered out during negotiations with the Senate, which is expected to pass the TV provision later this week as part of deficit-reduction legislation.

About 15% of U.S. households don't subscribe to cable or satellite service and watch only over-the-air broadcast stations, according to estimates. Anywhere from 16 million to 20 million households would either need to upgrade to new digital-ready television sets or purchase a set-top converter box to receive the digital signals. The consumer-electronics industry estimates the converter boxes might cost about $50. To placate unhappy consumers, lawmakers agreed to spend up to $1.5 billion to help people buy converter boxes. Households can request two $40 coupons to offset the cost of purchasing the converter boxes.

It has been nearly a decade since Congress first tried to establish a date for the digital-TV transition. Lawmakers originally set a deadline of Dec. 31, 2006, but stipulated that it could take effect only when 85% of households in a local market could receive digital signals, essentially making it unworkable.

RealMoney Radio Mailbag:
Sears Isn't Just for the Holidays
By TheStreet.com Staff - Excerpt
December 19, 2005

Editor's note: The following are questions received from listeners of "RealMoney Radio."

Jim, do you think Sears Holdings is going to have a good holiday season?

-- Tom from New Hampshire

James J. Cramer: I don't believe Sears will have a great holiday season, but I don't believe it will be quite as awful as the bears believe it will be. Even so, I consider Sears to be a long-term holding in my Action Alerts PLUS charitable trust, and I plan to keep it for quite a while, not just for a quarter or two. This is a long-term turnaround story, not a quick fix.

Sears sets up shop at Good Morning America
By Jennifer Waters - MarketWatch
December 17, 2005

CHICAGO (MarketWatch) - When passersby peek into the Good Morning America windows at 44th and Broadway in New York this weekend, they won't be seeing Diane Sawyer or Charlie Gibson.

In their stead will be Sears Roebuck & Co. clerks and snowflake-topped displays with cashmere cardigans, Kenmore coffeemaker and Craftsman wrench sets. Following a lead taken by other retailers, Sears Roebuck is setting up shop in the GMA studios for five days beginning Saturday.

Sears is carving out the 1,000 square foot space for a makeshift store that will feature a very limited amount of merchandise - there won't be any appliances or big-screen TVs - that will focus mainly on last-minute holiday gifts.

Consider it a meet-and-greet Manhattan - Sears' first foray into the neighborhood.

"This is our first time in Manhattan and we want to see how people respond to us," said Becky Case, vice president of creative and specialty marketing for Sears.

The "store" will be in place until Wednesday, though crews will have to take down everything each night and put the GMA set back together for the weekday shows. When GMA goes off air, the crew resets the pop-up store.

Meanwhile, the retailer is testing small in-store locations in two Kmart stores in New York. The 150 square foot in-store shops will sell such Sears-only items as Lands' End sweaters, small Kenmore appliance and Craftsman tools as part of a further test of how New Yorkers take to Sears' products.

"We're looking at lots of way to generate awareness of Sears," Case said. Last month, Sears blew up an oversized snow globe in front of the Nasdaq building in Times Square.

Jennifer Waters is a reporter for MarketWatch based in Chicago.

Executives Gone Wild: It's Not a Pretty Sight
(Refers to Lampert and Sears)
By Ben Stein – New York Times - Everybody's Business
December 18, 2005

THERE is a scene in the old gangster movie "Murder, Inc." in which a prominent member of that entity, a certain Abe "Kid Twist" Reles - ably portrayed by Peter Falk - is asked why he always wants more when he already has so much. "Don't ask questions," he shouts in response. "What've you got hands for, huh? Take!"

Then there was a scene I recall from my childhood during the Army-McCarthy hearings in 1954. After Senator Joseph R. McCarthy of Wisconsin said some nasty thing about a young attorney working for Joseph N. Welch, the canny Boston lawyer representing the Army, Mr. Welch asked Mr. McCarthy: "Have you no decency, sir? At long last, have you no sense of decency?"

These episodes come to mind because of some recent incidents in the world of managers, stockholders, bond holders and employees.

Robert S. Miller Jr., the chairman of Delphi, the auto parts giant that is now in bankruptcy, has said his company cannot compete with parts makers in Asia. To stay in the game, he said, he needs to cut his workers' base pay from about $25 an hour to $9 or $10 an hour, though he recently said he may be able to make it $12.

Well and good, and Mr. Miller, who is known by his middle name, Steve, has been in the news with some extremely astringent and on-target observations about the American labor force and its need to acquire more education to compete with workers in Asia. We would all like to see Delphi stay in business, and obviously something must be done in the way of sacrifice by all concerned. (I was a Delphi stockholder by inheritance, and I have already done my sacrifice by seeing my very small investment in it destroyed.)

But what's this echo of Kid Twist? Part of the package submitted to the bankruptcy court by Mr. Miller calls for the top 600 or so executives and managers to share about $510 million out of the corpse of the company to encourage a smooth transition. What? A bankrupt company enriching its executives even as it destroys its stockholders' equity and demands that its workers revert to spartan living standards? (To be sure, the compensation is concentrated at the high end of the corporate ladder - of course - and much of it is in stock, which is difficult to value. In these recapitalization situations, though, the stock tends to be a fabulous bonanza for those who got it free or for very little. And in the face of bitter labor union opposition, Mr. Miller says he will recast the package for executives.)

Now, I am a lawyer by training, and it seems to me, dope that I am, that this money belongs to us stockholders, the owners of Delphi, and not to the managers and executives. Mr. Miller's fiduciary duty runs to us exclusively, not to his colleagues. If he has a nine-figure sum lying around, it belongs to us stockholders first and foremost. I hope the bankruptcy court judge notices this.

However, despite my losses on Delphi, I still have a solidly comfortable life - at least for today. I don't desperately need my infinitesimal share of that $510 million (or whatever nine-figure sum it may be). But the workers on the assembly line and in the restocking room who make an hourly wage - they do need it. They need it badly. How on earth did the idea come into the head of someone as smart as Mr. Miller that he could get away with enriching those who already have high pay (or higher pay) and simultaneously demand that his workers accept poverty or lose their jobs?

This country is at war abroad. How can an executive try a bold maneuver against decency, like Mr. Miller's, at a time when we need to be united against terror? Maybe Kid Twist had the answer.

(Just for the future, it's worth taking a special look at Mr. Miller, whose salary is nil, but who no doubt sees a spectacular payday down the road when Delphi is recapitalized in the ashes of the employees' and stockholders' expectations. He is likely to walk off with what could literally be billions, based upon what has happened to smart people who seized companies after bankruptcy - see below and see the life and times of one Wilbur L. Ross Jr. And I certainly don't begrudge him high pay. I like high pay, too. But when my employees are suffering terribly? I don't think it looks pretty.)

Then let's briefly look at Edward S. Lampert, a staggeringly successful investor. He recently acquired Kmart, then recapitalized it; its stock soared, making him and his very rich investors a lot richer.

Why did its stock soar? Certainly not owing to Mr. Lampert's genius at retailing. Kmart is struggling against the Wal-Mart and Target juggernauts. No, Mr. Lampert's Kmart is considered a real estate play. Its stores, while not selling a lot of merchandise, are in good locations and are expected to deliver huge returns on liquidation. Mr. Lampert, meanwhile, acquired Sears and merged it with Kmart, and is contemplating laying off employees in large numbers. Again, this is expected to be a real estate play.

But if the poor pre-bankruptcy Kmart was so loaded with valuable real estate that it has made investors in the post-bankruptcy Kmart rich, didn't that real estate belong to the stockholders of Kmart? Why was it not liquidated for the benefit of existing stockholders? Why was it turned over to the new stockholders while the old stockholders walked off with nearly nothing? Where was the management of the old Kmart? Asleep?

And what about Mr. Lampert's plan to lay off Sears employees, which he inevitably must do if he sells off the stores in which they worked? What about the severe cuts in retirees' medical benefits that Mr. Lampert has announced? How can he square these with decency to the employees? They are hard-working, modestly paid men and women who probably expected to be with Sears for a lifetime. Mr. Lampert is already fantastically rich. Does he really have to fire people in small-town America or cut their health care to become even richer? How many yachts can he sail on? How many meals can he eat a day? How many homes does he need to own?

Then there is Carl C. Icahn, badgering the brass at Time Warner to make the stock go up so he can make money on his multibillion-dollar stake. One way he is suggesting that Time Warner can do this is by slashing what he says is its "bloated bureaucracy" - meaning, no doubt, laying off thousands of people in New York.

I KNOW some of these people from my many visits to CNN. They work hard. They are not paid a lot. Is it really necessary for Mr. Icahn to demand that they be fired, just before Christmas or at any other time, so he can make more on top of the billions he already has?

I'm a small Time Warner stockholder, and I would love to see the stock recover from the beating it took when tech crashed. But at the expense of firing a makeup artist or a secretary supporting her children? I don't think so. I don't need the money that badly. If I don't, how can Mr. Icahn need it so badly? I calculate that he has roughly 200 times what I have, maybe a lot more.

Alas, there are other examples, but I'll say it again: This is a country at war. For men who are already billionaires to look for more billions by firing hard-working middle-class employees or demanding they take a pay cut is not the kind of thing that unites a nation. I'm a devout capitalist, but this is just plain ugly.

Ben Stein is a lawyer, writer, actor and economist. E-mail: ebiz@nytimes.com.

Sears Is the Latest Retailer To Tighten Returns Policy;
How to Avoid Being Refused
Taking Back That Bathrobe Gets Harder
By Amy Merrick and Ilan Brat – Staff Reporters – The Wall Street Journal
December 15, 2005

This Christmas, don't expect many happy returns.

Retailers are further clamping down on return policies, imposing penalty fees and using sophisticated computer databases to flag serial returners trying to game the system. Some are also adding exceptions and caveats to their return policies -- for instance, making it particularly hard to return certain kinds of products, such as electronics.

In October, Sears began to impose a "restocking" fee amounting to 15% of the purchase price for some products that are returned used, or with missing parts or manuals. The new policy covers electronics, home appliances, tools, lawn and garden merchandise and automotive items -- though not clothing or home furnishings, among other things.

Earlier this year, Sears also tightened its time frame for returns, specifying that electronics and mattresses had to be returned within 30 days, while all other merchandise had to be brought back within 90 days. Previously, Sears simply said all goods had to be returned within "a reasonable period of time."

The move by Sears is only the latest crackdown. Retailers have been tightening up return policies for several years -- making returning goods an increasingly complex process for consumers to navigate.

Stores are trying to target customers who abuse the longstanding practice of legitimately returning goods. Retailers estimate return fraud costs them $16 billion a year. Their goal in identifying specific goods in return policies is to concentrate on the areas where they suffer most from fraud, says Joseph LaRocca, vice president of loss prevention for the National Retail Federation. For the holidays, these include electronics such as camcorders and digital cameras. (At other times of year, Halloween costumes and prom dresses tend to be used and returned.)

But consumer advocates worry that loyal customers will get caught up in the sweep. To avoid problems, shoppers may want to check the exact policy for the products they're buying. For instance, return policies for a company's stores and Web site may not be the same.

During the holidays, shoppers should ask when the time limit for returning purchases begins. Some stores will extend their 30-day rule for gifts bought early in the holiday-shopping season, so that recipients have time to return gifts after Christmas. But there are exceptions. Best Buy Co., for example, will allow most purchases between Nov. 1 and Dec. 24 to be returned until Jan. 24. But some common gifts, such as digital cameras, must be returned by Jan. 8, and computers still have to be returned within 14 days, no matter when they were purchased.

If a store won't budge on its time limits, and you suspect the recipient might want to return the gift, then it's actually a good idea to procrastinate and buy later in the season.

Restocking fees are increasingly becoming standard. A spokesman for Sears's parent company, Sears Holdings Corp., based in Hoffman Estates, Ill., said the restocking fee brings Sears in line with its competitors, which have levied such fees on electronics and other products for some time.

Another way stores try to target people who abuse the returns system is by tracking the return habits of individual shoppers. The cash registers at Wal-Mart Stores Inc. automatically flag a customer who tries to return more than three items without a receipt in a 45-day period, the company said. A manager then has to approve the return. The cash-register messages disappear after six months if a shopper makes no more returns without receipts during that time.

J.C. Penney Co. says it uses an internal database for tracking returns, especially if the customer doesn't have a receipt. A spokeswoman says the system occasionally flags customers, based on the frequency and dollar amounts of returns, but she declined to be more specific.

Gap Inc. says it tracks customer returns internally but doesn't use the system to deny returns. Nordstrom Inc., Kohl's Corp. and the Macy's division of Federated Department Stores Inc. also have in-house tracking systems, though the companies didn't explain the criteria for evaluating returns.

"You can't treat everybody as a fraudulent purchaser," says Jonathan Dampier, vice president of marketing and corporate strategy at Newgistics, a technology company that helps businesses manage their returns. "But the more information you have about your returns, the better you can control it." He estimates that about 9% of total returns are fraudulent, but the returners represent only 1% of consumers.

Some stores subscribe to a database called Verify-1, which was created by The Return Exchange, a closely held company whose clients include Sports Authority Inc. and the Express division of Limited Brands Inc. When a customer returns merchandise to any store that uses Verify-1, the cashier swipes the shopper's driver's license, which keeps an inventory of any return the shopper has made.

Figuring out exactly what triggers the system is tough, because The Return Exchange is tight-lipped about its criteria for rejection, saying only that it detects fraud through "rules and statistical models." But if a shopper crosses the database's line, the return is denied. Customers who are turned down may request, via email, a report from The Return Exchange with their return activity history.

In signs by its cash registers, Express explains that it may refuse a return if the customer returns items too often, takes back too much merchandise or returns goods to more than one store. It doesn't give precise guidelines.

Shoppers can be flagged for returns to multiple stores. So if you frequently shop at a chain that uses the Verify-1 database -- the retailer should mention that in its posted return policy -- it may be helpful to visit just one store. Salespeople and managers there will begin to recognize you as someone who buys a lot of merchandise and isn't trying to run a scam.

Consumer advocates, though, are concerned that shoppers aren't given enough information about what would cause a return to be denied. "I understand that there's a big problem with return abuse," says Edgar Dworsky, a consumer attorney and founder of ConsumerWorld.org. "But the percentage of consumers who are honest consumers and may change their minds about a good -- those are the ones I'm concerned about."

Military Recruits: Companies Make New Effort to Hire Spouses of Soldiers
By Sue Shellenbarger – Work & Family – Wall Street Journal Online
December 15, 2005

Amid debate on the war, employers are mounting a military campaign of their own: Helping soldiers' spouses find jobs.

A growing number of big employers have begun actively seeking to hire the wives and husbands of armed-forces enlistees. In partnerships with branches of the military, companies such as Boeing, Trammell Crow, Sears Holdings, Dell and CVS, among others, are signing accords to improve job opportunities for spouses, posting jobs on Web sites for military families or setting up résumé-sharing systems with military bases.

The trend signals a breakdown of old prejudices against military spouses, who have been stereotyped as too transient or unskilled to be good employees. Among the 60% of the nation's 694,000 military spouses who are in the work force, one-third are transferred each year, says the National Military Family Association, an Alexandria, Va., nonprofit. Military spouses also have been seen as less-educated than their civilian counterparts, a prejudice proven false by recent research.

MARRIED TO THE MILITARY

Helping military spouses find jobs:
• www.msccn.org: 1 Employer- funded site provides postings and résumé transfers, emphasizing portable jobs.

• www.Military.com/spouse 2: Job advice and postings, by military base, from a Defense Department joint venture.

• www.militaryspousejobsearch.org 3: Advice and postings from 21 big employers partnering with the Army

• www.usadecco.com/careeraccelerator 4: Portable job options from a Navy-Marine-Army partnership with a staffing firm

Now, a tightening labor market, pro-military sentiment and increasing mobility in the work force in general are changing employer attitudes. The Pentagon, recognizing that dissatisfied spouses are helping drive the military's high attrition rates, has been stoking employer interest by promoting recruiting partnerships. "The decision to re-enlist is often made around the kitchen table," says a Defense Department spokesman, Maj. Michael Shavers.

Companies say they're pleased with the results. Concentra Inc. of Addison, Texas, an operator of 300 occupational-health clinics, started interviewing military spouses 18 months ago via a not-for-profit hiring partnership it co-founded called the Military Spouse Corporate Career Network. The applicants were uniformly "good, qualified, solid candidates who are punctual, well-trained and well-educated," says Richard Parr, general counsel. Concentra has since hired 40 military spouses in jobs ranging from data entry to physicians.

Hopping from employer to employer, following their spouses in serial transfers, has doomed many military spouses to the margins of the working world. A 2004 study by the research concern Rand Corp. found military wives are less likely to be employed than civilian wives, and earn an average $5,500 to $7,400 less a year. The Rand study, based on Census data and interviews with 1,100 military spouses, also found military wives are better-educated, on average, than civilian wives.

Jessica Perdew, the wife of a Marine Corps major, has a bachelor's degree in physics but has had to reinvent herself repeatedly during her family's seven moves in 15 years. She has taken jobs from finance manager and substitute teacher to administrative assistant, bank teller and systems administrator. While Ms. Perdew stresses that she isn't complaining, she admits that her career is "not where I would be if we were a civilian family that had settled down and stayed" in one place.

The new recruiting partnerships are drawing big, multistate employers that can offer the "portable jobs" military spouses need. The Military Spouse Corporate Career Network, for example, has Concentra, Boeing, Trammell Crow, Magellan Health Services and Brass Ring, a human-resource information firm in Waltham, Mass., as partners -- plus the support of the Air Force, Navy, Coast Guard and Marine Corps, says Deb Kloeppel, president, founder and herself a Navy wife.

It links job counselors on military bases with employers through Brass Ring's information-sharing software. This allows employers to search spouses' résumés quickly, and encourages spouses to apply directly to member employers. By targeting military spouses, "we're confident that we'll find folks with hard-to-find skills," says Don Ceresia, a regional staffing manager for Boeing.

A venture between the Navy, Marine Corps, Army and Adecco, a Melville, N.Y., staffing company with 6,600 offices in 75 countries, has placed 12,730 military spouses in jobs since it began in 2002, an Adecco spokeswoman says. As employees of Adecco, the spouses are eligible for benefits and can transfer without losing vacation time or credit for experience.

A growing number of big employers are signing onto another initiative, the Army Spouse Employment Program, agreeing to actively recruit military spouses and post jobs on a Web site, www.militaryspousejobsearch.org. Dolores Johnson, director of family programs for the Army, says about 11,000 military spouses have been hired by partner companies since the program began in 2002, based on employer reports, and the number of partners has grown to 21 from 13.

One partner, pharmacy retailer CVS, with 5,200 stores, has interviewed more than 1,000 military spouses and hired a majority of them into jobs ranging from $10-an-hour entry-level positions to $80,000-a-year pharmacist jobs, says Stephen Wing, CVS's director, government programs.

Executives at other partner companies, including Home Depot, Sprint, Dell and Sears, report good results. Dell plans to expand a pilot program in which it hired Army spouses from Fort Hood, Texas, to work from home as customer-service agents, a spokeswoman says.

The Defense Department also has a new venture with Military.com, a unit of online recruitment site Monster.com. The Web site www.military.com/spouse, launched last April, lists jobs from Monster.com, plus government jobs and openings from employers seeking to hire military spouses. Employers can scan military-spouse résumés, and spouses can search for job openings near their military bases by name. The site next month will begin "aggressive outreach" to employers, says Chris Michel, Military.com founder and president.

New Problems in Medicare Drug Benefit
By Robert Pear – New York Times
December 14, 2005

WASHINGTON, Dec. 13 - Insurers reported government delays in handling applications for Medicare's new prescription drug benefit on Tuesday, and they said the delays could create problems for some beneficiaries when the coverage became available next month.

Because of the delays, insurance executives said, they have not been able to issue identification cards to some who want to enroll, and they cannot guarantee that cards will be sent to all people who sign up before Jan. 1, when the program begins.

Pharmacists said that some beneficiaries might have difficulty taking advantage of the new drug benefit if they showed up at pharmacies next month without identification cards. In any event, the druggists said, the lack of cards could create complications for pharmacists and increase uncertainty in the first weeks of the program.

The source of the problem was not immediately clear. Insurance executives said they understood that the federal government had had technical problems with one of its computer systems. But Gary R. Karr, a spokesman for the federal Centers for Medicare and Medicaid Services, said, "We have found errors in data submitted by some of the plans." In some cases, Mr. Karr said, "we kick back the applications" so the errors can be corrected.

On Tuesday, President Bush urged older Americans to sign up for the drug benefit and noted concerns about the complexity of the program. In a brief visit to a retirement community in Springfield, Va., Mr. Bush said it was "a daunting task" for some Medicare beneficiaries to sort through the many new prescription drug plans offered by private insurers. But he said they should sign up for the new coverage because it was "a good deal for our seniors."

The drug benefit is available to all 42 million Medicare beneficiaries. Enrollment, which is voluntary, began Nov. 15. Coverage starts next month for those who sign up by Dec. 31.

Dr. John W. Rowe, the chairman of Aetna, one of the nation's largest insurers, said his company had sent the government information on people who filled out enrollment forms indicating they wanted to obtain drug coverage from Aetna. But, Dr. Rowe said, in many cases, the government has yet to reply and has not verified that the people are eligible, so Aetna has not been able to issue identification cards.

"We send additional names to the government every day," Dr. Rowe said in an interview, "but the government has not verified the names."

Dr. Rowe said he believed that Medicare officials were "working hard to fix the problem."

The Medicare agency is supposed to confirm that a person is eligible to enroll in the program by sending the insurer an electronic document known as a transaction reply report.

Angela Feig, a spokeswoman for a consortium of Blue Cross and Blue Shield plans offering drug coverage in Iowa, North and South Dakota and four other Midwestern states, said they had received applications from 89,000 Medicare beneficiaries. But Ms. Feig said: "We have not sent out any identification cards. The Centers for Medicare and Medicaid Services has to conduct a verification process to confirm that applicants are eligible to enroll. We are working with the government to complete that process."

Robert E. Meehan, vice president of Horizon Blue Cross and Blue Shield of New Jersey, said, "Medicare is way behind in sending out documents to validate members' eligibility."

As result, Mr. Meehan said, "we are behind" in sending out cards.

Mr. Meehan said the delays increased the possibility of problems at pharmacies in early January. "When members walk into a pharmacy," he said, "we want them to have a good experience. We want this to go well on Jan. 1."

Mr. Karr, the Medicare spokesman, said pharmacists could use a computer terminal to verify the enrollment of beneficiaries who did not have cards. Mr. Meehan said beneficiaries could also "present a letter at the pharmacy" showing they had signed up.

But E. Timothy Marks, co-owner of Excel Drug, a pharmacy in Waldport, Ore., said, "It will certainly be easier if Medicare beneficiaries have their cards."

Congress had assumed that beneficiaries would be grateful for the new coverage, but many have had difficulty evaluating the options. In most states, people have a choice of more than three dozen drug plans, with different premiums, deductibles, co-payments and lists of covered drugs.

Mr. Bush emphasized that "the new Medicare plan is voluntary, it's optional." In addition, he told the audience of retirees, "There are people around who are willing to help explain the program."

Sears contributes $270 million to pension fund
Pension & Investments Online
December 14, 2005

Sears Holding Corp., Hoffman Estates, Ill., contributed $270 million to its pension plan in the quarter ended Oct. 29, according to its earnings statement. Chris Graftley, a Sears spokesman, declined to provide a current figure for Sears’ pension plan. Pensions & Investments estimates that the retailer’s U.S. pension funds totaled $4.3 billion as of Sept. 30.

Sears will freeze its pension plan on Dec. 31, according to its third quarter 10-Q filing with the SEC. In connection with freezing the pension plan, fund officials revised the target asset allocation to 42.5% equity, 42.5% fixed income and 15% alternatives, from 70% equity and 30% fixed income, according to the filing.

Portugal's Sonae Sells Brazilian Stores to Wal-Mart
Wall Street Journal Online
December 14, 2005

LISBON, Portugal -- Wal-Mart Stores Inc. is buying the Brazilian stores of Portuguese conglomerate Sonae for €635 million ($764 million), the companies announced Wednesday.

Wal-Mart, the world's largest retailer, said the purchase would improve its position as a national retailer in Brazil.

"This acquisition reinforces our commitment to Brazil," Mike Duke, vice-chairman of Wal-Mart, said in a statement.

Sonae's Brazilian division includes 140 hypermarkets, supermarkets and wholesale outlets and employs about 20,000 people. The stores stretch across four Brazilian states, including three in the south.

In 2004, Wal-Mart acquired the 118-store Bompreco chain in northeastern Brazil from Dutch retailer Ahold NV. The latest acquisition means the U.S. company will operate more than 250 units in 17 of Brazil's 26 states.

Sonae said it had trouble making a profit in Brazil because of high interest rates. However, Sonae said it remained committed to its other investments in Brazil, which include shopping-mall management and industrial production of wood-based materials.

Wal-Mart said in a statement it expects the acquisition to strengthen the profitability of its operations in Brazil. "We expect to learn a lot from Sonae that will help us improve further our business in Brazil," said Vicente Trius, president of Wal-Mart Brazil.

In September, Wal-Mart took a one-third interest in Central American Retail Holding Co., that region's largest retailer.

Sonae's shares dropped 0.7% to €1.48 ($1.78) on the Lisbon Stock Exchange after the sale was announced.

Before You Open That Nest Egg …
Ten questions to ask before taking the first dollar out of your retirement savings
By Glenn Ruffenach – Staff Reporter – The Wall Street Journal
The Journal Report: Encore – Money Matters
December 12, 2005

A steady paycheck is one of life's comforts. Once or twice a month, the money lands reassuringly in your lap.

Until, that is, you retire. And then it stops.

Suddenly, unless a traditional pension is close at hand, you are the one who has to make sure that the money lands in your lap. And you -- and those who depend on you -- will suffer if you don't.

That means, among other steps, calculating your income needs and whether your nest egg is big enough to support them; it means deciding which assets to tap and when. And it means designing a plan that keeps the paychecks coming -- for a retirement that could last 30 years or more.

After decades of saving for later life, millions of Americans are getting ready to crack open their nest eggs. But are they ready? We asked financial advisers across the country to identify the most important questions investors should ask themselves before withdrawing dollar one from their savings. If you can answer these questions, or simply consider these issues, your chances for a secure retirement should be better than most.

• Am I starting at the right time?

Ideally, the decision to begin tapping a nest egg is one that's been carefully planned over the course of several years. Often, though, the spark is something simple: a birthday.

Many Americans begin dipping into their retirement savings at age 62, or thereabouts. That's the age, of course, when people can first file for Social Security benefits; thus, it's about the age at which many workers retire. (The average retirement age in the U.S. is 61.6 for men and 61 for women, according to Murray Gendell, a research professor at Georgetown University.)

As appealing as early retirement might sound, it could put considerable strain on your savings. For example: Do you still have a mortgage? Most financial planners recommend paying off as much debt as possible before tapping a nest egg, so debt payments don't eat up your savings. What about health insurance? Medicare, unlike Social Security, isn't available until age 65 for most people. What kind of medical coverage -- if any -- do you have for the gap between ages 62 and 65, and how much will that cost?

The point: "Even a wait of two or three years [before tapping a nest egg] could make a real difference in retirement," says Christine Fahlund, senior financial planner at T. Rowe Price Group Inc., the Baltimore-based investment-management firm. "Every extra year, hopefully, your money has an opportunity for growth."

You also should investigate whether your employer offers, or is willing to consider, a "phased retirement," in which you reduce the number of hours you work but still draw a paycheck. Again, such an arrangement could give your retirement savings additional breathing room. A study in 2003 by Robert M. Hutchens, a professor of labor economics at Cornell University, found that 73% of employers were open to phased retirement, primarily on an informal basis.

• Can I do this myself, or should I get help?

Yes, you can -- and yes, you should.

Almost every financial expert we interviewed said investors are capable of tapping their nest eggs on their own. Indeed, all efforts to create a paycheck in retirement -- whether you do it by yourself or have someone do it for you -- are much the same: siphoning money each month from a "bucket" (a cash reserve, a mutual fund, certificates of deposit) and refilling that vessel, on occasion, with investment gains from other "buckets."

For example, "a retiree with everything in one mutual-fund family," says Ron Kelemen, a certified financial planner in Salem, Ore., "would set up an automatic withdrawal program from a middle-of-the-road fund or a low-risk fund and periodically replenish it from a more aggressive fund."

That said, there are some good reasons why here, if at no other point in your financial life, it's worth spending time with an adviser.

Start with the various pieces of your nest egg. The sheer variety of assets held by many investors these days -- 401(k)s, individual retirement accounts, insurance policies, real estate, taxable savings accounts -- can make it difficult to know when and why to tap particular investments. (More about withdrawal strategies and taxes in a moment.) At the same time, Uncle Sam is doing his best to keep retirement planning as complicated as possible. Consider the following instructions from the Internal Revenue Service regarding mandatory withdrawals from IRAs:

"You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year."

Got that?

Financial guidance, of course, can be expensive. An adviser might bill by the hour, set a flat fee (say, $3,000 for a financial plan) or collect a percentage of the assets being managed (a 1% management fee on a $1 million nest egg would cost you $10,000 each year). To keep things simple, and relatively affordable, first try sitting down with a financial adviser who charges by the hour. (Among other sources, the Garrett Planning Network, at garrettplanningnetwork.com <http://garrettplanningnetwork.com/> 3, can point you to such individuals.)

Ideally, several visits (at a cost of $100 to $200 an hour) will help you determine whether you want to manage and tap your nest egg on your own, or whether you want a financial adviser, or perhaps a mutual-fund company, to handle the job. Firms like Vanguard Group Inc., Fidelity Investments and T. Rowe Price are more than happy to manage your retirement savings and help generate a monthly check. If you end up working with a financial planner, his or her annual fee certainly should be no more than 1% of the assets under management.

"Can you [tap retirement savings] yourself? Sure," says Clark Randall, a certified financial planner with Lincoln Financial Advisors in Dallas. "But ask yourself three questions: Do I have the interest in doing this myself? Do I have the expertise? And do I have the time? If the answer to any of those is no, you might want some help."

• What are my plans for my nest egg?

Look down the road. Would you like to see your nest egg maintain its size -- or get bigger -- as you age? Would you like to leave some of your money for your children or charity? Or do you plan to spend it all?

Clearly, investors who have no plans to leave an inheritance might be able to pull more money each year from their savings (and perhaps enjoy a more comfortable retirement) than a couple, for instance, who wish to pay for their grandchildren's education. Consider this example:

Two retired couples, each with a life expectancy of 20 more years, have $1 million in savings. The first couple would like to withdraw some money from their nest egg to supplement a pension, but they also want to leave, if possible, $1 million to their children. (In other words, the principal would be left intact.) The second couple, in contrast, thinks their kids already are in good financial shape; they plan to use every penny of the $1 million for their own retirement.

So, how much can each couple withdraw from their respective accounts the first year (assuming both accounts earn 8%, both couples pay 33% in taxes, and the amount withdrawn each year increases by the rate of inflation)? The first couple: about $12,000. The second couple: about $59,000.

• Have I estimated my expenses in retirement?

Almost every financial adviser we spoke with said one of the first assignments they give clients approaching retirement is estimating annual expenses. Simply put, if you don't know what your bills might be each month or each year -- for both essential and discretionary items -- you won't know how much money you can withdraw safely from your nest egg. (Assuming, of course, that you would like your savings to last as long as you do.

And yet, people are hesitant to take this critical step.

"It gets very emotional," says Norman Boone, a certified financial planner and president of Mosaic Financial Partners Inc. in San Francisco. "People say, 'I've always had the right to spend whatever I wanted.' But [in retirement], you have a finite amount of resources. People resist and resent that."

The key here is to be as specific as possible. Brian Puckett, a lawyer and accountant who manages his own financial-services firm in Oklahoma City, presses his clients to go beyond the basics (like utilities, insurance, food and transportation) and estimate what their dreams might cost and when the bills might kick in. "I'll ask them, 'When is that trip to Spain going to happen?' " he says. "And then we'll pencil that in and budget for that."

None of this is easy; many people aren't sure what their expenses might be next weekend, never mind 20 years from now. At the very least, though, "we try to get people to start" this process, Mr. Puckett says. "What's the monthly amount [of money] you're going to need? What's coming in? And where's the shortfall? That's crucial."

Any number of mutual-fund companies, Web sites and books offer worksheets to help estimate expenses in retirement. One example: Financial Calculators Inc. On the home page of the Web site -- Fincalc.com <http://fincalc.com/> 5 -- click on "ConsumerCalcs" and scroll down to "Retirement." Then click on: "How will retirement impact my living expenses?"

• Do I understand my options -- and the possible pitfalls -- when leaving work and taking my nest egg with me?

Most nest eggs first take shape and reside within your employer's retirement program, whether it's a profit-sharing plan, a 401(k), or some other type of savings vehicle. Before you can start tapping that nest egg, you need to understand your options for getting it out of your employer's hands and into your own.

And it's not always as simple as: "Well, I'll just roll my money into an IRA."

Let's say your 401(k) contains company stock that's appreciated in value. Rolling that stock into an individual retirement account could mean that the proceeds eventually are taxed at ordinary rates; placing the stock in a separate account could allow you to take advantage of lower capital-gains taxes. Or, let's say you plan to retire before age 59½. If you roll over a 401(k) into an IRA and then tap those funds, Uncle Sam will collect ordinary taxes on the withdrawal -- and slap you with a 10% penalty. That's the fine the IRS levies on people taking early withdrawals from tax-deferred accounts.

(Yes, there is a way around that problem -- by means of a 72(t) payment, so named for the relevant section in the Internal Revenue Code. For more information online, visit 72t.net <http://72t.net/> 6.)

If, in the end, you decide to move your savings into an IRA, such transfers come with their own land mines. A rollover, for instance, must be completed within 60 days of when the money comes out of your 401(k); if you take longer, the whole amount could be taxed. And the "receiving" IRA must be eligible to accept the assets. Example: A 401(k) can be rolled into a traditional IRA, but not into a Roth IRA. (If a Roth is the desired end, you must first move your 401(k) into a traditional IRA, and then convert the assets to a Roth IRA, paying tax on some or all of the amount involved.)

Returning, for a moment, to the idea of tapping a nest egg on your own or getting help: The fact that your retirement fund at work likely represents the biggest part of your savings argues for sitting down with a financial planner before making any moves. The stakes are simply too high.

"It seems that a week doesn't go by without hearing some rollover horror story where someone has lost his or her IRA," says Ed Slott, a Rockville Centre, N.Y., tax adviser who specializes in IRAs.

• What is a realistic rate of withdrawal from my savings?

The key word is "realistic." Many Americans approaching retirement still think they can pull more money out of their savings each year than is prudent.

The number heard most frequently among retirement planners is 4%. That figure is based primarily on research by William Bengen, a certified financial planner in El Cajon, Calif. In other words, if your retirement savings total $1 million, you could withdraw $40,000 the first year. Assuming that a good chunk of your nest egg -- about 40% to 60% -- remains invested in equities (to help your savings keep pace with inflation), a 4% rate of withdrawal, according to Mr. Bengen, means your nest egg has a good chance of lasting as long as you do.

Remember, that's a starting point. Some planners say 3% is a safer figure these days, given that market returns in coming years are expected to hover in the single-digit range. Others say a withdrawal rate of 5% could be acceptable in the early years of retirement, when people are likely to be more active -- as long as they're prepared to trim withdrawals in later life. Age, health and family history will be part of the equation, as well; if you're in poor health, and if your parents and grandparents all died before their peers, that might argue for a higher initial rate of withdrawal on your part.

But again, 4% is the figure around which most realistic withdrawal strategies revolve. The problem, says Ms. Fahlund at T. Rowe Price, is that would-be retirees still set their sights too high.

"People prefer [withdrawal rates of] 6% to 7%," Ms. Fahlund says. That's an improvement, she notes, from the late 1990s, when retirees -- still enjoying the fruits of the bull market -- talked about withdrawal rates as high as 12%. But even rates of 6% to 7%, she says, could drain your savings prematurely.

"It's the biggest mistake [retirees] make," Ms. Fahlund says. "They withdraw too much initially."

• Do I have a withdrawal strategy?

Put another way: Do you know which assets or accounts to tap first?

There are as many ways to open a nest egg as there are investors and planners. If you prefer fixed-income investments, says Mr. Kelemen in Oregon, you can set up a series of "laddered bonds," with different maturities, that will produce income each month. If you like stocks, he says, you can set up a portfolio that generates dividends.

For his part, Mr. Kelemen spreads no-load mutual funds across 10 asset classes, including a money-market fund. His clients receive a monthly check from the money-market fund. After he and a client decide how they wish to divide the client's holdings among those 10 classes, Mr. Kelemen rebalances the portfolio every three months to keep in step with the original allocation.

"At any one time, one or more asset classes are doing fairly well, most are OK, and a few may be lagging," he explains. "When that happens, we sell some of the overweighted classes -- the stuff that's done well -- and buy into the underweighted classes, the not-so-well, after we have replenished the money-market fund."

The strategy highlights one of the two most important parts of any withdrawal strategy: gauging market conditions in deciding which assets to sell and buy. The other piece of the puzzle is tax efficiency.

You're probably familiar with the conventional wisdom: Draw down your taxable accounts first; then turn to tax-deferred accounts, like IRAs; and save your Roth IRA (if you have one) for last. In this way, tax-deferred assets get more time to grow. But the sequence isn't always that simple.

J. Graydon Coghlan, president of Coghlan Financial Group in San Diego, gives the example of a man with $1.5 million in an IRA who is turning 70½, the age at which withdrawals from an individual retirement account become mandatory. His required distribution this year would be almost $55,000, leaving him in the 25% tax bracket (assuming a standard deduction).

If however, the man had withdrawn funds annually from his IRA starting 10 years earlier -- and reached age 70½ with $900,000 in his account -- his required distribution would be about $33,000, leaving him in the 15% tax bracket. The early withdrawals, meanwhile, could have been invested in tax-free municipal bonds or given as gifts to children or charity.

The point: A withdrawal strategy that focuses only on the short term -- on this month's check or this year's distribution -- is an accident waiting to happen. "You have to start projecting out -- five years in advance or more," Mr. Coghlan says. "Otherwise, you could be stuck with a huge tax bite."

• Have I factored life expectancy and inflation into my plans?

Plan on living to age 90. At the very least.

Almost every financial adviser we spoke with said they use a life expectancy in the 90s when calculating how long a nest egg should last. There are two reasons why you should do the same.

First, the word "average" can be misleading. Yes, you can use your average life expectancy to determine when you might die and how long your nest egg needs to last -- but remember that about half of all people will live beyond their average life expectancy. Put another way, the odds are 1 in 2 that your nest egg will need to last longer than you think.

(To get you started, men and women in the U.S. who reach age 65 can expect to live, on average, 16.4 more years and 19.4 more years, respectively.)

Second, most people fail to think about joint life expectancy. If you're married, the chances are good that one spouse will live to age 85 or beyond, and will need a nest egg that survives that long, as well. To be more specific: There's a 66% chance, according to research from the University of California at Berkeley and others, that one member of a 65-year-old couple will reach age 85, and a 39% chance that one member will live to 90.

Life expectancy and inflation go hand-in-hand. The longer you live, the more corrosive the effects of inflation on your purchasing power. At an annual inflation rate of 3%, a nest egg of $1 million will have a value of $737,000 after only 10 years.

The point: Before you begin tapping a nest egg, you should have a well-diversified portfolio with a mix of equities, bonds and alternative investments (like real estate and inflation-protected securities). Ideally, such a portfolio, coupled with a prudent withdrawal strategy, will keep pace with inflation and last as long as you do.

• Should I buy an annuity?

Retirees often speak about running out of money as one of their biggest concerns, says Mr. Randall in Dallas. But that anxiety, he says, is somewhat misplaced.

"What they're really worried about is running out of income -- a regular paycheck," Mr. Randall says. That's where an annuity can help.

A nest egg, depending on how assets are allocated and the rate of withdrawal, could provide income for many years. But there's no guarantee; even the best strategies for tapping one's savings can founder. An annuity, however, assuming that it's purchased from a reliable insurance company, will provide guaranteed income for life. That security is what makes an annuity appealing -- and why retirees should consider making such products a part of their portfolio.

Yes, investors have long been wary of annuities, primarily because individuals had little or no control over their money once they handed it to the insurance company. But an increasing number of annuities today offer features that address such concerns. Take New York Life Insurance Co. and its "LifeStages Lifetime Income Annuity." Among other options, an investor can accelerate payments from the annuity, have payments increase automatically and add a death benefit.

The latest twist involves "longevity protection." Let's say you've done your life-expectancy homework, and you think there's a good chance you'll make it to your late 80s, and perhaps your 90s. For about $165,000, a 65-year-old man could buy an annuity from New York Life (with what the company calls a "Changing Needs Option") that provides an annual income of $10,000 until age 85, at which point the annual payments would jump to $50,000 until he dies. (That compares with a premium of about $126,000 for a fixed annual payment of $10,000 for life.)

That guaranteed increase means "you can spend more money" early in retirement, says Ted Mathas, executive vice president of New York Life, "and know [the higher payment] will kick in" if you live a long life. "That's the key -- insuring against the back-end risk."

Annuities, to be sure, have their drawbacks. The fees can be steep, and the products themselves can be maddeningly complex. Still, if you want the predictability of a pension as part of your income in retirement, you can, in effect, buy one with an annuity.

• Do I have a backup plan?

It's the kind of number that can make a retiree weep.

Earlier this year, Fidelity Investments, the Boston-based financial-services company, estimated that a 65-year-old couple retiring today, with no employer-sponsored retiree health coverage, would need about $190,000 to pay their medical expenses during the next 15 to 20 years. That includes $58,900 for Medicare premiums, $62,700 for prescription drugs and $68,400 for other health-care needs, like preventive care, eye exams, glasses, hearing exams and hearing aids.

So...do you have $190,000?

The point here isn't so much the size of your checkbook as it is your ability to adapt. What steps are you prepared to take if big bills (like health care), a bear market, rising inflation or some combination of calamities throw your plans to tap your nest egg out of whack?

Each alternative, of course, will prompt additional questions. Perhaps you return to work -- but will your health allow that? Perhaps you put off, or abandon, your dream to buy that recreational vehicle -- but how will that affect the quality of your retirement? Perhaps you slash your annual withdrawals from savings -- but do you have the self-discipline to do so?

Whatever the options and answers, the key, says Mr. Puckett in Oklahoma City, is to draft a strategy that's unique to your circumstances.

"A lot of people, when it comes to managing their money [in retirement], will default to what Mom and Dad did...[or] what the guy at work did," Mr. Puckett says. But "that has no relevance to your situation. Your retirement could be three times as long as your parents'. The only plan that's right for you is the one that's crafted for you."

--Mr. Ruffenach is a reporter and editor for The Wall Street Journal in Atlanta and the editor of Encore.

Gift card might be the gift that doesn't keep on giving
By Dan Thanh Dang - Sun Reporter – Baltimore Sun
December 11, 2005

Contrary to popular belief, Sandy Lerner says, gift cards are not on everyone's holiday wish list.

In fact, the 50-year-old Caroline County antiques dealer wants to tell everyone she knows - and anyone else who would care to listen - to take a stand and ban the diabolical plastic this year.

"Do not buy gift cards," Lerner warns. "They charge you fees for not using the card in time. They charge you fees if you call to check your balance more than once a month. They charge you fees just to buy the card. It's absurd. I will not buy gift cards again. My family will not buy gift cards again."

Ah, Gift Card Fury strikes again. Even as retail studies show they grow in popularity every year, gift cards continue to outrage many consumers who still aren't aware of the various terms and conditions attached that can whittle away your balance down to zero. Increasing anger over gift card fees has moved many state governments to ban such practices.

Lerner learned her lesson the hard way.

Lerner received a $40 Discover gift card to The Mall in Columbia from her sister last Christmas. While the mall was a convenient destination when Lerner lived in Elkridge, it became an hour-plus drive each way when she moved the Eastern Shore.So it took a while to get around to spending the $40 card.

"I mostly just forgot I had the card in my wallet," Lerner says. "And then in August, I used it to buy a knit top at Hecht's in Columbia mall for $6.09. I still have the receipt. I thought I still had $33.91 left."

Little did Lerner know that Discover was already charging her fees for maintaining the account.

Though the front of the card says it's good until June 2007, more important is what's written on the back. Lerner concedes that she failed to read the terms and conditions, which say that, after the first six months from when it was issued, $2.50 will be deducted from the balance every month it is not used.

While she thought she still had $33.91, she actually had only $23.91 left when she went to use the card again last month.

"I had no idea," Lerner says. "I didn't think there was such a thing. Most people don't read the back of the card. I think it's very deceiving to customers. Why is that date even on the front if there won't be any money left by June 2007?"

Lerner complained to mall management, but got nowhere. The mall, run by General Growth Properties Inc. in Chicago, told her to take the issue up with the credit card company. Discover sent her back to the mall.

In the end, all Lerner got was more angry.

Asa Williams, a mall spokeswoman, says their hands are tied. "What we do at each point of purchase is clearly explain the terms and conditions to the buyer," she said. "It's also on the packaging that the card is in when purchased. I'm not sure if the person who gave [the card] to her explained the terms to her." Obviously not.

Discover spokesman Mai-Lee Ua says there isn't much the credit card company can do either, because the card is issued by MidAmerica Gift Certificate Co., a Colorado subsidiary of BB&T Corp. (based in Winston-Salem, N.C.), which set the rules on fees and charges. "She would have to take it up with them," Ua says.

Efforts to reach someone at MidAmerica were unsuccessful. All Lerner knows is that she's out $10 that was given to her.

"I will shop elsewhere," she vows.

"I certainly hate to hear when one of our shoppers is upset," says David Keating, a General Growth spokesman. "I do know that our shoppers are quite happy with the gift cards. That's why we rolled them out at all of our malls. They have no worries about wrapping or thinking about the perfect gift to buy. I hope [Lerner] doesn't stop shopping at the Mall in Columbia. Customer service is very important to General Growth."

Lerner says she can attest to that, "They were all very nice about telling me there was nothing they can do."

So the big lesson in all this is to be wary when buying gift cards. Read all the fine print about fees. Be informed about state laws governing gift cards. In Maryland, a new law kicks in after July 2006 preventing retailers from imposing fees on a card for four years after purchase.

"If you have $100 now, you should have $100 later," says state Sen. Katherine Klausmeier, a Baltimore County Democrat who helped sponsor the gift card legislation. "We did give companies the right to charge fees after four years."

Maryland consumers should be aware, however, that the law does not apply to bank cards issued by the credit card companies or mall cards, which can be used at various retail and service stores.

In other words, Lerner would still be out of luck.

The Next Retirement Time Bomb
By Milt Freudenheim and Mary Walsh - New York Times
December 11, 2005

Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.

It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.

The total came to about $178 million, or more than double the city's operating budget. And the bill was growing.

"Then we knew we were looking down the barrel of a pretty high-caliber weapon," said Gary Meier, Duluth's human resources manager, who attended the meeting where the actuary presented her findings.

Mayor Herb Bergson was more direct. "We can't pay for it," he said in a recent interview. "The city isn't going to function because it's just going to be in the health care business."

Duluth's doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.

Off the government balance sheets - out of sight and out of mind - those obligations have been ballooning as health care costs have spiraled and as the baby-boom generation has approached retirement. And now the accounting rulemaker for the public sector, the Governmental Accounting Standards Board, says it is time for every government to do what Duluth has done: to come to grips with the total value of its promises, and to report it to their taxpayers and bondholders.

The board has issued a new accounting rule that will take effect in less than two years. It has not yet drawn much attention outside specialists' circles, but it threatens to propel radical cutbacks for government retirees and to open the way for powerful economic and social repercussions. Some experts are warning of tax increases, or of an eventual decline in the quality of public services. States, cities and agencies that do not move quickly enough may see their credit ratings fall. In the worst instances, a city might even be forced into bankruptcy if it could not deliver on its promises to retirees.

"It's not going to be pretty, and it's not the fault of the workers," said Mayor Bergson, himself a former police officer from Duluth's sister city of Superior, Wis. "The people here who've retired did earn their benefits."

The new accounting rule is to be phased in over three years, with all 50 states and hundreds of large cities and counties required to comply first. Those governments are beginning to do the necessary research to determine the current costs and the future obligations of their longstanding promises to help pay for retirees' health care. Local health plans vary widely and have to be analyzed one by one. No one is sure what the total will be, only that it will be big.

Stephen T. McElhaney, an actuary and principal at Mercer Human Resources, a benefits consulting firm that advises states and local governments, estimated that the national total could be $1 trillion. "This is a huge liability," said Jan Lazar, an independent benefits consultant in Lansing, Mich. "If anybody understands it, they'll freak out."

Last spring, the state of Alaska was the scene of a showdown over retirement benefits that those involved said was a precursor of fights to come. Conservative lawmakers who supported scaling back traditional retiree health care and pension benefits squared off against union lobbyists, advocates for the elderly and the schools superintendent of Juneau, the state capital, who defended the current benefits.

After saying that Alaska's future combined obligations for pensions and retiree health care were underfunded by $5.7 billion, Gov. Frank H. Murkowski called a special session of the Legislature and pushed through changes in pension and retirement health care benefits for new state employees. (The state Constitution forbids changing the benefits of current employees.)

Instead of having comprehensive, subsidized medical coverage, new public workers will have a high-deductible plan and health savings accounts. The changes cleared the State Senate and passed by a one-vote margin in the House.

Even the White House weighed in on the Alaska problem. Ruben Barrales, President Bush's director of intergovernmental affairs, lobbied wavering Republican legislators, arguing in favor of replacing pensions and traditional retiree health benefits with private savings accounts for new employees. Mr. Barrales noted that the president was seeking similar changes in Social Security, including a plan for private accounts.

The union that represents state employees in Alaska said the narrower benefits would make it harder to recruit qualified teachers and government workers. "They keep chiseling away" at school employees' pay and benefits, said Julia Black, a single mother and union activist who earns $11 an hour as an aide in classes for disabled children in Juneau.

Actuaries say that about 5.5 million retired public employees have health benefits of some kind - and accountants joke that there are not enough actuaries in the country to do all the calculations necessary to estimate how much all these retirees have been promised.

Though it may seem strange after a decade of double-digit health cost inflation, hardly any public agencies have been tracking their programs' total costs, which must be paid out over many years. The promises seemed reasonable when they were initially made, officials say.

In Duluth, Mayor Bergson said the city actually offered free retiree health care as a cost-cutting measure back in 1983. At the time, Duluth was trying to get rid of another ballooning obligation to city workers: the value of unused sick leave and vacation days. Public workers then were in the habit of saving up this time over the course of their careers and cashing it in for a big payout upon retirement. Compared with the big obligations the city had to book for that unused time, substituting free retiree health care seemed cheap. "Basically, they traded one problem for another," Mayor Bergson said.

WITH some exceptions, most states and cities have set aside no money to pay for retiree medical benefits. Instead, they use the pay-as-you-go system - paying for former employees out of current revenue. Agencies did not have to estimate the total size of their commitment to retiree health care, so few did so.

Under the new accounting rule, local governments will still not have to set aside any money for those promises. But they will be required to lay out a theoretical framework for the funding of retiree health plans over the next 30 years, and to disclose what they are doing about it. If they fail to put money behind their promises to retirees, they may feel the unforgiving discipline of the financial markets. Their credit ratings may go down, making it harder and more expensive to sell bonds or otherwise borrow money.

Parry Young, a public finance director at Standard & Poor's, the credit rating agency, said his analysts look at total liabilities, including pension and now other "post-employment" obligations. Many governments, he added, have already been grappling with big deficits in their employee pension funds.

A few agencies are wrestling with the daunting task of estimating their total retiree health obligations and coming up with a way to slice it into a 30-year funding plan. They are finding that under the new method, the benefit costs for a particular year can be anywhere from 2 to 20 times the pay-as-you-go costs they have been showing on their books.

Maryland, for example, now spends about $311 million annually on retiree health premiums. But when that state calculated the value of the retirement benefits it has promised to current employees, the total was $20.4 billion. And the yearly cost will jump to $1.9 billion under the new rule, according to an analysis for the state by actuaries at Aon Consulting, which advises companies on benefits.

That is because Maryland would not be recording just its insurance premiums as the year's expense, but instead would report the value of the coverage its employees have earned in that year as well as a portion of the $20.4 billion they amassed in the past. After 30 years, the entire $20.4 billion should be accounted for.

Michigan says it has made unfunded promises that are now valued at $17 billion for teachers, part of a possible $30 billion total for all public agency retirees. Other places that have done the math include the state of Alabama; the city of Arlington, Tex.; and the Los Angeles Unified School District. New York City has not yet completed an actuarial valuation of its many retiree benefit plans. But in its most recent financial statements, the city said it expected that the new rule would "result in significant additional expenses and liabilities being recorded" in the future.

The numbers can vary wildly by locality, depending on how rich its benefits are, what assumptions its actuary uses about future demographics and investment earnings, and that great unknown: the cost of health care 30 years in the future.

"Fifteen years ago, who would have projected 10 years of double-digit increases in health care costs?" said Frederick H. Nesbitt, executive director of the National Conference on Public Employee Retirement Systems, an advocacy group in Washington. Mr. Nesbitt pointed out that when the accounting rulemakers began requiring a similar change in financial reporting for companies in the 1990's, it was followed by a sharp decline in the retiree medical benefits provided by corporate America.

Today, only one in 20 companies still offers retiree benefits, according to Don Rueckert Jr., an Aon actuary. The rate for large companies is less than one in three, down from more than 40 percent before the private-sector accounting change, according to Mercer Human Resource Consulting. General Motors and Ford are among the big companies that still offer retiree health benefits. But G.M. recently persuaded the United Automobile Workers union to accept certain reductions, and Ford is seeking similar cuts.

"We expect the same thing in the public sector, unless we help employers do the right thing," said John Abraham, deputy research director for the American Federation of Teachers.

The Governmental Accounting Standards Board, known by the acronym GASB (pronounced GAZ-bee), is a nonprofit organization based in Norwalk, Conn., and a sister to the Financial Accounting Standards Board that writes accounting rules for the private sector. Karl Johnson, the project manager for the retiree-benefits rule, said GASB began hearing from public employees' unions as soon as it issued a first draft of its new standard. The unions said that if governments were forced to disclose the cost of their plans, they would probably cut or drop them, just as companies have done.

Mr. Johnson said the accounting board had no interest in trying to reduce anyone's benefits, and no power to dictate local policy even if it wanted to. "Accounting is just trying to hold up a good mirror to what's happening," he said. "These are very expensive benefits."

Under the new rule - outlined in the board's Statement No. 45 in June 2004, and known widely as GASB 45 - large public governments and school boards with large health care obligations to retirees will have to start reporting their overall benefits cost in 2007 - either on Jan. 1 of that year or, for most big governments, on the start of the fiscal year beginning June 1, 2007. Smaller governments will start using the new method in the two years after that.

The change comes at a rough time for state and local governments. Spending on Medicaid and education has been spiraling, and Congress continues to cut federal taxes and shift burdens of governing away from Washington. In some areas, including parts of Michigan, governments are also suffering from the financial difficulties of important local industries. Max B. Sawicky, an economist at the Economic Policy Institute, a liberal research group in Washington, called the new requirement "another straw on the camel's back" for state and local governments already straining under their budget burdens.

Mr. Johnson said the accounting board had tried to issue the retiree health care rule 10 years ago, when the economic picture was rosier. It did succeed then in issuing an accounting standard for government pension plans, but before it could turn to the related issue of retiree health care, other urgent accounting issues crowded onto its agenda. The board finally cleared its decks and voted to address retiree benefits in 1999. Coming up with the new methodology took five years.

Now that it is here, "the general sense in the marketplace is that GASB 45 is going to lead to a watershed in public-sector health benefits," said Dallas L. Salisbury, president of the Employee Benefit Research Institute, a nonpartisan research center in Washington.

Indeed, the handful of states and cities that have already calculated their obligations to retirees have concluded they must also rein in the costs. Michigan, for example, with its possible $30 billion in largely unfunded health care promises, is already considering legislation that would shift "a considerable amount of the cost for health insurance to the retiree," said Charles Agerstrand, a retirement consultant for the Michigan Education Association, a teachers union. The legislation would require teachers retiring after 20 years to pay 40 percent of their insurance premiums, as well as co-payments and deductibles, he said.

The pressure is greatest in places like Detroit, Flint and Lansing, where school systems offered especially rich benefits during the heyday of the auto plants, aiming to keep teachers from going to work in them. Away from those cities, retiree costs may be easier to manage. In the city of Cadillac, 100 miles north of Grand Rapids, government officials said they felt no urgent need to cut benefits because they promised very little to begin with. Instead, Cadillac has started putting money aside to take care of future retirement benefits for its 85 employees, said Dale M. Walker, the city finance director.

Ohio is one of a few states to set aside significant amounts. Its public employee retirement system has been building a health care trust fund for years, so it has money today to cover at least part of its promises. With active workers contributing 4 percent of their salary, the trust fund has $12 billion. Investment income from the fund pays most current retiree health costs, said Scott Streator, health care director of the Ohio Public Employee Retirement System. "It doesn't mean we can just rest," he said. "It is our belief that almost every state across the country is underfunded." He said his system plans to begin increasing the employee contributions next year.

In Duluth, Mayor Bergson grew quiet for a moment at the thought of a robust trust fund. "There was not a nickel set aside" in Duluth, he said. "The reason was, if you set money aside, you'd do less 'pretty projects.' Less bricks and mortar. Fewer streets. Fewer parks. So no one set the money aside. "If the city had set $1 million aside every year for those 22 years" since the promise was made, he added, "we'd be in really good shape right now."

Mayor Bergson said his city intends to start setting aside money for the first time in 2006, but he is also trying to rein in the growth of new obligations. He raised to 20 from 3 the number of years that an employee must work for the city in order to qualify for retirement benefits.

He also imposed a hiring freeze and pledged not to lift it until Duluth could hire employees without promising them free lifetime health care. As the city has lost police officers, firefighters, an operator of its huge aerial lift bridge and other workers, the remaining employees have racked up more than $2 million in overtime. But Mayor Bergson says that this is still cheaper than dealing with free retirement health care once the new accounting rule takes effect.

Most recently, he reached out for what may prove a political third rail: he took issue with the idea that once a public employee has retired, his benefits can never be reduced. This idea, as applied to pensions, is rooted in the constitutions of about 20 states, and unions argue that it also protects retiree health care.

Active employees in Duluth have had to start paying more for their health care under the city plan, Mayor Bergson said. If active workers must make concessions, he said, retired workers should make concessions, too. Otherwise, in relative terms, they are pulling ahead of the active work force.

"That's not a popular thing to say," Mayor Bergson said. "I'm getting kicked hard by retirees. I'm getting beat up by active employees. The people who are kicking me are the ones I'm trying to protect."

ATTEMPTS to balance the competing interests of retirees, active workers and taxpayers are building tension. Ross Eisenbrey, a former Clinton administration official who is now at the Economic Policy Institute, said that "when taxpayers wake up to these obligations, their first inclination is often to escape them or reduce them."

The problem is that people have counted on those benefits, and many have accepted lower salaries in exchange for better retirement benefits, said Teresa Ghilarducci, an economics professor at the University of Notre Dame. If they are close to retirement, said William R. Pryor, a firefighters' union official who is an elected board member of the Los Angeles County Employees Retirement Association, it may well be too late for them to make up for the loss with their own savings.

The clock is ticking. In Duluth, a city official approached the actuary who made the city's estimate in 2002 and asked her to refine and update her numbers because economic conditions had changed and the new accounting rule had been announced. This time the obligations worked out to $280 million, a 57 percent increase in less than three years.

Prodigy up for sale/founded by IBM, Sears and CBS
By Stefanie Olsen – News.com
December 10, 2005

Prodigy Communications, one of the oldest brands on the Internet and among Net service providers, is up for sale by its parent SBC Communications, now known as AT&T.

The Prodigy brand name and associated 66 registered trademarks in 52 countries are the intellectual property being sold, according to a document and proposal seen by CNET News.com. AT&T has contracted Ocean Tomo, an intellectual capital equity firm based in Chicago, to solicit and accept bids starting this month. The sale is expected to be closed by the end of March 2006.

"We're exploring the market for the brand and anticipate there will be strong interest for these marks, particularly in Asia," said George Kelakos, managing director at Ocean Tomo. Asian investors often look for established brands that can be reworked and marketed for similar offerings, he said.

AT&T representatives did not immediately respond to a request for comment.

Prodigy has one of the longest histories on the Internet, and hit its peak of popularity during the dot-com heyday selling DSL services.

It was founded in 1984 as a joint venture between IBM, Sears and CBS to market consumer Internet services--a rarity in the earliest days of the Net. Four years later, it launched one of the nation's first online services called Prodigy Classic, which offered basic e-mail and discussion groups to consumers.

By 1994, Prodigy became a pioneer in selling "dial-up" connections to the Web, the graphical interface for the Internet, and sold hosting services for Web publishers. By 1999, the company had become Prodigy Internet, marketing a full range of services, applications and content, including dial-up and DSL for consumers and small businesses, instant messaging, e-mail and communities. In true dot-com bubble fashion, its shares shot up 56 percent on its first day of public trading that year.

In 2000, SBC bought a 43 percent interest in the company, and Prodigy became the exclusive provider to SBC's 77 million high-speed Internet customers. More than a year later, SBC bought controlling interest for $465 million when Prodigy was the fourth-largest Internet service provider behind America Online, Microsoft's MSN and EarthLink. Prodigy in 2000 was reported to have 3.1 million subscribers of its own, of which 1.3 were DSL customers.

IBM and Sears had already sold their interest in the company in 1996, after investing more than $1 billion between them, according to the sales proposal.

The proposed sale comes as AT&T and SBC are working out some of their brand issues. In January, SBC agreed to buy AT&T for $16 billion; and the joint company agreed to change its name to AT&T in the aftermath of the deal. Still, SBC, for example, has a deal with Internet giant Yahoo to sell and market DSL (digital subscriber line) services, an offering called SBC Yahoo. An AT&T spokesman said that the company has yet to finalize a new name for the joint program that reflects SBC's parent name.

Today, Prodigy Internet is not actively marketed by SBC. Visiting Web addresses including Prodigy.com or Prodigy.net will direct people to SBC Yahoo services. Still, the company retains some die-hard e-mail users, Kelakos said, without specifying how many. Also, SBC has reportedly started marketing a Prodigy-branded Wi-Fi device for dial-up users.

As part of the proposed sale of Prodigy, SBC plans to retain an exclusive field-of-use license with respect to the U.S. ISP market, according to the document. Australia and Mexico markets may still have Prodigy subscribers, Kelakos said.

Sears chairman keeps analysts baffled, angry
By Sandra Guy – Business Reporter – Chicago Sun-Times
December 9, 2005

Sears Chairman Edward S. Lampert, who has kept retail experts puzzled by his business moves, might have another ace up his sleeve.

Rumors are surfacing that Lampert might buy up the 60 percent of Sears' stock that he doesn't already own, and take the Hoffman Estates-based retailer private.

Lampert would benefit by keeping all the future gains in the stock for his hedge fund, ESL Investments, and for other inside shareholders.

Lampert's focus is on returning value to shareholders and cutting expenses, rather than investing money in store upkeep and pumping up sales. He has arranged financial deals to ensure dividend payments to shareholders, and has set up share buybacks to pump up earnings.

He also has baffled and angered some of the Wall Street experts who rate Sears' stock. Just this week, Sears announced it would buy the 46.2 percent stake in Sears Canada it doesn't already own, rather than selling off the Canadian operations, and insisted that it will turn Sears into a retail player against its fast-growing rivals.
Analyst Howard Davidowitz dismissed the idea that Lampert will take Sears private, unless Lampert simply no longer can take analysts' and reporters' criticisms.

Lampert may well make a new retail acquisition, said Davidowitz, chairman of New York retail consulting and investment banking firm Davidowitz & Associates.

Lampert has greater leeway to make deals if Sears remains a publicly traded company, and he can make acquisitions on the cheap by using deft financing, Davidowitz said.

"He will only go private if he can't stand this heat, if he just can't take it any more," Davidowitz said, referring to analysts' skepticism about Lampert's retail strategies.

Lois Huff, senior vice president of Retail Forward, a Columbus, Ohio-based retail strategy consulting firm, said investors should realize that "retail is not a great money-maker" for shareholders looking for a quick return. "It's way too competitive and way too mature. But for a few exceptions, it's not a high-flying growth industry," she said. "It's usually at least a several year venture to turn [a lagging retailer] around."

Lampert's Lash Struck Some as Unbecoming
By Nat Worden - Staff Reporter - TheStreet.com
December 9, 2005

In the bull-vs.-bear street fight over whether Sears Holdings (SHLD:Nasdaq) can flourish, no victor has emerged -- although both sides have gotten in their licks.

The last blow was landed by Chairman Ed Lampert, the hedge fund manager who brought Kmart out of bankruptcy and led its acquisition of Sears one year ago. In a letter to shareholders released Tuesday, Lampert took aim at the credibility of his critics, saying they are often conflicted and confused.

"There is no shortage of commentators who are eager to make known their perspectives on our company and its prospects. Some of these do so 'on the record;' others cloak themselves in anonymity or do not disclose the true motives that are driving their comments," he wrote. "Although all the attention Sears Holdings is receiving is, in some fashion, flattering, I would caution you to approach much of what is written and said about us with an appropriate amount of healthy skepticism."

Throughout Kmart's rise, Lampert has been compared to Warren Buffett, the Berkshire Hathaway chairman whose value investing style Lampert is said to idolize. "There is no question he will turn Kmart into an investment vehicle like Warren Buffett's," legendary value investor Martin Whitman told Business Week last year. Tuesday's letter was more evidence of Lampert's respect for the Oracle of Omaha, evoking the frank talk that Buffett is famous for in his own annual letters to shareholders.

Still, others view Tuesday's dramatics as outside the Buffett mode. Lampert -- who has watched Sears stock sink 30% since its summer highs -- might or might not have been referring to short-sellers when he lashed out at anonymous critics, but if he was, he was waving one of Wall Street's brightest red flags. Many believe the public bashing of shorts by company insiders bolsters the bearish case against a stock. Even if Lampert wasn't referring to short sellers, reference to naysayers of any kind by a CEO is viewed uncharitably in many quarters of Wall Street, and some wonder if it is worthy of "the next Warren Buffett."

"Buffett is always silent with critics," said Robert Miles, author of Warren Buffett Wealth: Principles and Practical Methods Used by the World's Greatest Investor. "Back during the Internet boom, everyone was saying that Buffett had lost it and his style was old-school. Buffett said nothing. Even when the press asked him about the critics after the stock-market bubble burst, he wouldn't say, 'I told you so,' and he never addressed short-sellers."

Sears and Berkshire do have elements in common. Like the Massachusetts textile mill that Buffett transformed into his publicly traded investment vehicle, Sears is a once-great company with major historical significance and sentimental appeal that was hurt by global economic forces. Still, its assets and cash flow hold value.

Buffett and Lampert also have employed similar strategies. They are students of an investment philosophy -- value investing -- pioneered by the late Benjamin Graham, which holds that investors can beat the market averages by finding companies that are underpriced on a cash-flow basis and also enjoy high rates of return on investment.

In his seminal treatise, The Intelligent Investor, Graham espoused buying shares of companies so cheap that one could buy them for less than the proceeds that could be earned by just shutting them down. Such investment opportunities are much harder to find now than they were in Graham's day (he died in 1976 at age 82).

Buffett found one when he started buying Berkshire in the 1960s. Eventually, he used the cash raised by closing the textile business to make other successful investments. Many bulls believe Lampert has such an asset in Sears Holdings. They say the value of its real estate portfolio, its cash, and other assets like the Lands' End catalog business, support the stock price.

For some observers, however, the similarities between the two men are more surface than substance. Lampert may aspire to Buffett's folksy image, they say, but he got his start at Goldman Sachs. He might cultivate a reputation for reserve, but now he's spending time ridiculing his critics. Lampert bills himself as a capital allocator in the Buffett tradition, but he also recently named himself to a position where he will "direct the marketing, merchandising, design, and on-line businesses of Sears Holdings."

Another supposed parallel strikes some as stretched. Like Buffett, Lampert refuses to kowtow to Wall Street custom by filtering his communication through investment analysts. Still, it would be hard for anyone but a forensic accountant to make sense of some of the earnings statements he's filed since using Kmart to acquire Sears.

Even if that difficulty is written off to the realities of post-merger accounting, critics point to financial details of last month's spinoff of Sears' Orchard Supply Hardware chain as the kind of tortured engineering that would never fly at Berkshire.

"That deal was very Milkenesque," said Jeff Matthews, general partner with Ram Partners, referring to Michael Milken, the Drexel Burnham financier who revolutionized the junk bond market in the 1980s. "Buffett didn't do deals like that that I know of. I thought that was absurd on the face of it. You can't leverage a piece-of-garbage retailer that's slowly dying. They just slapped a bunch of debt onto it and took the cash." (Matthews and his firm had no position in the stock when he spoke to TheStreet.com.)

"There are more dissimilarities between what's going on at Sears and what Buffett did at Berkshire," Miles said. "Buffett doesn't buy investments looking to sell them for their underlying value. He buys businesses where he can enjoy the benefits of the business."

The idea that Lampert bought Sears and Kmart with a plan to cash out their assets is a controversial one that Lampert denied at the time of the merger. But that didn't stop many investors from buying Sears shares on that premise.

"It's a very difficult to have a long-term, enduring business model in retail, and Lampert understands that better than anyone else," said Mohnish Pabrai, managing partner with Pabrai Investment Funds. "He never wagered that he could compete with Wal-Mart. He's going to milk Sears for all he can. He knows some of the assets are golden nuggets that he can always sell off, and then eventually he can sell the rest of the assets to Home Depot (HD:NYSE) , or someone who can do something with it."

Lampert indicated in his letter that he may consider shrinking Sears rather than growing it. He noted that Sears' and Kmart's 2,300 stores outnumber those run by Target, J.C. Penney and Kohl's.

"The issue for Sears Holdings is therefore not one of building more stores, but rather one of making our existing stores more productive and relevant to our customers," Lampert said, noting that spending capital at stores is not always the best use of cash for shareholders.

Arguably, the philosophy is similar to Buffett's in the 1980s, when he opted not to update technologies at the ailing textile mill.

"Buffett told Berkshire's management at the time, which he had great affection for, that he had other options besides the textile industry," Pabrai said. "He said he had to look for maximum returns on capital. The same goes for Lampert. He's not in business to maximize Sears' revenue. He's not in business to make the stores look nice. He's in business to maximize returns for shareholders."

Since bringing Kmart out of bankruptcy, those returns have been extraordinary. Whether Lampert will be able to emulate Buffett's most meaningful achievement -- longevity -- remains to be seen.

Why Lampert Should Take Sears Private
By John Crudele – New York Post
December 8, 2005

THE two big questions in retail ing today: Will consumers spend more this Christmas, and will Eddie Lampert splurge and buy the chunk of Sears Holdings that he doesn't already own?

The answer to the first one, probably not much more.

The answer to the second: nobody really knows what the secretive Lampert is up to, maybe not even Eddie himself.

Wall Street loves to fill in factual voids with speculation. And since Lampert doesn't talk much to outsiders (I'm still waiting for a lunch promised two months ago) he's a prime candidate for the gossips.

So, what are they saying?

The version I heard was this: Lampert actually believes he's sitting on a gold mine in Sears and he's willing to recapitalize the company in a way that eliminates those pesky public shareholders.

Oh, don't worry. The dream sequence I'm picking up has Lampert refinancing the company so shareholders are more than adequately rewarded for turning over their shares.

And not surprisingly the rumored restructuring would free up some of the pile of dough Lampert has locked up in Sears — a figure that has appreciated from less than $1 billion to some $8 billion in the year since he combined the aging retailer with equally antique Kmart.

Nobody with any connection to Sears or Lampert would speak about the future, other than to say that the big guy has their confidence.

One source, who is on the fringes of the circle that hears things, believes insiders have been floating going-private speculation in order to gauge reaction.

Right now Lampert's ESL Investments owns about 40 percent of Sears Holding's outstanding shares. He had owned 55 percent of Kmart, but Lampert's holdings fell when he engineered the merger in which Sears was the surviving corporate name.

Sears recently completed most of a $500 million share buyback, which has helped strengthen Sears shares over the past year. The stock has traded between $163 a share earlier this year and as low as $84.51. Yesterday's closing price was $121.50, down $1.47.

Fueling speculation that the company might be taken private is Lampert's announcement that Sears planned to purchase another $500 million of its stock. And since Lampert's group is unlikely to be among the sellers, ESL's percentage holdings in Sears will automatically rise.

And even more share repurchases could be coming, especially if analysts are right that Sears will sell real estate and raise cash in the months ahead.

Even without any more moves, Sears is expected to have $3 billion in cash and $4 billion in available credit by the end of this year. While nobody knows how good (or bad) Santa will be to Lampert's stores this Christmas, there's no doubt that the Sears and Kmart brands will be in far superior shape than they were a year ago.

But why would Lampert do it?

This same insider says Lampert effectively controls the company already. And while he has to deal with the moans from Wall Street, that's a small price to pay for access to public financing.

Still, analysts aren't pleased with the way Lampert handles them. One analyst complained this week that "Eddie's letter (to shareholders) laid out his distaste for analysts and reporters."

Hell, what do you expect!? The guy's 43 years old. Isn't it about time Wall Street stopped calling him "Eddie?"

Why Kmart skeptics were right
By Herb Greenberg - MarketWatch
December 8, 2005

SAN DIEGO (MarketWatch) -- When I get too edgy on one of his favorite stocks, Jim Cramer can give me the hook, which is what he did Wednesday night on CNBC's Mad Money. "Don't listen to that man behind the curtain," he yelled, as my face disappeared from the screen. It is, after all, his show.

But Cramer can't control this column, and right now I want to say what I was trying to say before I was so rudely interrupted: Kmart wasn't the success
Chairman Edward Lampert is making it out to be in his latest letter to shareholders.

In the letter, Lampert scoffed at skeptics, making special mention of those who said, "Kmart would neither emerge from bankruptcy nor survive its first Christmas as a new company." While the company did both, to say the Kmart of Sears is better today than it was a year ago would be wrong.

As I've said previously, the merger with Sears - announced on the day a year ago Kmart reported lousy third quarter earnings - came just in the nick of time.

Proof, based on deciphering Sears' recent disclosures: Despite 4% fewer Kmart stores, Kmart's sales per store slipped 1% from a year ago while its Ebitda - a metric Sears likes to use - slipped 22%. And that's with having shut what supposedly were underperforming stores, which should've boosted performance. At the same time, inventory per store ballooned by 16%.

The trend would not appear to be Kmart's friend, at least not right now, and that's only the start of my quibbles with Lampert's comments.

Among other things, he talks about:

Big cash generation, saying Sears will have more than $3 billion in cash by year-end, without the need to borrow under the company's $4 billion credit facility. Nifty, but what he doesn't say is that unlike a year ago, when Sears had more $2.5 billion in cash and around $340 million in debt - otherwise known as have net cash - the situation is now reversed, with $922 million in cash and $4 billion in debt. (In other words, net debt.) Oh, and free cash flow for the first nine months was negative.

A big push of the Sears-owned Lands End brand into Sears stores. Didn't they already try that once?

My favorite: "We will not rely on a single grand strategy." How can they not have a grand strategy? How can any company, especially one trying to go through an extreme makeover, not have a grand strategy?. Sears can't be faulted for trying new ideas, but without a plan they appear haphazard. So, for example, Lampert hinted that the move to convert Kmarts into Sears Essentials isn't producing the desired results. One alternative, he said, is that to keep the Kmarts, but stock them with old-line Sears brands like Craftsman, DieHard and Kenmore while identifying them as "Sears Inside" at each Kmart.

Am I the only one thinking the obvious: If it didn't help putting Sears name on the outside, why should putting it inside, instead, make much of a difference?

Answer: It shouldn't, which is why all Lampert's horses and all Lampert's men (and women), aren't likely to put Kmart (or Sears, for that matter) together again.

Herb Greenberg is senior columnist for MarketWatch, based in San Diego. He does not own stocks (except for shares of his employer), and he does not sell stocks short or invest in hedge funds.

Sears puts 'Christmas' back in holiday promotions
By Sandra Jones – Crain’s Chicago Business Online
December 7, 2005

Retailer takes steps after American Family Assoc. campaign

Sears Holdings Corp. put up “Merry Christmas” signs in its stores and posted a Christmas greeting on its Web site the week after conservative groups launched a campaign targeting retailers that took the Christmas out of holiday shopping, according to the American Family Assoc.

The AFA, a Mississippi-based group leading the campaign, criticized Hoffman Estates-based Sears earlier this month for advertising a “holiday tree” in its newspaper circulars and avoiding the word Christmas in its store displays. Other retailers targeted include Target Corp., Walgreen Co., Office Max Inc., Lowes Cos. and Home Depot Inc.

The group launched a boycott against Target Corp. on Nov. 17 before the Thanksgiving weekend for what the AFA says is the Minneapolis-based discount retailer’s refusal to include the word Christmas in its in-store promotion and retail advertising. An AFA spokeswoman says the boycott will be called of if Target agrees to include Christmas in its displays next year.

A petition on the AFA Web site tells supporters, “By making an example of Target, you will send a loud message to all retailers banning Christmas because of their concern about offending a few non-Christians.”

Sears had no immediate comment.

Target says it doesn't have a policy of excluding the word "Christmas from its advertising.

It plans to include references to Christmas in some TV commercials, newspaper circulars and in-store displays in the next few weeks as part of its effort to "become more specific to the holiday that is approaching," according to a company statement.

"Christmas images and themes have been used in our advertising and marketing in the past and you will continue to see these images and themes in the future," Target says in the statement.

Sears to sell DieHard batteries at Kmart stores
REUTERS
December 7, 2005

CHICAGO (Reuters) - Sears Holdings Corp. on Wednesday said it would sell its DieHard auto batteries in nearly 1,400 Kmart stores as part of the retailer's strategy to add exclusive Sears merchandise to the Kmart chain.

The news comes one day after the No. 3 U.S. retailer said it was slowing down expansion of its Sears Essentials format, which sells both Kmart discount merchandise and Sears-exclusive brands like Kenmore appliances.

Sears Essentials was touted as a key reason for Kmart's purchase of Sears, Roebuck and Co. in March. But the chain has reported mixed results, so Sears Holdings said it was looking for other ways to sell Sears merchandise to Kmart customers.

The company had 50 Sears Essentials stores as of October 29, but now sells Kenmore appliances at 90 Kmart stores. The retailer is also selling a limited selection of its Craftsman tools at Kmart during the holiday season.

Sears Holdings said pricing on the DieHard batteries would be consistent at Kmart and Sears.

Off-mall idea still puzzling for Sears
By Susan Chandler – Staff Reporter – Chicago Tribune
December 7, 2005

Retailer says it will pull back from its Sears Essentials concept, the underperforming format that had been touted as the company's way to compete with Wal-Mart, Target and Kohl's

You can take Sears away from the shopping mall, but creating a stand-alone store that works is proving harder than expected.

Sears Holdings Corp. Chairman Edward Lampert on Tuesday announced a retreat from Sears Essentials, the retail format that was supposed to combine the best of Sears and Kmart and was once touted as the company's future.

The idea was to mix Sears' Kenmore appliances and DieHard batteries with everyday items such as snack foods and laundry detergent in former Kmart locations away from crowded shopping mall parking lots. Sears has opened 50 Sears Essentials stores around the country--including three in the Chicago area and one near Rockford--and previously had promised that 400 were coming in the next two years.

But the stores have fallen far short of expectations, and Lampert dropped hints Tuesday that such lofty numbers may never be reached.

Sears Essentials' sales are tracking about 30 percent below Sears' target, according to sources close to Sears, and are down about 15 percent from those racked up by the former Kmart stores at the same sites. Sears declined to confirm those figures.

Sears had hoped the stores would generate between $15 million and $20 million in annual sales, significantly less than an average Sears store, the sources said. But the proposition was attractive because the cost to convert the former Kmarts was low, and the process was much speedier than building new stores from the ground up.

Alan Lacy, the former CEO of Sears, embraced Sears Essentials as the fastest way to move Sears away from shopping malls and better compete with off-the-mall giants such as Wal-Mart, Target and Kohl's. Lacy's plans initially were adopted by Lampert when he proposed the acquisition of Sears by Kmart last year, a transaction that closed in March.

Sears Essentials hasn't worked out for a variety of reasons, retail experts say.

Kmart shoppers can't afford--or don't want to pay--$40 for a pair of brocade pants in Sears' Apostrophe line or even $20 for a Lands' End men's flannel shirt. Kmart's apparel was much cheaper. On top of that, their favorite Kmart brands, such as Martha Stewart's popular line of housewares and linens, are missing from Sears Essentials.

Many Sears shoppers may not know that Sears Essentials exists because many are tucked away in out-the-way sites, and Sears Essentials hasn't been doing much advertising.

"When Sears Essentials came in, you had a lot of morons running around screaming this was the greatest thing. I said it was a bowling alley with no customers," said Howard Davidowitz, the outspoken chairman of Davidowitz & Associates, a national retail consulting and investment banking firm in New York. "This business of going off-the-mall is much more complex than it looks."

In his quarterly letter to shareholders, Lampert distanced himself from the Sears Essentials strategy and said it was a mistake to view Essentials as "The strategic rationale behind the merger, or at least the critical barometer of the success of the combination." Lampert acknowledged the track record to date has not been gratifying.

"We will not simply throw money behind any concept, but instead will test, evaluate, refine and `prove the math,' so that the investment is justified before we make it," Lampert wrote.

In its 10-Q filing with the Securities and Exchange Commission, Sears said it has reduced the number of Kmarts that will be converted to Sears Essentials in 2006 but provided no specific numbers.

Lampert hinted that Plan B may be to simply insert Sears' hardline brands into Kmart stores, a strategy he referred to as "Sears Inside of Kmart."

"These offerings present the possibility of achieving increased customer satisfaction and increased profit without the customer education needed to convert to a Sears Essentials format," Lampert said. "I have always believed that Kmart customers had the inclination to buy more valuable products at Kmart if presented with the right value offerings."

Still, that leaves Lampert with the dilemma of what to do with Kmart, a chain that has been losing market share over the last few years at an astonishing rate. Many retail analysts believed that Sears Essentials was basically a strategy to liquidate Kmart. But if that's not the plan, Lampert will be faced with the redundant costs of running two separate retail chains for the long-term.

Profit down sharply

Lampert's letter accompanied Sears Holdings' third-quarter financial reports, which showed a modest decline in revenue and a steep fall-off in profits for the combined company.

In the quarter ended Oct. 29, Sears reported net income of $58 million, or 35 cents per diluted share, a 61 percent decline from pro forma earnings of $150 million, or 93 cents per diluted share, in the same period a year ago. (Pro forma results treat Sears and Kmart as if they had been combined at the beginning of 2004 for apples-to-apples comparison purposes.)

Revenue declined 5 percent, to $12.20 billion from $12.84 billion.

For the first nine months, Sears reported a profit of $141 million, or 87 cents per diluted share, down 52 percent from $295 million, or $1.84 per diluted share, in the year-earlier period. Revenue declined 2 percent, to $38.18 billion from $39.12 billion.

Sears and Kmart no longer issue the monthly sales reports that are forthcoming from other major retailers, but they do provide numbers on a quarterly basis. In the third quarter, sales at Sears domestic stores open at least a year declined 11 percent, led by disappointing apparel sales. Kmart same-store sales fell 2.8 percent, hurt by lackluster sales of home goods.

It was hardly an encouraging lead-in to the important holiday selling season, but Wall Street found reason to cheer anyway.

Investors bid up Sears shares $6.26, or more than 5 percent, to $122.97. They were encouraged because Sears easily surpassed analysts' earnings estimates of 28 cents per share and because its gross margin widened because of fewer price-oriented promotions.

"Expectations for them are very low," Arun Daniel, an analyst at ING Investment Management, told Bloomberg News. ING's $40 billion assets included about 293,000 Sears shares as of September. "Any improvement they can show on the merchandising side without compromising margins is a positive."

Sears Isn't Decking the Halls, But Investors Are Cheery
By Amy Merrick – Staff Reporter - The Wall Street Journal
December 7, 2005

For shoppers preparing for Christmas, Sears is touting sales on LCD TVs and digital cameras, and Kmart is offering big discounts on toys. But the retailers' chairman has been more Scrooge-like when it comes to spending on stores and employees.

While Wal-Mart Stores Inc. and other retailers gussy up their stores for the holiday sales season, Sears Holdings Corp. Chairman Edward S. Lampert has stuck to his strategy of cutting payrolls and other expenses, holding down capital spending and trying to reduce unprofitable sales since Kmart bought Sears early this year.

Critics have questioned Mr. Lampert's reluctance to put much money into his stores. But he is defiant. "We will not rely on a single grand strategy, but will respond to customer desires and market opportunities," he wrote yesterday in a letter filed with the Securities and Exchange Commission, his preferred method of public communication.

For their first holiday season as a combined entity, it is hard to say how Sears and Kmart are doing, because Mr. Lampert refuses to say. But if the company's fiscal third-quarter results are any indicator, Target Corp. and Wal-Mart aren't losing many sales to it.

Net income for the quarter ended Oct. 29 dropped 89%, to $58 million, or 35 cents a share, compared with $552 million, or $5.45 a share, in the prior-year period. In the year-ago quarter, Kmart recorded a gain of $4.88 a share from selling stores and assigning leases to Home Depot Inc. and Sears, Roebuck & Co., the predecessor company.

Results were better than investors had expected and the retailer's stock price rose sharply. In 4 p.m. Nasdaq trading, Sears shares rose $6.26, or 5.36%, to $122.97. But both Sears and Kmart continued weak sales trends. Total revenue more than doubled to $12.2 billion from $4.4 billion, because of the addition of Sears.

However, Kmart's same-store sales, or sales at stores open at least a year, decreased 2.8%, with the biggest declines in home products and electronics. Kmart's apparel business did have positive same-store sales. The brand's gross margin rate declined because of increased markdowns.

Sears's same-store sales dropped 10.8%, hurt by its effort to improve gross margins by trimming storewide discounting. Although it posted strong home-services sales and positive same-store sales in appliances, apparel sales were weaker than it expected. Its gross margin rate improved, but not as much as in the previous two quarters.

Both Sears and Kmart have holiday advertisements that are more stylish and appealing than last year's. Sears has put more emphasis on electronics, while Kmart has been pushing toys, offering a "buy one, get one 50% off sale" on many items this week. But at the same time, Mr. Lampert has resisted spending money to remodel older stores or wow shoppers with its latest format, Sears Essentials, stores that include popular Sears brands such as Kenmore and Craftsman, as well as products not sold in a typical Sears store, such as groceries.

Gary Balter, a Credit Suisse First Boston analyst, visited a Sears Essentials store recently and pronounced it "clean and well-merchandised, but boring." He wrote in a research note to investors, "Since Eddie does not return my calls, if he reads this, add some pizzazz please to the stores."

Mr. Lampert in yesterday's letter said that when the company can get higher returns by making an acquisition or buying back stock, rather than by increasing capital spending, it would be a mistake to put money into stores simply because it is expected practice. "For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their article -- not on the accuracy of their writing or of their predictions," he wrote.

Sears is slowing down a plan to convert Kmart stores to Sears Essentials. Initially, the company expected to convert about 400 Kmart stores to Sears Essentials by the end of 2007. But yesterday, Sears said the 50 stores it has converted so far "have achieved varying degrees of success," and it's backing off its expansion plan for the format next year.

Mr. Lampert wrote that the company is having success with introducing Sears brands such as Kenmore appliances and Craftsman tools into Kmart stores, without spending as much money on renovation. He said the performance of Sears Essentials is not a "critical barometer" of success but "one concept among many to be tested."

The strategy of scaling back capital spending has arguably undermined AutoZone Inc., where Mr. Lampert began investing in the late 1990s. Mr. Lampert holds a large stake in AutoZone through his hedge fund, ESL Investments Inc., and is a member of the retailer's board.

For years, the auto-parts retailer's stock soared. But with its cash flow slowing this year and AutoZone's same-store sales lagging behind those of its rivals, the company has decided to invest more in its business, taking a hit to its earnings. AutoZone is increasing its spending on improving stores and training employees.

An explanation for the ongoing problems with Sears's apparel business remains elusive. Last year, Sears said it didn't have enough trendy styles. Yesterday, Mr. Lampert wrote that "customers have not yet embraced the new, more fashion-forward brands."

While Sears has struggled to fix its clothing lines in recent years, competitors such as Kohl's Corp. and J.C. Penney Co. have made major improvements in their own apparel businesses and benefited from the disarray at Sears.

Some shoppers at a Sears store in downtown Chicago yesterday said the quality and style of its clothing have improved. "My mom used to shop at Sears," said Cherie Littles, a 45-year-old commercial banker.

She was standing near a rack with skirts, sweaters, slacks and dress shirts marked 30% to 50% off. "Now I shop at Sears. It's not your grandmother's store anymore," Ms. Littles said. She left empty-handed.

For Sears Shareholders, Silence Stirs Anxiety
By Riva D. Atlas – New York Times
December 7, 2005

FOR Edward S. Lampert, the hedge fund manager who is leading Sears, silence has not been golden, at least over the last few months.

Mr. Lampert, for the most part, has kept his distance from shareholders and analysts in the year since he engineered the merger of two struggling retailers: Sears and Kmart. Yesterday, in a somewhat defiant letter to investors, Mr. Lampert acknowledged that critics have stepped in to fill that vacuum.

"There is no shortage of commentators who are eager to make known their perspectives on our company and its prospects," he wrote in the letter, which accompanied a report on the company's third-quarter results.

"For a business executive, the key is to think about and understand one's business and its strategic and financial characteristics, make decisions based on that understanding, and have the confidence to stay with well-reasoned decisions even in the face of vocal doubters," Mr. Lampert wrote.

The low profile of Mr. Lampert, who is chairman of Sears, has contributed to sharp swings in Sears shares this year, even as he has said it will take time to turn around the struggling retailer.

Sears shares rose more than 60 percent earlier this year to a high of $163, with heavy buying from other hedge fund managers who are believers in Mr. Lampert, who runs one of the largest hedge fund firms, ESL Investments, with $10 billion under management.

But in the absence of much news from Mr. Lampert, that momentum reversed over the last three months, with Sears shares falling to $113 last month.

Yesterday, Sears rallied more than $6 a share, to nearly $123, despite declining sales at both Sears and Kmart for the quarter. Analysts said the increase reflected relief that earnings of 35 cents a share were 7 cents better than the average analyst estimate.

Even supporters of Mr. Lampert said they wished he would be more forthcoming.

"We would like it if management talked more," said Gary Balter, a retail analyst with Credit Suisse First Boston who has a target of $180 on the shares over the next 12 months. "It means there will be bigger swings in the stock on the day they report earnings."

Sears is closed-mouthed about basic information that most other companies readily provide, Mr. Balter said.

Last month, for example, Mr. Balter published a report with the sarcastic title "Great Mystery Is Revealed" after he finally discovered the date when Sears would report earnings.

Sears also does not provide monthly sales reports, in contrast to many retailers, analysts said.

In his shareholder letter yesterday, Mr. Lampert scoffed at "so-called experts" who have criticized the company's spending cuts, among other moves.

"I would caution you to approach much of what is written and said about us with an appropriate amount of healthy skepticism," he wrote.

Mr. Lampert acknowledged that reviving Sears will take time. "We are not yet even one year into the merger, and we have plenty of work ahead of us," he wrote.

A spokesman for Mr. Lampert said he would have no further comment.

Yesterday's results highlight that uphill battle. Sales were down 10.8 percent at Sears stores and 2.8 percent at Kmart stores compared with the quarter a year earlier.

"Given its merchandising woes, we don't think Sears Holdings is well positioned to compete in the highly promotional retail environment this holiday season," Kimberly Picciola, an analyst with Morningstar, wrote in a report yesterday. She said the stock was worth just $100 a share.

Among those hurt by Sears's short-term troubles are the numerous hedge fund managers who followed Mr. Lampert into the stock. These include Perry Capital, whose co-founder, Richard C. Perry, joined the Sears board in September.

Yesterday, several of those investors said they still had faith in Mr. Lampert. They argued that Sears should not be valued, like most retailers, based on short-term sales at its stores but rather on how Mr. Lampert manages its liquid assets, which will total $3 billion in cash and $4 billion in available credit by year-end.

"Sales are going to be weak for some time," said one hedge fund manager who spoke on the condition that he not be identified, citing his firm's policy about not speaking about holdings. "Eddie's running it for cash."

In October, Sears announced that it had completed most of a $500 million buyback of its shares and planned to purchase $500 million more. Earlier this year, it sold a minority interest in its Orchard Supply Hardware unit to Ares Management, a private equity firm, valuing that division over all at $750 million. It also recently sold the credit card division of its Canadian arm.

"He is focusing on making the best use of Sears's balance sheet," said Robert Jaffe, managing director of Force Capital, a hedge fund that owns Sears stock. "My biggest concern is that Eddie takes the company private," thus keeping all the future gains for Mr. Lampert's hedge fund and other insiders.

Sears chief seeks new strategy
By Sandra Guy – Business Reporter – Chicago Sun Times
December 7, 2005

Sears' sales fell for the second straight quarter, prompting Chairman Edward S. Lampert to concede Tuesday that Sears must improve its limp clothing lines and find a better strategy than its Sears Essentials stand-alone stores.

Sears Essentials, the off-mall stores that combine Sears' tools and appliances with Kmart's toys and pharmacy, were one of the key reasons Lampert engineered Kmart's $12.3 billion takeover of Sears on March 24.

The format represented the retailer's top priority to grow Sears off-mall, and better compete with Wal-Mart, Target and Kohl's. But the stores' results have been mixed, as the Sun-Times reported on Nov. 8.

The number of Sears Essentials stores to open in 2006 will be reduced, but Lampert declined to give specific numbers.

Lampert initially said the retailer would convert 100 Kmart stores to Sears Essentials this year, and would convert 400 Kmarts in three years. Only 50 Sears Essentials have opened nationwide, including three in Chicago's suburbs.
Lampert's new spin on Sears Essentials is that the concept is one of many Sears is testing.

"We will not simply throw money behind any concept, but instead will test, evaluate, refine and 'prove the math' so the investment is justified before we take it," Lampert wrote in a letter to shareholders that accompanied Sears' report on the third quarter ended Oct. 29 and made public Tuesday.

Sears will continue to sell its best-selling tool, appliance and battery brands -- Kenmore, Craftsman and DieHard -- in selected Kmart stores. Introducing Sears' labels in Kmart stores costs less money than marketing a new store, and it's easier for shoppers to grasp, Lampert said.

So far, 90 Kmart stores are selling home appliances and Sears' Kenmore brand, and the "Sears Inside" Kmart strategy will expand in the next few years. In April, a Kmart store in northwest suburban Norridge started selling Sears' Kenmore-branded appliances and Craftsman tools and lawn mowers.

Sears also had counted on an off-mall mega-store called Sears Grand to lure shoppers away from Wal-Mart, Target and Kohl's, but that strategy, too, has stalled. Sears has opened eight Sears Grand stores nationwide, but has not disclosed how many more it will build.

Lampert also conceded that Sears' efforts to sell more edgy, fashionable clothing has failed. Sears' top apparel merchant is the latest among many top executives to leave since the Kmart takeover, and Lampert is seeking a new chief merchandiser and head of apparel.

A Chicago-based analyst expressed skepticism Tuesday that Sears will turn things around for this holiday season, given the Hoffman Estates-based retailer's declining revenues, anemic profit margins and tight-fisted spending on store upkeep.

"We think Sears will continue to struggle for the remainder of the year," said Morningstar analyst Kim Picciola.

Against the background of that grim assessment, Lampert on Tuesday harped on analysts, the media and others who he says have misunderstood his strategies to bring Kmart out of bankruptcy and to turn around the second-biggest department store in the nation.

"For many commentators, analysts and reporters, their success is dependent on the excitement or controversy generated by their articles -- not on the accuracy of their writing or their predictions," Lampert wrote.

Lampert also defended his decision to put little money into Sears and Kmart stores, noting that there's no need to "plow money" into the stores when it's not generating superior returns. Capital spending declined to $153 million in the quarter, compared with a combined $319 million that Sears and Kmart spent a year earlier.

"Most observers and financial pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at JCPenney, missed the emergence of Google, and missed the resurrection of Kmart -- until it was abundantly clear that those companies had succeeded," Lampert said.

Poor clothing sales and markdowns hurt Sears' performance in the three months that ended Oct. 29. Sales at Sears Roebuck stores plunged 10.8 percent from a year ago.

Sears' only boost came from its push to get salespeople to sell extended warranties and service contracts on appliances.

Kmart's store sales dipped 2.8 percent from year-ago levels, hurt by slow sales of electronics and home merchandise, but Kmart's apparel sales increased from a year ago.

Sears' profit dropped to $58 million, or 35 cents a share, in the third quarter, from $552 million, or $5.45 a share, in the year-ago period. Last year's results included a gain of $807 million in selling Kmart stores. Adjusted to include Sears and Kmart, last year's profit would have been $150 million, or 93 cents a share, meaning that Sears' latest quarterly profit dropped 61 percent from a year earlier.

Despite the decline, the number exceeded analysts' forecast of 32 cents a share in profit by three cents. Analysts also were impressed that Sears is being more selective about its promotions and discounts.

Revenue dropped to $12.2 billion, below analysts' expectations of $12.9 billion, and down 4.7 percent from last year's $12.8 billion for Kmart and Sears.

There is hope in a Sears turnaround, Lampert said in pointing out new strategies much like his predecessor, Alan Lacy, who tried everything from central cash registers to buying Lands' End to try to reverse years of sales declines.

Lampert's bright spots included:

*New Lands' End's shops that highlight the preppy brand in 11 Sears stores are attracting shoppers.

*Sears has paid down $700 million in debt so far this fiscal year, and expects to have more than $3 billion in cash by year-end.

*Sears believes it will return value to shareholders by buying the 46.2 percent of Sears Canada it doesn't own, and by selling a portion of its Orchard Supply hardware chain.

*Sears CEO Aylwin Lewis is making unannounced store visits and running day-long "culture training" classes for the top 500 executives to urge them to step up their game.

Some investors and industry analysts are getting impatient for Lampert to sell Sears' real estate.

Howard Davidowitz, chairman of New York retail consulting and investment banking firm Davidowitz & Associates, said he wouldn't underestimate Lampert's ability to come up with a surprise.

For now, Davidowitz said, "[Lampert] is still rearranging the deck chairs on the Titanic."

Analyst Bill Dreher at Deutsche Bank Securities said Lampert's strategy "is a long-term drive for return on investment, and we believe Lampert is on the right track."

Investors looked at the bright side Tuesday, and boosted Sears' stock 5.36 percent, or $6.26, to $122.97. The stock traded at a 52-week high of $163 in July.

LETTER FROM THE CHAIRMAN
December 6, 2005

To Our Shareholders:

Sears Holdings is in the midst of the holiday season, when we have more customers in our stores than at any other time of the year. We are working hard to provide these customers with the great experience and great value that will strengthen our relationship with them.

We released our third quarter financial statements today and reported GAAP net income of $58 million and earnings per share of $0.35 for the quarter. Our reported results are affected by a number of items – namely the merger, the significant gains realized from the sale of real estate assets last year, and restructuring charges incurred this year. Therefore, to evaluate operating performance we use Pro Forma Adjusted EBITDA, which adjusts for the effects of the merger and excludes gains on the sale of assets and restructurings. (Please see our earnings release for a full reconciliation of Pro Forma Adjusted EBITDA to GAAP net income.)

For the quarter, we generated $426 million of Pro Forma Adjusted EBITDA, up from $396 million last year, as summarized below:

13 Weeks Ended
Pro Forma Adjusted EBITDA			% to Revenues
	Oct. 29 '05	Oct. 27 '04	Oct. 29 '05	Oct. 27 '04
				Pro Forma
Domestic Operations	$ 367	$ 320	3.3 %	2.7 %
Sears Canada	59	$ 76	4.8%	6.6%
Total Pro Forma Adjusted EBITDA	$ 426	$ 396	3.5%	3.1%

39 Weeks Ended
Pro Forma Adjusted EBITDA			% to Revenues
	Oct. 29 '05	Oct. 27 '04	Oct. 29 '05	Oct. 27 '04
			Pro Forma	Pro Forma
Domestic Operations	$ 1,319	$1,096	3.8 %	3.1 %
Sears Canada	162	187	4.6%	5.7%
Total Pro Forma Adjusted EBITDA	$1,481	$1,283	3.9%	3.3%

While we have made some progress in our operating performance, we need to continue making the changes necessary to drive even more significant improvement.

In order to provide you with additional clarity with respect to our fourth quarter performance relative to last year, we are making available today (in our Form 8-K) the unaudited pro forma financial information for Kmart and Sears for the 13-week period and fiscal year ended January 26, 2005, prepared as though the companies had been combined as of the beginning of fiscal 2004.

We enter the holiday season in strong financial condition. From the beginning of this fiscal year through the end of the third quarter, domestically we have paid down $700 million in debt, contributed $270 million into our pension plans, repurchased $434 million of our stock, and funded the $1.4 billion seasonal build in our inventories for the holiday selling season. By fiscal year-end, without giving effect to any further share repurchase or acquisition activity, we expect that we will have over $3 billion in cash and we will not have borrowed at all under our $4 billion credit facility (other than for letters of credit). We believe these resources give us ample ability to invest in our business and pursue attractive investment opportunities.

As I have described in previous letters to you, we are a learning company that analyzes, tests, and adapts as appropriate. While we are clear on our vision, we recognize the importance of being flexible and quick to change if the situation warrants. We will not rely on a single grand strategy, but will respond to customer desires and market opportunities.

Transactions
Three significant financial transactions that have been announced or closed since my last letter exemplify this approach.

First, on November 15, 2005, Sears Canada, of which we own 53.8% and which is consolidated in our results, announced the completion of the sale of its credit card business to JPMorgan Chase, from which it realized after-tax proceeds of nearly $2 billion. Last Friday, the Board of Sears Canada declared a C$18.64 per share distribution to all its shareholders. As a result, Sears Holdings will receive approximately US$820 million in proceeds (after-tax) in mid-December. The Board of Directors of Sears Canada, chaired by Alan Lacy (our Vice Chairman at Sears Holdings), decided that greater value could be achieved for the Sears Canada shareholders by selling the credit card assets to a company that is an expert in that business, while maintaining and developing the important customer relationship elements of the credit card offering. As a result, Sears Canada received an attractive price for the assets and established a strong alliance with JPMorgan Chase.

Second, we announced yesterday our intention to make an offer to acquire all of the outstanding common shares of Sears Canada that we do not already own, at a price of C$16.86 per common share in cash, post-distribution. The offer represents an 8.7% premium over Friday’s closing price and a 22.2% premium over the average closing price since August 31, 2005, the date that Sears Canada announced it had entered into the agreement to sell its credit card business (in each case, adjusted for the C$18.64 distribution), and is more than two times the closing price at the beginning of the year. Our proposal represents an attractive opportunity for shareholders to achieve a premium and liquidity after a year-long increase in the stock price.

We recognize that Sears Canada, now dependent on its retail business, faces an increasingly competitive retail environment in Canada, including aggressive Canadian retailers as well as expanding US retailers like Wal-Mart and Home Depot. We believe that Sears Canada will best be able to compete if it is owned 100% by Sears Holdings. The benefits will include an ability to reduce costs and counteract some of the scale advantages of the US competitors as well as the ability to focus on long-term challenges rather than having to meet short-term expectations as a public company.

We do not assume that the improvements will be easy. Far from it. Instead, we believe that the benefits that will come from integration will help Sears Canada in its struggle to succeed. Our offer to acquire 100% of the shares is, from our perspective, a prudent investment to preserve the value of our existing ownership and shared brands.

The third transaction relates to Orchard Supply Hardware (“Orchard”). On November 23, we closed the sale of 19.9% of Orchard to the private equity fund of Ares Management LLC at an enterprise valuation of approximately $750 million. We also sold a three-year option to the private equity fund of Ares to purchase additional shares that currently represent a 30.2% ownership interest in Orchard, at a price that values the company at approximately $900 million based on the current capital structure. This structure allows us to recognize immediate value for Orchard, a chain of hardware stores based in California that is not central to our core business, while participating in the additional value that we believe the management team can create in partnership with Ares’ private equity fund, an experienced equity investor with significant “skin in the game.” We hope that if Ares exercises its option, the value of Orchard is then substantially above the exercise price, because the ownership interest we would continue to own after exercise of the option would allow us to share in the additional value creation.
In structuring the transaction, we anticipated the possibility that a weak bond market could burden Orchard with high interest costs throughout the life of any financing. Therefore, Sears Holdings agreed to accept a note, with an initial 10% interest rate that increases over time, pre-payable without penalty, that allows Orchard to obtain permanent financing on terms that reflect its future cash flow and when conditions in the bond market are conducive to such a financing. Both the structure of the acquisition by Ares and the note show our ability to adapt to take advantage of the opportunities that are presented to us: as we previously announced, we originally solicited interest in a sale of 100% of Orchard, but we developed this structure, which allows us to share in additional value creation, when we concluded that potential buyers did not recognize what we believe to be the true value of the business.

People
Consistent with our commitment to drive cultural change, we announced several important management changes and additions in the last quarter. I have been very impressed with the quality of the associates throughout Sears Holdings and with their desire to succeed. I have been focused on ensuring that we provide the right leadership for them. I would prefer to be able to mention all of the internal promotions and changes, because the team we are putting together is outstanding, but within the confines of this letter I will limit myself to a handful.
We named David McCreight as President of Lands’ End. David has wholeheartedly embraced our culture of teamwork, learning, and customer focus. We are thrilled to have begun to explore the opportunities for Lands’ End in Sears stores. We expect that this year will represent the second-best year in the history of Lands’ End in terms of EBITDA performance.

We created a single Apparel Design organization based in New York City under the leadership of Lisa Schultz. Lisa not only is a talented designer with keen insight concerning our strategic issues, but also excels at attracting extremely talented people to her team. I appreciate the buzz and excitement that I experience every time I visit our New York design offices.

Yesterday, we announced that we were combining our Sears and Kmart merchandising efforts. Peter Whitsett, currently Senior Vice President and Kmart Merchandising Officer, will lead general merchandising as Senior Vice President, Merchandising for Sears Holdings and will continue to lead Kmart’s merchandising efforts. Dan Laughlin, currently Senior Vice President/GMM, Home for Sears, Roebuck, will become Senior Vice President, Merchandising for Sears Holdings and will oversee Sears Holdings’ overall hardlines business as well as Sears, Roebuck’s merchandising. Peter and Dan embody the customer-focused leadership that we believe Sears Holdings needs to have in this highly competitive retail environment. This structure will enable us to work more effectively with vendors as one company.

I am also very pleased that we could attract Maureen McGuire, Executive Vice President and Sears Holdings Chief Marketing Officer, and Corey Yulinsky, Sears Holdings Executive Vice President, Customer Strategy and Insight, two very talented and experienced executives, to our leadership team. While Maureen and Corey bring us a variety of skills, I most value the intellect and thought leadership that they provide.

Aylwin Lewis, our President and Chief Executive Officer, in day-long culture training classes that he is holding for the top 500 executives, stresses that we are committed to leaders who build teams and coach for performance. I continue to look for talented individuals who want to embrace the challenges that we have before us. We are looking to field the “best available athletes” and are adapting our structure to give them the opportunity to make an impact. We will not be bound by organization charts, office size, or titles – none of which our customers care about. We are focused on achieving our goals and building long-term customer relationships.

Integration
We continue to make progress integrating Sears and Kmart. On the day the merger closed, we began to integrate the support functions: Supply Chain, IT, Finance, Legal, and HR. While we will continue to advertise both Sears and Kmart, we have combined marketing under Maureen, who is creating the appropriate shared-services model. As I mentioned above, we are also combining our apparel design (under Lisa) and fostering closer collaboration in our merchant organization (under Dan and Peter). We expect to operate the stores separately for the foreseeable future, and we are evaluating alternatives to jointly support the stores. We are rapidly developing an integrated approach to our customers.

As I said in my last letter, we have completed the painful but necessary reduction of support associates that will allow us to achieve the cost savings and leaner organization needed to compete. The relocation of former Kmart associates to Hoffman Estates is nearing completion. Some associates will remain in Troy permanently, either to support our Troy data center and related functions, or as an accommodation to individuals who are unable to move to Hoffman Estates but can effectively contribute from Troy. Let me pause to thank the Troy associates, some of whom are aware that they will not remain with the Company for the long term. We have been impressed by their contributions and their professionalism.
Organizationally, the table is being set. Culturally, we are coming together. We are shedding our separate Kmart and Sears corporate identities and are becoming Sears Holdings. I am pleased with our progress in this area, and applaud Aylwin for his tireless work in forging a new winning culture.

One aspect of integration I would like to highlight is our growing ability to offer Sears-owned brands in Kmart locations. One manifestation of that offering is Sears Essentials. At the time of the merger, we discussed the opportunity that Sears Essentials represents as one way to provide customers with the opportunity to purchase Sears products and services outside of Sears’ mall-based stores. Some interpreted that to mean that Sears Essentials was the strategic rationale behind the merger, or at least the critical barometer of the success of the combination. That is not how we look at Sears Essentials. We always intended Sears Essentials to be one concept among many to be tested and to learn from, and since the merger we have opened 50 Sears Essentials stores, which have achieved various degrees of success to date. We believe that Sears Essentials can be a very successful and profitable retail concept – especially under the able leadership of Julie Younglove-Webb – and we are evaluating the early results and testing changes. We will not simply throw money behind any concept, but instead will test, evaluate, refine, and “prove the math” so that the investment is justified before we make it.

Furthermore, we will evaluate the Sears Essentials opportunity against other alternatives to achieve the same goal of offering Sears-owned brands and services in existing Kmart real estate. One alternative we are implementing is retaining the locations as Kmart stores and adding items like Kenmore and other appliances, Craftsman tools, and DieHard batteries into the product mix. These brands, together with the Sears credit card and home services offerings, allow us to put “Sears Inside” of Kmart. These offerings present the possibility of achieving increased customer satisfaction and increased profit without the customer education needed to convert to a Sears Essentials format. I have always believed that Kmart customers had the inclination to buy more valuable products at Kmart if presented with the right value offerings.

While the results of “Sears Inside” are preliminary, we are seeing good sales of the Sears products in the Kmart stores. In addition, our remodeled Kmart stores have demonstrated a gross profit lift compared to the rest of the chain, particularly where the remodels have included Sears products. As a flexible, learning company, we look forward to seeing the results of these and possibly other formulas for using Kmart locations as we seek to best serve our customers.
We have also been pleased with our customers’ response to the more complete Lands’ End apparel and home products presented in Sears stores, in a store-within-a-store format. Again, I must caution you that these are early results, but our customers are embracing the quality and value represented by Lands’ End. Our store associates, who we value both as employees and as customers, have been excited by the newly displayed Lands’ End product. We have provided customers with the ability to order from in-store – either online or by phone – Lands’ End product that would not otherwise be available in the store. Even though Sears has owned Lands’ End since 2002, some of our customers apparently did not realize that it was available in the stores. Lands’ End is a great brand and offers great value. We need to make sure we allow the customers who visit our stores to experience this world class brand and associated service experience. I credit the whole Lands’ End team for their contagious enthusiasm in bringing the Lands’ End experience into our Sears stores. This is only the beginning, but we could not be more pleased with the initial results.

Other
Being a learning company also means appreciating frankness and being willing to recognize where our ideas have not played out as expected – so that we can refine and change course. This quarter’s performance in Sears apparel is one example of this. Our overall apparel results in Sears stores this quarter were disappointing.

Sears attempted to move its apparel offering to be more “fashion forward,” relying on the introduction of new proprietary brands. Customers have not yet embraced the new, more fashion-forward brands. In addition, an unseasonably cool Spring and warm Fall depressed apparel sales throughout the industry. Fortunately, Sears ordered substantially less apparel this year than last; but the lower sales and required markdowns have hampered Sears’ overall performance. We are currently adjusting our apparel strategy to be more in tune with customer demand, and we expect those improvements to be in place beginning in Spring 2006.

I want to close with a broad observation. I am an avid reader of books, newspapers, and magazines, and in the course of my reading over the last year, I have noticed that there is a significant degree of interest in the press about Sears Holdings. This is not surprising: as a well-known, high-profile American company, Sears will always attract considerable attention. There is no shortage of commentators who are eager to make known their perspectives on our company and its prospects. Some of these do so “on the record”; others cloak themselves in anonymity or do not disclose the true motives that are driving their comments.

Although all the attention Sears Holdings is receiving is, in some fashion, flattering, I would caution you to approach much of what is written and said about us with an appropriate amount of healthy skepticism. This is particularly so with respect to the loudest views, the most widely held views, or the so-called “expert” views. For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their articles – not on the accuracy of their writing or of their predictions.

As a long-term value investor, I am constantly on the lookout for situations in which the conventional wisdom of the commentators and “experts” is incomplete. There are many such examples, and those are the situations that produce real opportunities. I will not dwell here on the many instances where the “conventional wisdom” – for example, the view that Kmart would neither emerge from bankruptcy nor survive its first Christmas as a new company in 2003 – has turned out to be only “conventional” and not at all “wisdom.” I will simply say that I am pleased with the progress we are making at Sears Holdings. We are hiring great people, creating a winning culture, and focusing relentlessly on profitability. We have accomplished much in eight months and have a long way to go. We will continue to get better, which also entails recognizing the mistakes we make and correcting them.

One subject where the conventional wisdom has been much on display recently is the issue of capital expenditures. As I made clear in my very first letter to shareholders, we do not subscribe to the view (seemingly widely held) that more is better, or that there is a certain amount that must be spent on cap ex every year. The question we ask at Sears (and I believe every business should ask) is: “What is the most productive way to allocate the capital that we have on hand and the cash flow the company generates?” In some cases, spending money on the construction of new stores or the updating of existing stores produces real bottom-line benefits. In those cases, increasing capital expenditures is an attractive option. But if the analysis shows that allocating capital in some other way – for example, on acquisitions or stock repurchases – will generate superior returns, then it would be a mistake to plow money into capital expenditures merely because that is the “accepted practice” or “expected.” (That approach – of uncritically following accepted or prevailing practice – is what led many telecom companies astray as they tried to “keep up” with WorldCom’s expenditure levels.)
A meaningful analysis of the retailing industry would show the following. Between Sears and Kmart stores, we have approximately 2,300 large-format domestic stores – which is considerably more than Target (around 1,400), JC Penney (a little over 1,000), and Kohl’s (fewer than 1,000). The issue for Sears Holdings is therefore not one of building more stores, but rather one of making our existing stores more productive and relevant to our customers. Part of the solution obviously includes capital investments in existing stores. But that is not the complete formula, and, in any event, spending on existing stores should be expected to improve the operating performance of these stores.

For a reader, the key is to read broadly, but to be appropriately skeptical of the so-called experts. For a business executive, the key is to think about and understand one’s business and its strategic and financial characteristics, make decisions based on that understanding, and have the confidence to stay with well-reasoned decisions even in the face of vocal doubters. Most observers and financial pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at JC Penney, missed the emergence of Google, and missed the resurrection of Kmart – until it was abundantly clear that those companies had succeeded. In all those cases and in many others, imposing the right disciplines; adjusting the cost structure; creating an atmosphere of teamwork and collaboration; and being willing to learn while having the confidence to stay the course in the face of skepticism – were the necessary preconditions of success. We are not yet even one year into the merger, and we have plenty of work ahead of us, but that is the culture that we are committed to building at Sears Holdings.

I wish you and your families all the best this holiday season and for the coming year.

Respectfully,
Edward S. Lampert, Chairman

Sears Records Sharp Drop in Profit
By Amy Merrick – Staff Reporter – The Wall Street Journall Online
December 6, 2005

Sears Holdings Corp. said net income for its fiscal third quarter dropped sharply because of a big year-ago gain from asset sales. But results were better than investors had been expecting, and its shares rose sharply in early trading.

Kmart acquired Sears in March to form Sears Holdings, which is based in Hoffman Estates, Ill. The results from last year's fiscal third quarter are only for Kmart.

Operating income fell 87%, to $119 million from $909 million, mainly because of the asset sales in the year-ago quarter. Also, the quarter just ended included $59 million in restructuring charges, comprising $53 million for Sears Canada and $6 million for integrating Kmart and Sears.

Both brands continued to have weak sales trends. Total revenue more than doubled, to $12.2 billion from $4.43 billion, because of the addition of Sears. However, at Kmart, same-store sales, which are sales at stores open at least a year, decreased 2.8%, with declines across a broad range of categories, including home products and electronics. The company said Kmart's apparel business did have positive same-store sales during the quarter.

Sears, meanwhile, said its total sales declined 6.3% during the quarter, and its same-store sales dropped 11%. Although the retailer posted strong home-services sales, its apparel sales were weaker than it expected. Its sales also were hurt by an effort to improve gross margins by cutting back on discounting.

In a letter to shareholders, Chairman Edward S. Lampert told investors to be skeptical of outsiders' opinions about the company. In particular, he said, pundits are wrong to question whether Sears spends enough money on its stores. Mr. Lampert said that whenever the retailer can get higher returns by making an acquisition or buying back stock than by increasing capital expenditures, it would be a mistake to put money into the stores simply because it is expected practice.

"For many commentators, analysts, and reporters, their success is dependent on the excitement or controversy generated by their articles -- not on the accuracy of their writing or of their predictions," Mr. Lampert wrote.

Sears Holdings Reports Third-Quarter Net of $58 Million
Bloomberg
December 6, 2005

Dec. 6 (Bloomberg) -- Sears Holdings Corp., the largest U.S. department-store operator, reported third-quarter net income of $58 million.

Earnings were 35 cents per share, the company said in a regulatory filing today. Revenue rose to $12.2 billion at the Hoffman Estates, Illinois-based retailer.

Chairman Edward Lampert is remodeling stores, adding private brands and taking control of merchandising to revive sales at Sears, Roebuck & Co. and Kmart. Comparable sales at both retailers have declined for more than three years amid competition from Federated Department Stores Inc. and J.C. Penney Co.

“This is a work in progress and a company that's transitioning,'' said Scott Rothbort, president of Lakeview Asset Management in Millburn, New Jersey, with assets including Sears Holdings shares. ``Don't expect instant gratification here.'' Rothbort declined to disclose Lakeview's assets under management.

Bear Stearns Cos. analyst Christine Augustine, top-ranked for accuracy by StarMine Professional, estimates profit of 27 cents a share for the period. Augustine cut her estimate by 4 cents on Nov. 28 as she lowered same-store sales forecasts for the company.

Augustine forecast a comparable sales decline of 9 percent for Sears, Roebuck after earlier estimating a drop of 5 percent. She expects a 2 percent decline for Kmart after earlier estimating sales would be little changed.

Profit Forecast

Three analysts surveyed by Thomson Financial forecast profit of 28 cents a share. Thomson declined to disclose the parameters for the estimates in its survey.

Sears Holdings yesterday offered $719 million (C$835 million) to buy the publicly traded shares in its Canadian unit, giving Lampert more control over the struggling retailer.

Shares of Sears fell $2.79, or 2.3 percent, to $116.71 in Nasdaq Stock Exchange composite trading yesterday. The stock has risen 18 percent this year through yesterday. Shares of Federated, the second-largest U.S. department store chain, have gained 13 percent. J.C. Penney shares have risen 30 percent.

In September, Lampert, who engineered Kmart Holding Corp.'s $12.3 billion purchase of Sears, Roebuck, said he was taking a greater role in day-to-day operations to participate “more directly in the renewal of the company'' and to make Sears “more responsive to customers.''

Lampert ousted Chief Executive Officer Alan Lacy, naming him vice chairman, and installed then-Kmart CEO Aylwin Lewis in his place.

Skeptical on Personnel

“I have been and continue to be skeptical that they have the right people in place to drive performance there,'' said Todd Jones, an analyst at PNC Advisors, with $50 billion in assets. PNC doesn't own Sears shares.

Lampert is converting more than 400 former Kmart stores to Sears Essentials, a new format featuring centralized cash registers, wider aisles and more fashionable clothing, to try to boost sluggish sales.

The company is opening Sears Essentials and Sears Grand stores, which sell food and groceries, in affluent areas to gain shoppers from retailers including Target Corp., the second- largest U.S. discount chain.

Sears's appliance business is being challenged by competitors including Home Depot Inc. and Lowe's Cos., said PNC's Jones.

``Home Depot and Lowe's and even to an extent Best Buy have done a good job in introducing new product,'' said Jones, who is based in Philadelphia.

Losing Share

In a report last month, Credit Suisse First Boston analyst Gary Balter estimated that Sears lost 4 percent of market share in appliances during the third quarter to competitors including Home Depot, the world's largest home-improvement retailer.

Balter also said Sears's remodeled stores aren't catching on with shoppers.

“Discussions with store employees were quite clear that the customers have not yet accepted the merchandising combination,'' the New York-based analyst wrote last month. “The store we visited was clean and well merchandised but boring.'' He rates the shares “outperform.''

The company yesterday centralized its merchandising staff and said it's looking for a “chief merchant'' and an executive to lead the apparel business.

Sears Holdings named Dan Laughlin senior vice president of merchandising for appliances, electronics and tools. Peter Whitsett will lead general merchandising, including food and pharmacy.

Executive Changes

The company earlier this year appointed a Kmart executive to oversee the Sears Essentials and Sears Grand stores and named a separate head of the company's 16-store Great Indoors home decorating and remodeling chain.

Lampert, a former risk arbitrage executive at Goldman Sachs Group Inc., heads ESL Investments Inc., a hedge fund company in Greenwich, Connecticut. He has focused on buying undervalued companies and has said he's a student of billionaire Warren Buffett's investment philosophy of buying assets shunned by others.

During the quarter, Sears announced that private equity fund Ares Management LLC would buy a 20 percent stake in its 84-store Orchard Supply hardware chain for $58.7 million. Sears received a $450 million dividend from the sale, completed last month.

Ares, based in Los Angeles, will have a three-year option to purchase another 30.2 percent of the company for $126.8 million. Sears, Roebuck bought Orchard Supply in 1996 for about $415 million.

Sears Holdings Bid For Rest Of Sears Canada Seen Too Low
By Andy Georgiades – Dow Jones Newswires - Wall Street Journal Online
December 6, 2005

TORONTO -- Retailer Sears Holdings Corp.'s (SHLD) bid to buy the rest of its Sears Canada Inc. (SCC.T) subsidiary is too low, some analysts say.

As reported Monday, the U.S. parent and owner of 53.8% of Sears Canada is proposing to buy the balance of shares it doesn't own for C$16.86 a share. Combined with a pending C$18.64 distribution from the credit card sale, shareholder stand to get a total of C$35.50 a share.

However, investors are betting there will be a higher bid. In Toronto Tuesday, shares of Sears Canada are up 6 Canadian cents, or 0.2%, to C$36.41 on about 1.0 million shares.

In a research note, Keith Howlett, analyst at Desjardins Securities, said Sears Holdings initial offer won't cut it.

"There are a number of attractive alternatives open to Sears Canada in light of the strong real estate market and the revival of the income trust market. These alternatives are all within management's control," he wrote, adding that a merger with struggling department store operator Hudson's Bay Co. (HBC.T) is more "speculative."

Howlett said his previous target for the stock, minus the credit card business, was C$16.36 a share, but that didn't include the potential sale of underlying real estate, the spinning out of the travel or trucking businesses, the conversion of the retail business into an income trust, or a merger with Hudson's Bay.

"We think that some or all of these actions will be taken by Sears Holdings if it is successful in buying out the minority interest," he said, and called a bid of C$22.36 a share "more appropriate."

Howlett estimates Sears Canada has C$5 a share in underlying real estate value, and highlighted a recent sale-leaseback transaction of two Canadian Tire Corp. (CTR.NV.T) distribution centers as evidence real estate values are soaring.

"Sears Canada has significant real estate holdings, including its head office in downtown Toronto, distribution centers and stores," he wrote, adding that the bid is below recent industry transactions in terms of enterprise value/EBITDA.

He upgraded the stock to buy (speculative) from hold, and raised the target price to C$41 from C$35.

Research Capital analyst David Brodie called the offer from Sears Holdings "inadequate," noting that his post-distribution target price is C$16.90, which didn't consider a takeover premium.

"There is certainly no premium; indeed, there appears to be a discount in the price (Sears Holdings) is proposing to pay compared to (Sears) Canada's target price as a going concern," Brodie wrote.

Sears Canada is forming an indpendent committee to review the bid, and Brodie said he expects it to "extract some additional value" before recommending that minority shareholders accept the offer. He kept his hold rating.

Brodie doesn't own Sears Canada stock, nor does his firm have an investment-banking relationship with the company. It wasn't immediately clear if Howlett owns Sears Canada stock, nor if his firm has had an investment-banking relationship with the company.

Sears' Lampert details strategy
By Emily Kaiser - Reuters
December 6, 2005

CHICAGO (Reuters) - Sears Holdings Corp. Chairman Edward Lampert on Tuesday detailed a new strategy to add Sears merchandise to Kmart stores and blasted "so-called experts" who criticized the company's capital spending cuts.

In his quarterly letter to shareholders, which was considerably longer than his last one and at times more sternly worded, Lampert said the company never intended its Sears Essentials store format to be the only way of combining Kmart and Sears merchandise.

Sears does not give financial forecasts or hold conference calls, so the quarterly letters are among the few opportunities for investors to hear Lampert's philosophies.

The retailer said earlier on Tuesday that the Sears Essentials format, which combines Kmart's discount merchandise with Sears staples such as appliances, had mixed results and it was scaling back 2006 expansion plans.

"We always intended Sears Essentials to be one concept among many to be tested and to learn from," Lampert wrote. "We will not simply throw money behind any concept, but instead will test, evaluate, refine, and 'prove the math' so that the investment is justified before we make it."

Sears Holdings touted Sears Essentials among the reasons for Kmart's purchase of Sears, Roebuck and Co. in March.

Lampert said the company still sees value in adding Sears merchandise to Kmart stores, but was now simply adding brands, including Kenmore appliances and Craftsman tools, to existing Kmart stores, a strategy the company called "Sears Inside."

The idea is that the retailer won't need to spend time and money explaining a new format to consumers. Instead, they can simply remodel Kmart stores to add Sears brands.

"While the results of 'Sears Inside' are preliminary, we are seeing good sales of the Sears products in the Kmart stores," Lampert wrote.

Lampert also explained why Sears clothing sales were so poor in the latest quarter, when the chain reported a 10.8 percent decline in comparable-store sales.

"Sears attempted to move its apparel offering to be more 'fashion forward,' relying on the introduction of new proprietary brands," he wrote. "Customers have not yet embraced the new, more fashion-forward brands."

Overall, Sears Holdings reported a steep decline in quarterly profit from a year earlier, when it recorded big gains from selling Kmart stores.

Lampert said the company was in strong financial shape going into the holiday shopping season and expected to end the fiscal year with more than $3 billion in cash, excluding any share repurchases or acquisitions.

He saved his toughest words for Wall Street and the media.

Lampert said readers should be "appropriately skeptical of the so-called experts" and singled out those who questioned the wisdom of cutting back on capital spending.

Capital spending fell to $153 million in the latest quarter from the combined $319 million that Sears and Kmart spent a year earlier.

"We do not subscribe to the view (seemingly widely held) that more is better, or that there is a certain amount that must be spent on cap ex every year," Lampert wrote.

He said business executives need to have the confidence to stick with "well-reasoned decisions, even in the face of vocal doubters.

"Most observers and financial pundits missed the turnaround at IBM, missed the turnaround at American Express, missed the turnaround at J.C. Penney, missed the emergence of Google, and missed the resurrection of Kmart -- until it was abundantly clear that those companies had succeeded," he said.

Sears Holdings Profit Down, Scales Back Sears Essentials
By Emily Kaiser – Reuters
December 6, 2005

CHICAGO (Reuters) - Sears Holdings Corp. <SHLD.O>, the retailer headed by financier Edward Lampert, on Tuesday posted lower quarterly profit on sluggish sales and said it is scaling back plans for its Sears Essentials format, a key reason behind Kmart's purchase of Sears.

The third-largest U.S. retailer with some 3,500 stores said comparable-store sales fell at both Kmart and Sears, as Kmart reported weak demand for electronics and home products, while Sears continued to struggle with poor clothing sales.

Net income dropped to $58 million, or 35 cents per share, in the third quarter ended October 29, from $552 million, or $5.45 per share, a year earlier. Last year's results included a gain of $807 million from selling stores.

Analysts, on average, expected 32 cents per share, according to Reuters Estimates. The company does not provide financial forecasts.

Shares rose $6.93, or 6 percent, to $123.64 in premarket trading on the Inet electronic system.

When adjusted to reflect results from both Sears and Kmart, last year's profit was $150 million, or 93 cents per share.

The company reported mixed results from its Sears Essentials stores, which combine Kmart's discount merchandise with Sears staples such as appliances. The retailer, which had 50 Sears Essentials stores at October 29, said it was scaling back 2006 plans to convert Kmart stores into the new format.

The company said it was still looking for ways to profit from selling Sears brands, particularly appliances, to Kmart customers, but not necessarily through the Sears Essentials format.

LAMPERT TOUCH

Lampert, the hedge fund manager who brought Kmart out of bankruptcy in 2003 and orchestrated the takeover of Sears, has been cutting costs and trying to better position the retailer to compete in a cutthroat environment.

The side effect has been slumping sales, as it eliminated some profit-draining promotions and cut back on store investment. Capital spending fell to $153 million in the last quarter from the combined $319 million that Sears and Kmart spent a year earlier.

Cash and cash equivalents dropped to more than $900 million from more than $2 billion at the end of the second quarter. Retailers typically ramp up spending in the third quarter to prepare for the holiday shopping season.

Many investors bought Sears Holdings stock, hoping to cash in on Lampert's hedge fund prowess. He was the industry's highest paid manager last year, taking home $1 billion, according to Institutional Investor's Alpha magazine.

Lampert sold off big chunks of Kmart's real estate last year, sending the stock price up sharply, and many shareholders hoped for the same at Sears. But asset sales in the latest quarter amounted to just $15 million.

His first major move at Sears Holdings came Monday, when he offered $718.5 million to buy the rest of Sears Canada Inc. <SCC.TO>, surprising some analysts who had expected him to sell the existing 53.8 percent stake instead.

SOFTER SIDE OF SEARS

Quarterly revenue jumped to $12.2 billion from the $4.4 billion, largely because last year's results do not include sales from Sears. Adjusted revenue was $12.8 billion in last year's third quarter.

Comparable-store sales fell 10.8 percent at its U.S. Sears stores, and were down 2.8 percent at Kmart.

Sears has had little success with its apparel offerings, and acknowledged "weaker than expected customer response to fashion offerings" in the latest period.

In recent years, the retailer has added brands including Lands' End, Apostrophe and Structure in hopes of luring customers who shop at Sears for appliances or tools but buy clothing elsewhere.

By contrast, Kmart's clothing business outperformed other categories, with sales in that category up on a comparable-store basis.

Lampert has put himself in charge of merchandising and marketing, and hired a new head of apparel design and chief marketing officer in the past two months.

Some on Wall Street remain skeptical whether Sears can transform two downtrodden chains into a successful retailer in a fiercely competitive sector.

The stock is down some 24 percent over the last six months, while the Standard & Poor's retail index is up 7.7 percent.

Sears Holdings bids $835.4M Cdn for rest of Sears Canada
By Rita Trichur and James Dalziel – The Canadian Press
December 6, 2005

TORONTO (CP) - Sears Canada Inc. will likely suffer more layoffs and a possible divestiture of its real-estate assets if its American parent succeeds in taking the ailing Canadian subsidiary private, retail analysts said.

That speculation gained legs Monday after Illinois-based Sears Holdings Corp. surprised some industry observers by offering to pay $835.4 million Cdn to scoop up the 46.2 per cent of Sears Canada it doesn't already own. Analysts had originally expected Sears Holdings to unload its 54 per cent stake in the Toronto-based department store chain but surmised Monday's announcement would set the stage for such a sale down the road.

"Consolidation is definitely what's happening in the retail sector," said Wendy Evans, president of Evans & Co. Consultants Inc.

However, she added, Sears Holdings' first order of business will be to cut costs: "I would certainly think that they would look to downsizing the head office."

Earlier this fall, Sears Canada announced it would cut 1,200 jobs to improve productivity and help achieve annualized savings of about $100 million.

With this latest proposal, Dominion Bond Rating Service analyst John Chamberlain said more layoffs remain a "real possibility" but also raised the spectre of a real-estate divestiture. But with many of Sears Canada's holdings tied up in joint ventures, he said it is not clear what those assets would be worth.

DBRS, meanwhile, placed the ratings of Sears Canada Inc. "under review with developing Implications."

"Sears Holdings has not articulated how the elimination of the minority shareholders will impact the management of the business, so DBRS is unable to fully assess the implications for debt holders," the agency said late Monday.

Chris Brathwaite, spokesman for Sears Holdings, said it is too early to speculate about such moves but conceded the parent company does intend to cut costs. He declined, however, to specify its savings targets.

"With a 100 per cent ownership, we will attempt to integrate the business," Brathwaite said, adding Sears Holdings has no plans to sell the Canadian business.

"We believe the benefits that will come from integration will help Sears Canada in its struggle to succeed."

Piggy-backing on an imminent payout to shareholders, Sears Holdings said it will pay $16.86 a common share in cash, after the distribution to stockholders of $18.64 per share - about $2 billion - details of which were announced last week.

Sears Canada, now in its key Christmas shopping season, said its board of directors will establish an independent committee to review the offer.

Some analysts, however, suggested it was a low-ball proposal.

"The SHLD offer is below our fundamental target price of $19, which is predicated upon SCC successfully reducing its operating cost base by $80 MM in 2006," said Irene Nattel of RBC Capital Markets, but noted the probability of a competing bid is "negligible."

She added, "However, given that the shares are already trading through the offering price and that the largest minority shareholder is committed to the offer, we recommend investors sell into the market."

Sears Holdings plans to make a formal offer in January but said its proposal is already backed by Sears Canada's second-largest shareholder, Natcan Investment Management Inc., which owns a 9.06 per cent stake.

Another minority shareholder, CIBC Asset Management - formerly called TAL Global Asset Management Inc. - holds a 1.13 per cent interest and is still evaluating the proposal.

"We had always felt that this was the scenario that made the most sense," said Lieh Wang, vice-president of Canadian equities.

The Canadian retail operations, he added, have seen its profits squeezed in recent years because of cutthroat competition from U.S.-based discounters.

Earlier this fall, Sears Canada said it fell to a third-quarter loss of $37.4 million reversing a year-ago profit of $12.7 million, after booking $83.8 million in one-time charges while same-store sales slumped 8.2 per cent.

"We have to be cognizant that Target most likely will come into Canada at some point and would mean even more competition the likes of Sears Canada and HBC," Wang said in reference to Hudson's Bay Co. (TSX:HBC) which is also the target of a takeover bid.

Echoing market speculation, he mused that Sears Holdings chairman Edward Lampert could eventually orchestrate a merger between the two rivals: "That's a scenario that's been bandied about."

Sears Canada has a network of 188 corporate stores, 180 dealer stores, 67 home improvement showrooms, over 2,100 catalogue merchandise pickup locations, 112 Sears Travel offices and a national home maintenance, repair, and installation network.

On the Toronto stock market, Sears Canada shares (TSX:SCC) rose $2.20 to close at $36.35.

Sears goes shopping -- for the rest of Sears Canada
By Sandra Guy – Business Reporter – Chicago Sun-Times
December 6, 2005

Sears' largest shareholder, hedge-fund guru Edward S. Lampert, left experts scratching their heads again Monday after Sears announced it had agreed to buy Sears Canada and operate it as a subsidiary.

Sears Holdings already owns 53.8 percent of Sears Canada's shares, but most analysts had predicted that Sears would sell its stake in its Canadian sibling rather than acquire it.

Yet the takeover would repeat a common Lampert tactic: Sears shareholders gain a dividend payment, while the retailer pumps out a sharp improvement in earnings and sheds massive amounts of jobs and costs.

Sears offered $718.5 million for the Canadian company's shares, an 8.7 percent premium over Friday's closing stock price. A major Canadian shareholder, Natcan Investment Management, has agreed to support the deal by tendering its stake of more than 9 percent of Sears Canada's outstanding shares. The deal is expected to close in the first three months of 2006.

The deal calls for Sears' shareholders -- Lampert is the biggest single shareholder -- to gain a one-time dividend payment from the sale of Sears Canada's credit-card business to JPMorgan Chase & Co.
In many ways, the Canadian deal aims to achieve the same kinds of cost cuts and cost savings as Lampert envisioned when he engineered Kmart's $12.3 billion buy of Sears Roebuck on March 24.

Sears can wield its larger size to squeeze cost savings from suppliers in Canada, and to use the two retailers' North American distribution network more efficiently.

Lampert will take charge, getting rid of many of Sears Canada's executives and their administrative functions.

And Sears Canada will no longer report its finances in the detailed way it did as a standalone company.

The cost-cutting would make Sears a more viable rival in Canada against competitors such as Wal-Mart, Lowe's and Home Depot, which are growing in Canada but aren't as deeply rooted there as they are in the United States.

"If Sears centralizes lots of Sears Canada's functions, it would save a fortune," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail-consulting and investment-banking firm based in New York.

Sears could also save money by putting the same merchandise in its Canadian stores as it does in the United States, and vice versa, opening the way for Martha Stewart Living to take a bigger presence in Sears stores here. Sears Canada has sold Stewart's home furnishings for more than two years.

Sears took a similar step in the United States Monday by naming executives to oversee merchandising for both Sears and Kmart. The executives, Peter Whitsett and Dan Laughlin, will report directly to Lampert.

Analysts played a guessing game Monday about Lampert's other interests in Sears Canada: Lampert may want to fend off a rival suitor for Sears Canada; sell Sears Canada's real estate; set up Sears Canada for a merger with fellow Canadian retailer Hudson's Bay, or simply realize a tax advantage.

Lampert long ago declared he was less interested in sales results than in realizing profits.

Indeed, sales at Sears stores open at least a year -- a key measure of retailing strength -- are expected to have declined when Sears reports earnings today. Sears Canada reported in October that its same-store sales in the third quarter dropped 8.2 percent from a year earlier.

U.S. parent bids for Sears Canada
By Marina Strauss – Globe and Mail, Toronto
December 6, 2005

Some think move to take company private could lead to consolidation with HBC
Sears Holdings Corp. has bid $834.5-million to take Sears Canada Inc. private, a move some analysts say positions it to eventually scoop up rival Hudson's Bay Co. and merge the two department store companies.

Sears Holdings, controlled by U.S. hedge fund manager Edward Lampert, made the all-cash offer yesterday for the 46.2 per cent of Sears Canada it does not already own.

The offer could be the first step toward Mr. Lampert selling off Sears Canada's real estate or, down the road, buying all or part of HBC, said retail analyst Robert Gibson of Octagon Capital. Merging the two companies would create a stronger, more focused merchant.

HBC itself is the target of a $1.1-billion takeover bid by U.S. businessman Jerry Zucker.

"We're not going to have any Canadian department stores any more," Mr. Gibson said, only half jokingly.

Sears Holdings, based in Hoffman Estates, Ill., said it intends to continue operating Sears Canada as a retail business, but hopes to make it more efficient.

"On a stand-alone basis, Sears Canada's retail business faces an increasingly competitive retail environment in Canada," Alan Lacy, vice-chairman of Sears Holdings, said in a statement. He is also chairman of Sears Canada.

"Sears Canada has long been an important part of the retail landscape in Canada and, with our shared brand name, is strategic to Sears Holdings."

Sears Holdings' acquisition would give Sears Canada more economies of scale to take on U.S. heavyweights such as Wal-Mart Stores and Home Depot, Chris Braithwaite, spokesman for Sears Holdings, said in an interview.

Both Sears Canada and HBC, which owns the Bay and Zellers, have been struggling in the face of more nimble competitors.

Mr. Lampert began the process earlier this year of trying to revamp Sears Canada and squeeze more value from it for the parent.

It sold the lucrative Sears Canada credit card division to J.P. Morgan Chase & Co. for $2.3-billion -- with most of the proceeds going to majority owner Sears Holdings.

It also trimmed 1,200 jobs in a bid to slash $100-million in annual costs.

The latest move to take Sears Canada private, if approved, would inevitably lead to Sears Canada cutting costs further by folding management, distribution and other operations into those of Sears Holdings, industry sources said.

And there is no doubt that decisions are being driven by the U.S. head office: The latest one took company executives in Canada by surprise, sources said.

That was despite a board of directors meeting in Toronto on Friday to approve the distribution of money from the sale of the credit card business.

For Mr. Lampert, the latest move is an attempt to shore up his strategy amid criticism that he has failed to radically improve Sears Holdings' financial performance, analysts said.

Mr. Lampert, chairman of Sears Holdings, was seen by many investors as a financial whiz who would transform Sears as quickly as he did discounter Kmart by selling off real estate.

Mr. Braithwaite, the Sears Holdings spokesman, would not comment on the possibility of an HBC acquisition or any other potential business ventures.

Asked whether Sears Holdings has had any discussions with Mr. Zucker, Mr. Braithwaite declined to say.

"We're talking today about this offer" to take Sears Canada private.

The deal could close by February, he said.

Robert Johnston, a vice-president at Mr. Zucker's company, said there have been no talks with Sears.

Analysts expect Sears Holdings will be successful in buying up the Sears Canada's shares that it doesn't own.

Already, the parent has struck a lockup deal with Natcan Investment Management Inc. With 9.06 per cent of Sears Canada's shares, Natcan has agreed to tender all of the 9.7 million shares that it owns or controls.

Clifton Robbins, chief executive officer of Blue Harbour Group LP, one of Sears Canada's largest minority shareholders, said management delivered excellent value to shareholders with the sale of the credit business.

"A merger with Sears Holdings could be the next logical step for Sears Canada," Mr. Robbins said. He backed the decision that Sears Canada form a special committee of its board to evaluate the offer and make a recommendation to shareholders.

Sears Holdings is offering $16.86 a share after the distribution to shareholders of the $18.64-a-share dividend for the sale of the credit division.

The offer represents an 8.7-per-cent premium above Friday's closing price and a 22.2-per-cent premium over the average closing price since Aug. 31. That's when Sears Canada announced it had a deal to sell its credit business.

On the Toronto Stock Exchange yesterday, Sears Canada's shares soared $2.20 or more than 6 per cent to $36.35, a 52-week high.

Sears Holding's stock, meanwhile, rose more than 2 per cent or $2.79 to $116.71 (U.S.) on the Nasdaq Stock Market.

Holiday shopping
Sears Holdings has bid $834.5-million for the 46.2 per cent of Sears Canada that it does not already own.

What is Sears Holdings?
One of the biggest U.S. retailers with about $55-billion (U.S.) in annual revenue and 3,900 stores, it is controlled by hedge fund billionaire Edward Lampert, who also owns discounter Kmart.

Who is on side?
Montreal-based Natcan Investment Management Inc. is the largest shareholder of Sears Canada, with 9.7 million shares, or about 9 per cent of Sears Canada's shares. It has agreed to the bid.

What has been happening at Sears?
In November, its credit card division was sold to J.P. Morgan Chase & Co. for $2.3-billion - with most of the proceeds going to majority owner Sears Holdings. It has also trimmed 1,200 jobs in a bid to slash $100-million in annual costs.

'On a stand-alone basis, Sears Canada's retail business faces an increasingly competitive retail environment in Canada.'

ALAN LACY,
VICE-CHAIRMAN OF SEARS HOLDINGS
AND CHAIRMAN OF SEARS CANADA.

Sears Holdings Looks North
By Brenon Daly – The Deal.com
December 5, 2005

The move by Sears Holdings Corp. on Monday, Dec. 5, to buy out its Canadian operation is an effort by the retailer to shore up one of its strongholds amid increased competition there.

The Hoffman Estates, Ill.-based company offered a total of $719 million for the half of Sears Canada Inc. it doesn't already own. A spokesman said Sears planned to complete the acquisition in the first quarter of next year.

Other U.S. retailers operating in Canada have "significant economies of scale in terms of purchasing and distribution" by centralizing North American operations, Sears spokesman Chris Brathwaite said. "It's clear to us that we have much greater opportunities for cost savings and management [expertise]" by owning Sears Canada outright.

Wal-Mart Stores Inc., a cutthroat competitor, is already the largest retailer in Canada, while home improvement chains Home Depot Inc. and Lowe's Cos. have expansion plans for the country.

According to terms, Sears would pay C$16.86 ($14.51) in cash for each share of the roughly 46% of Sears Canada it doesn't already own. That payment would be in addition to the C$18.64 per share distribution announced last Friday, stemming from the agreement to sell its credit card portfolio.

Brathwaite declined to say whether Sears Holdings used outside financial or legal advisers.

Sears Canada's largest shareholder, Natcan Investment Management Inc., indicated it will tender its 9.7 million shares, representing 9.1% of outstanding shares.

Credit Suisse First Boston analyst Gary Balter estimated Sears is paying roughly 6 times Ebitda to acquire its Canadian subsidiary.

"At first glance, this seems like a strange deal as investors in Sears Holding are looking for cash generation, not new investments," Balter wrote in a research note. "Given that, there is likely more to this transaction than meets the eye ... Bottom line from our side is that we do not believe that this changes the Sears cash monetization story."

Sears Canada, with about 368 full-line and specialty stores across the country, has been outperforming its corporate parent. In the most-recent quarter, Sears Canada reported sales rose 9.5%, while revenue at both Kmart and Sears stores in the U.S. slipped about 3%.

"What you have is Sears with a solid position in Canada, but a continued deterioration in the U.S.," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consultant based in New York City. "So this move is fundamentally sound — you put your money where your strength is."

Since combining a recently bankrupt Kmart and a stagnant Sears a year ago, Eddie Lampert has reshaped the No. 3 general merchandise retailer in the U.S. Through his ESL Investments Inc., Lampert owns about 40% of Sears Holdings.

Lampert divested Orchard Supply Hardware, a California-based hardware retailer that Sears had owned for nearly a decade, earlier this summer. Additionally, he pushed through the sale of Sears Canada's credit card portfolio.

"This is what Eddie Lampert does best," Davidowitz added. "You can second-guess him as a retailer, but you can't really doubt his financial acumen."

In the year since Lampert cobbled together Sears and Kmart, shares of the combined company have nearly quadrupled, giving the once-forgotten retailer a market capitalization of $19.6 billion. The stock was virtually unchanged at $119.06 in Monday afternoon trading.

Analysts attribute much of that value to the real estate holdings of Sears, which operates more than 3,800 U.S. stores. That puts a premium on Lampert continuing to pull off "clever tactics" such as acquiring Sears Canada rather than investing in the stores or merchandising or marketing, according to Richard Hastings, analyst at retail consultancy Bernard Sands LLC.

Sears Holdings "is not keeping up with other retailers," Hastings said. "They're not willing to put the $300 to $500 million in [capital expenditure] toward fixtures, lighting or remodeling. That's just not part of their strategy."

Investors will get an update on the business at Sears Holdings on Tuesday, when the company is slated to report third-quarter results.

Sears Holdings shakes up top ranks again
By Jennifer Waters - Market Watch
December 5, 2005

CHICAGO (MarketWatch) -- Changes in the top ranks of Sears Holdings Inc. continued Monday with a realignment of the retailer's merchandising divisions, a move aimed at creating a "more integrated approach" to marketing Sears Roebuck and Kmart stores, the company said.

Effective immediately, the Sears Roebuck and Kmart merchandising groups will be combined under two senior executives who will report to Chairman Edward Lampert until a chief merchant for Sears Holdings is named.

Dan Laughlin has been named senior vice president of merchandising for Sears Holdings while Peter Whitsett, already a senior vice president, will lead general merchandising businesses across all of Sears Holdings.

Laughlin will lead the so-called hardlines businesses such as lawn and garden, appliances and home furnishings as well as oversee merchandising for Sears Roebuck stores. Whitsett will also continue in his current job overseeing merchandising for Kmart.

Roger Detter, who was senior vice president of hardlines for Sears Roebuck, is retiring at the end of the month after 33 years on the job, the company said.

Gwen Manto, executive vice president of Sears Roebuck's softlines, which is mostly apparel and shoes, has left the company "to pursue other interests," Sears Holdings said in the release.

Until she is replaced, the businesses will report to Laughlin and Whitsett, the company said.

The action follows a series of dismissals and retirements that have taken place at the nation's third-largest retailer since Lampert put the Sears Roebuck and Kmart stores together earlier this year.

It's unclear exactly what the Sears Holdings strategy is because Lampert does not communicate it with shareholders, but investors widely believe that he will continue to merge the operations in a bid to lower costs while closing a number of underperforming stores and shifting the retail direction on others. For example, he has restored a number of Kmart locations with Sears Roebuck concepts.

They also expect him to drum up shareholder value by selling off unnecessary real estate when appropriate. Lampert is the company's largest shareholder.

In a press release, Lampert said that centralizing the merchandising teams creates a structure that "capitalizes on the strength of this combined organization."

"By building and aligning these teams, we'll take a more integrated approach to how we interact with our customers and how we go to market," Lampert said.

Sears Holdings is expected to report third-quarter earnings on Tuesday, ahead of the market's opening. The company does not hold a conference call, though Lampert has written a letter to shareholders in the past as part of Securities and Exchange Commission filings.

Sears Holdings Announces Centralized Merchandising Organization and Leadership
Sears Holdings News Release
December 5, 2005

HOFFMAN ESTATES, Ill., Dec. 5 /PRNewswire/ -- Sears Holdings Corporation announced today a realignment of its merchandising divisions as part of the company's continuing effort to increase the efficiency and effectiveness of its business.

Effective immediately, the Sears, Roebuck and Kmart merchandising organizations will be centralized under the following executives, who will report to the Chairman of the Board, Edward S. Lampert, until a Chief Merchant for Sears Holdings is appointed:

Dan Laughlin, currently senior vice president/GMM, Home for Sears, Roebuck has been named senior vice president, merchandising for Sears Holdings. Laughlin will lead the Hardlines businesses across all of Sears Holdings and will oversee merchandising for Sears, Roebuck.

Peter Whitsett, senior vice president and Kmart merchandising officer, will lead the General Merchandising businesses across all of Sears Holdings and will continue to oversee merchandising for Kmart

"By centralizing our merchandising teams under these two talented and experienced merchants, we are able to create a structure that capitalizes on the strength of this combined organization. It allows us to better focus on providing our customers with quality services, products and solutions," said Mr. Lampert. "By building and aligning these teams, we'll take a more integrated approach to how we interact with our customers and how we go to market."

Sears Holdings also announced that Roger Detter, senior vice president/GMM, Hardlines for Sears, Roebuck will retire from the company at the end of the month.

Mr. Lampert stated, "I'd like to thank Roger for his commitment, his drive for excellence and for his focus on customers during his 33 years with Sears. I wish Roger and his family all the best in this next chapter of their lives."

The company also confirmed that Gwen Manto, executive vice president/GMM, Softlines for Sears Roebuck, has left the company to pursue other interests. Sears Holdings is currently conducting a search for senior leadership for the company's apparel businesses. In the interim, the apparel businesses of Sears and Kmart will report to Laughlin and Whitsett, respectively.

Sears top apparel executive resigns
By Sandra Jones – Crain’s Chicago Business Online
December 5, 2005

Gwen Manto to be chief merchandising officer at Dick's Sporting Goods

Sears Holdings Corp.’s top apparel executive, Gwen Manto, resigned from the Hoffman Estates-based retailer and took a post as chief merchandising officer at Pittsburgh-based Dick’s Sporting Goods Inc.

Ms. Manto’s departure follows a string of senior executive departures in the wake of Kmart Holding Corp.’s purchase of Sears, Roebuck and Co. in March.

Last month, Luis Padilla, a Target Corp. veteran, resigned as Sears’ chief merchandising officer after little more than a year in the job. The general manager of Sears’ growth format, Sears Essentials, also resigned recently, as did the head of Lands’ End.

Earlier this year, billionaire hedge fund manager Edward Lampert, who engineered the takeover, replaced Sears CFO and its senior vice president of real estate with executives from his hedge fund and Kmart. Mr. Lampert, chairman of Sears Holdings, also demoted Alan Lacy, Sears’ former Chairman and CEO, to vice chairman in September and gave the CEO title to former Kmart CEO Aylwyn Lewis.

Ms. Manto joined Sears in February 2004 after four years as chief merchandising officer of Stein Mart. She joins Douglas Walrod, who left Sears’ real estate department earlier this year and joined Dick’s Sporting Goods as senior vice president of real estate and development.

A Sears spokesman was not immediately available.

Ms. Manto starts her job Jan. 9. She succeeds Gary Sterling, senior vice president of merchandising, who plans to retire.

Sears Holding Offers To Buy Sears Canada
Dow Jones Newswires – Wall Street Journal Online
December 5, 2005

Sears Holding Corp. proposed to acquire all outstanding shares of Sears Canada Inc. that it doesn't currently own for about 835.4 million Canadian dollars (US$718.5 million).

The per-share price of C$16.86 a share is in addition to the C$18.64 a share distribution to shareholders announced Friday by Sears Canada's board.

Sears Holding said the offer represents an 8.7% premium over Friday's closing price and a 22.2% premium over the average closing price since Aug. 31, the date Sears Canada entered into an agreement to sell its credit and financial services unit. Sears Holding owns 57.7 million shares, or about 53.8% of the outstanding shares of Sears Canada.

Additionally, Natcan Investment Management Inc. entered into a lock-up pact with Sears Holding, agreeing to tender all 9.7 million shares, or about 9.06% of Sears Canada it owns or controls in response to Sears Holdings' offer.

In premarket trading on Inet, Sears Holding traded at $116.12, $3.38 lower than Friday's closing price of $119.50. Sears Holding was scheduled to release its fiscal third-quarter quarter results tomorrow morning. In 2004, Sears Holding had $23.3 billion in annual revenue.

Sears Holdings bids $835.4M Cdn for rest of Sears Canada
Canadian Press
December 5, 2005

TORONTO (CP) - Piggy-backing on an imminent payout to stockholders, Sears Canada's U.S. parent firm is offering $835.4 million Cdn to acquire the 46.2 per cent of the subsidiary it doesn't already own. Sears Holdings Corp. said Monday it will pay $16.86 a common share in cash, after the distribution to stockholders of $18.64 per share - about $2 billion - announced last Friday by Sears Canada.

Toronto-based Sears Canada (TSX:SCC) would become a wholly owned subsidiary of Sears Holdings.

"The Sears Holdings proposal represents an excellent opportunity for Sears Canada shareholders to realize a premium and liquidity for their shares," Alan Lacy, vice-chairman of Sears Holdings, said in a release.

"On a stand-alone basis, Sears Canada's retail business faces an increasingly competitive retail environment in Canada, and the principal factor that will determine the value of this business is the prospects for its retail operations."

Sears Holdings also said Natcan Investment Management Inc. has agreed to sell its 9.06 per cent stake in Sears Canada.

On Friday, Sears Canada announced the $2-billion distribution of proceeds from the sale of its credit and financial services operations, which was completed on Nov. 15.

Its board of directors declared that $4.38 a share - or about $470 million - would be paid Dec. 16 and that $14.26 a share - or about $1.53 billion - would be paid with a special cash dividend.

The company also publishes Canada's most extensive general merchandise catalogue and offers shopping online at www.sears.ca.

Sears Holdings Corp. is the third-largest general retailer in North America with about $55 billion US in annual revenues, and with about 3,900 full-line and specialty retail stores in the United States and Canada.

The Sears Holdings offer is subject to customary conditions, including the tender by holders of a majority of the Sears Canada shares not already owned by Sears Holdings and its affiliates.

On the Toronto stock market Friday, Sears Canada shares closed at $34.15, down 34 cents.

Pile of vintage toys rakes in cash on eBay
By Mike Wendland – Free Press Columnist – Detroit Free Press
December 5, 2005

The somewhat obsessive-compulsive habits of a recently deceased St. Clair Shores woman has turned into unexpected goldmine for her survivors -- and the Clinton Township couple who convinced them to sell off much of the estate on eBay rather than through an estate sale.

Melissa and Jim Sands, who run a small Clinton Township business called Sands-O-Time said an unusual find in the basement of the home is the reason.

Stacked up there, in unopened boxes and neatly arranged on shelves, was a treasure trove of mint-condition toys that the mother had kept since the 1960s.

Tonka trucks and Matchbox cars still in their cases. Barbie doll collections sealed in cellophane. Action figure dolls that had never been opened or played with. Chemistry sets, doll outfits, puppets and toys of every shape and size and all unused and as undisturbed as if they had been in a time capsule.

"The children said they were never allowed down there," said Melissa Sands. "So when we did the inventory they were shocked. Apparently, their mom ordered three of every toy she gave the kids. Unknown to them, she hid two of them in the basement in case they broke."

Through Sands, the surviving children -- five daughters and three sons, the youngest of whom is 47 -- declined to be interviewed for this story.

"They said they were a little embarrassed about their mother's eccentric behavior and didn't want their names used," explained Sands. "They said to talk about their mother's hoarding all that stuff for years would have reflected poorly on her memory. My husband, Jim, said there's nothing to be embarrassed about because their mother's habits turned out to be genius."

That's because there's a huge worldwide market for toys. And eBay, the online auction site that the Sands use for much of their business, is the way to reach it.

So far, the 40-year-old toys are fetching huge prices.

Because the mother ordered all the toys from a Sears Roebuck & Co. catalogue, and because those catalogues were carefully preserved right next to the toys, the Sands have been able to trace the vintage of each toy.

And the prices these old toys are getting on eBay are nothing short of astronomical. Consider:

A Thumbelina doll bought for $5.99 from the 1964 Sears catalogue sold for $519.99.

A $2.19 GI Joe action figure from 1965 sold for $302.

A Captain Action Superman outfit from 1966 that originally cost $3.89 went for $736.56.

A Creepy Crawlers Thing-Maker set was listed for $6.66 in the 1965 catalogue. It was snapped up for $1,285.99.

But if you think that's crazy, consider the top price getter: A Barbie's Dream Kitchen accessory for the Barbie doll that consisted of cardboard punch-outs of kitchen appliances and furniture. It created a virtual feeding frenzy when the Sands listed it.

"In 1965 it cost $4.97," said Sands. "We put it up on eBay and there was a bidding war from the minute we listed it. In the last 20 seconds of the auction it went from $900 to $1,575. It was crazy."

The now middle-aged children are understandably delighted with the eBay results, said Sands. As they've watched the auctions unfold, one of the daughters recalled a cryptic promise her mom had given her years ago.

"She said her mom once said something to the effect that one day, the kids would see what treasures the mom had left for them," said Sands. "Now they know. It was down in the basement all along. This is going to be quite a Christmas present for them."

So far, the toys have brought in about $30,000 in eBay sales, with buyers from across the country and as far away as Australia.

But before you start rummaging around your basement and think you've hit the eBay big-time with the discards from your own kids, you'd better listen to Melissa.

"The collectors on eBay are not afraid to spend extreme amounts when it comes to mint in-package items," said Sands. "Had this stuff been loose and played with it would have been interesting but not anything like what we've seen."

Though most of the more valuable toys have sold, the Sands still have a few items from the collection up for auction. What's left can be seen on their eBay store at http://stores.ebay.com/Sands-o-Time-Estates-Antiques. Make sure you enter that address with the capitalization just as you see.

Sears sits out the season
As Wal-Mart, Target tout price cuts, Lampert takes more muted tack
By Sandra Jones – Crain’s Chicago Business
December 5, 2005

In a holiday season that's shaping up to be the Super Bowl of price-cutting, Sears Holdings Corp. is sitting on the sidelines.

Archrival Wal-Mart Stores Inc. kicked off the critical Thanksgiving-to-Christmas shopping season with stampede-inducing bargains. Target Corp. is aggressively touting its "lowest prices ever" in advertising circulars.

Shoppers swarmed Wal-Mart stores the morning after Thanksgiving hoping for a chance to buy notebook computers for $378 and 42-inch plasma TVs for less than $1,000. Target, Best Buy, Kohl's and J. C. Penney joined in with price cuts on toys, electronics and apparel.

Sears, meanwhile, has been offering less generous discounts. The deal Sears played up most prominently in its post-Thanksgiving circular was a $10 gift card to the first 200 customers in each store. Some observers interpret the strategy as another sign that Sears Chairman Edward Lampert is throwing in the towel on retail.

With Wal-Mart and Target loudly promoting discount pricing, Hoffman Estates-based Sears risks losing the holiday race if it doesn't follow suit, observers say.

"This year you have two choices," says Britt Beemer, founder of America's Research Group, a South Carolina-based consumer research firm. "You can be promotional, give up some profit and get a lot of shoppers, or not be as promotional, not get as many shoppers and lose a lot of money."

While Wal-Mart offered that TV for less than $1,000, Sears was marking down a 42-inch plasma to $1,299.99 from $1,599.99.

And on the Sunday after Thanksgiving, Sears' circular showcased a Magnavox 26-inch LCD TV for $799.99, down from $899.99. Target, meanwhile, offered on its Web site a Syntax Olevia 26-inch LCD HDTV-ready set for $699.99 with free shipping.

PROFIT PRIORITY

Sears' more muted discounting suggests that Mr. Lampert is aiming to preserve profits rather than compete aggressively on price with rivals.

Sears stopped talking with Wall Street after Mr. Lampert took control in March. But a letter to shareholders, written shortly after he combined the former Sears, Roebuck and Co. and Kmart Holding Corp., provides some insight into his thinking: Profits matter more than sales.

"In the past, too often our predecessor companies pursued higher sales and accepted lower profits to meet objectives that, we believe, did not increase the value of the companies," Mr. Lampert wrote in June. "We will need to focus our management, our associates and our vendors on the goals of creating value rather than solely building market share or sales."

A more recent memo to employees signals that Sears execs anticipate a challenging holiday season. "We need an awesome contribution from each of our associates in (the) fourth quarter to meet our 2005 financial commitments," warns Sears Holdings CEO Aylwin Lewis in a Nov. 16 memo to employees obtained by Crain's. "If we are to meet our plan, the next six weeks will require an 'all hands on deck' mindset."

A Sears spokesman declines to comment on how the holiday promotions at Sears compare with its rivals', but says they are "roughly comparable" to what Sears offered last year. The $10 gift card was "hugely popular" with customers, he says, and as of late Friday was slated to be offered again over the weekend. Sears declines to comment on sales.

Sears' holiday season got off to a rough start. Marketing chief Luis Padilla resigned just weeks before the season kicked off. Sales dropped for the Thanksgiving weekend from the same period last year, according to people familiar with the figures. By comparison, national retail sales rose 0.4% for the Thanksgiving weekend, according to Chicago-based ShopperTrak RCT Corp.

Year-to-date sales through November at Sears stores open at least a year are also down about 8%, according to people familiar with the figures. That compares to a 3.9% gain at stores nationwide, according to the International Council of Shopping Centers, a New York-based trade group. Sears is slated to report third-quarter results on Tuesday.

WRITING OFF THE HOLIDAYS?
Retailers usually go all out to capture consumers' holiday dollars. Sears, like most of its rivals, historically generates about 30% of its annual revenue in the fourth quarter.

Carol Levenson, founder of Gimme Credit Publications Inc., a corporate bond research house in Chicago, suggests in an October report that Sears could be writing off this holiday season, and indeed, "writing off retailing period, full stop."

Investors following Sears these days are waiting for Mr. Lampert to generate cash, not through merchandise sales, but by unloading assets, such as Lands' End, the company's stake in Sears Canada, the Kmart headquarters site in Michigan and 200 to 300 of Sears' 870 mall stores.

"If you're a Sears investor, this isn't going to be your Christmas," says Ivan Feinseth, director of research at Matrix USA in New York, who rates Sears stock a "buy." "Hopefully, if Eddie does his job right, next year investors will have a merry Christmas."

Wal-Mart's Low-Cost Health Plan Lifts Enrollment
By Kris Hudsin - Staff Reporter – The Wall Street Journal
December 3, 2005

Wal-Mart Stores Inc. added 70,000 U.S. workers to its health-care plans for next year, with roughly a third of those choosing the retailer's new low-cost plan.

The enrollment increase comes as the world's largest retailer weathers a storm of criticism regarding its health-care offerings and its strategies for containing health-care costs.

In late October, a union group made public internal Wal-Mart memorandum from the Bentonville, Ark., company's benefits chief to its board outlining methods for curtailing the rise of health-care costs. The suggestions included requiring more physical activity in employees' duties and crafting coverage plans that shift more costs to employees who require more health care.

At the beginning of this year, 568,000 of Wal-Mart's total 1.2 million U.S. employees were enrolled in its health-care plans, amounting to roughly 47% of the retailer's overall domestic work force. The national average for retailers is 46%, according to the Henry J. Kaiser Family Foundation, a health-care research group.

Medical plans are available to both full- and part-time associates, but part-time workers are eligible for single coverage only.

Wal-Mart's U.S. ranks have grown this year to roughly 1.3 million employees. Adding 70,000 employees to its health-care plans would boost the total covered to 638,000, not accounting for turnover. That would raise its percentage of all workers covered to roughly 49%. Wal-Mart will not have a final figure until early next year. In the interim, the retailer estimates that its percentage of eligible employees -- those who have worked for the company at least six months -- who opt for coverage will climb by three percentage points.

Fueling the enrollment rise is a low-cost health plan that begins Jan. 1. Wal-Mart tailored the plan for employees who want lower premiums and have minimal health-care needs. All told, about 53,000 employees opted for the Value plan, including 31,000 who switched from other Wal-Mart plans and 22,000 who had no previous coverage with Wal-Mart because they were new hires or had not previously enrolled. Including dependents, the plan will cover about 85,000 people.

The low-cost plan offers average monthly premiums of $23 for individuals, $37 for a single parent and $65 for a family -- figures that Wal-Mart says are at least 40% lower than those in its other plans. However, as a trade-off, an annual deductible of $1,000 kicks in after three doctor visits per enrollee per year. And the plan has a $25,000 cap per enrollee in the first year of coverage. Union-backed groups have criticized the plan's deductibles and first-year cap as prohibitive for low-wage workers with health-care needs.

Is Wal-Mart Good for America?
Wall Street Journal
December 3, 2005

By any normal measure, Wal-Mart's business ought to be noncontroversial. It sells at low cost, albeit in mind-boggling quantities, the quotidian products that huge numbers of Americans evidently want to buy -- from household goods to clothes to food.

Wal-Mart employs about 1.3 million people, about 1% of the American work force. Its sales, at around $300 billion a year, are equal to 2.5% of U.S. gross domestic product. It is not, however, an especially profitable company. Its net profit margins, at about 3.5% of revenue, are broadly in line with the rest of the retail industry. In fiscal 2004, Microsoft made more money than Wal-Mart on just one-eighth of the sales.

The company's success and size, then, do not rest on monopoly profits or price-gouging behavior. It simply sells things people will buy at small markups and, as in the old saw, makes it up on volume. We draw your attention to that total revenue number because, in a sense, it tells you most of what you need to know about Wal-Mart. You may believe, as do service-worker unions and a clutch of coastal elites -- many of whom, we'd wager, have never set foot in a Wal-Mart -- that Wal-Mart "exploits" workers who can't say no to low wages and poor benefits. You might also accept the canard that Wal-Mart drives good local businesses into the ground, although both of these allegations are more myth than reality.

But even if you buy into the myths, there's no getting around the fact that somewhere out there, millions of people are spending billions of dollars on what Wal-Mart puts on its shelves. No one is making them do it. To the extent that mom-and-pop stores are threatened by Wal-Mart, it's because the same people who supposedly so value their Main Street hardware store find that Wal-Mart's selection, or prices, or parking lot -- something about it -- is preferable. Wal-Mart can't make mom and pop shut down the shop any more than it can make customers walk through the doors or pull out their wallets. You don't sell $300 billion a year worth of anything without doing something right.

What about the workers? In response to long-running criticisms about its pay and benefits, Wal-Mart's CEO, Lee Scott, recently called on the government to raise the minimum wage. But as this page noted at the time, Wal-Mart's average starting wage is already nearly double the national minimum of $5.15 an hour.

So raising it would have little effect on Wal-Mart, but calling for it to be raised anyway must have struck someone in the company as a good way to appease its political critics. (Bad call: Senator Ted Kennedy quickly pocketed the concession and kept denouncing the company.) The fact is that the company's starting hourly wages not only aren't as bad as portrayed, but for many workers those wages are only a start. Some 70% of Wal-Mart's executives have worked their way up from the company's front lines.

The company has also recently increased its health-care options for employees on the bottom rungs of the corporate ladder. Starting in January, one of those options will be a high-deductible health-savings account, which is a great way to insure yourself if you're relatively young, relatively healthy and yet want to protect against the onset of some catastrophic illness. Mr. Kennedy, who recently called Wal-Mart one of the most "anti-worker" companies around, has been a chief opponent of these pro-worker, pro-market health insurance vehicles.

But suppose Wal-Mart did look more like the company its detractors would like it to be, with overpaid workers, union work rules, and correspondingly higher prices on goods. It would not only be a less attractive place to shop, and hence a considerably smaller company. It would drive up the cost of living for the millions who shop there, thus hurting those in the bottom half of the income-distribution tables that Wal-Mart's critics claim to be speaking for. One might expect this fact to trouble the anti-Wal-Mart forces, except that their agenda is very different from what they profess it to be.

As our Holman W. Jenkins Jr. pointed out in a recent column, the vanguard of the Wal-Mart haters is composed of unions that have for decades kept retail wages and prices artificially high, especially in the supermarket business. Those unions have had next to no success organizing Wal-Mart employees and see Wal-Mart's push into groceries as a direct threat to their market position. And on that one score, they may be right.

But seen it that light, it becomes clear that much of the criticism is simply a form of special-interest lobbying in socially conscious drag. And why an outside observer should favor the interests of unionized supermarket employees over those of Wal-Mart shoppers and employees is far from clear (unless you're a politician who gets union contributions).

Any company as successful as Wal-Mart will invariably run afoul of such vested interests. It is in the nature of the rise of a new giant on the scene that it disrupts established ways of doing things and in the process upsets established players. So it was with Standard Oil at the beginning of the 20th century, IBM in the middle and Microsoft at the end of the century. Wal-Mart, perhaps because it restricted itself to towns of less than 15,000 people as a matter of policy into the 1990s, at first avoided and later seemed blindsided by the attacks that have come its way.

The company has never been shy about defending its interests. But some of its recent ripostes -- such as Mr. Scott's call for hiking the minimum wage or its gestures toward fighting global warming -- seem to be addressed to the wrong audience.

Its customers don't need to be told what they like about Wal-Mart. But the company's management would do well to bear in mind that it is those millions of shoppers, and not the elites with which the company has sometimes of late been seen to be currying favor, that have made the company what it is.

Sears Canada to pay C$18.64 dividend windfall
Reuters
December 2, 2005

TORONTO, Dec 2 (Reuters) - Sears Canada Inc. said on Friday it will return approximately C$2 billion ($1.7 billion) to shareholders through $18.64 in dividends, following the sale of its credit card business to JPMorgan Chase & Co. .

The retailer said a return on capital of C$4.38 per share and an extraordinary cash dividend of C$14.26 per share will be paid on Dec. 16.

Last August, Sears Canada sold its credit card business to JPMorgan Chase for C$2.3 billion.

Shares of Sears Canada were down 39 Canadian cents at C$34.10 on the on the Toronto Stock Exchange on Friday.

U.S.-based Sears Holdings Corp. owns 54 percent of Sears Canada, which operates 122 department stores, 217 off-mall stores and 62 home-improvement showrooms.

($1=$1.16 Canadian)

Sears Holdings Pension Fund May Include Hedge Funds
By Becky Yerak – Chicago Tribune
Excerpt from Inside Financial Services
December 2, 2005

Hedging bets: Institutional investors' appetite for hedge funds is expected to increase to $300 billion by 2008.

That's up from $60 billion in September 2004, when Bank of New York and Casey Quirk & Acito LLC released their study.

Could the pension fund of Sears Holdings Corp. be the latest to sink money into hedge funds, which are more loosely regulated investments?

The Hoffman Estates-based retailer plans to allocate 42.5 percent of its pension fund assets to fixed-income securities, 42.5 percent to stocks and 15 percent to "alternative investments."

The plan's previous asset allocation was about 70 percent stocks and 30 percent fixed income.

The change in investment practices comes shortly after Kmart Holding Corp. Chairman Edward Lampert led the acquisition of Sears, Roebuck and Co. to form Sears Holdings.

Lampert's day job: hedge fund manager.

A Sears spokesman said Thursday that the alternative investments "could" include hedge funds, but it "does not include" Lampert's.

Waiting in Lampert's Orchard
By Nat Worden – Staff Reporter - The Street.com
November 30, 2005

While investors wait for Sears to revive its retail operations, a recent deal to spin out part of its Orchard Supply hardware chain shows that the cash-raising plank of Ed Lampert's turnaround platform is also given to tremors.

Sears' stock has lost 25% since the beginning of August amid a series of disappointing sales and earnings reports. The stretch has been the first major test of loyalty to Lampert, the hedge fund guru who brought Kmart out of bankruptcy and bought Sears a year ago.

Last week, reflecting Lampert's efforts to monetize noncore assets, Sears announced that it closed on a $58.7 million investment from Ares Management LLC, a private equity firm, in the retailer's Orchard Supply Hardware subsidiary. Ares bought 19.9% of the garden supply company and a three-year option to acquire another 30.2% stake for $126.8 million.

News that the deal had closed was contained in a press release issued the night before Thanksgiving, and elicited no reaction from Wall Street, which first learned of the sale in October. In anticipation of a turkey dinner, however, some Sears followers might not have noticed a modification to the transaction's initial terms. Specifically, Orchard Supply didn't raise the $405 million it had planned to get from the high-yield debt market.

According to the October press release, Orchard was going to use the $405 million to pay a dividend of about $450 million to Sears when the Ares investment closed. As drawn up by Sears' innovative finance department, the transaction is something like a leveraged buyout of Orchard, or more precisely, a "recapitalization" in which Sears -- which paid $415 million for the chain in 1996 -- is able to harvest cash from a nine-year-old investment and still retain majority ownership of the chain.

One problem: Last week's press release made mention of only $250 million in debt financing for Orchard, consisting of a $130 million revolving credit facility and a $120 million loan backed by commercial mortgages. As a result, Sears got $225.5 million in cash from the deal, along with a $230 million note from Orchard bearing interest at 10% to 12.5%. In essence, Sears loaned Orchard Supply half the money it planned to receive, insisting on junklike interest rates for its trouble.
Sears spokesman Chris Brathwaite declined to comment on the deal beyond the details included in the press release, except to say that this possibility "had been anticipated or contemplated when the deal was announced."

After the deal closed, Moody's Investors Service gave Orchard Supply a B1 credit rating, a deeply speculative grade. Moody's rating "considers the leveraged nature of Orchard's expected balance sheet," along with competitive threats posed by Lowe's (LOW:NYSE) and Home Depot (HD:NYSE) , the ratings outfit said in a press release.

Orchard Supply currently operates 84 hardware stores in California, and its financials are not available to the public. Sears, which has a speculative-grade debt rating by all the major ratings agencies, reported more than $4 billion in debt outstanding at the end of its second quarter.

Marty Fridson, the publisher of Leverage World, said it looks like the deal became partly "seller financing," which leaves Sears on the hook should the junk bond market further deteriorate or if something went wrong with Orchard Supply Hardware.

"That certainly wouldn't be their first choice," Fridson said. "I'm sure they would have rather had the cash and moved on, rather than having the potential of being dragged back into it in the event of a failure down the road."

In its release, Sears said the use of a note for part of the dividend was always on the table "to ensure that Orchard Supply Hardware would not be dependent on conditions in the high-yield debt market." Orchard Supply expects to refinance the note when "market conditions improve and provide it with an appropriate financing rate."

Will that happen? It might or might not.

"There have been big capital outflows from the high-yield debt sector with the flattening of the yield curve, and it hasn't been the best time for raising money there lately," Fridson said. "A number of deals have been postponed or canceled. That doesn't mean this is an exceptionally poor deal among others that have been out there, but it's just been a tougher environment lately."

If things go as planned for Orchard Supply, the transaction could be a good deal for Sears, particularly stockholders already benefiting from the $225 million dividend.

"This deal didn't go as planned, but underwriting a part of it isn't a big deal for a big company like Sears," said Charles O'Shea, a senior analyst with Moody's. "But it does show how complicated these deals can get. We still haven't seen any real estate transactions yet."

In the absence of those, investors are left with two slightly wounded discount chains where markdowns were said to be rampant over the Thanksgiving holiday. Whether there's more markdowns coming for the stock remains to be seen.

Sears' unit to pay parent $455.5 million dividend
By Sandra Guy – Business Reporter – Chicago Sun-Times
November 30, 2005

Sears Chairman Edward Lampert is up to some fancy financial footwork that appears to benefit himself and other shareholders.

Sears' Orchard Supply Hardware store chain will pay a $455.5 million dividend to Sears, consisting of $225.5 million in cash and a $230 million note initially paying 10 percent interest.

Orchard Supply will borrow roughly half the dividend, signaling that Orchard's new lenders will be secured, and will stand ahead of unsecured bond holders in a creditors' pecking order, according to analyst Carol Levenson at New York-based Gimme Credit research service, in a report issued Tuesday.

Sears could pass along the dividend to its shareholders.

Lampert, who took control of Sears when he engineered Kmart's $12.3 billion buyout of Sears on March 24, owns about 40 percent of parent company Sears Holdings' stock. Many of Sears Holdings' other shareholders are hedge funds, whose principals have stuck by Lampert because of his reputation for generating lucrative returns from his investments.

Indeed, the Orchard Supply deal, originally announced May 10, surprised no one because Lampert had squeezed savings out of Kmart by slashing costs and selling off valuable real estate.

"It's a smoke and mirrors financial transaction, in my view, that disadvantages current unsecured Sears bond holders," Levenson said.

Levenson fears the Orchard deal could serve as a model Sears could follow in other, larger secured real estate deals.

A Sears Holdings spokesman had no comment on the report.

Analysts had speculated that Kmart's takeover of Sears would result in numerous spinoffs, including that of the Orchard Supply chain, which operates 82 stores in California.

In a second, related transaction, Sears is selling a 20 percent stake in Orchard to a private equity fund, Ares Management of Los Angeles.

Ares will invest $58.7 million in cash for 19.9 percent of the voting stock in Orchard Supply. Ares also will take a three-year option to buy another 30.2 percent of Orchard for $126.8 million.

Orchard Supply or its subsidiaries entered into arrangements for $250 million in financing, including a $130 million secured credit line and a $120 million commercial mortgage-backed loan.

Meanwhile, some investors are getting grumpy that Lampert hasn't done more to spin off cash by selling Sears' prime real estate.

Indeed, rumblings are getting louder that shoppers have turned away from Sears Essentials, the stand-alone stores that combine Kmart and Sears goods and represent a key element of the merged retailers' future outside the mall.

The stores have failed to drive enough shopper traffic to support the investments Sears Holdings has poured into them, according to a report issued recently by Gary Balter, an analyst at Credit Suisse First Boston who maintains his optimistic assessment of Sears as a real estate play.

A 'city' at Sears Crosstown?
By Amos Maki – Memphis Commercial Appeal
November 30, 2005

Mixed-use complex planned; sale possible in December

One of the city's biggest eyesores could be getting a makeover.

An investor group has plans to buy the 1.3 million-square-foot Sears Crosstown building and transform it into a mixed-use development featuring retail, office and residential space.

The group, which consists of local and out-of-town investors, is called DBS LLC 2 and plans to buy the 18-acre site in December. The group will appear before the Memphis and Shelby County Land Use Control Board in January with its rehab plan.

"We feel like the financing is pretty much in place," said Guy Payne, president of Guy Payne and Associates Architects, who is handling architecture and site planning for the buyers. "We're within two weeks of closing on the purchase.

"The most important thing for us is the purchase of the building, and the rest is a matter of timing," Payne said.

The site is zoned for light industrial use, which prohibits residential development. The developers will seek a planned development recommendation from the LUCB, which would allow for residential development on the upper floors of the building, before heading to the City Council for final approval.

"We have some pretty concrete possibilities for residential, office and some big-box retail," Payne said. "It would probably be like a city to itself."

The owner of the site, Memtech LLC, bought the property from Sears in 2000 for $1.25 million.

"Everybody is pretty excited about the project," said Don Jones of the Office of Planning and Development. "It's such a big old boy, it will take some real effort and real creativity (to fix it.)

"Of course, it's not the first time something has been proposed at the site, so we are guardedly optimistic," he said.

Opened in 1927, the Art Deco-style building near the intersection of Cleveland and North Parkway has been an empty shell for years.

The Crosstown building was the home to the Mid-South regional office of Sears, Roebuck and Co., the company's catalog merchandise distribution center and its Credit Central operation.

In its heyday, people from across the Mid-South traveled to Memphis to shop at Sears Crosstown.

But times changed and the retail Sears store closed in 1983. The building has been vacant, except for the pigeons that roost there and the occasional vagrant, since its catalog distribution center closed in 1993.

Since then, a number of projects have been proposed at the site, but none of them has come to fruition.

The city talked with retail giant Target about the site, and even had discussions with Crichton College about possible uses, said Robert Lipscomb, chief financial officer for the city and director of Housing and Community Development.

"You don't dismiss anything when you're dealing with this building," Lipscomb said.

Earlier this year, the Crosstown building made the "Ten in Tennessee" list of the state's most endangered historical treasures compiled by the Tennessee Preservation Trust. The list, based on nominations from the public, is intended to generate public support for saving threatened historical sites.

Bill Bullock, president of the Evergreen Historic District Association, has heard proposals to redevelop the site before.

Bullock, citing the presence of Home Depot in Midtown and a 30-unit planned development south of the Sears building at Claybrook and Larkin, said he thinks the tide could be turning for the old site.

"Whether or not it is this specific project, I believe something will be happening with the Sears building, and based on the trend of development in the neighborhoods around it, it will be sooner rather than later," he said.

Retailers could find the inner-city location very appealing, according to a report from the Initiative for a Competitive Inner City.

Because of population density, inner-city neighborhoods in the United States have eight times more spending power than the neighborhoods that surround them, the report said.

In a letter to the OPD, SR Consulting LLC, a Memphis-based planning, zoning and civil engineering firm, said the potential developers plan to keep much of the building intact.

"The exterior of the building will not be changed or drastically altered," the letter said. "Our plans are to update the outer shell with new windows, etc. The immediate plans are to update the exterior and then work on build-to-suit interior changes."

Enrollment Deadline Extended for 2006 Medical Benefits
Nov. 29, 2005

Sears has announced the following extension for enrolling in 2006 medical benefits:

The original deadline for enrolling in Retiree Health Access, including the AARP Medicare Supplement Insurance Plan was Friday, December 2, 2005. If you enroll on or before December 2, your coverage will be effective January 1, 2006 and you will receive your identification cards prior to January 1, 2006.

This deadline has been extended to Friday, December 16, 2005. If you enroll after December 2 but before December 16, your coverage will be effective January 1, 2006. However, you may not receive your identification cards until early January.

If you do not enroll on or before December 16, please note the following:

• AARP will continue to accept applications for the AARP Medicare Supplement plans through January 31, 2006 for coverage effective January 1, 2006. The direct phone number for AARP is 1-800-392-7537

• Retiree Health Access will continue to accept applications after December 16 for the Aetna RxAccess Medicare Part D prescription drugs plans. However, if you enroll after December 31, 2005, your coverage will not become effective until the first day of the following month.

• You will receive your identification cards 3-4 weeks after your enrollment is processed.

Kmart, employees settle for $11 million
By David Ashenfelter – Free Press Staff Writer – Detroit Free Press
November 29, 2005

Up to 150,000 current and former Kmart employees who participated in Kmart pension plans before the company's historic collapse will share $11.75 million under a proposed settlement of a lawsuit against the retailer's former officers and board members for investing the pension plans in now-worthless Kmart stock.

If approved, the settlement could help to heal some of the ill will many employees felt toward Kmart officers who, they contend, misled pension plan participants about the company's failing financial condition as the retirement plans bought stock that steeply declined in value after the company filed for Chapter 11 bankruptcy protection in January 2002.

How much each person receives will be determined by how many people held Kmart stock in the retirement plan, how much they held and when they acquired it.

The proposed class consists of all participants and beneficiaries of the plan from March 15, 1999, through March 6, 2003. Court documents have pegged their loss at between $28 million and $300 million.

"The settlement is fair, reasonable and in the best interests of the class and should, therefore, be approved," attorney Glen Connor of Birmingham, Ala., said in court papers Monday that asked U.S. District Judge Avern Cohn to approve the settlement.

"The settlement will provide significant benefits to the class, and will remove the risk and delay of further litigation," Connor added. He asked Cohn to certify the class of stockholders who will be eligible for the settlement and to schedule a fairness hearing early next year for class members to object to the proposed settlement.

Connor's client, Quincie Rankin, a former Kmart employee from Alabama who holds 160 shares of the retailer's stock, filed a class action against former Chief Executive Officer Charles Conaway and other former Kmart officers and directors in U.S. District Court in Detroit in March 2002 for alleged breach of fiduciary duty.

The lawsuit said the officers invested the retirement plans in stock that became worthless after the retailer filed for Chapter 11 bankruptcy protection. It also said the officials misled pension plan participants about the company's dire financial condition and business prospects. They admit no wrongdoing in the settlement.

Connor, Detroit attorney Mary Ellen Gurewitz and their law firms will receive up to 20% of the settlement for legal fees and costs of bringing the lawsuit, the settlement said.

The settlement would be paid by a $25-million insurance policy from the National Union Fire Insurance Co. of Pittsburgh. The insurance company and Sears Holding Corp., the publicly-traded corporation that resulted from the merger of Kmart and Sears on March 24, would pay up to $200,000 more for notifying settlement beneficiaries and administering the settlement.

Connor said in court papers that the suit involved complex litigation the plaintiffs could have lost. He also said the defendants have vigorously contested the case, spending significant sums of the $25-million insurance policy.

"If the litigation continues, additional funds will be used to defend the named defendants and the available proceeds under the policy will be significantly diminished," Connor said.

Kmart filed for Chapter 11 bankruptcy on Jan. 22, 2002, after a team of executives known inside the company as the Frat Boys, allegedly misused corporate jets, drove luxury leased cars, and received lavish salaries while steering the company into the largest retail bankruptcy in history.

During bankruptcy, the company reorganized and shed 602 stores and 54,000 workers. The bankruptcy also wiped out some $6.3 billion in shareholder equity and left creditors with $6 billion in unpaid bills.

On May 6, 2003, Kmart emerged from bankruptcy under the ownership of investor Edward C. Lampert as Kmart Holdings Corp. In May 2005, the company merged with Sears, Roebuck and Co.

In August, the U.S. Securities and Exchange Commission filed a lawsuit against Conaway and John McDonald Jr., a former chief financial officer, saying they engaged in numerous deceptions to conceal actions that led to the Kmart bankruptcy. The defendants have asked the judge to dismiss the SEC lawsuit.

The U.S. Attorney's Office in Detroit declined to prosecute Conaway after a grand jury investigation. They handed off the case to authorities in New York for possible prosecution. Arbitrators in a civil lawsuit filed in Oakland County Circuit Court by Kmart creditors cleared Conaway of any wrongdoing in July and said the creditors must pay his legal fees and court costs.

Wal-Mart: The Good Goliath
By John Tierney – Op-Ed Columnist - New York Times
November 29, 2005

Once upon a time, social activists decried the plight of workers in company towns whose paychecks vanished each week because they were being gouged by the local stores. Urban politicians, angered by the high prices charged at grocery stores in the inner city, offered subsidies to attract chain stores that would make food more affordable for the poor.

Then Wal-Mart came along, giving small-town workers an alternative to the local oligopoly and offering urbanites food at the same low prices charged in the suburbs. Now the activists and politicians have a new cause: Say No to Wal-Mart! Stop it before it discounts again!

This new crusade is especially puzzling in light of the current consensus among poverty experts. I recently moderated what I expected to be a liberal-conservative debate on the topic that was sponsored by The New York Times Neediest Cases Fund. It was a fascinating discussion - but as hard as I tried to provoke controversy, there wasn't much of a fight.

Both sides praised welfare reform and said the government should keep pushing people off the rolls and into jobs. And because many of these people are unskilled workers who command less than $10 per hour, both sides agreed that the government should make work worthwhile by supplementing their income through more income tax credits and other programs.

From that perspective, Wal-Mart has been one of the most successful antipoverty programs in America. It provides entry-level jobs that unskilled workers badly want - there are often 5 or 10 applicants for each position at a new store.

Critics say Wal-Mart's pay, $9.68 per hour on average, is too low and depresses local retail wages when a new store opens. That effect is debatable, but even if wages do go down slightly, these workers still end up with more disposable income, as Jason Furman, a visiting professor at New York University, concludes in a paper titled "Wal-Mart: A Progressive Success Story."

Furman, a former economic adviser in the Clinton administration and the Kerry presidential campaign, notes that the possible decline in wages is minuscule compared with what the typical family saves by shopping at Wal-Mart: nearly $800 per year on groceries alone, a savings that's especially valuable to the many low-income shoppers at Wal-Mart.

The average income of shoppers at Wal-Mart is $35,000, compared with $50,000 at Target and $74,000 at Costco. Costco is touted as the virtuous alternative to Wal-Mart because it pays better wages, but it needs to because it requires higher-skilled workers to sell higher-end products to its more affluent customers.

Wal-Mart is often denounced for getting "corporate welfare" because some of its employees rely on Medicaid for health care and on other government aid. But so do some employees at other companies or at government institutions like public schools. Wal-Mart offers health benefits that are generally comparable to what other retailers offer.

Its size makes it an easy target for enemies, like the Maryland legislators who passed a bill that would apparently affect only one company in the state: Wal-Mart. The legislators in Maryland (and other states) want to force Wal-Mart to either increase its spending on health care benefits or to make payments to the state's health program for the poor.

But suppose Wal-Mart were forced to give health coverage to all of its part-time employees. To remain competitive, Wal-Mart would probably cut the cash wages of the workers to compensate for the additional health benefits. The cut in take-home pay would be particularly hard on the many part-timers who don't need the benefits because they're already covered through their spouses' or other insurance.

Some of Wal-Mart's critics prefer to imagine that Wal-Mart wouldn't have to cut wages - that it could get away with raising prices a little to cover the extra health care costs. But that would force Wal-Mart's shoppers to cover costs previously paid by the government out of revenues coming largely from income taxes, which are paid disproportionately by the affluent. Instead, Wal-Mart's low-income shoppers would, in effect, pay a regressive new sales tax.

It's easy to understand the motives of some of Wal-Mart's enemies. Local merchants don't want to match its prices. Labor leaders know that they'll lose members and dues if unionized stores suffer. But why would anyone who claims to be fighting for social justice be so determined to take money out of the pockets of the poor?

Kmart Workers, Retirees in Pension Deal
Chicago Tribune Online - Associated Press
November 29, 2005

TROY, Mich. -- As many as 150,000 employees and retirees of the former Kmart Corp. would share $11.75 million in a proposed settlement of a lawsuit against ex-company officials over the investment of pension funds in Kmart's now worthless stock.

The agreement involves those who participated in Kmart pensions from March 15, 1999, to March 6, 2003. Court documents say the people involved lost between $28 million and $300 million.

"The settlement is fair, reasonable and in the best interest of the class and should, therefore, be approved," Glen Connor, a Birmingham, Ala., lawyer for one retiree who filed a class-action lawsuit, said in court papers filed Monday. The papers asked Detroit U.S. District Judge Avern Cohn to approve the deal.

A message seeking comment was left for Sears Holdings Corp., Kmart's successor, before business hours Tuesday.

Connor's client, Quincie Rankin, is a former employee of Kmart in Fairfield, Ala. Rankin sued ex-Kmart Chief Executive Charles Conaway and other former executives and board members in March 2002.

The suit said the company officials invested Kmart pension money in Kmart stock after the company filed for Chapter 11 bankruptcy protection on Jan. 22, 2002. It said the officials failed to exercise proper care for the pension money.

The settlement would be paid from proceeds of a $25 million insurance policy from National Union Fire Insurance Co., the Detroit Free Press said.

Kmart emerged from Chapter 11 bankruptcy protection in 2003 as Kmart Holding Corp. In March, the Troy-based company combined with Sears, Roebuck and Co. to form Sears Holdings. The new company is based in Hoffman Estates, Ill.

In August, the U.S. Securities and Exchange Commission filed civil charges of securities fraud and aiding and abetting securities fraud against Conaway and former Kmart Chief Financial Officer John T. McDonald.

The SEC said the executives made "materially false and misleading" disclosures to shareholders before the retailer's bankruptcy filing.

The agency's complaint filed in U.S. District Court in Detroit also accused the men of aiding and abetting violations of rules that require publicly traded companies to file quarterly reports and to include material information in the reports so they are not misleading.

Lawyers for Conaway and McDonald have said that their clients acted in good faith.

Sorting Out A Sears Warranty Nightmare
Seven’s On Your Side
By Tappy Phillips – WABC New York
November 28, 2005

A warranty nightmare kept a Long Island homeowner on hold for months. She was having a problem with an expensive home heating unit from Sears until she called Seven On Your Side and Tappy Phillips.

It was starting to get cold and the Baldwin woman had no heat. She had called Sears repeatedly to get her heat pump serviced, but she was getting nowhere. Finally she dialed her thermostat for Seven On Your Side.

This fall, a space heater is Dorothy Vacaro's means of warmth.

Dorothy Vaccaro, Homeowner: "I've just about had it. I mean enough is enough."
//
The problem? A Sears heating unit she bought two years ago.
Each day, Dorothy calls Sears and says their response has left her cold.

Dorothy: "It's just been a series of telephone calls, emails ... it's extremely frustrating."

She says Sears technicians had visited her home twice, and both agreed...

Dorothy: "It needs to be replaced."

But Dorothy says, even though it's under warranty, Sears would never authorize replacing the unit.

Roger Bogsted, Nassau County Consumer Affairs: "We've seen a 350 percent increase in complaints from Sears in 2005."

Nassau County had seen a spike in Sears complaints ever since the retail giant merged with Kmart last March. It got so bad, they slapped Sears with a rare fine and a 72 hour ultimatum.

Roger Bogsted: "If you don't get their act together, you're going to be issued multiple fines and you risk losing your license to do home improvement in Nassau County."

It took more than a week of calls, but finally Sears agreed to issue Dorothy a refund -- but there was a catch. That catch was a release that said there could be no publicity regarding the settlement.

Dorothy refused to sign.

Dorothy: "The bottom line is I am getting a full refund."

And eventually Sears withdrew the request for Dorothy's silence. Complaints have increased since Sears merged with K-Mart last March. Apparently, their service and installation departments are in different locations and did not communicate well. As for Nassau County complaints, Sears has addressed all of them.

Sears Closes on Orchard Investment
Associated Press – Forbes.com
November 23, 2005

Sears Holdings Corp. said Wednesday it has closed on a $58.7 million investment by Los Angeles private equity firm Ares Management LLC in the retailer's Orchard Supply Hardware subsidiary.

Under the agreement, which was first disclosed in October, Ares now owns 19.9 percent of Orchard, which operates 84 hardware and garden supplies stores located in California. The deal also gives Areas a three-year option to buy an additional 30.2 percent of Orchard for $126.8 million.

Sears said it received from Orchard $225.5 million in cash and a $230 million note bearing interest at 10 percent initially, and increasing over time to a maximum of 12.5 percent. Orchard said it plans to refinance the note when market conditions improve.

Orchard said it obtained $250 million in financing, comprising a $130 million senior secured revolving credit facility and a $120 million mortgage-backed loan. The company said in October it would pay Sears a dividend of about $450 million.

Sears shares were unchanged in after-hours trading after closing down 59 cents at $121.17 on the Nasdaq.

Don’t Blame Wal-Mart
The giant retailer isn’t evil
just caught up in the global economy.
By Geoffrey Colvin – Value Drive - Fortune
November 28, 2005 issue

VALUE DRIVEN

Executives at Wal-Mart are worried that Robert Greenwald’s new documentary film about the company—Wal-Mart: The High Cost of Low Price—could become a cult hit on the order of Michael Moore’s anti-GM rant, Roger & Me. So my first piece of advice to CEO Lee Scott and his team is: Stop worrying about the movie. It’s a jeremiad—a ham-handed snore with none of the humor, craft, or story sense that made Moore’s film so engaging. The people who already hate you will love it, but nobody else will be able to sit through it.

My second piece of advice is to worry deeply about what the film represents. It’s a response to the great social disrupter of our time—the emergence of a friction-free global economy. This new film, awful though it may be, is a cry from the hearts of people being wrenched from the old world into the new and not liking it. There are millions of them, and they will demand to be heard in the media, the markets, and government. And the world’s largest corporation is, inevitably, the most inviting target they can find.

Why they’re unhappy is no mystery. In the new world it’s possible to coordinate supply chains and distribution networks with precision and efficiency never before imagined. Result: big-box retailers with extremely low prices. Wal-Mart’s critics (including the new movie) dwell heavily on how the company heartlessly drives small-town stores out of business. One never hears the obvious problem with that allegation: that Wal-Mart can’t drive anyone out of business. Only customers can do that, and millions of them happily drive right past those little stores because they’d rather pay lower prices. Of course it isn’t just Wal-Mart that draws them. Home Depot and Lowe’s have been death for small hardware stores, Zales for mom-and-pop jewelry shops, Sports Authority for the old sporting goods retailers. They’re all using the plunging cost of computing power and telecommunication to create previously impossible business models that give customers what they want. That trend is not going to stop.

The new world also makes it impossible for employers to pay people as they used to. Maybe the most important part of the new world for many Americans is the advent of a genuinely global labor market, in which workers around the world compete. Of course nobody in Mumbai can directly take the job of a retail clerk on the floor of a Wal-Mart. But a lot of labor is fungible; a given person could work in a store or factory or office. So global competition for workers in factories or info-based jobs, where work can be offshored, pushes down the pay of millions of others—bad news for Wal-Mart employees and potential employees.

A big chunk of the documentary concerns the fact that many Wal-Mart workers don’t get very good medical coverage—or any at all. Again, welcome to 2005. Everybody’s medical coverage is getting stingier because in a global economy, where U.S. workers compete with those in Datang and Wal-Mart competes for capital with every other business on earth, American companies can’t continue paying the world’s highest health-care costs. Don’t blame Wal-Mart; blame America’s inability to devise a national health plan that takes the burden off employers.

The film includes a few allegations of illegal conduct by Wal-Mart managers, and obviously nothing can excuse that. The big question is whether such behavior is systemic, as the film suggests but doesn’t prove. Until there’s better evidence, one should be agnostic on this question, which is not the same as giving Wal-Mart the benefit of the doubt. The company’s growth has been slowing, and it’s under pressure from investors to improve results. As that pressure gets transmitted down to stores, it’s easy to imagine managers doing things they shouldn’t.

If that’s happening and Wal-Mart doesn’t fix it, the results could be dire. This is a battle, and nothing ordains that Wal-Mart must win. The forces of discontent could enable competitors to find toeholds and over time reduce it to just one of America’s several major retailers. What’s critical to realize is that it wouldn’t really matter. This film’s greatest disservice is to tell people, as it does in its closing sequence, that victory consists of stopping Wal-Mart. That’s a delusion. The only true victory will be adapting to the world that’s coming, like it or not and regardless of who brings it.

Sears' investors still looking for Lampert's genius
CHICAGO BUSINESS.COM
November 22, 2005

Rather than wheeling and dealing, shareholders face retailing reality (Reuters) — Sears Holdings Corp. investors were hoping to cash in on the financial genius of hedge fund manager and Chairman Edward Lampert, who swiftly transformed Kmart from a bankrupt discounter into a real estate gold mine.

But instead of being treated to a dazzling demonstration of wheeling and dealing, shareholders so far have gotten only a sobering dose of retailing reality as the company struggles with sluggish sales and tough competition in an industry dominated by Wal-Mart Stores Inc.

With the holiday shopping season beginning in earnest this weekend, and Sears Holdings' third-quarter results due in early December, Wall Street is eager for proof that Lampert can revive sales at the No. 3 U.S. mass retailer's long-struggling chains, Sears and Kmart. Both have reported years of declining sales as fast-growing Wal-Mart and others take market share.

True to Lampert's secretive hedge fund roots, Sears Holdings has been stingy with information and does not provide monthly sales reports or financial forecasts. The latest data for investors came back in early September, when the company posted higher quarterly profit, but declining sales.

The stock has fallen about 6 percent since then, amid concerns about holiday sales prospects. Rival Target Corp. warned last week that November sales would miss its forecast, heightening holiday sales worries sector-wide.

"Comments from competitors, markdown worries and lack of management communication has sent the stock on a pretty weak spiral," Gary Balter, retail analyst with Credit Suisse First Boston, wrote in a recent note to clients.

That dearth of information from management is a major reason why only seven Wall Street analysts cover the stock, compared with 27 who follow Target and Wal-Mart.

Several institutional investors declined to be quoted for this story. But, one big shareholder who has commented on the stock is Marty Whitman, whose Third Avenue Value Fund sold millions of Sears Holdings shares this year.

"The company has to succeed in a big way in order to justify these (stock) prices," Whitman wrote in a letter to shareholders of his fund, explaining why he sold some 2.25 million shares in the quarter ended July 31.

Whitman was among the original investors with Lampert when Kmart emerged from bankruptcy protection in 2003. Lampert, who also orchestrated the acquisition of Sears, Roebuck and Co. in March to form Sears Holdings, made Kmart shareholders rich by selling chunks of prime real estate and building up a huge cash pile.

Many investors expected him to repeat that pattern as the chairman of Sears Holdings, which boasts hundreds of urban stores with long-term leases carrying rents well below market rates. They envisioned an acquisitive holding company modeled after Warren Buffett's Berkshire Hathaway Inc.

But the retailer hasn't generated the sizable returns seen at Lampert's ESL Investments fund, which earned him $1 billion in 2004 and made him the highest paid hedge fund manager, according to Institutional Investor's Alpha magazine.

No major real estate deals have been announced since the company was formed in March. Aside from Sears Canada Ltd.'s sale of its credit card business, the biggest transaction was a relatively small $59 million deal to sell a stake in its Orchard Supply Hardware Stores chain.

The stock is down some 26 percent from a July peak of $163.50. Analysts say some stores look neglected as the retailer cuts back on capital spending.

Lampert insists that the future of Sears Holdings remains as a retailer, not a real estate investment trust.

He put himself in charge of marketing and merchandising -- a shock to some analysts who saw him as a financial wizard rather than a retailer. He hired a new team of designers and merchandisers to try to reverse years of slumping sales.

His strategy will be put to the test in the crucial holiday shopping season. Sears Holdings declined to comment for this story, and has not provided any forecast on holiday trends.

Analysts are expecting modest holiday sales growth for the retail sector, but Sears Holdings may be in a tough spot because Wal-Mart is aggressively advertising and cutting prices to win customers. Target and Best Buy Co. Inc. are likely to do the same.

The retailer certainly has valuable assets beyond its real estate holdings. Sears is the No. 1 seller of appliances, although it has been ceding market share to home improvement chains, and is a key destination for consumers seeking electronics and tools. Kmart has exclusive brands including the popular Martha Stewart Everyday home decor line.

But analysts have been underwhelmed by the stores, noting that Sears Holdings invests far less in upkeep than Wal-Mart and Target. Credit Suisse's Balter said a recent store visit turned up boring merchandise and outdated signage.

His advice to Lampert? "Add some pizazz please to the stores."

Shares of Sears Holdings closed up $1.61 cents at $121.76 in trading on the Nasdaq on Tuesday.

Lampert plays Grinch at Sears
By Sandra Jones – Crain’s Chicago Business
November 21, 2005

Hard line on softer side: philanthropy squeezed

Sears Holdings Corp. Chairman Edward Lampert's cost-cutting campaign is slicing into the retailer's philanthropic commitments.

A series of cutbacks since the billionaire hedge fund mogul's Kmart Holding Corp. bought Sears, Roebuck and Co. earlier this year suggest Sears is going the way of Amoco, Andersen, Quaker Oats and United Airlines — once big contributors to Chicago's cultural and civic life that virtually disappeared after mergers or financial woes.

Hoffman Estates-based Sears has ranked among Illinois' top 10 corporate and foundation donors since 1997, giving $44 million a year as recently as 2003, according to the Donors Forum of Chicago, an association of grantmakers. Sears no longer discloses its corporate giving, a Sears spokeswoman says.

Sears dropped out of the Donors Forum in June, withdrawing from the organization it helped found in 1974, says Donors Forum CEO Valerie Lies. Susan Duchak, who oversaw most of Sears' giving as director of community relations, left the company in June, and the post hasn't been filled. Just three weeks ago the company canceled its membership in the Executives' Club of Chicago, a spokeswoman for the group says. Sears chairmen dating back to Gen. Robert Wood in the 1940s have served as directors of the business leaders' organization. Mr. Lampert, a resident of Greenwich, Conn., is the first Sears chairman not to live in the Chicago area.

GIVING IS 'SMART BUSINESS'

Shrinking the company's civic and charitable spending would be consistent with Mr. Lampert's effort to improve financial performance by trimming overhead. But many retailers give large sums to charities, trumpeting the donations as part of their marketing strategies. Wal-Mart Stores Inc. and Target Corp. each gave away more than $100 million in 2004. Sears' retreat reinforces the widespread perception that Mr. Lampert is more interested in harvesting the value of Sears' real estate holdings than in its potential as a retailer.

"Retailers give because it's smart business and part of the history of retail," says Kathy Mance, vice president of the National Retail Federation Foundation in Washington, D.C. "It's our business to be out in front."

The Chicago Symphony Orchestra , which Sears has sponsored for more than 20 years, hasn't received a funding commitment from Sears for fiscal 2006, but still hopes the company will come through, a CSO spokeswoman says. The Lyric Opera of Chicago, another longtime Sears beneficiary, declines to comment on whether Sears will contribute to its 2006 budget. Sears' relationship with the Lyric dates back to the 1980s, and Sears Vice-chairman Alan Lacy sits on the Lyric's board.

'SAD TO SEE THEM GO'
Sears began pulling back giving last year when Mr. Lacy ran the company and was under pressure to cut costs. In 2004, Sears severed a long-standing relationship with the United Negro College Fund, an organization it helped found in the 1940s. Sears had been giving the Virginia-based fund up to $250,000 a year as recently as 2003.

"There was always a strong relationship between the UNCF and Sears," says UNCF's John P. Donohue, executive vice-president of development. "They were a good donor. We were sad to see them go."

A Sears spokesman says the company's five-year, $100-million campaign to build and improve housing that began in 2002 remains the "strategic framework of all of our corporate giving." Sears declines to comment further.

Explaining Medicare Drug Benefit Can Be a Headache for the Kids
By Sarah Rubenstein – Wall Street Journal Online
November 21, 2005

Joann Kutac has been under pressure from her mom to find out about the new Medicare prescription-drug benefit -- immediately.

"It's a daily thing," Ms. Kutac, of Plantersville, Texas, says of her 73-year-old mother's requests for help. "Did you find out anything? Did you find out anything?"

Getting involved in parents' personal finances and health decisions can be sticky. And the Medicare drug benefit isn't a simple financial issue: There's a host of available plans, with different lists of covered drugs and a wide range of out-of-pocket costs.

Still, many adult children are getting involved, whether they like it or not. And the federal government, which has a lot riding on getting seniors to sign up for a plan, is encouraging family participation in the decision. The government is promoting this Friday as a "national conversation" day for families to discuss the drug benefit while they're still together and stuffed from their Thanksgiving feasts.

Meanwhile, UnitedHealth Group Inc. this month launched a Web site, www.partdcentral.com 1, which includes tips on how to speak with your parents about the drug coverage. PacifiCare Health Systems Inc. is featuring characters from "I Love Lucy" in its ads because the classic television show appeals to seniors as well as their adult children, the company says. Humana Inc. in early 2006 plans to host educational sessions on various aspects of Medicare for seniors' children, friends and other caregivers.

In many cases, though, the most persistent prompting is from the parents themselves.

Ms. Kutac, a 46-year-old library assistant at a junior-high school, has already spent hours surfing the Internet and calling insurance companies for her mom, who is partially blind and recently underwent heart surgery. Then, three days in a row starting last Sunday, Ms. Kutac's mother asked her daughter to attend an educational event at a local pharmacy at 9 a.m. that Tuesday.

"Well, Mom, I work," Ms. Kutac recalls saying. "I don't know if I can get off."

For other adult children, the problem is that their parents aren't quite eager enough.

Cindy De Santis, 50, says that her 76-year-old mother has "actively acted like it was a pain in the butt" to choose and sign up for a plan. Still, Ms. De Santis, of Los Gatos, Calif., convinced her mother, who lives in Vermont, to email lists of the prescription drugs that she and Ms. De Santis's aunt take, so Ms. De Santis could research plans for both of them. But shooting off an email has turned out to be a difficult feat.

"I asked her several times to send it to me," says Ms. De Santis, a stay-at-home mother. "She said, 'Well, I wrote you an email, and I got it all written, and then it disappeared. Did it get to you or did I lose it?'"

Ron Fuqua, of Dallas, thought he was a step ahead of the tech issues. To better understand his 78-year-old mother-in-law's current insurance coverage, he logged on to her carrier's Web site himself, typing in her personal-identification information that she'd permitted him to use. He got pretty far -- until the site indicated that a password would be sent via the U.S. Postal Service. Since he was logged on under his mother-in-law's name, Mr. Fuqua, a 55-year-old manager at a bank, couldn't direct the Web site to send the password to his own mailing address. He says he told his mother-in-law, "When you get it, let me know."

Victoria Schindler, 52, doesn't expect to get answers from her father, who lives in an assisted-living facility and, at about 90, lacks the mental dexterity to deal with insurance issues himself. What frustrates Ms. Schindler, a psychologist from Cary, N.C., is that she called her father's pharmacy to find out what insurers the pharmacy is working with -- but so far hasn't been able to get a response. The assisted-living facility hasn't had easy answers either. "I'm hitting dead ends," she says.

Ms. Schindler has the right idea, though. Especially if your parents are tied to one pharmacy, it's important to find out whether that pharmacy is part of an insurance plan's network. When you're doing research, it also helps to have a list of your parents' drugs, dosages and frequency of use. You should understand your parents' current insurance coverage. Also, if your parents are low income, they may qualify for extra help.

The easiest option for most children may be to help your parents pick a plan and then have them sign up themselves. To enroll parents on your own, you'd generally need to be granted power of attorney or designated a "health-care proxy" or legal guardian, says Amy Paul, executive director of FRIA, or Friends and Relatives of Institutionalized Aged, a New York nonprofit that advocates and provides information for residents of nursing homes and other long-term care settings. (In many states, if a person is incapacitated, the state may authorize a spouse or child to step in, she says.)

As for the tricky social dynamics of getting involved, UnitedHealth Group's site provides a reminder that could come in handy in lots of parent-child talks: "Use a normal conversational tone."

"Although seniors do tend to process verbal information differently, avoid using 'elderspeak' which is often spoken to seniors and is characterized by sing-song verbal patterns, unnecessarily loud speech, and overly shortened words," the site cautions. "Seniors tend to feel that this is condescending."

If your parents are anxiously nagging you to get everything done now, it may help to remind them that there's no big rush, Ms. Paul says. The enrollment period lasts six months, from Nov. 15 to May 15, 2006.

It's also important not to be condescending about any difficulty your parents have understanding the program, Ms. Paul says. And while you can encourage your parents to think through the options, remember that, ultimately, this is their decision -- not yours, she says.

In helping her mother and aunt in Vermont, Ms. De Santis says she's trained herself not to express too much of her own frustration about how complicated the program seems to be. Also, she's tried to boil the message down to a simple one: you could save money. "That's the way you bait them," she says.

To keep adult children motivated, the government launched an ad campaign reminding them that they could rack up brownie points by helping out.

"I just made up for 40 years of disappointing my parents," proclaims a woman in a Medicare television ad that's airing nationwide. Adds a different character, hugging her daughter: "I forgive you for marrying Bob." ("Rob," the daughter corrects her.)

Sears stuffs new day into shopping season
By Mary Ellen Podmolik - Chicago Tribune
November 19, 2005

The excuse "I didn't have time to shop" may not cut it this holiday season.

Retailers are adding to their overtime this year to attract shoppers, and it all begins in earnest on Thanksgiving.

For the first time, Sears, Roebuck and Co. will open some of its stores on Thanksgiving Day.

A group of 48 Sears Essentials stores, including four in Illinois that were former Kmart locations, will be open from 8 a.m. to 6 p.m. and offer special sales for customers on that day only.

Unlike its traditional department stores, Sears Essentials carry pantry items and such goods as foil roasting pans, which the merchant believes cooks may need at the last minute on Thanksgiving.

"We're looking to see how it performs," Sears spokeswoman Corinne Gudovic said. "There's not many retailers open on that day. And it's been a great day for Kmart."

Kmart, which acquired Sears earlier this year, has been open on Thanksgiving for many years and says the day has become a holiday shopping tradition for some families.

"People have different traditions for different holidays," spokeswoman Colleen Cleary said. "Some people figure instead of going [shopping Friday], let's go today because there'll be less people in the store."

Most stores that will be open on Thanksgiving, which also include Wal-Mart Supercenters, Big Lots and Family Dollar, will offer special Thursday-only deals for customers.

For shoppers who don't want to leave home Thursday or brave the crowds Friday, it might pay to take a peek at retailers' Web sites.

Stores like Best Buy, Sears and Toys "R" Us say some of the merchandise advertised for Friday will be available online on Thanksgiving. However, shoppers will not be able to buy online the "doorbuster" or "early bird" specials that many chains have on Friday.

On the day after Thanksgiving, skies will still be dark when many retailers throw open their doors to bargain hunters. In what is expected to be a season filled with promotions and special deals, more stores than ever are opening as early as 5 a.m.

"That's what we heard our customers want," said Best Buy spokeswoman Natalie Bushaw.

"People are so excited to go shopping. We've had people lining up at our stores at three or four in the morning. They won't have to wait outside quite as long," Bushaw said.

Toys "R" Us' national ad in Thanksgiving papers will say the stores open at 6 a.m., but most in the Chicago area should open at 5 a.m., spokeswoman Kelly Cullen said.

Customers are encouraged to call individual stores to double-check the opening time, she said.

Some malls are getting in on the action, too.

Westfield Old Orchard doesn't open until 8 a.m. Friday, but Woodfield mall will unlock at 6 a.m.

Target, which will open stores at 6 a.m. Friday, is again offering to help shoppers get out of bed to get to the sales. Consumers can go to the Target Web site (www.target.com/2daysale) to sign up for a free, prerecorded wake-up call from such personalities as Kermit the Frog, model Carolyn Murphy or country singer Brad Paisley.

Mega-merger: One year later
Marriage of faded icons may spell end of Kmart
After merger, future dims for Sears Holdings
By Tenisha Mercer - The Detroit News
November 17, 2005

TROY -- It was billed as a marriage of equals that would transform two struggling American icons into a $55 billion retailing powerhouse.

But one year after Troy-based Kmart Holding Corp. announced it would acquire Sears, Roebuck & Co. in a blockbuster $12.3 billion deal, the new company, called Sears Holdings Corp., is struggling and the future of the Kmart name is in doubt.

Big plans to combine the best brands of both companies haven't been fully realized. Neither Sears department stores nor Sears Essentials, the new format expected to drive the company's off-mall growth, has not added Kmart merchandise, including iconic marques like Martha Stewart Everyday.

At the same time, Kmart stores in Michigan and around the country have closed.

"The Kmart brand name is gone," said Howard Davidowitz, chairman of Davidowitz & Associates, a retail consulting and investment banking firm in New York. "If you were going to keep a brand, you wouldn't be closing more stores. (Sears) is going to milk this brand for everything that it's worth, and then it's going to disappear."

The impact on Michigan has been swift and painful. When the merger was announced, company officials pledged to keep a "significant" corporate presence in Michigan. That hasn't happened.

Hundreds of Kmart employees in Michigan have been transferred to Sears' offices in Hoffman Estates, Ill., near Chicago, or to Dallas, according to SEC filings.

Only a few hundred employees remain at Kmart's massive headquarters building on Big Beaver Road in Troy.

Sears Holdings Corp. spokesman Chris Brathwaite would not comment about the merger this week. But Sears Holdings Chairman Edward S. Lampert, the Wall Street whiz kid who orchestrated the deal, is preaching the positive despite a languishing stock price, executive turmoil and falling sales.

"We continue to work on steps to make Sears Holdings more customer-focused and more profitable in order to compete in the 21st century," Lampert wrote in a letter to shareholders in September.

"We intend to build on the historic strengths of both companies, while overcoming some of the more recent weaknesses."

Analysts say that Sears Holdings has not proven to be greater than the sum of two proud but out-of-step companies.

Wal-Mart, Target and a tide of growing off-mall retailers have exposed the weaknesses of both Sears and Kmart -- muddled marketing identity, falling market share and uneven brand awareness.

"They are not yet developing a niche," said Farmington Hills retail analyst Kenneth Dalto, who expects Sears will close more Kmart stores. "They are trying to be everything to everybody, but everyone else is so far ahead of them."

Sears plans to introduce its private label brands such as Kenmore appliances and Craftsman tools into 50 Kmart stores by year's end, but there are no known plans to introduce Kmart merchandise into Sears stores.

The company also expects to open 50 Sears Essentials by the end of the year as part of a plan to convert 400 Kmart stores to the Sears Essentials concept.

So far, consumer reaction is mixed.

Karen Stonehouse, 53, of Shelby Township, likes what she sees at Kmart since the merger, which was finalized in March.

"The stores needed a new look," said Stonehouse, shopping this week at the Kmart store in Troy. "The stores have improved, and it's easier to find things."

But Laura Abshire, 60, of Hazel Park, doesn't like Sears Essentials, which doesn't offer her favorite Martha Stewart products.

"The Sears merchandise is more expensive," Abshire said after shopping at the Sears Essentials in Warren. "If I want appliances, I'll go to the regular Sears."

The loss of Michigan's last national retailer was a painful blow to Metro Detroit, which had already lost retailers like Winkelman's and J.L. Hudson in the 1990s. To keep Kmart, the Michigan Economic Development Authority had offered Kmart at least $45 million in incentives to convince the retailer to remain in Michigan.

Ground zero for the impact of Kmart on southeast Michigan is at the company's sprawling former headquarters in Troy. At one point, Kmart employed as many as 6,000, mostly in high-paying, white collar positions.

Kmart began lopping off jobs as its fortunes declined. By last summer, it had just 2,000 employees in Troy.

It is not known exactly how many employees now remain. On Wednesday, about 600 cars could be seen outside the Big Beaver complex, filling about half of the main parking lot. According to financial documents, Sears Holdings notified 1,435 Kmart employees that their jobs were being relocated, under review or eliminated as part of the company's restructuring. Sears offered some employees slight raises if they would move to Illinois, but officials won't say how many accepted.

The 1 million square-foot building is regarded as too big and outdated to reuse, so it is likely to be demolished and turned into a mixed-use development, possibly with residential, retail and entertainment components.

Madison Marquette, the Washington, D.C.-based real estate company chosen to market the prominent site, has not announced any plans, and a company spokesman did not return phone calls.

Troy officials are also waiting to hear what Sears intends to do with the site.

"As far as we know they are still talking with Madison Marquette about trying to firm up a deal on the property," said Doug Smith, the city's real estate and development director. "It's a very important site for redevelopment. It's fairly large with a key location."

The merger could not have happened if it weren't for Lampert, the 43-year-old investment wunderkind who snapped up Kmart in 2002 while the company was mired in Chapter 11 bankruptcy. Kmart closed nearly 600 stores and cut 57,000 positions during its bankruptcy, emerging as a new company 15 months later.

Lampert --also a large investor in Sears --waged an aggressive cost-cutting campaign, selling unprofitable stores to other retailers, slashing inventory costs and spiffing up stores.

Kmart was transformed into a money vehicle for stock holders. Kmart stock that once traded for under $1 a share soared to more than $100 a share.

Yet Lampert's brilliant retail makeover also raised speculation on Wall Street that he would sell off Kmart's retail business for its valuable real estate holdings.

That speculation has continued, as Kmart and Sears cobble together their businesses. Analysts say the company's stock is overvalued at $116.70 a share, with investors banking more on the value of Sears and Kmart's 3,500 stores than selling Martha Stewart sheets and Kenmore washing machines.

"It's never been about driving customers," Davidowitz said. "This is about realizing cash from a cadaver and getting the most from your assets. As far as a retail entity ... it's looking like a failed retail enterprise that can never compete on the retail battlefield."

A report last week by Credit Suisse First Boston analyst Gary Balter raised further doubts about the future of Sears Essentials. The stores haven't gained enough customer traffic, the report said, and Sears could be priming itself for a "major real estate sale" in 2006.

"There has to be operational improvements for this story to work," Balter wrote.

Analysts view executive changes at the top of Sears Holdings as a sign that Lampert is becoming impatient. The company's top merchant, Luis Padilla, left last month. Top managers with Lands' End, a unit of Sears; Sears Essentials; Sears Grand, a smaller version of traditional Sears department stores, and the Great Indoors, Sears' chain of home décor stores, also have left the company in recent months.

Despite the turmoil, Sears Holdings has made good on its promise to cuts costs, saving $90 million in administrative and selling expenses during its second quarter, which ended July 30, and whittling its debt by more than $200 million. The retailers expected to achieve more than $300 million in cost savings with the merger.

Trouble is, nothing has stopped the sales slide. Kmart's overall sales were down 3.2 percent for the 13-week period ending July 30, while same-store sales fell 0.3 percent. Sears' domestic sales declined 3.0 percent for the quarter, while same-store domestic sales were down 7.4 percent.

"Whether this will work still has to be proven," said Ulysses Yannas, an analyst with Buckman, Buckman & Reid in New York. "I don't think they have the right people in place to improve a tough situation."

Shop-Till-You-Drop Specials, Revealed Here First
By Michael Barbaro – The New York Times
November 17, 2005

For retailers, the day after Thanksgiving is a painstakingly orchestrated affair.

Prices are scientifically slashed, down to the penny. Sales begin at dawn. And glossy circulars containing the well-laid plans are distributed just a day or two ahead to keep consumers and competitors in the dark.

Or at least that is how it worked before people like Michael Brim came along. From a cramped dorm room in California, Mr. Brim, an 18-year-old college freshman who dines on Lucky Charms and says he rarely shops, is abruptly pulling back the curtain on the biggest shopping day of the year.

His Web site, BF2005.com , publishes the circulars for what retailers call Black Friday - the day that officially starts the holiday shopping season - weeks ahead of time.

So far this year, sources have leaked advertisements to him from Toys "R" Us (showing the Barbie Fashion Show Mall, regularly $99.99, for $29.97); Sears (a Canon ZR100 MiniDV camcorder, regularly $329.99, for $249.99); and Ace Hardware (a Skil 12-volt drill, regularly $44.99, for $24.99).

Mr. Brim says his motive is to educate consumers. But retailers are furious, arguing that the site jeopardizes their holiday business, and they have threatened legal action.

But BF2005.com is not their only problem. There are now at least three Web sites dedicated to digging up Black Friday sales secrets, creating a fierce competition to post the ads first. It is so heated, in fact, that all three sites stamp the circulars with bright electronic watermarks to discourage rivals from stealing a scoop.

The renegade sites, whose popularity is growing, highlight how much the Web is shifting the balance of power in retailing from companies to consumers. Big national chains used to control discounts carefully, and shoppers were lucky to stumble into a sale at a store or receive an e-mail message promising free shipping. Today, however, online forums encourage strangers to exchange hard-to-find online coupon codes, and they offer instructions on how to combine rebates with one-day sales to cut retail prices in half.

For the discount warriors who run these sites, Black Friday is the best chance to share their techniques, not to mention their zeal, with the masses who pay full price.

"It's the day that even the average Joe becomes a professional bargain hunter," said Mr. Brim, an electrical engineering student at California Polytechnic State University in San Luis Obispo, Calif., who finances his Web site through ads placed there by Google .

Black Friday - so named because it traditionally was the point when retailers started to earn a profit (went into the black) for the year - is now more of a social ritual than a make-or-break financial moment. (A company that waited until the second-to-last month of the year to make money would probably face an investor revolt.)

Still, it remains a lucrative day for retailers. In 2004, consumers spent about $8 billion on the day after Thanksgiving, compared with $4 billion on the next Friday, according to ShopperTrak, a retail research firm. "This is a significant day for them," said Bill Martin, ShopperTrak's co-founder.

Significant enough, in fact, that lawyers for Sears, Roebuck sent a letter this month warning Mr. Brim that his site infringed on the chain's trade secrets and copyright. It gave him 48 hours to remove scanned copies of the Black Friday circulars for Kmart and Sears (now owned by Kmart) and a typed list of the deals from his site. He took down the ads, but he left the product lists up under the labels "Sbears" and "J+1Mart."

Mr. Brim said he believed that posting copies of the ads was a "legal gray area," adding, "It's not like we are posting pirated materials, just materials the public would see in a few weeks anyway."

But Andrew Beckerman-Rodau, co-director of the intellectual property program at the Suffolk University Law School in Boston, said the legal issue in such a case was black and white. "You cannot reproduce copyrighted material" without permission, he said.

Mr. Brim, a computer whiz whose classes include physics and multivariable calculus, is an unlikely figure to shake up American retailing. He rarely leaves campus to eat, let alone go to the mall.

Even though his site advertises hundreds of clothing deals, he does not, he says, pay any attention to fashion. Most days he runs from class back to his dorm to check on his Web site, snacking on a buffet of Pringles, Lucky Charms and Pepperidge Farm Milano cookies laid out on his bookshelf.

But Mr. Brim is obsessed with bargains. He recalls watching his mother and father debate which big-screen television to buy - a 42-inch model for $1,500 at Costco or a 65-inch version for $1,700 from a local electronics store. (They took the bigger one. "More bang for the buck," Mr. Brim said.)

When Dell offered a coupon for $750 off a computer purchase over $1,500 this summer, Mr. Brim bought six laptops, then sold them for a profit of $200 apiece.

Mr. Brim said the idea for the Black Friday Web site came to him three years ago when he discovered ads from retailers like Best Buy and Wal-Mart circulating in online forums well before Thanksgiving. Patient Web surfers could track down all the discounts if they had two hours to spend, but Mr. Brim wanted to organize the deals on a single site that would operate from mid-October to the end of November.

Bf2004.net , which Mr. Brim set up at home when he was a high school senior, described itself as "the ultimate collection of rumored" Black Friday deals. Mr. Brim said the site had cost roughly $600 to operate - $10 for the domain name and the rest to pay for computer servers. At first, he borrowed leaked circulars from the forums. But as the site gained a modest following (Mr. Brim estimated more than 200,000 visitors a week) it attracted what he wanted most: a steady stream of retail circulars.

Mr. Brim says he does not know the full identities of the leakers. Judging by the quality of the copies, which generally arrive as digital images or scanned copies, he suspects they are either from store employees or printing plant workers, neither of whom, he conceded, may be authorized to distribute the circulars.

Those who want to leak an ad have plenty of options. Besides Mr. Brim, there is Brad Olson, 26, who runs Gottadeal.com out of his parents' house near Milwaukee, and Alan Smolek, 21, who runs BlackFridayAds.com from his apartment near Chicago.

The three sites openly compete, like newspapers chasing the same news tip, to publish the contents of big circulars first. Gottadeal.com scored perhaps the season's biggest coup when Mr. Olson obtained a copy of Wal-Mart's Black Friday ad in late October.

Since then, Mr. Olson has been first to post the circulars of Best Buy, OfficeMax and Kohl's , among others. Mr. Brim was the first to post ads from Kmart, Toys "R" Us and Radio Shack. BlackFridayAds.com posted CompUSA.

Because the sites occasionally lift one another's circulars, each etches its name across every ad in capital letters. Gottadeal.com even inserted the image of the "Baywatch" star David Hasselhoff on Page 3 of this year's Sears circular as "an extra security measure," Mr. Olson said.

In 2004, both Sears and Home Depot asked Gottadeal.com to remove their circulars. Mr. Olson complied. But "the majority of stores don't care," he said. "It's free publicity for them."

Not all retailers see it that way. "We would rather the information not be out there," said Charles Hodges, a spokesman for Radio Shack. "We like to surprise people when they get their circulars in the mail."

Jerry Shields, a spokesman for Home Depot, said that by tipping off the public to Black Friday bargains weeks in advance, the Web sites "could enable competing retailers to react and change their plans."

Disclaimers on the three Black Friday Web sites warn that the discounts are speculation and rumor. But the warnings appear to be half-hearted. The "frequently asked questions" section of BlackFridayAds.com states archly, "We believe the deals posted to be very good guesses (wink, wink)."

Publicly, retail executives declined to confirm the accuracy of the circulars on the Black Friday sites. Several acknowledged, however, that they are correct and expressed dismay that either their own employees or outsiders hired to print the ads were leaking them.

"We wouldn't want this to become a habit, by any means," said Mr. Hodges, the Radio Shack spokesman.

Mr. Brim has already registered a new site for next holiday season. And he is still waiting for two big circulars this week to round out his 2005 collection: Circuit City and Target. His biggest fear is that a source will leak one of them while he is in class.

"In physics I'll be thinking about Black Friday," he said. "It's almost an obsession."

Here's Mr. Macy
By Julia Boorstin and Eugenia Levenson - Fortune
November 28, 2005 issue

Federated CEO Terry Lundgren reckons he can save the great American department store from the scrapheap. His plan? Turn Macy's and Bloomingdale's into national brands.

Even in the world of J. Crew and Target, Terry Lundgren believes there's a place for the good old department store.

It's hard not to believe. Earlier this year the Federated Department Stores CEO purchased May Department Stores for about $17 billion; as he points out, the combined companies produced sales of more than $30 billion in 2004.

That's a lot of customers who don't yet know they're supposed to be shopping someplace else. But growing is another thing. Lundgren's plan is to focus on a few brands. That way he can efficiently market to consumers nationwide. The strategy hasn't been without pain. When Lundgren said he was replacing the Marshall Field's nameplate in Chicago with Macy's, movie critic Roger Ebert and the Chicago Tribune recoiled in horror. Over Bloomingdale's frozen yogurt, Lundgren explained to FORTUNE why he's not worried about getting a thumbs-down in Chicagoland. Excerpts:

Any second thoughts about replacing the Marshall Field's name?
I am not surprised that there was a very strong emotional reaction. Marshall Field's captured the hearts of Chicagoans but over the past few years has been unable to catch their pocketbooks. The reality is that the division's sales declined in four out of the past five years. Two-thirds of the customers we surveyed said that if you have the same merchandise, the same service or better, the same store environment or a better one, and your pricing is the same or better, and if my salesperson behind the Frango Mint counter is the same person—if all that is the same and you're going to change the name—the answer is, Yes, I would still shop with you.

But why risk offending that third of customers who remain loyal to regional brands?
I couldn't expand Marshall Field's. When we tested the name, it did not register on the East or West Coast. This is not unique to Marshall Field's. The regional department store sector has been under attack for a long time. People remember how great things were 20 years ago, but 20 years ago the retail landscape was substantially different.... Thousands of new stores have opened from the lower end and even at the higher end, and so customers have many more choices. The idea behind Macy's is that it can market on a national basis but can respond regionally to consumer fashion, choices, and taste. That's a new model for growth.

Will the rest of the country embrace a New York brand?
We do more business in the state of California than we do in the state of New York. Macy's is a national brand, and it's an international brand. I was in Beijing in March because they were recruiting me to open a Macy's store there. They said, "We've done our market research, and the Chinese consumer knows the Macy's brand more than they know brands from Japan and France." So we've got this great, untapped asset in the Macy's brand. On March 1, 2005, we had 240 Macy's stores in America. On Sept. 1, 2006, we'll have 850 Macy's stores.

What's one of the biggest benefits of a national platform?
We have never been able to advertise on our Macy's Thanksgiving Day Parade because it's a national program, and we didn't have national coverage. This year we've gone to 425 stores, which is enough coverage to get us onto national TV. When we go to more than 800 stores next September we'll be in 63 of the 65 largest cities in America. And while advertising is national, merchandising and local marketing, like newspaper advertising, will stay local.

The market seems to be splitting to discount stores and specialty retailers. What's your niche?
We're not like a strip mall self-service operation, and we're not like a specialty boutique that is so high-end that it turns off the large majority of customers. We sell affordable luxury. A large segment of the population can afford to shop at Macy's. It crosses numerous income brackets, and it addresses the lifestyles of a large population of America. We're able to offer a much broader assortment of different products at different price ranges, focused on the four lifestyles of our core customers.

Four lifestyles?
We call them Katherine, Julie, Erin, and Alex. There's a male version too. Katherine is traditional, a classic dresser, doesn't take a lot of risks, likes quality. Julie is neo-traditional, slightly more edgy but still classic. Erin is the contemporary customer who loves newness and shops by brand. Then there's Alex, the fashion customer, and she wants only the latest and greatest. She worries about what everybody was wearing at the event she went to last night.

Erin and Alex sound pretty hip. Haven't they deserted the department store?
People have been saying that for decades. My friends in college asked, Why did I want to get into the department store business? Isn't it a dinosaur business? Shortly after that people said, Aren't you worried that the catalog business is going to make stores obsolescent? And then it was QVC. Next was the [Internet]. Every time I became less and less of a believer in all those things. We did $15.6 billion in sales last year, May Department Stores did $14.4 billion last year, and so people are still shopping at department stores. My job is to grow the business.

A lot of brands sold at Macy's are also available elsewhere. What's the draw?
One of our absolute secret weapons, a clear sustainable competitive advantage, is our private-brand prowess. Macy's private brand, INC, is a several-hundred-million-dollar brand today, the single fastest-growing brand in all our stores. The largest brand we have in our entire company—bigger than Estée Lauder and Ralph Lauren—is Charter Club. May's private brand was the worst-performing part of their business. We're going to replace that with the best-performing private brand in the industry, the Macy's private brand. That's a very key part of this whole merger—our very productive private brand replacing space that was not as productive in those stores.

So what's different about your brand?
We have great people working on the private brand. We were faced with the expense challenge: Should we move the Federated merchandising organization out of New York City? May moved it to St. Louis. J.C. Penney moved it to Texas. Target is in Minneapolis. Limited is in Columbus. We recognized that it would be a several-million-dollar decision to stay here. But here we can draw from the same pool of creative, talented people working on Seventh Avenue for all of the designers.

What else have you done to bring people into your stores?
We asked customers, What is it that you want from us? We found that our shoppers want us to speed the process of shopping. They said, Take merchandise off the aisles. Allow me to [go around] the fixtures with my stroller. Now every department manager at Macy's has a 32-inch ruler, and they have to have a 32-inch aisle between all their fixtures throughout their store. For accounting reasons, most retailers receive inventory between the 25th and 5th, but our customer is in the store more than once a month. So we changed the merchandise flow to have more frequent deliveries in smaller bites. Customers said, "I have to put my glasses on to see the menu signs," so now we've put up street sign-sized signs. Customers want to look beautiful with the product in fitting rooms, so we've made them bigger and added better lighting. Now we've got TVs outside, we've got a bench, we've got the sports channel, we've got the Cartoon Channel. You know what we're trying to do—we're trying to distract the distracters.

Your third-quarter profit more than quadrupled from last year. Besides the May acquisition and a one-time gain from selling some of your credit card assets, what caused the upside surprise?
It is a combination of things: sales, managing our expenses, managing our gross margins, taking timely markdowns. Six months ago we rolled out a program called 20-20 into all our Federated stores. Every buyer can call up the 20% best-performing items and the bottom 20% performers. So you have a natural forum for a conversation about what we're doing about both buckets. The bottom 20 is pretty easy: A lime-green product may not be selling, but it doesn't hit the manufacturer suppliers' markdown cycle for six more weeks. They would recommend that we hang on to it for a while, but when you've sold zero for two weeks, we know it's not going to get better.

And what store is the gold standard now? Nordstrom?
Bloomingdale's is doing as well as Nordstrom. Neiman Marcus is doing the best right now. But, again, I used to be the CEO of Neiman's. It's a great company, but they have 36 stores. We have 950.

What's your outlook for the holiday season? Analysts are predicting a slower year.
We have modest expectations for the fourth quarter, in the 1% to 2% comp-store-sales-growth range. This is a really critical period for us. Then in January we begin the full integration. We start remodeling the May stores, setting our inventory, training our service expectations. I can't tell you that oil prices won't be high, and I can't tell you that the housing won't be slow in terms of starts, but I can tell you that we will begin to take market share.

We hear that this Thanksgiving you're running ads with The Donald?
We had this idea to do a million-dollar giveaway for Thanksgiving. He was doing a personal appearance with us—his line of clothing is in our stores, selling off the charts. He comes to our store, and 2,000 people show up to see him. Our marketing people asked, "Do you think we could convince him to do this commercial?"

Do you have any other acquisitions in mind?
Not today.

Sears Canada sees C$650 mln gain from cards deal
Reuters Canada
November 15, 2005

TORONTO, Nov 15 (Reuters) - Sears Canada Inc. said on Tuesday it has completed the sale of its credit card business to JPMorgan Chase & Co.

Sears said an after-tax gain of around C$650 million from the sale will be accounted for in its fourth-quarter results.

The company said it will distribute around C$2 billion from the net after-tax proceeds to shareholders, by paying an extraordinary cash dividend of around C$1.53 billion among other things.

The exact amount and timing of the distribution will be determined by the board after a special meeting of shareholders scheduled for Dec. 2, Sears Canada said.

According to the deal, Sears Canada will receive annual performance payments from JPMorgan Chase generated through credit sales, the opening of new accounts and sales of financial products.

Shares of Sears Canada were down 14 Canadian cents at C$33 on the on the Toronto Stock Exchange on Tuesday, while JPMorgan Chase was up 3 cents at $38.16 on the New York Stock Exchange.

Sears Holdings Corp. owns 54 percent of Sears Canada, which operates 122 department stores, 217 off-mall stores and 62 home-improvement showrooms.

($1=$1.19 Canadian)

J.C. Penney Turns Sales Rise Into Profit
Associated Press - FORBES.COM
November 15, 2005

Department-store chain J.C. Penney Co. Inc. turned a small increase in sales into a 57 percent jump in third-quarter profit, helped by lower interest rate costs and a huge cut in its number of shares, which made the earnings on each share look better.

Company executives said Tuesday they were optimistic about the crucial holiday season for retailers, but they conceded that consumers are weighed down by higher costs to heat their homes and fill their gas tanks.

Penney, which is still riding the crest of a turnaround begun in 2001, said it earned $234 million, or 94 cents per share, in the three months ended Oct. 29. That compared to profit of $149 million, or 50 cents per share, a year earlier.

The recent quarter also topped the forecast of 92 cents per share from analysts surveyed by Thomson Financial.

Sales edged up 2 percent to $4.48 billion from $4.39 billion a year ago but fell short of analysts' forecast of $4.53 billion.

Penney's results were helped, however, by a 39 percent reduction in interest expense and a 20 percent decline in the number of average shares, which boosted earnings per share.

The company bought back 23.8 million shares of its stock in the quarter and has spent about $2.2 billion to buy back about 44 million shares in the past nine months.

The Plano-based company made modest promises about the upcoming holiday season. It predicted sales at stores open at least a year, a key measurement in retailing, would grow by low single digits, and earnings per share from continuing operations would match analysts' forecasts - $1.58 per share in the fourth quarter and $3.51 per share for the year.

Penney shares fell 65 cents, or 1.2 percent, to $53.10 in midday trading on the New York Stock Exchange. They have ranged from $38.12 to $57.99 in the past year.

The retailer said clothing sales have suffered in the past six weeks due to mild weather. President Ken Hicks said executives were still "cautiously optimistic" for the rest of November and the holidays, but he admitted that retailers face threats including aggressive price-cutting by rivals and the rising costs consumers face for home heating and gasoline.

"Obviously it's a very challenging environment for the consumers," Hicks said. "They've got a lot of pressures on them."

Chairman and Chief Executive Myron Ullman said the holiday season is when consumers return to shopping malls, and Penney is the only mall anchor that has recorded better same-store sales and sales per square foot over the past four years, "so we feel we're well-positioned competitively."

"If mall traffic is down dramatically, obviously that would have an effect on us," Ullman said. "But we've told our people there are already plenty of (shoppers) there for us do business with. We just need to compete effectively with the other (stores) already in the mall."

On Monday, discount retailer Target Corp. said November same-store sales would fall short of expectations. Wal-Mart Stores Inc. said Monday it expected a solid holiday season.

For the first nine months of its fiscal year, Penney earned $537 million, or $2.05 per share, compared to $191 million or 64 cents per share a year earlier. Revenue rose 3.6 percent to $12.58 billion from $12.14 billion a year earlier.

Hedge Funds Stick With Lampert
By Gregory Zuckerman – Staff Reporter – The Wall Street Journal
November 15, 2005

HEARD ON THE STREET

Managers Pull for Sears Executive To Turn Around the Retailer, Betting on Stock Even as It Falls

Hedge-fund managers usually are among the most competitive players on Wall Street. But when it comes to Sears Holdings Corp., it is as if they are all on the same team.

Some of the biggest stars in the hedge-fund and money-management worlds are pulling hard for Sears Chairman Edward Lampert -- who also runs ESL Investments Inc., a hedge fund with about $10 billion in assets -- to turn around the retail chain. They have been betting on Sears shares, and some funds have added to their positions or established new ones in recent months, even as the stock has tumbled in value.

"To some extent, it's a faith bet on Lampert, I'll admit that," says Whitney Tilson, who runs New York hedge fund T2 Partners LLC, a $110 million firm that has been buying Sears shares. "Hedge funds worship Eddie."

Mr. Lampert's following is understandable. He helped bring Kmart Corp. out of bankruptcy proceedings in May 2003 at the equivalent of $17 a share, and this year led a merger with Sears, moves that helped to send shares of Sears Holdings (the former Kmart) surging to $163.50 in July on the Nasdaq Stock Market.

But lately, the bets on Sears have backfired. Since July, Sears shares have dropped 31% to $113.52, amid concern that Mr. Lampert's turnaround efforts might not pay off, hampering the recent returns of some of the largest hedge funds, even though the stock is up 15% this year.

Among the hedge-fund firms most involved in Sears is Richard Perry's Perry Corp., which held 2.7 million shares of the retailer at Sept. 26, according to securities filings. That is about 2.5% of Perry's $12 billion of investments. Mr. Perry was elected to the board of Sears on Sept. 26.

Other hedge funds that held big positions in Sears at the end of the second quarter included SAC Capital Management LLC, with $6.5 billion under management; Atticus Capital LLC, with $7 billion; Citadel Investment Group LLC, with $12 billion; and Third Point Capital Management Co., with $4 billion in assets, according to securities filings.

In fact, nine of the 25 largest holders of Sears at that point were hedge funds, while other hedge funds held Sears shares through investment banks that were among the largest holders of the stock. Traders say hedge funds remain big holders of the stock.

Representatives of SAC, Atticus, Citadel and Third Point wouldn't comment or weren't available to comment.

Sears is the 10th-largest holding of investor Bill Miller's Legg Mason Value Trust mutual fund, representing about 3% of the fund at the end of September. Sears was the largest addition to Legg Mason Capital Management Inc.'s portfolio in the second quarter, according to securities filings, with 8.6 million shares purchased by the firm in the period, according to FactSet Research Inc. Overall, Legg Mason was the second-largest Sears shareholder at the end of the second quarter. A representative of the firm wouldn't comment.

Regulatory filings provide a snapshot of holdings on a certain date, of course, and the investors may have adjusted their positions, or offset them with other trades. For some hedge funds, Sears is just one of many investments, and if it doesn't work out, it might not mean that much. Chicago's Citadel holds about 610,000 shares, according to a filing yesterday. That was down from more than 1.1 million shares earlier in the year and represented less than 1% of Citadel's investment portfolio.

But for others, the Sears wager is more meaningful. Alson Capital Partners LLC, a New York hedge fund run by Neal Barsky, had more than 7.5% of its roughly $1.5 billion portfolio in Sears at Sept. 30, according to data provided by FactSet Research. Mr. Barsky wouldn't comment on the current size of his firm's position.

Same Trading Ideas

Skeptics say the buying is another sign that even the savviest investors today are flocking into the same trading ideas, a factor that could be pushing hedge-fund returns lower. Bears on Sears say Mr. Lampert hasn't yet demonstrated that he can improve operations, pointing out that Sears hasn't invested in its stores at the same rate as its rivals. And Sears continues to lose market share in some key areas, like appliances, analysts say.

So what are the hedge-fund bulls thinking? Some say they are comfortable investing alongside Mr. Lampert, noting that they have an appreciation for Mr. Lampert's track record -- annual gains of about 25% since his fund began in 1988 -- because they compete against him. They also argue that it is too early to criticize his efforts.

"Eddie has been chairman of Sears for less than a year, there's so much potential but it doesn't happen overnight," Mr. Perry says.

A spokesman for Mr. Lampert declined to comment.

Mutual Funds Hanging Back?

The fact that so many hedge funds are holders of Sears could simply suggest that mutual-fund managers aren't yet on board. Sears doesn't disclose as much information to its investors as some other companies do, refusing to provide earnings forecasts, for example, perhaps making some mutual funds uncomfortable. Other bulls cite a September purchase of more than 265,000 Sears shares by Steven Mnuchin, a Sears director, at prices that are slightly higher than current levels. Mr. Mnuchin is an investment professional who was chief executive of George Soros's hedge fund and previously a senior executive at Goldman Sachs.

Sears continues to buy back stock, hedge funds note. T2's Mr. Tilson and others say Mr. Lampert will do a much better job deploying cash flow than previous Sears management. And if the stores can't be turned around, the chain can sell real estate, or other assets, to bail out investors.

"There appears to be more low-hanging fruit operationally to build value, and Sears management is a motivated bunch," says Curtis Jensen, co-chief investment officer at Third Avenue Management LLC, a hedge-fund and mutual-fund firm that trimmed most of its Sears position in recent months out of concern that the stock became too expensive. "It's not a wildly expensive stock at these levels by any means, and the jury is still out" on Mr. Lampert's efforts.

Sears director makes bundle on stock sale
Insider Day unloads almost 1 million shares
By Sandra Jones – Crain’s Chicago Business
November 14, 2005

Sears Holdings Corp. director Julian C. Day isn't waiting around to find out how Chairman Edward S. Lampert's turnaround plan turns out.

Since Mr. Lampert engineered the merger of Sears and Kmart in March, Mr. Day has exercised options to sell $145 million in stock after buying the shares for about $13 million.

Mr. Day exercised options to buy 983,317 Sears shares at $10 to $20 each and sold them at prices between $120 and $155.50 each, regulatory filings show. Mr. Day, 53, a former top executive at both retailers, is the only Sears director to sell stock since the merger. He didn't return calls and Sears declines to comment.

"It's certainly a red flag for anybody that would be watching the company, as to how much the people who know most about the company are owning," says Richard Bennett, a consultant at Maine-based Lens Governance Advisors. "Nothing tells the tale better than that."

The sell-off comes as Mr. Lampert tries to convince investors that he can turn around the long-ailing discount chain. Shares of Sears have dropped about 12% since Mr. Lampert's Kmart took over Sears, Roebuck & Co. in March.

Mr. Day left Sears in September 2000 after 18 months as chief financial officer and then chief operating officer. In 2002, he joined Kmart, and upon becoming CEO in 2003 received options to buy about 1.6 million shares at $10 to $20 each once the retailer emerged from bankruptcy protection.

Mr. Day stepped aside as Kmart's CEO in October 2004 but remained on the board and kept his options. The Kmart stock options that Mr. Day still had at the time of the merger converted into Sears stock options when the two retailers combined.

Mr. Day's stock options expire in October 2006. He has 125,000 stock options remaining and holds no shares outright in Sears.

Gwinnett developer to purchase biggest building in Georgia
By Bryan Brooks - Staff Writer – Gwinnett Georgia Daily Post
November 13, 2005

LAWRENCEVILLE - A local developer neck deep in revitalization efforts across Gwinnett County is purchasing the largest building in Georgia.

Emory Morsberger and his business partners will pay $35 million for Atlanta City Hall East - a former Sears & Roebuck warehouse on Ponce de Leon Avenue in Atlanta.

The 2 million-square-foot structure is owned by the city of Atlanta, and Atlanta City Council members approved its sell earlier this week.

Ponce Partners will turn the fortress-like building into 1,580 lofts accompanied by roughly 300,000 square feet of retail and office space. Morsberger, of Lilburn, said the transaction should be finalized in coming days.

Construction of the project's first phase - 400 residential units and 20,000 square feet of retail - will start in the spring. "We're going to take a historic building and turn it into something the surrounding neighborhoods are proud of and can use," Morsberger said. "We're creating an environmentally friendly project."

Besides donating 2 acres to the city for use as a park, Morsberger said the lofts will also have a fleet of cars that residents can check out. That way they can rely on public transit for day-to-day trips and not be forced to own an automobile and pay its associated costs, Morsberger said.

Also, the developers are partnering with the Shepherd Spinal Center so patients rebounding from spinal injuries can live in the building. From there they will be able to travel by wheelchair across flat ground to nearby Piedmont Park.

Built in several stages beginning in 1926, the cavernous structure once served as a regional distribution center for Sears & Roebuck Co. It now houses a handful of city departments, including the Atlanta Police Department, but much of the facility is empty.

Three teams of developers asked the city to let them bid on the building, but the group organized by Morsberger was the only one selected last summer to enter serious negotiations for its purchase. Those talks ended this fall and the Atlanta council approved the sell on Tuesday.

The City Hall East project will cost about $350 million and will take about seven years to complete, said Morsberger, who is leading the development team.
The team consists of Lane Investment and Development Corp., Integral Properties LLC, the Morsberger Group, Adams & Co. Real Estate Inc. and the Atlanta Neighborhood Development Partnership. All are based in metro Atlanta.

Sears & Roebuck built 12 regional distribution centers around the United States in the 1920s, and nine are still standing with the largest one in Atlanta, Morsberger said.

Most of the warehouses have already evolved into mixed-use developments that blend residences, offices and shops, including ones in Boston, Dallas and Los Angeles. Another in Minneapolis will have its grand opening Dec. 1, said Morsberger, who visited many of them.

Sears ads attractive, but what do they sell?
By Lewis Lazare – Sun-Times Columnist - Chicago Sun-Times
November 10, 2005

There's been nothing but tumult within the employee ranks at Sears, Roebuck and Co. since Eddie Lampert took control of the company a year ago. Some of the departing players were pushed out, while others, including former marketing honcho Luis Padilla, apparently chose to leave of their own volition.

But with the holiday season fast approaching, this is probably not the time to dwell on the internal angst at the retailing giant. Certainly, Sears ad agency of record Young & Rubicam/Chicago is trying to put a bright face on things in a lavish ad campaign breaking this week with the terse tagline "Wish Big."

As lovely as it is to look at, however, "Wish Big" is a rather puzzling campaign because we couldn't see what it all had to do with making Sears a must-stop for holiday shopping. Though it's always nice to spread a little holiday cheer in these seasonal campaigns, it's also nice when the commercials make viewers want to buy things too.

The central conceit in both the 60-second "Big World" and the 30-second "Taking Home the Tree" is a series of visuals playing off "big." In "Big World" we see exquisitely composed scenes of people in the snowy big city carting home a variety of oversized gifts such as a tool kit, wrench, washer and dryer, camera, flat screen television and a doll. There's also a great image of a big gift box being opened beneath the Christmas tree to reveal a huge pair of Levi's jeans.

The second spot simply focuses on a man and woman trying to navigate their way down the street with a very big Christmas tree attached to the top of their car. With its subtly humorous touches, "Taking Home the Tree" is an easy spot to watch. But in the end, there was absolutely no connection to Sears. Or holiday shopping for that matter.

The "big" conceit makes for some fun image possibilities. Still it proves hard to develop in a big way as the constant repetition of bigness begins to fall a little flat about three-quarters of the way through "Big World."

But the tagline is perhaps the campaign's most troublesome aspect. Even those who remember the days of Sears' "Wish Book" catalog may not make a connection with "Wish Big."

As we said before, the work looks great. But it all fails, finally, to mesh into a convincing whole with a clear, compelling message.

Lew's view: C+

Who's Buying Now?
Sometimes insiders are buying for all the right reasons. Who's at it this week?
By Tim Beyers (TMF Mile High) The Motley Fool.com
November 8, 2005

First, thanks to all of you who wrote in wondering where last week's column was. It was nice to be missed, but it was even nicer to have the day off so that my wife and I could celebrate our eighth anniversary. And let's face it, a day without SEC filings can do the eyeballs good.

You know me, though. I just can't go more than a week without knowing who's buying what and why. So without further ado, let's get back to it. Here are my top five insider purchases from the past seven days:

The week's buying

Company	Closing price 11/7/05	52-week change
AutoZone (NYSE: AZO)	$87.65	2.7%
General Electric (NYSE: GE)	$34.02	- 1%*
General Growth Properties (NYSE: GGP)	$41.05	31%*
Oakley (NYSE: OO)	$15.16	19%*
Redback Networks (Nasdaq: RBAK)	$11.88	162%

Sources: Fool.com, Yahoo! Finance
*Returns calculated inclusive of dividends

Eddie in the zone
Unless you've been asleep for the past year or so, you know investor Eddie Lampert bought up Kmart's debt in bankruptcy, giving him control of the ailing retailer, which he then helped merge with Sears (Nasdaq: SHLD). The new Sears Holdings has proven to be a wonderful investment for Lampert and others. Over the past 52 weeks alone, the stock is up roughly 30%, according to Yahoo! Finance.

AutoZone, also a Motley Fool Inside Value pick, has long been in Lampert's sights, as well. And last week, he bagged a whole lot more of the stock. According to this filing , Lampert's ESL Investments -- his private investment partnership -- bought 680,000 more shares for approximately $78.11 per stub, or $53 million. Wow.

But the story isn't that simple. According to the recently filed proxy statement , Lampert was in some way responsible for nearly 28% of insider holdings. (Yahoo! Finance pegs insider ownership at 28.81%.) That's waaaaaay up from the 15.7% of AutoZone ESL Investments owned when Lampert was elected to the company's board of directors in 1999. (Details can be found in this proxy statement .)

But before the most recent purchase, ESL Investments actually owned less AutoZone stock than it did in 1999. Have a look at the breakdown, taken from the footnotes in the latest, as well as the 1999, proxy statements:

ESL Investments ownership - 10/17/05

Fund	Shares owned
ESL Partners	11,520,943
ESL Institutions	71,771
ESL Investors	3,858,519
Acres Partners	5,875,557
ESL Investment Management	19,130
Lampert's personal stake	4,221
Lampert's exercisable options	8,500
TOTAL SHARES OWNED	21,358,821

ESL Investments ownership - 9/30/99

Fund	Shares owned
ESL Partners	10,775,083
ESL Limited	2,645,021
ESL Institutions	348,528
Acres Partners	6,867,928
Marion Partners	1,124,840
TOTAL SHARES OWNED	21,761,400

So why does Lampert own a larger percentage of AutoZone today? Fewer shares. Since 1999, more than 70 million stubs have been repurchased and retired by the company. That's arguably an excellent use of shareholder cash, but none has benefited more than Lampert. Maybe that's why he's steadily moved up the Forbes list of the 400 richest people.

Indeed, there's little doubting Lampert's investing acumen, especially with the 29% annual return Forbes says he's achieved since ESL was founded in 1988. Still, I can't help but wonder why he wasn't more of a net buyer while AutoZone was repurchasing shares. I mean, really, why now?

Maybe it's because the stock dropped under $80. After all, that's where the shares were a year ago, the last time Lampert bought. Sure, that could be a coincidence. Or it could mean AutoZone's intrinsic value is well north of $80 by Lampert's estimation. You don't really need help figuring this one out, do you?

Insurers Sweeten Health Plans for Seniors
By Vanessa Fuhrmans and Sarah Lueck - Staff Reporters
The Wall Street Journal
November 8, 2005

Humana, Aetna, PacifiCare Offer Improved Private Plans
For Medicare Recipients

Some of the nation's biggest health-insurance companies are significantly improving their insurance policies for Medicare recipients, spurred by billions of dollars in new government funding.

The companies, including Aetna Inc., PacifiCare Health Systems, UnitedHealth Group Inc. and Humana Inc., are adding extras like vision benefits and gym memberships, and offering lower premiums -- or even no premiums -- in an effort to sign up new customers for their plans. Often these plans include prescription-drug benefits at no extra premium.

The flurry of new activity is part of a renewed effort by the federal government to shift Medicare recipients into privately run managed-care plans. These plans, known as Medicare Advantage, are an alternative to traditional government-run Medicare. Instead of paying beneficiaries' claims directly, the government pays commercial plans to provide "all in one" coverage for hospital care, doctor visits and prescription drugs.

Private Medicare options have been available since the 1970s, and have been often promoted as a more-efficient approach to Medicare. After an explosion of growth in 1990s, though, government cutbacks prompted insurers to trim benefits and pull out of markets, triggering wariness on the part of many seniors. Only 13% of Medicare enrollees currently get their Medicare benefits through an Advantage plan (the rest are on traditional Medicare). And last year, just 62% of Medicare beneficiaries lived in areas where Medicare managed-care plans are an option.

Now, as part of the overhaul that created the Medicare drug benefit in 2003, the government is improving funding and has created more options for sicker patients and those in rural areas. The legislation increased government payments to Medicare Advantage plans by $46 billion in the 10-year period starting in 2004, under Medicare actuaries' estimates.

There are risks to the new Advantage plans. Medicare is always a popular target for government budget cutting. Some members of Congress have said Medicare Advantage plans are being overpaid. So despite the current push, there could be cutbacks at some point, leading insurers to pull back on coverage again.

But many Republicans, including the Bush administration, view private plans as a way to rein in long-term costs of Medicare, which covers about 41 million people who are either 65 and older or have certain disabilities. For now, the government is spending hundreds of dollars more on average for each Medicare Advantage beneficiary than it is for the people in the traditional arm of the program. Mark McClellan, head of the federal agency that runs Medicare, says that when beneficiaries' out-of-pocket costs are counted, spending in traditional Medicare is "significantly higher" than in Medicare Advantage and that the private plans will help avoid duplicative services.

Many rural areas, where the Medicare Advantage plans had been scarce, will have at least three to four plans, thanks to the creation of new regional PPOs, or preferred provider organizations. Such plans provide benefits even for services outside of their network of "preferred" doctors, though at a higher cost. The new PPOs help address one of the concerns with older HMO-like Advantage plans, where benefits were restricted to limited networks of doctors, so they appeal to consumers who want more choices. In order to provide PPOs, insurers must offer them for a whole region, including rural areas,