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Rating the Retailers Uncovers Surprises
By Kim Mikus - Daily Herald - Suburban Chicago - June 30, 2002

Would you rather shop at Sears or Wal-Mart?

On paper, Wal-Mart seems it would be the retailer of choice. The discounter continues to report phenomenal growth and with $220 billion in annual sales, it's the world's largest company.

But the pages of the most recent Consumer Reports rated Sears above Wal-Mart as the desired place to shop. In fact, Sears comes out on top among the six chains examined in the publications first-ever reader retail survey.

In order of best to worst, the rankings were: Sears, Costco, Target, Sam's Club, Wal-Mart and Kmart. Readers were asked to look at everything from product quality to checkout speed. Some of the article's results seem to go against stereotypes.

Sears results may have surprised some. "With somewhat lower prices than the typical department store and better service than most discounters, Sears is a retailing hybrid," the story said.

However, analysts point out that just because shoppers like a store, it doesn't mean they actually shop there on a regular basis.

"It's an attitude survey. Attitudes don't always coincide with behavior," said Sid Doolittle, founding partner of the Chicago retail consulting firm McMillan and Doolittle.

The story showed that shoppers are willing to put up with a lot in order to save a buck.

People choose Wal-Mart for price, despite having to put up with some inconveniences. Readers complained of overcrowding in the store as well as cluttered displays. Wal-Mart was also criticized for being difficult to navigate.

Wal-Mart says they will use the survey as a way to improve.

"We're always looking at customer service and customer satisfaction," said Wal-Mart spokesman Tom Williams.

Doolittle, of Chicago, believes the survey results, while unscientific, are "reasonably valid" and accurately describe the positioning of the companies in relation to each other. He said one aspect that was not addressed was the location of the stores in relation to the shopper's home.

Some results were of no surprise. For example, bankruptcy-ridden Kmart was rated as worst in every category.

Other points of interest were that Costco and Sam's Club were praised for their home-entertainment products and Sears and Costco for hardware.

Sears stood out for service, checkout speed, product selection and store layout.

A spokeswoman for the Hoffman Estates-based retailer said officials were "very pleased" with the outcome of the survey.

Sears is aware of the areas that need work, spokeswoman Peggy Palter said. For example, the article criticized Sears for its apparel. To address this issue, Sears recently purchased Lands' End as a way to spruce up its selection.

Industry analysts credit Target with bringing more affluent customers to the world of discount retailing with its "cheap chic" merchandise.

Although Target touts its affiliation with stylish designers, fewer than 20 percent of readers said the store's clothing was excellent. Costco also was praised for its name brand clothing.

WHICH IS BEST?
Consumer Reports readers ranked the retailers. The stores are listed in order of reader score, with highlights of the magazine's report:

SEARS -- SCORE 77 PERCENT
Quality of products ranks high Superior sales staff, checkout speed, selection and layout Highest prices

COSTCO -- SCORE 76 PERCENT
Winner for value Good place to buy electonics, hardware, small appliances and entertainment products Gold Star membership costs $45 per year

TARGET -- SCORE 76 PERCENT
Shopper friendly environment Product quality unexceptional Sale items out of stock fairly often

SAM'S CLUB -- SCORE 74 PERCENT
Less sophisticated than Costco Considered the biggest warehouse club Advantage membership costs $35 a year

WAL-MART -- SCORE 71 PERCENT
Strength is price Overcrowding is a big complaint Displays and clutter criticized

KMART -- SCORE 66 PERCENT
Complaints of missing price tags Cluttered aisles Filed for bankruptcy protection this year

This is How Sears' Used to Be!
What is Lands' End Future?

"Lands' End Hiring, Promotional Policies Get the Job Done Right "
Author: SARAH Z. SLEEPER
Section: Managing A Successful Company - Investor's Business Daily
June 28, 2002

Kelly Ritchie is a good example of corporate promotions done right. Ritchie is senior vice president of employee services for direct merchant Lands' End Inc.

She's been with the company since 1985, right out of college. She worked her way up from front-line sales to executive management, and now reports directly to the chief executive of the 10,000-person firm.

Ritchie says her long, happy tenure is the result of company policy that gave her opportunities to advance and gain diverse experience. She managed a call center, served as a recruiter and had several other roles at Lands' End before landing her VP job three years ago.

While hopping from company to company is a standard practice for many executives trying to climb the corporate ladder, Ritchie says it's not the norm for Lands' End. The company has a turnover rate well below the industry average. Analysts cite its hiring and promotion policies as among the best in corporate America.

Lands' End, said John Challenger, CEO of outplacement firm Challenger, Gray & Christmas Inc., "cares for its people, invests in their futures, emphasizes education and training and provides opportunities for growth and promotion." From a list of top-performing firms, he selects Lands' End as one of the best in hiring.

And it's gotten better over the last few years. Three years ago, its turnover rate was 12%, about the norm in retail. That was during the tenure of former Chief Executive Michael Smith, when the company had flat sales and earnings.

"We were in a time where we needed to bring in talent," said Ritchie.

Smith and a number of other executives were ousted, and the company has returned to rising sales and a low 6% turnover rate.

On June 17, Sears completed a $2 billion acquisition of Lands' End. The two will work together to mesh what Ritchie says are complementary hiring practices.

"If it wasn't a great place to work, you'd have more turnover," said Tierney Remick, managing director of the consumer practice for executive recruiter Korn/Ferry International.

Lands' End does the single most important thing that ensures long-term hiring success, says Challenger. It places personal qualities at the top of the list of a candidate's credentials. It looks for folks who fit its corporate culture, not just for people who look good on paper.

"Chemistry and rapport are the intangibles that are critical to most successful management teams," said Challenger.

Many people will have plenty of experience and resumes that seem perfect, but that's not enough. In a face-to-face meeting it's usually clear within 10 minutes if a given candidate has the right stuff, he says.

At Lands' End, that means new hires must have positive attitudes and they must be team players, says Ritchie. Over a series of interviews at the company's Dodgeville, Wis., headquarters, a candidate's behavior is scrutinized as part of an overall screening.

"How did they greet the receptionist when they came in? How did they do under stress when their flight was delayed?" said Ritchie. "We are constantly looking to see that they have respect for the individual."

Curt candidates are passed over for folks who show collaborative, diplomatic personalities, she says. "We spend a lot of time asking questions to try to get an idea of how this person will work under pressure," said Ritchie.

That's smart, says Challenger. "Mistakes happen all the time because employers are dazzled by a resume."

That was especially true during the heyday of the Internet, says Remick, when hiring was at a frenzy. It's crucial that companies take the time for conversations that reveal a person's motivation and leadership skills, she says.

Even before holding in-person interviews, Lands' End tries to find people who will get along well with current staff. Some 50% of all new hires come from employee referrals of family and friends. To keep employees informed about open jobs, Lands' End puts out a bimonthly internal newsletter.

The firm offers financial incentives of between $1,000 and $2,500 for referrals who get hired for salaried positions. For nonsalaried spots, referrals garner $35 plus a chance in an annual drawing for a Saturn sport utility vehicle.

Hiring costs have dropped because of the incentive program. In 2000, the average cost to fill a Lands' End position was $15,681. In 2001, it was just $10,629.

Remick says the referral program works well. But she notes it's not as efficient for high-level staff as it is for mid- and low-level staff.

Lands' End also uses job fairs, recruiting services, media advertisements, Web postings and internships to find some of the 20,000 resumes it receives each year. About 6% of its hires are actually rehires who left for greener pastures, but then returned when they didn't find them, Ritchie says.

Promoting from within is often the best method, says Challenger. With an employee, the company knows the good and bad of that person. When someone comes from another company, it's hard to know exactly what you're getting, he says.

For promotions to succeed, it's vital that individuals have enough tact and political savvy to stay on good terms with bypassed co-workers. As long as hard feelings are kept in check, a competitive atmosphere can be a boon. "It's good for the organization for people to have ambition," said Challenger.

Ritchie says it's more efficient to promote from within. In 2000, Lands' End took an average of 72 days to fill positions with external candidates, while it took just 44 days when the candidate was promoted. In 2001, it took an average of 80 days for external candidates and 41 days for promotions.

EEOC May Allow Companies to Reduce Retirees' Benefits
A FIGHT BREWS over company-sponsored retiree benefits.

Wall Street Journal - June 26, 20002

In a rare step, federal officials plan to exempt retiree health benefits from age-discrimination laws in some cases. In a regulatory agenda published last month in the Federal Register, the Equal Employment Opportunity Commission said it plans to propose a rule that would let companies reduce benefits to older retirees without fear of lawsuits when they qualify for Medicare or state programs.

Cost-conscious employers typically cut back on benefits when retirees reach 65 and qualify for Medicare, but they fear a two-year-old court decision that squelched the practice could boost expenses and force them to eliminate benefits entirely. The EEOC's notice last month was a message to employers. "We're saying 'don't drop your retirement plan. Help is on the way,' " says David Frank, EEOC legal counsel.

Opposition is forming. The AARP, the group formerly known as the American Association of Retired Persons, says the decision weakens discrimination laws. "Can you simply deny people a particular benefit because of their age?" asks Michelle Pollak, an AARP lobbyist.

Scrutiny of retiree benefits comes as they become harder to find. A General Accounting Office study found that about a third of the 23.4 million retired Americans 65 or older supplemented Medicare with some form of employer coverage in 1999. But fewer employers these days provide these benefits. "There's very little new formation of retiree health benefits for people entering the workplace today," says Paul Dennett of the American Benefits Council, a business group.

Companies, which have made it tougher for workers to qualify for retiree plans over the years, say additional costs simply will hasten that pullback. So they protested when, two years ago, a federal appeals court ruled that workplace age-discrimination laws forbid offering retirees different amounts of coverage based on age. The EEOC adopted the same interpretation but backed off under employer pressure.

The EEOC expects the new rule to be proposed later this year, when it will be open for official comment. Mr. Frank, of the EEOC, says the rule is narrow, related only to Medicare and not as broad as legislation proposed last year with a similar aim.

Still, Christopher Mackaronis, a Washington, D.C., employment attorney, contends the EEOC is exceeding its authority and may hurt retirees. "Everybody agrees you couldn't do this in a million years to a current employee," he says.

Goodbye to Proud Morgan Stanley

Commentary: America's leadership fails us, again
By Paul B. Farrell, CBS.MarketWatch.com
June 25, 2002

Someone tell Phil Purcell he just made a big mistake: He should have kept "Dean Witter" and retired "Morgan Stanley."

That would have been more in keeping with his recent congressional lobbying efforts that seem more in the spirit of Gordon Gekko than the historic way of doing business at the once proud House of Morgan.

We lived by simple principles. When I was at Morgan Stanley, I kept a plaque on my desk with these bold words from J.P. "Jack" Morgan Jr.: "Do your work, be
honest, keep your word, help when you can, be fair." It's still on my wall 25 years later.

Unfortunately, Purcell's lobbying efforts fall far short of the kind of leadership character that Morgan Stanley ... that Wall Street ... that Americans everywhere need at this crucial juncture in our history.

God stopped calling Morgan Stanley last week

The name Dean Witter was officially removed from the Morgan Stanley Dean Witter moniker -- under which the company had done business since the 1997 merger of the
two firms -- last week. But everyone knew that eventually it would be shortened to just Morgan Stanley (But in reality Morgan Stanley disappeared, not Dean Witter -- at least the Morgan Stanley I knew, which was a firm so proud of its heritage that when I was there back in the 1970s we ran an ad with this caption: "If God Wanted to Do a Financing, He Would Call Morgan Stanley."

We lived as if that were true. Morgan Stanley had a worldwide reputation as the "Rolls Royce of investment bankers." And with that reputation came responsible leadership.

I remember one firm meeting attended by Henry Morgan, J.P.'s son.

After everyone had a chance to speak on a certain prospective client, Morgan spoke of principles, then added, "My father would turn over in his grave if we did this." He stood and walked out. The deal was dead.

Dean Witter stole more than just a name

The merger came as a surprise in 1997, an "odd couple" match between the white-shoe Morgan Stanley, the world's leading investment banker, and Dean Witter, a blue-collar retail brokerage house once owned by Sears Roebuck.

Yet each saw advantages in joining forces: Morgan Stanley wanted a wider retail distribution network. Dean Witter wanted more product and more clout with
institutions. Before long, Phil Purcell, a Dean Witter broker, had forced out his Morgan Stanley co-CEO and took control of the merged firm.

Last week it became painfully obvious that Morgan Stanley isn't on God's call list anymore. Shortly after "Dean Witter" was officially deleted and the name again became Morgan Stanley, I saw how much the Morgan tradition had disappeared. Morgan Stanley was now a wolf in sheep's clothing, while Dean Witter is very much alive, hiding under the Morgan Stanley brand yet refusing to live up to Morgan Stanley's legacy of leadership.

Lobbying for more pork from politicians

What happened?

Shortly after the name change, news reports began circulating that Purcell was lobbying Congress to avoid responsibility, water down reform efforts and prevent state attorneys general from enforcing state securities regulations.

That's hardly a leader in the historic Morgan tradition.

Purcell is obviously afraid that New York Attorney General Elliott Spitzer might hold Morgan Stanley (along with overhyped Internet analyst Mary Meeker) as accountable as he did with Merrill Lynch and its Net analyst, the discredited Henry Blodget.

So out of fear, Purcell put on his broker's hat and went whining to Washington, doing everything possible to undercut the power of the state attorneys general -- anything to prevent the states from enforcing the laws designed to protect Main Street investors.

He'd rather leave enforcement to a weaker SEC headed by a chairman clearly biased in favor of Wall Street.

America's gross failure of leadership

Today, Main Street America is crying for leaders to stand up for something -- leaders on Wall Street as well as in Corporate America, the White House, SEC, Congress
and the Church.

America needs leaders, and too few are answering the call. The vast majority of America's so-called leaders are ducking responsibility and running for cover.

Today, Wall Street's credibility is at an all-time low, slipping lower every day. And yet here we see the head of the world's top investment bank, the once proud Morgan Stanley, flagrantly attempting to avoid responsibility and undercut the enforcement of securities regulations clearly designed to protect individual investors.

Once more it becomes painfully obvious that Wall Street's primary interest is enriching Wall Street at the expense of Main Street investors. Unfortunately, they just don't get how they're failing as leaders.

Stand-up guy?

Can Phil Purcell become a true American leader? Maybe.

Purcell has two choices: First, he can continue his absurd lobbying efforts, which are as bad for America as all the pork-barrel lobbying that's jacking up federal
deficits and lowering our confidence in America's weak leadership. But if he continues, he should at least be honest enough to keep the Dean Witter name and stop demeaning Morgan Stanley's proud heritage.

Alternatively: Purcell could transform himself into a true American leader. He could take full responsibility. He could take charge of reforming Wall Street, not just Morgan Stanley. He could make a real difference by leading the way to restoring America's confidence in the financial markets. Main Street needs that kind of leadership.

But if Purcell doesn't take charge, will someone please tell him to retire the Morgan Stanley name? Because right now the old Dean Witter hustler image fits a lot
better.

You bet J.P. Morgan is rolling over in the grave, and you know God quit calling.

Sears Same Store Sales are Below June Forecast

From Bloomberg, June 24, 2002

Sears, Roebuck & Co., the largest U.S. department-store chain, said sales at stores open at least a year are "slightly'' less than the company's June forecast.

Sears has exited businesses such as window treatments and reduced its number of apparel lines to free up space for more- profitable items such as fitness equipment.

The company will introduce its Covington clothing in September and start selling apparel from Lands' End, the Internet and catalog retailer it bought last week, in some of its stores by the end of the year.

Coverage Causes Pain
by Sandra Guy - Chicago Sun-Times - June 20, 2002

Richard Bruce sits at the kitchen table of his Elmhurst home, pointing to the numbers written neatly on lined paper.

The numbers tell his story: When Bruce, 65, took early retirement from Sears, Roebuck and Co. almost nine years ago, he contributed $95 a month for health care coverage for himself and his wife, Betty. At that time, Sears provided a 75 percent subsidy for Bruce's medical insurance premium.

Three years after Bruce retired, Sears froze the dollar amount it contributed to retirees' medical plans, and today, Bruce pays $148 for considerably less coverage. The benefits, provided by an insurance company that contracts with Sears, are limited to prescription drug costs and catastrophic medical expenses.

The coverage kicks in when a retiree's out-of-pocket expenses exceed $2,000 in a calendar year, after a $250 deductible is met for eligibility. The lifetime cap for the plan's total reimbursements was raised this year to $250,000 from $150,000.

Bruce estimates Sears now subsidizes less than 50 percent of his medical insurance premium as a result of the company's decision to cap the dollar amount of its health care contribution to retirees enrolled in medical plans.

For Bruce to maintain health coverage at the level he had when he retired, he now pays another $305.68 for a Medicare program and a supplemental insurance plan, bringing his total monthly premiums to $453.68--a 378 percent increase since he retired.

"When you are an employee, and the company is doing take- aways, you can go somewhere else. When you are a retiree, you have no options," said Bruce, who rose through the ranks for 33 years, starting as a catalog order-buyer and ending as an executive compensation manager in Sears Tower and later at corporate offices in Hoffman Estates.

Sears officials counter that rising drug costs and retirees' longer life-spans make it difficult for Sears to keep costs in check.

"Health care costs are the single fastest-rising cost facing our company, and it is essential that we keep these costs in line if we are to remain competitive in a very price-sensitive retail environment," said Liz Rossman, Sears vice president of human resources, compensation and benefits.

Sears declined to provide its retiree health care costs. However, an annual benefits report shows Sears' contributions in 2000 for catastrophic and
prescription- drug coverage for the company's Medicare-eligible retirees totaled $64.4 million, or about 5 percent of its net income that year.

Nationwide, large companies' retiree health care costs last year skyrocketed 18 percent to 20 percent, and double-digit increases are expected to continue, according to the U.S. Chamber of Commerce.

But Bruce's fellow Sears retirees Lewis Orlow and David N. Silger have their own stories about rising costs of health care.

Silger is angry that Sears reneged on its promise to retirees that their medical insurance costs would not exceed 25 percent of the total cost of coverage.

"What (Sears) is doing is morally wrong," he said. "If you make a contract with someone, you should keep it."

Sears first cut back its health care coverage for retirees 12 years ago. At the time, many companies were changing their coverage plans because of the growing number of two-income households and a new accounting rule that forced companies to list as a liability the cost of future retirement benefits.

Before the rule change, companies treated retirement benefits as liabilities in the year in which they were paid. As a result, companies took a big one-time charge against their earnings--Sears took a $1.9 billion non- cash charge in 1993--and must now carry their future retiree expenses on their books every year.

"The accounting rule changed retiree health benefits as we knew them," said Paul Fronstin, director of the health research program for the Employee Benefit Research Institute, a non-profit research organization in Washington, D.C. "Once employers saw what the numbers did to their balance sheets, there was a mass exodus away from offering the benefits."

Among companies that continued offering retiree health care coverage, many put caps on their plans, Fronstin said. When the cap is reached, any additional costs are borne by retirees.

Sears' next move came in 1996, when it froze the dollar amount it contributed to retirees' medical plans for pre- 1996 retirees. Sears also froze the dollar amount for post-1995 retirees at the amount it contributed in the year of their retirement.

For those who retired after 1995, Sears also cut its contribution to retirees' spouses from 100 percent to 50 percent of the amount it contributes toward a retiree's medical coverage.

Finally, Sears stopped subsidizing health care coverage after age 65 for employees who retired after Dec. 31, 1999.

Sears' retirees feel betrayed. They worked at Sears with the understanding that though their salaries weren't as high as those at other big businesses, their retirement benefits would let them live out their lives with a sense of security. They feel they have been deceived about their promised benefits.

At Boeing Co., the high use of prescription drug benefits is a major driver of rising retiree health care costs, said Boeing spokesman Ken Mercer.

While prescription drugs account for 25 percent of the total health care costs of Boeing retirees younger than 65, that percentage jumps to 59 percent for retirees 65 and older.

Boeing and Sears also face a problem increasingly common to old-line companies that have downsized their work forces.

Boeing's active work force of 170,000 is not much bigger than its pool of retirees, which numbers 140,000.

Sears has about an equal number of active workers and retirees--137,000 active workers and 140,000 retirees.

At Navistar International Corp., retirees outnumber active workers 3 to 1.

Navistar, the Warrenville-based truck and bus maker formerly known as International Harvester, paid $125 million in retiree health benefits last year.

"Post-retirement benefits remain a major financial issue for our company," said spokesman David Wrobel.

Companies like Sears that contracted with Medicare HMOs suffered yet another blow in 1999, when a change in federal reimbursements slashed Medicare spending, prompting many insurers to flee the field, raise rates or cut benefits.

Since 1998, the HMO exodus has forced 2.2 million elderly and disabled people to lose their plans, and for many, the prescription drug coverage they got with those plans also disappeared.

Adding to the misery is the steady rise in the cost of prescription drugs and health insurance.

Spending on prescription drugs is expected to rise 16 percent this year because of higher prices and increased use, according to a survey by Express Scripts, one of the nation's largest pharmacy benefits managers.

Sears retirees, organized as the National Association of Retired Sears Employees, want Sears to keep its promise to them, but their court battle over Sears' cutbacks in their life-insurance coverage brought little relief. In the insurance battle, a judge ruled in March that Sears' benefit plan enabled it to make cuts at any time. U.S. District Court Judge James B. Moran described the retirees' lawsuit as "good facts and bad law," noting that laws regarding companies' obligations to their retirees have not been favorable to workers.

The place for long-term relief is Congress, Moran said. "I, of course, have to follow the law."

How did we come to this?

Key milestones in corporations' decisions to reduce health care coverage for
retirees:

* 1974: Congress passes the Employee Retirement Income Security Act (ERISA). It gives employers the right to change the retiree benefits of active workers at any time. The law also allows companies to change the benefits granted to retirees, as long as the companies reserve the right to do so in specific language and on a widely known basis when the benefits are first provided.

* 1993: The Financial Accounting Standards Board adopts a new accounting rule requiring companies to list future retirement benefits as liabilities on their balance sheets over the period in which the benefits were earned. The rule forces companies to take one-time charges and reduces reported earnings because of the large liabilities they now must carry on their balance sheets.

* 1997: Congress changes the Medicare managed-care funding formula, substantially reducing profitability for insurance companies. The change prompts insurers to cut benefits and either raise rates significantly or flee the Medicare HMO program.

* 2001-2002: Health insurance premiums for employment- based health insurance in the United States rise an average of 14 percent, and are forecast to jump more than 20 percent next year.

* Current: Prescription drug costs are rising an estimated 16 percent a year. Medicare doesn't cover outpatient prescription drug costs for people 65 and older.

Sources: Sun-Times research, Employee Benefit Research Institute

Many big firms don't cover retirees

Fragile corporate balance sheets and skyrocketing costs for health care and prescription drugs are forcing old- line businesses such as Sears, Roebuck and Co., Boeing Co. and Navistar International Corp. to rethink their policies of providing health care coverage to current and future retirees.

Indeed, Chicago-based Boeing Co. has informed non-union salaried employees hired within the last four years that the company will provide no health care benefits when they retire.

That's not unusual. Mercer Human Resource Consulting says 77 percent of U.S. companies employing more than 500 workers offer no health benefits in retirement to employees who retire at age 65 and older.

Of the 23 percent who do offer benefits to over-65 retirees:

* 22 percent of employers will pay all costs.

* 47 percent offer plans where the worker shares the costs.

* 31 percent offer plans in which the retiree pays all the costs.

And 71 percent of large employers will offer no benefits in retirement to active workers who will retire before age 65.

Of the 29 percent who will offer benefits to early retirees:

* 20 percent of employers will pay all costs.

* 45 percent offer plans where the worker shares the costs.

* 35 percent offer plans in which the retiree pays all the costs.

Sears Wraps Up Lands' End Buy
By Kelly Quigley - Crain's Chicago Business  - June 17, 2002

Sears, Roebuck and Co. on Monday completed its $1.9-billion purchase of Wisconsin-based catalog and Internet clothing retailer Lands' End Inc.

Hoffman Estates-based Sears closed on its cash tender offer, at $62 per share, for Lands' End stock—a hefty 20% premium over its stock price at the time the deal was announced. Sears CEO Alan Lacy spoke enthusiastically about the deal at Credit Suisse First Boston's Third Annual Retail and Apparel Conference in New York.

"We think Lands' End provides a very good value that will stand up very well on our retail shelves," he told investors.

Lands' End will provide Sears with a more affluent customer base and an undeveloped credit business, which currently accounts for more than half of Sears' profits. Mr. Lacy said the acquisition also will boost Sears' lagging apparel business, which contributes only $6 billion of the retailer's $41 billion in annual sales.

Sears said the acquisition may dilute its earnings this year and next but will add to earnings in 2004.

Sears has long been a force in the home appliance and hardware business, in large part due to the popularity of its Kenmore and Craftsman brands, Mr. Lacy said. The retailer is hoping the Lands' End brand will lure Sears' hardline shoppers into the clothing aisles, he said.

The Lands' End purchase is part of Mr. Lacy's master plan to transform Sears from an amorphous, old department store chain into a vital, growing business that can actively compete against Target, Kohl's, Wal-Mart and Home Depot. But even though Lands' End offers tremendous growth opportunity, local retail experts warn that Sears must avoid pitfalls such as reduced customer service, corner-cutting in manufacturing and pared benefits for Lands' End's 8,300 employees (Crain's, May 20).

By the end of the year, Lands' End apparel will be available at some 170 Sears stores, and by 2003 at least 870 stores will have significant retail space devoted to the brand, Mr. Lacy said.

Lands' End, now a subsidiary of Sears, will continue to offer its product line direct to customers through its catalogs and online at landsend.com.

Flashing Yellow on Asset-Backed Debt
By Janet Kidd Stewart - Chicago Tribune staff reporter - June 16, 2002

Seeking shelter from balance sheet "perfect storms," skittish investors have been flocking to companies with lots of visible assets and regular revenue streams. Just don't get too comfortable under the umbrella.

Like so many cash-strapped consumers who take payday loans or hock the Rolex for cash, companies are loading up on debt backed by future sales and hard assets. Now at record levels, these asset-backed securities ratchet up risk levels for investors, some observers are warning.

U.S. companies in the first quarter had a record $1.3 trillion in outstanding debt backed by specific assets like receivables, loans owed to them and inventory, according to the Bond Market Association. The total has more than quadrupled since 1995.

In some respects, asset-backed borrowing has been a good thing.

Unlike the egregious fees of consumer payday loans, the debt is cheaper for companies because it is guaranteed with huge, specific assets. The guarantee also means a generally higher credit rating than unsecured bonds, a big plus for institutional investors like pension and mutual funds that buy them. With several companies imploding swiftly into bankruptcy in the last year, investments that are at the front of the payout line and insulated from the bankruptcy process have obvious attractions.

But it also means that as investors seek safety in the brick and mortar of the old economy, those companies are surrendering ownership of what would seem to be their bedrock assets.

Just two local examples: Sears, Roebuck and Co. put up nearly a third of its customers' credit card debt as collateral for asset-backed securities. UAL Corp., parent of United Airlines, has more than half of its 243 company-owned airplanes obligated--with a book value of $5.5 billion.

As more companies securitize a greater portion of their assets, overall credit quality declines, say some market observers and bond buyers. That decline affects bond investors of all types, and stock buyers to some degree, as share prices in recent months have been shaken by credit-quality concerns. And it moves everybody down the priority line in the event of bankruptcy.

"It's taking away collateral from traditional bondholders, and when companies book gains from securitization on the balance sheet, it takes away from the quality of earnings," said John Vail, chief strategist for Mizuho Securities' Chicago office.

The Enron effect

And as corporate profits remain squeezed, and regulators wrestle with Enron Corp.-inspired reporting changes intended to make the obscure financial instruments more transparent, some fear even their cost advantages will shrink.

Already, credit downgrades in the sector--usually rare events compared with unsecured bonds--are on the rise, a serious issue for the sector, said Ray Kennedy, a bond expert with Pacific Investment Management Co., known as Pimco.

Last month, for example, Fitch Ratings downgraded some of Downers Grove-based Spiegel Inc.'s asset- backed notes, citing rising charge-offs.

Asset-backed securities are different from traditional bonds in that they are backed by a specific set of assets, such as inventory, home mortgages, auto loans, credit card receivables and even future revenue streams from tobacco litigation settlements and feature films. In the event of default, those pledged assets are off-limits to traditional creditors such as bondholders and shareholders.

The instruments have come under scrutiny in Enron's aftermath because the energy trading company was a heavy user of special-purpose entities, which are financial vehicles set up to hold instruments like asset-backed securities. Enron utilized the special-purpose entities to mask massive credit risk in off-balance-sheet deals.

In response, the Financial Accounting Standards Board is hammering out new guidelines for reporting accounting gains from the transactions, and a new industry group-- the American Securitization Forum--sprang up in March, in part to lobby for keeping the securitization vehicles free of onerous regulations in Enron's wake.

Amid the noise, some market experts worry that even legitimate uses of the securities pose a serious risk for investors.

As credit card delinquencies rise, for example, companies must boost reserves for them, a difficult feat in a downturn.

Issuing oom

The complex financial products aren't new, but their use exploded in the latter 1990s as a relatively cheap source of capital for growing companies--cheap, because investors were willing to take lower interest rates in exchange for the guarantee of the assets.

In 1991, total volume of outstanding asset-backed debt amounted to $50.6 billion. A decade later, it had soared to $1.3 trillion.

Their rise is but one burgeoning risk among many for investors in the post-Enron, recessionary environment, according to a report by J.P. Morgan Securities Ltd.

"Market sentiment on weaker credits has deteriorated quickly following the Enron bankruptcy and suspected fraud issues," Morgan analyst Emmanuel Weyd wrote. "Poor disclosure often prevents us from quantifying these risks properly and leads market participants to assume the worst for any suspect credit."

Shining light on transactions

Disclosure is supposed to be improving. Last year the FASB started requiring companies to disclose more information about special-purpose entities and asset-backed securities, especially when those results are kept separate from financial results.

Standards board officials say companies, in general, are doing a better job explaining their transactions, but many have a long way to go.

Still, said Weyd, increased securitization itself poses a danger, even while it adds liquidity to run companies.

"For companies that use this excessively, they are taking assets out of the balance sheet to get cash. For existing creditors, it weakens their protections," he said.

Area firms among big U.S. issuers

Banks and other financial institutions are the biggest issuers of the complex asset-backed instruments, but many other types of companies now use them as a relatively cheap source of credit.

U.S. companies have sold 313 of the financial instruments this year for a total of nearly $160 billion, according to Thomson Financial.

Local companies Navistar International Corp. and Sears, Roebuck and Co. were two of the first non- financial concerns to create securities out of their balance-sheet assets.

Sears, the first U.S. mass-market retailer to become active in this market back in 1988, was the nation's 20th-largest issuer in the first five months of this year, selling more than $2.1 billion worth, according to Thomson Financial.

Sears' $1.9 billion purchase of cataloger Land's End was partly financed with debt drawn from Sears' credit card receivables, or future customer payments.

In recent years, Sears has loaded up on $9.5 billion in outstanding securities that are backed by its $28 billion in credit card receivables, and that doesn't count traditional corporate bonds and other debt.

Asset-backed borrowing is cheaper than traditional loans, said Sears' treasurer, Larry Raymond. He said that 62 percent of Sears' private-label credit card accounts are more than 5 years old, indicating a fairly stable portfolio, and its asset-backed securities account for a third of total receivables, compared with much higher percentages for other issuers.

Navistar had nearly $3 billion in asset-backed receivables as of Oct. 31, according to the company's most recent filings with the Securities and Exchange Commission. The company pledged portions of its future truck sales as collateral.

Another Chicago-based firm, Bank One Corp., is the 12th-largest manager of asset-backed debt, with $3.5 billion in proceeds issued in the year's first quarter alone.

And Household International Inc. has nearly $22 billion in asset-backed securities, or roughly 21 percent of its receivables stream, according to regulatory filings.

Detroit automakers GM and Ford are big players, too, issuing a combined $21.2 billion in asset-backed securities this year alone through June 6, according to Thomson Financial.

Sears, Costco Score High in Consumer Reports
Survey (Update1)
By Chitra Somayaji and Anna Dubrovsky - Bloomberg - June 12, 2002

Sears, Roebuck & Co., Costco Wholesale Corp. and Target Corp. scored high with shoppers for merchandise quality and convenience, according to a survey by Consumer Reports magazine.

Wal-Mart Stores Inc., the world's largest retailer, and Kmart Corp., the largest U.S. retailer to file for bankruptcy, fared the worst in the survey. The magazine used 56,000 responses from 31,000 subscribers to compile its results. Wal-Mart's Sam's Club warehouse chain unit was ranked in the middle.

Sears, the largest U.S. department store chain, received high marks for its service, checkout speed, product selection and store layout, the magazine said. Readers cited the retailer's appliances, hardware and lawn and garden equipment.

``Sears does quite a bit of customer research,'' Peggy Palter, a spokeswoman for Sears, said in a telephone interview. ``We would expect to fare well in the survey.''

Costco was noted for its low prices and high product quality, the survey found. Target has a shopper-friendly environment and customers liked the company's checkout speed, selection and layout, the magazine said.

This was the first such survey by the magazine, which is published by the nonprofit testing and information company Consumers Union. The results were based on overall shopping experience, quality and selection of products, prices, sales staff, checkout speed and problems.

Wide Variety

Consumer Reports chose the six chains because they are all big-name stores that sell a wide variety of merchandise, spokeswoman Jennifer Shecter said in a telephone interview.

"These places are increasingly very popular places to shop,'' she said. "They are all doing very big ad campaigns right now. And with the recession, people are looking for value and good deals in general, and that's what these places offer.''

Shoppers complained that Wal-Mart stores were too crowded and hard to navigate, the magazine said.

Wal-Mart spokesman Tom Williams said in a statement e-mailed to Bloomberg News the company plans to use the feedback from the survey and that it is always focused on improvement.

Respondents also said they preferred certain stores for specific types of products. The warehouse clubs operated by Costco and Sam's Club were popular with people who wanted to buy home- entertainment products, while hardware buyers liked Sears and Costco.

The survey results are published in the July issue of the magazine.

Sears Expects June Decline
By James Evans - Crain's Chicago Business  - June 11, 2002

Sears, Roebuck and Co. on Monday said sales from the first week of June are on target with the company's June forecast of a low single-digit sales decline for the month.

In its weekly sales update, the Hoffman Estates-based retailer said same-store sales; sales at stores open more than one year; were stronger in hardlines products than in softlines categories. Sears noted that strong sales categories included home appliances, lawn and garden and women's apparel.

A spokeswoman would not comment further.

Just last week, Sears reported that unseasonably cool weather put a damper on May sales. Sears reported same-store sales fell 4.4% in May. Overall store revenues for May dropped 1.5% to $2.25 billion, down from $2.29 billion in May 2001 (ChicagoBusiness.com, June 6).

Shares of Sears traded up 50 cents, or nearly 1%, to close Monday at $58, near the 52-week high of $59.90 hit on June 3. Shares hit a 52-week low of $29.90 on Sept. 21.

Sears Must Pay $10.2 Million in Firestone Tire Death
June 9, 2002 Bloomberg.com

Sears, Roebuck & Co. must pay $10.2 million to relatives of a man who died when a Firestone tire bought from the retailer failed and a sport-utility vehicle flipped, a Texas state court jury decided.

The jury last week awarded $29 million in damages to the family of Terry Tripp, who was riding in a Chevrolet Blazer that rolled over in September 2000 after a Firestone Dueler APT-model tire failed. Jurors held Sears 35 percent responsible for the wreck and Bridgestone Corp.'s Firestone unit 65 percent responsible. Firestone had already settled with the family.

Firestone, which has recalled 10 million AT, ATX II and Wilderness tires since August 2000 made for the Ford Explorer SUV, faces hundreds of lawsuits stemming from tire failures, which U.S. highway-safety safety officials have tied to 271 deaths. Lawyers for the Tripps said the Dueler tire, sold only by Sears, is just as dangerous as the recalled models. "I think the jury verdict sends a clear signal that if you're selling defective tires you need to do something about It," said Houston attorney Joe Alexander, who represented the Tripps at trial.

Class Action Against VISA/MasterCard
Wall Street Journal Online News - June 10, 2002

High Court Allows Class Action
Against Visa and MasterCard

WASHINGTON -- The Supreme Court on Monday rejected a bid by Visa USA Inc. and MasterCard International Inc. to quash a class-action lawsuit accusing them of forcing merchants to accept their debit cards.

The lawsuit was filed in 1996 on behalf of about four million retailers across the U.S.

Visa and MasterCard, the world's biggest payment companies, argue that the case, with so many plaintiffs, would be unmanageable.

Dozens of banking groups and trade associations argued that case sets standards that "too easily permit the cobbling together of industrywide classes, with potentially devastating economic effects for individual companies or whole industries." Visa and MasterCard also questioned whether the plaintiffs had enough in common to merit class-action status.

By turning away the appeal, the justices passed up a chance to rewrite rules for class-action lawsuits. The decision cleared the way for the case to proceed before a federal judge in Brooklyn, N.Y.

The plaintiffs named in the suit include some of the nation's largest retailers -- such as Wal-Mart Stores Inc., Sears, Roebuck & Co. and Safeway Inc. The plaintiffs asserted that processing Visa and MasterCard debit cards as if they were credit cards forced them to pay billions of dollars a year in extra processing charges -- costs that are passed on to their customers. The retailers were given class-action status in 2000.

An estimate from the plaintiff's economists puts damages, including interest, at between $13.1 billion and $15.8 billion. The claims could triple to between $39.3 billion and $47.6 billion under U.S. antitrust law.

Visa and MasterCard say the claims are closer to $100 billion. They argue that such high stakes can coerce defendants into a settlement regardless of the merits of the case. "Coercion is, if anything, an understatement for a class such as the one proposed in this case of four million members seeking damages of approximately $100 billion," their attorneys told the justices.

A divided Second U.S. Circuit Court of Appeals in New York had concluded that the district judge had "carefully" applied federal rules of civil procedure, and upheld the class certification in October. The Supreme Court's action Monday leaves that ruling intact.

The two payment associations have policies that require shopkeepers to accept any card with a Visa or MasterCard logo. That means merchants must accept Visa Check or MasterCard debit cards with higher transaction fees than those charged by other debit-card networks, the plaintiffs claim.

Visa and MasterCard, which account for three-quarters of the $1.3 trillion U.S. credit-card market, say the allegations aren't true.

It is unlikely that the suit will ultimately result in Visa and MasterCard paying $39 billion. If the merchants prevail in court, the two credit-card companies could declare bankruptcy, or, more likely, seek a settlement that might include court-ordered changes in the rules they impose on retailers, and probably a settlement of several billion dollars. (Visa vs. Wal-Mart)

Allstate Targets Commissions
By Steve Daniels  - CRAIN'S Chicago Business
June 6, 2002

Stung by property losses last year, Allstate Corp. is proposing cutting commissions paid to its agents for sales of homeowners insurance policies by 50% as part of a wide-ranging new compensation plan now being drafted.

The Northbrook-based insurer floated a new proposal to agents June 4 that would reduce commissions on sales of new homeowners policies from 20% of premiums to just 10%. Compensation on sales of car-insurance policies wouldn't change.

An Allstate spokesman says money saved from the cut in compensation for homeowners policy sales will go toward new agent bonuses for reaching growth and profitability goals.

"It is not in any way intended to say that the company is de-emphasizing homeowners (insurance)," he says.

Allstate also is proposing to scrap its current agent bonus system, which rewards agents with company stock if certain earnings-per-share goals are met. Instead, a new system would provide its 12,000 agents with bonuses based on hitting growth and profitability targets for their agencies.

U.S. Retail Sales Rose in May
June 6, 2002 - Bloomberg

Led by Costco, Kohl's New York: U.S. retailers' same-store sales rose in May, helped by higher-than-expected increases at Costco Wholesale Corp., Kohl's Corp. and other chains that emphasize low prices.

Sales at stores open at least a year climbed 3.4 percent, according to the Bank of Tokyo-Mitsubishi Ltd.'s index of more than 80 chains. They increased 6 percent at Costco, the largest operator of warehouse clubs, and 8.7 percent at Kohl's, which sells clothing priced lower than at many other department stores.

"The strong got stronger," said Elizabeth Shamir an analyst at PNC Advisors, which holds shares of Costco among the $60 billion in assets it manages. Sales are rising at chains "when you're offering the consumer what they want."

Discount retailers such as Wal-Mart Stores Inc. and Costco had the biggest sales gains as consumers remained careful about where they spent money. The pace of sales slowed from the average 4.8 percent gain between January and April. Unusually cool weather reduced demand for items such as summer apparel and lawn and garden equipment, analysts said.

Life Cycles of the Rich and Famous

Death often inevitable for corporate giants

By Janet Kidd Stewart - Chicago Tribune staff reporter  - May 26, 2002

With the implosion of such American icons as Xerox, Kmart and Polaroid after a relatively mild recession, investors are facing a grim reality: Companies, even giant ones, have organic life cycles that are shrinking with alarming speed.

The corporate scrap heap is piled high with once-stalwart brands that fell victim to bad decisions, better rivals or just plain fate, forcing investors to rethink the buy-and-hold mantra that financial strategists have preached for years.

Other giants aren't dead, just ailing shadows of their former selves. And others are simply not the go-go growth machines they once were, plodding along in old age and showing signs of senility.

If this sounds familiar, perhaps it is because it's reminiscent of the Nifty Fifty large-cap growth companies held up in the late 1960s and early 1970s as "one-decision" stocks.

Polaroid was one of them. The company introduced instant color film in 1963, split its stock 4-for-1 the following year, added thousands of workers and saw shares soar. But by 1972, the stock had reached its peak, and began a slow slide. Last year, it became one of more than 250 public companies to file for Chapter 11 bankruptcy protection, a record.

Most of the other Nifty Fifty stocks never regained former glory and underperformed the benchmark Standard & Poor's 500 over the long haul.

And it's not just the Nifty Fifty--remember American Cotton Oil, Distilling & Cattle Feeding and Tennessee Coal & Iron? All were once part of the elite Dow industrials.

Blue-chip companies dominate their industries, and their products seep so deeply into the consumer psyche during their high-growth phases that they can appear invincible. But that success can be what makes them most vulnerable. As demonstrated by dramatic changes in the list of leading companies by market capitalization over the years, it's clear even the biggest can fall hard.

"What you find is a lot of roiling. It's very hard to get to the top and even harder to stay there," said Al Ehrbar, a partner with Stern Stewart & Co., a New York consulting firm that helps companies measure shareholder wealth.

A new study by Chicago consultant A.T. Kearney has found a pattern in that
roiling: Measuring consolidation patterns of 25,000 global companies, the firm found that industries go through predictable phases, and that the pace of that movement is accelerating rapidly.

Of course, there are companies that defy the odds and survive: General Electric and Coca-Cola are two, as are Chicago heavyweights Kraft Foods and Walgreen--all companies with at least 100-year histories that are still growth machines.

Yet even these powerhouses are vulnerable to extinction at some point, experts say, or at least enough retrenchment to be extremely painful to investors.

Motorola a case study

Consider Schaumburg-based Motorola. It dominated the cellular telephone industry in the early 1990s; expecting its growth rate to continue, investors bid up shares just over two years ago to nearly $185 before a 3-for-1 split--and the bursting of the technology bubble.

This week, Motorola will be a case study in failure at Northwestern University's Kellogg School of Management, where an associate dean will argue that the company didn't react more quickly to the introduction of digital cell phones precisely because of its success with older analog technology. Last year, the company turned in its first operating loss since 1930--more than $1 billion. Shares have plunged 72 percent since their 2000 high.

"A record of success leaves you vulnerable to competitors not on your radar screen. That organic process is very difficult to overcome," said David Besanko, Kellogg's associate dean and management strategy professor.

The upshot, for investors, challenges the fundamental buy-and-hold mantra and the nation's love affair with stock picking: Investing in any single company takes on more inherent risk as the economy matures and consolidates.

Some lay the demise of these giants squarely at the feet of management.

"Ultimately, management takes responsibility for success or failure," said retail consultant Sid Doolittle, a former executive of now-defunct Montgomery Ward. "Companies with strong cultures are resistant to change and get trapped in their own strategies."

Others call these implosions a healthy, natural selection process as global business consolidates. Still others point to a host of other factors, from the business cycle to an unforgiving capital market structure.

"Once you are no longer a growth story and are part of everyone's lives, now your fortunes are tied; it's more difficult to get away from the economic cycle," notes Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York.

Federal Reserve Chairman Alan Greenspan recently blamed corporations' increasing reliance on intangible assets, which indeed represent a fast-growing proportion of market capitalization. "Trust and reputation can vanish overnight," Greenspan said recently while discussing the Enron collapse. "A factory cannot."

Intangibles now account for about 70 percent of corporate market value, down from 80 percent in 1999 but still well above the 59 percent as recently as 1992, according to Compustat data analyzed by PricewaterhouseCoopers.

Analyzing the "implied value" of companies in different sectors (market capitalization minus book value), PricewaterhouseCoopers found that even after the stock bubble burst, industry market worth still ranged between two and four times corporate book value.

Goodwill and intangible assets

It's not just investors bidding up a company's prospects. Some of America's biggest corporate giants have few tangible assets on their balance sheets: AOL Time Warner, Viacom and Kraft all have goodwill and intangible assets making up more than 60 percent of total assets.

And yet Corporate America couldn't disagree more with the idea that intellectual property is killing off companies. To the contrary, they contend, it has helped companies stave off death by allowing them to enter new markets quickly.

Consider Coke, which derives the lion's share of its market wealth from its powerful brand, not plants and equipment. Corporate growth comes not just from physically expanding into new markets (which has largely been done) but in marketing new extensions of the brand.

On Monday, for example, the company is heavily promoting its new 12-pack refrigerator cases with dozens of area children in Lincoln park painting refrigerators that will be donated to charity. It also is launching Vanilla Coke in Chicago and five other markets.

"It's constant reinvention of what we are," said Steve Hutcherson, vice president in charge of the Coca-Cola Classic lines for the Atlanta-based soda giant. "You have to constantly get the public to reconsider your proposition, and if you don't, you become stagnant."

If it weren't for the innovation and flexibility that reliance on "intellectual assets" brings, many more firms would already be in the grave, experts said.

"This does create faster product life cycles because companies can more quickly update to stay ahead of the competition," said Aron Levko, a PricewaterhouseCoopers consultant who analyzed the Compustat data.

Whatever their cause, the swift demise of so many should be a siren song for investors, alerting them to the risks that even giant consumer names can stumble and fall, observers say.

"The value trap is buying into a business and assuming it goes on forever," said Edward Studzinski, a portfolio manager with Harris Associates. "If there's a mistake we investors have made over the years, it was forgetting that in reality there are very few really good businesses and that a lot of [company] managers are not as brilliant as they or we thought they were."

Commonly, managers fall into the all-too-easy trap of clinging to what has worked--not daring to tinker with success--or even to old problem behavior.

"Kmart was the son of Kresge, and it kept all of its predecessor's problems in logistics and efficiency," Doolittle said.

For investors, it's important to note that advocates strongly caution against active trading in and out of individual positions--which can be costly both in transaction fees and in missing market upturns--and that buy and hold, as a philosophy, has its place. But, experts stress, just don't hold forever.

"Companies have to reinvent themselves," says Julie Van Cleave, managing director of Mason Street Advisors, a new investment unit of Northwestern Mutual Insurance.

Or die trying. And maybe they should: Artificially propping up companies with government intervention, as in Japan, creates a drag on growth, argues Edward Snyder, an economist and dean of University of Chicago's Graduate School of Business.

"The thing that's truly special about our economy is that it tolerates failure," Snyder said.

And even when the government does step in--as in Chrysler and Continental Bank--it doesn't guarantee companies long-term survival in that form.

Not all companies fail, of course. Some shrink, many merge into other companies, and some actually survive and grow. Nowadays, though, the life cycle moves much faster.

Predictable patterns

In a new study of 25,000 global corporations, A.T. Kearney has found industry consolidation isn't a series of random events: Players in virtually every industry follow a predictable consolidation pattern from fragmentation to domination until something--like deregulation or technical innovation--wakes the industry's slumbering giants and interjects a flood of upstart competitors.

That four-stage industry life cycle--opening, scale, focus and alliance, to use Kearney's terms--has shrunk due to technological innovation from several decades in the early part of the 20th Century to roughly 25 years today.

Further, Kearney studied Chicago's business landscape and found a critical mass poised in the latter stages of the growth curve, suggesting a potentially rapid rate of more corporate deaths to come.

"It's a call to arms because ultimately survival boils down to management," said Larry Hitchcock, vice president in A.T. Kearney's strategy and organization practice. "It's been widely talked about that Chicago's business community needs to cultivate innovation, but from my perspective the leadership here needs to define its end game rather than let it be done for them by an East Coast investment bank. Not having a [strong] merger integration process is crazy."

Companies can move through life cycle stages with breathtaking speed. AT&T, one of the 10 biggest U.S. companies at the close of the 20th Century, is now preparing for a 1-for-5 reverse stock split to keep its share price in double digits after it sells its cable TV operation.

"In our view there is no such thing as a one-decision, buy-and-hold-forever stock anymore," said Steve Galbraith, a senior equity researcher with Morgan Stanley who has written about share-price inflation. "This is explicitly not to say to trade like a maniac, but Cisco at $60 a share was a sell, as was AIG at $100 and GE at $50. I'm still inclined to hunt for the winning 800-pound gorilla, but history is not on your side when valuations get nutty."

Headliner: Alan Lacy
A Change of Clothes at Sears

by Robert Berner - May 27 2002 Business Week - May 21, 2002

Sears Roebuck CEO Alan Lacy is turning to the top line of shoring up profits through cost-cutting. On May 13, Sears said it would buy cataloger Lands' End for $1.9 billion, cementing talks that Lacy's predecessor, Arthur Martinez, began back in 1998. Sears, which will continue to run Lands' End catalogs and Internet site, also plans to carry the brand's merchandise in its stores to bolster Sears' eroding apparel sales.

Lacy figures that buying a well-known brand will help in its bid to develop an in-house label. And beginning the only retail shop to carry the Lands' End line should help distinguish Sears' from rival chains. "It allows you to compete on something other than price," Martinez says.

But there are risks as well. Lands' End is aimed at higher-income shoppers, who may be alienated as Sears lowers prices. Store sales might end up cannibalizing Lands' End catalog sales. Those sales are about where they were three years ago, suggesting the brand might not have much growth potential. Lacy could find more in this package than he bargained for.

Sears Plan to Sell $1 Billion in Bonds

Sears Boosts Sale of 30-Yr Bonds 33 Percent to $1
Bloomberg -  (Update1) - By Terence Flanagan
May 21, 2002

New York:  May 21 (Bloomberg) -- Sears, Roebuck & Co., the largest U.S. department store chain, plans to sell $1 billion of 30-year bonds, up from $750 million originally planned, said people familiar with the sale.

Morgan Stanley Dean Witter & Co. is managing the sale, with help from Bear Stearns Cos. and Lehman Brothers Holdings Inc., the people said. The sale is expected as soon as today.

Hoffman Estates, Illinois-based Sears has about $10.8 billion of bonds outstanding, according to Bloomberg data. The company's debt carries investment-grade ratings of ``Baa1'' at Moody's Investors Service and "A-" at Standard & Poor's.

Sears Roebuck Sells $1 Billion of 30-Year Bonds Yielding 7.238%
By Terrence Flanagan - Bloomberg
May 21, 2002

The following issue went on sale today:

New Accounting Rules Turn Lands' End
Into a Bargain for Sears
By Allan Sloan - Washington Post.Com - May 21, 2002

If you're shopping for upscale merchandise, it's hard to turn down a nifty property that will cost you 40 percent less now than when you coveted it two years ago. Especially when it's become more valuable in the interim. That, in a nutshell, is how a change in accounting rules has marked down Sears's effective cost of buying Lands' End, the big catalogue retailer, for $1.9 billion in cash.

While there's more to this acquisition than just numbers -- for reasons we'll get into later, I think Sears will mess up Lands' End -- an accounting change that took effect last July helps make this transaction feasible for Sears, which can pay a steep $62 per share for Lands' End stock without eviscerating its own per- share profit.

Under the old accounting rules, buying Lands' Ends for $1.9 billion in cash would have triggered large accounting charges for Sears that would have wiped out most of Lands' End's reported profits. Under the new rules, however, these charges no longer exist.

Had Sears bought Lands' End at the current price when it sniffed around the company before -- in July 2000, according to the companies' Securities and Exchange Commission filings -- the deal would have diluted Sears per-share earnings. Now, it won't. It has to do with what accountants call "goodwill," which is the difference between the price Sears is paying and Lands' End's stated net worth. At today's price, that's a $1.5 billion difference.

According to Lehman Brothers accounting guru Robert Willens, under the old rules Sears would have had to charge about $50 million of goodwill a year against its profits for 30 years. Since Lands' End's profits for its most recent 12-month period are only $87 million, a $50 million hit would leave only $37 million of reported profits for a property that cost Sears $1.9 billion. That's more than 50 times profits, a prohibitively steep price. "If they had to amortize goodwill, the acquisition would have diluted Sears's profits substantially," Willens said.

Let's look at it another way. Buying Lands' End under the old rules would have cost Sears the equivalent of $3.4 billion -- the $1.9 billion purchase price plus the $1.5 billion in accounting charges. Having to pay just $1.9 billion means a cost for accounting purposes more than 40 percent below the cost under the old accounting rules. (I'm not saying the old rules were better than today's regulations; I'm just showing what a big difference the rule change makes.)

Current rules will require Sears to show goodwill on its books after the Lands' End acquisition is completed, but it won't have to subtract goodwill from its reported profits unless it decides that the value of Lands' End has been permanently reduced. It will probably take a couple of years for Sears to mess up Lands' End that badly.

Under the old accounting rules, the only way Sears could have bought Lands' End without running into a goodwill problem would have been to swap Sears shares for Lands' End shares. But that would have diluted Sears's earnings per share because it would be paying much more for each dollar of Lands' End earnings than the stock market accords to each dollar of Sears's earnings.

By paying cash under today's rules, Sears will break even on the deal almost immediately -- provided Lands' End's profit projections turn out to the accurate. Here's why: Let's assume that Sears pays 7 percent a year for long-term money. That makes an interest tab of $133 million a year on the $1.9 billion purchase price. So if Lands' End produces at least $133 million of pretax profit, Sears breaks even.

Guess what. In SEC filings Friday, Lands' End said it expects to make $133 million before taxes in its current fiscal year, which will end in February. The year after that, Lands' End expects to earn $152 million, which would put Sears solidly ahead.

Given these numbers -- and given that Sears badly needs help in its apparel business and its online operation, two areas in which Lands' End is terrific
-- you can see why Sears is hot for the deal. Why not? It gets really good people to run its Web site, which is now strictly blahsville. And without much embarrassment, it gets back into the catalogue business, which it foolishly (in hindsight) abandoned under a previous regime.

So why am I downbeat on this transaction, which looks so brilliant on paper? Because there's more to life than numbers. I'm a customer of Lands' End because its service is excellent, and I'm an ex-customer of Sears because the Sears service I've gotten is just horrible. Customer service is expensive. So the first time that Lands' End misses its profit projections -- and it's missed at least twice since 1999 -- I can see Sears reacting by cutting customer service because it thinks customers won't notice.

But they will. And the downhill slide will start. And Lands' End will become like Sears.

Some people tell me that Sears's recent ventures into upscale merchandising have been done very well. Maybe that will happen at Lands' End, but I doubt it. Even a bargain price is too much to pay if you degrade the thing you've bought.

Sloan is Newsweek's Wall Street editor. His e-mail is sloan@panix.com.

Turnarounds
 By Pablo Galarza - Money Magazine - June 2002  - May 20, 2002

Lucent, Conceco an Sears (oh my) What are we, nuts? Read on Investing in troubled companies that are struggling to turn around their failing operations is about as perilous as it gets. But along with he risks that a turn around won't ever happen comes out-sized returns for those lucky enough to be right. Indeed, there are few better ways in the stock market to score the elusive "10 bagger" - or tenfold return - than to correctly bet that a company is on the verge of a comeback. Turnarounds can take time to pay off, however, making patience not just a virtue but a must. Here are three turnaround gambles that we believe have a decent likelihood of success - and belong only in the most speculative portion of a diversified portfolio. (Lucent, Conesco details are omitted.)

SEARS.
Here's a less risky but still potentially lucrative turnaround. Shares of the retailer - once the country's largest - have been on the softer side for too long, under performing the S&P by 31% since 1997. But signs now point to changing fortunes, and value managers have been climbing aboard.

The key lure is not retail apparel. Rather, it's CEO Alan Lacy's focus on the more profitable and faster-growing home improvement market - and on credit cards. In fact, the credit-card business makes up an astounding 69% of Sears operating profit of $2.6 billion. With more than 40 million accounts, Sears is actually the nation's seventh largest credit-card company.

"People misunderstand where Sears makes its money," says Susan Byrne, manager of Gabelli Westwood Equity, who's recently been buying the shares. "It's like a huge bank." A growing bank at that. Operating income from financial products were up 25.3% in the fourth quarter, as low interest rates cut Sears' cost of borrowing. CEO Lacy's stated goal is to grow operating income from credit cards by 5% a year. To that end, Sears has invested heavily in high-tech screening programs to identify better quality credit card customers.

The company executives recently told Wall Street that earnings should be up 17% in 2002 - somewhat higher than the mid-teens gains that many analyst had been expecting. Byrne thinks the good news will keep coming. Sears currently fetches $54 a share; her target price is $80 within 12 months and $110 within three years.

Sears Gets Credit for Lands' End Deal
Big Store Set to Cash in on Plastic

By Eddie Baeb - Crain's Chicago Business - May 20, 2002
 

Squall jackets and Oxford shirts from Lands' End promise to spruce up Sears, Roebuck and Co.'s apparel offerings. But the acquisition of Lands' End also means a potential bonanza for Sears' most robust business: credit.

The catalog and Internet retailer delivers to Sears a more affluent customer base and an undeveloped credit card business, giving Sears an opportunity to further expand its already lucrative credit business, which currently accounts for more than half of profits.

The $1.9-billion acquisition of Dodgeville, Wis.-based Lands' End Inc. also could hold the key to expanding Sears' lagging apparel business, which contributes only $6 billion of the retailer's $41 billion in annual sales.

But Hoffman Estates-based Sears will also have to overcome pitfalls, including resisting the temptation to meddle with Lands' End's successful formula. One particular danger is that, in a down cycle, Sears would slash customer service or product quality to improve margins, thereby putting the franchise at risk.

Indeed, Sears hasn't distinguished itself with past acquisitions — its foray into auto parts with the 1988 purchase of Western Auto Supply Co. blew up under Sears' tinkering, turning a once-profitable chain into a money loser.

Toting up the benefits
But allowing that the retailer has learned from past missteps, observers say the Lands' End acquisition has the potential to generate both revenue and profit growth.

Credit could offer a key.
"No question, credit is a great opportunity," says Kevin Silverman, retail analyst at ABN AMRO Asset Management in Chicago. "It's one of the reasons Sears was such a fabulous buyer for Lands' End. Very few potential buyers would be in a position to bring Lands' End apparel into so many stores. And very few buyers would be in a position to offer credit like Sears can."

Mr. Silverman, who has followed both companies, says that over time, he estimates 40% of Lands' End catalog sales could be made on Lands' End plastic. Based on its $1.5 billion in sales last year,

that would mean about $600 million of additional sales going through Sears' credit business, which tallied net credit card receivables of $28 billion at yearend. Sears currently offers a proprietary Sears card and last year launched a Sears MasterCard.

CEO Alan Lacy says Sears is likely to issue a Lands' End proprietary credit card and a co-branded Lands' End MasterCard — the catalog company doesn't now offer its own credit card — and customers also will be able to use their Sears card for purchases from Lands' End catalogs and Web site.

Expanding credit will improve Sears' bottom line. While retail and related services generated $31.43 billion in sales last year, they produced only $901 million in operating income. Meanwhile, Sears' credit business generated $1.53 billion of operating income on $5.22 billion of revenues.

Sears posted 2001 net income of $735 million, or $2.24 a share, on revenues of $41.08 billion. Lands' End, whose fiscal year ended Feb. 1, reported net income of $66.9 million, or $2.23 a share, on revenues of $1.57 billion.

With a proprietary card that could be used only at Lands' End, Sears will gain an opportunity to finance purchases at interest rates typically higher than on bank-issued credit cards.

With a co-branded Lands' End MasterCard, Sears can provide a consumer's primary credit card — covering consumer purchases such as restaurant, hotel and airline charges.

Lands' End rival L. L. Bean Inc. of Maine offers a Visa card, issued by MBNA America Bank, that carries free shipping, monogramming and spending rewards.

In addition, Sears can market credit and other products to Lands' End's customer list, which includes more than 33 million names. Last year, Lands' End took orders from 7 million individual customers.

The danger, of course, is that Sears could alienate Lands' End's more-affluent customer base by trying to sell them products such as credit card insurance or dental plans.

"What (Sears) really shouldn't do is go in and mess Lands' End up," says Claire Gruppo, president of New York-based investment banking firm Gruppo Levey & Co., which specializes in direct marketing and retail. "If Sears starts using the catalog as a marketing tool for its stores, or if they start asking Lands' End management to work on Sears catalogs, that would be a big problem."

Getting the right mix
One particular danger: If it found itself under profit pressures, Sears could look to cut costs at Lands' End as a way to boost corporate margins. Sears' retail operations have a gross margin of 26.6%, according to a recent financial statement, while Lands' End enjoys a 43.9% margin.

But Lands' End success is predicated on strong service — customers can quickly reach telephone representatives who are familiar with the product — and high quality at reasonable prices.

And retail experts say that Sears must integrate and display the new merchandise in a way that's consistent with Lands' End's reputation for quality, also making sure its sales people are knowledgeable about the goods.

One analyst estimated that Sears' plan to devote 15% to 20% of its apparel floor space to Lands' End at its 870 department stores could result in sales of up to $2 billion of Lands' End merchandise.

But Sears must get the product mix right, carrying enough inventory to meet demand while avoiding overstocks that lead to heavy markdowns.

Mr. Lacy doesn't foresee problems. "I don't think the execution risk is that significant," he said in an interview. "We're essentially just adding another apparel brand."

Trying to Dodge a Merger Bullet
Lands' End Town Knows Sears Link Means Change

By Susan Chandler - Chicago Tribune Staff Reporter  - May 19, 2002

DODGEVILLE, Wis. -- Ruth Murphy is skeptical, and she's not afraid to say it. The grandmotherly soda fountain clerk just doesn't see a good fit between Lands' End Inc., her town's economic engine, and Sears, Roebuck and Co.

"I can't see Lands' End clothing sold in Sears. Can you?" she asks while mixing an 85-cent ice cream float for a young customer perched on an old-fashioned stool at the Corner Drug Store in downtown Dodgeville. "Lands' End clothes are very good quality."

The implied criticism of Sears is clear, even in a town where people are mostly too polite to say anything negative about Lands' End Chairman Gary Comer's decision last week to sell the preppy apparel catalog company to a big-city retail giant for almost $2 billion.

But the sense that an era is ending is inescapable.

"I have a lot of people who sneak down here on their lunch break or come after work," says Vern Ott, owner of the Village Barbershop. "I hope everyone working here now can stay.

Since 1978, when Lands' End moved its headquarters from Chicago to southwest Wisconsin on the whim of Comer, Dodgeville has flourished. The tiny town surrounded by dairy farms has seen an influx of new residents and wealth as Lands' End added jobs and developed a national reputation as a good place to work.

But while such growth often brings negatives, Dodgeville has retained its small-town character. Serious crime is virtually non-existent, leaving court dockets filled with cases of disorderly conduct and driving under the influence.

The schools are good, the streets are quiet. Senior citizens gather at the Courthouse Inn on weekday mornings to play a few hands of cards or feast on the Foreman's Breakfast, two eggs smothered in cheddar cheese sauce served on a bed of hash browns for $5.50.

"It's pretty obvious when they have 4,000 employed in the Dodgeville facility, and we're only a community of 4,200 that it's a real positive for the whole area," says Dodgeville Mayor Jim McCaulley. "Not only the weekly paycheck, but the benefits have really helped stabilize the farm economy."

Gary Schill, co-owner of the 109-year-old drugstore, agrees. "You can travel in the Midwest and see a lot of communities our size that have really struggled. But here, it's been steady upward growth.

`It's been a blessing'

"Many townspeople and farm wives have been able to endure hard times because of a second wage earner. It's been a blessing."

Some of those blessings are quite tangible, such as the town swimming pool, made possible by a $500,000 donation from Comer, and a new surgical and outpatient wing at the local hospital, which got under way with a $250,000 contribution from Lands' End.

But now Dodgeville's favorite billionaire is taking his money and going home to Chicago. If the deal is approved as expected, there won't be any more Lands' End annual meetings for him to preside over. No more board meetings for him to attend. That prospect was enough to cause 74-year-old Comer to break into tears several times Monday while explaining to employees why it was time for Lands' End to move on without him.

By the end of June, Lands' End will simply be a unit of Sears.

Frankly, that concerns Brindi Melton, the manager of Thistle Hill Table Top Co., an upscale home accessories shop on Dodgeville's main street that is a favorite with many Lands' End designers and graphic artists.

"A lot of our business comes from Lands' End," says Melton, the daughter of shop owners Carla and John Lind. "How is this going to affect business? Are people going to be worried about their jobs? We're worried."

Outside of Lands' End workers, there aren't many townspeople who would pony up their cash for Thistle Hill's orange-linden blossom herbal bath beads, rusty wrought-iron garden tables or Fiestaware pitchers in the latest colors.

And it takes a rather urban design sense to pay 75 cents per dried quince pod or $1.50 for an octopus-like spider cone to create a tony table display.

Trying to ease fears

Of course, Sears is saying all the right things to allay the potential fears of Lands' End employees and Dodgeville residents. Sears Chief Executive Alan Lacy, who traveled to Dodgeville to meet with Lands' End employees Monday, has promised to leave Lands' End alone, maintaining its Dodgeville headquarters under CEO David Dyer. "We want them to continue to be the happy family they are," Lacy said last week after the deal was announced.

But such fairy tale endings are unusual in mergers between big companies and small entrepreneurial ones, notes Thomas Lys, professor of mergers and acquisitions at Northwestern's Kellogg School of Management.

"Here's what happens. The culture of the buyer gets imposed on the seller," Lys said. "If Sears doesn't want to turn Lands' End into Sears, they have to be very vigilant."

If Sears decides to integrate Lands' End into its accounting system or reporting structure, it's the beginning of the end, Lys warns. "The moment they start integrating them, the entrepreneurial people will leave. If they wanted to work for Sears, they would have."

That's certainly the case for Devan Thompson, a California native who had his pick of job offers but decided to join Lands' End as soon as he graduated from Brigham Young University in Utah four years ago.

Thompson, 28, believes that change is inevitable once the merger goes through, but he also believes that what Lands' End has created is worth fighting for.

"I'm loyal to the Lands' End brand and I'll defend it and make sure it stays the way it should be," says the senior inventory manager for outerwear. If Sears were to ask him to make a product cheaper, "I'd say, `We're either going to do it the Lands' End way or not at all,'" Thompson vows.

The Lands' End way

So what exactly is the Lands' End way? To those caught up in the urban rat race, it almost sounds too good to be true.

Customers and good service are revered here. All products are guaranteed, and Lands' End will accept returns years later on items that clearly have been well used. Phone operators, many of them farm wives, are not allowed to prompt a customer to place an order. If the person on the other end of the line wants to talk about the weather for 15 minutes, that's fine.

Employees are treated with the same respect. Part-timers who work more than 25 hours a week receive the same benefits package as full-time workers, including annual bonuses, medical and dental insurance, profit-sharing and a company match on their 401(k) contributions.

All employees have free use of a fitness center, including pool, and there's a backup child-care center available to anyone who has a sick baby-sitter or other glitch. There's also paid caregiver leave for those with a severely ill spouse or child, and anyone can buy an extra week of vacation annually.

Lands' End also knows how to have fun. Phyllis Toay, who spends her days at a sewing machine hemming pants, is part of the 10,000 Steps Club. She and other workers have meters that count each step they take daily. Club members encourage each other and keep track of their weekly progress.

One morning last week, Toay went on a company-sponsored Poker Walk among Lands' End's buildings, picking up a playing card at each one, trying to put together a winning hand. With her three 10s, a king and five, Toay has a decent chance to win but doesn't know what the prize might be.

It doesn't really matter.

"I like the atmosphere. Coming to work is a pleasure," says Toay, 62, who joined Lands' End after injuring her back 20 years ago on the family farm.

With so much to lose, it only makes sense that Lands' End workers would be nervous at the prospect of change. Surprisingly, perhaps, few say they feel that way.

"I look at this as a good opportunity for growth," said Cindy Doney, a specialty shopper at Lands' End who answers product-related questions for customers. "They're presenting it in such a nice light."

Doney, who has 20 years invested in Lands' End, was surprised to hear the company was sold, but the name Sears didn't scare her. "I thought it was great. I buy at Sears in Madison. I get good customer service."

Still, she wouldn't want her job to change. As the mother of three, Doney's second income is critical to her family. "This is not an extra for me," she says.

Cash bonuses awarded

Helping to ease the shock to employees is a lot of cash.

On the day the sale was announced, Comer and Dyer said they would give Lands' End employees a bonus equal to two weeks pay. Then Lacy tacked on an additional one-week bonus payable at Christmastime.

Then Comer decided to go further. He is kicking in an additional $1 million to be split among current employees who were there when he stepped down as president in 1990. There's talk he might even double that amount.

Chris Aide, who has worked for six years packing customer orders, already knows how she is going to spend her extra dough. She will attend a nearby music festival and her son is going to Australia in July.

No one appears to be begrudging the big paydays that are going to the guys at the top. Comer's 52 percent stake is worth close to $1 billion. Former CEO Richard Anderson's holdings will bring him $71.4 million.

And Dyer is sitting on $28.7 million in Lands' End shares, including exercisable options. That makes Dyer, who lives on an estate near Governor Dodge State Park, Dodgeville's richest resident by far.

Other top executives are being paid retention bonuses to make sure they stick around.

Will Sears get its payoff?

But whether Sears will receive the big payoff it is expecting from acquiring Lands' End probably won't be known for at least two years, business experts say.

By then it should be clear whether Lands' End's reputation for quality has given Sears new credibility in the apparel area or whether being in Sears has hurt Lands' End's image with upscale consumers.

Robert Blattberg, director of the Center for Retail Management at the Kellogg School, isn't optimistic.

"In the long run, it's a question of whether they bastardize the brand. Does having Lands' End products at Sears degrade the image of Lands' End?" Blattberg said. "My gut feeling is yes."

Dodgeville's residents are hoping he's wrong.

Allstate Said to Coerce Its Agents

By Joseph  B. Treaster - New York Times - May 18, 2002

A federal agency has concluded that the Allstate Insurance Company was illegally discriminating against about 650 life insurance agents even as it was negotiating to settle similar charges involving thousands of agents who sell auto and home insurance, several agents and the company disclosed yesterday.

In a letter to both sides in the dispute dated May 10, Lynn Bruner, a district director of the Equal Employment Opportunity Commission, said Allstate had engaged in "unlawful interference, coercion and intimidation" against the life insurance agents in 2000 and 2001.

According to the E.E.O.C., the company required agents to convert from being employees with health and pension benefits into independent contractors. Ms. Bruner said Allstate had acknowledged telling the agents they would not be permitted to work for the company unless they agreed in writing not to sue for any kind of employment discrimination. Such an action is a form of illegal pre- emptive retaliation, she said in the letter, which urged the company and the agents to begin settlement talks.

For nearly two years, Allstate has been fighting similar claims that it forced thousands of auto and home insurance agents to become independent contractors. Those agents sued Allstate in Federal District Court in Philadelphia in August. In December, the E.E.O.C. also sued Allstate.

Allstate has in turn sued the agents for fraud, saying they got severance or other benefits after agreeing not to sue the company, but never intended to honor their agreements. Susan Rosborough, an Allstate lawyer, said the company, the country's second-largest seller of auto and home insurance after State Farm, treated its agents properly and legally. The company says it wants to make its sales force more efficient and is increasing commissions to compensate for the elimination of benefits. But Michael Wilson, the lead lawyer in the agents' private suit, said their earnings as independent contractors were not making up for the losses in benefits.

The initial complaints from the home and auto insurance agents were based on age discrimination. More than 90 percent of them were more than 40 years old. More than 80 percent of the life insurance agents are that old. Both of the commission's cases cover a wide range of employment discrimination offenses.

Lawyers who specialize in suing corporations on behalf of workers portrayed Allstate as arrogant in its persistence. "If an employer gets a finding based on a certain type of practice, normally, you would expect the employer to be very cautious about doing it again," said L. Steven Platt, a Chicago lawyer who is president of Workplace Fairness, a group that provides information to workers.

But Ms. Rosborough said Allstate continued converting employees into contractors under the belief that the commission was wrong. "We don't understand their theory of retaliation," she said.

Felix Miller, the lead E.E.O.C. lawyer in the case involving the larger group of agents, said the retaliation concept was simple: agents were required to sign a release giving up their right to sue under antidiscrimination employment laws. "If an agent refused to sign," he said, "Allstate said: `Goodbye. We're not even going to consider keeping you as a sales agent.' We found that to be unlawful retaliation."

But Ms. Rosborough said, "The way we look at it, their jobs were going to go away whether they signed the release or not."

There were two types of jobs, she said — one with full benefits, the other with opportunities to make more money. "We essentially said, Job A is going away," she said. "You have a number of options. If you wanted to apply for Job B, in this case the independent contractor job, you had to sign the release."

With Allstate maintaining its position, there seems to be little hope for a negotiated settlement with the 650 life insurance agents. Whether the E.E.O.C. will eventually sue Allstate over the second group is unclear.

The commission's action against Allstate comes as its leadership and attitudes are shifting in a direction potentially more favorable to corporations. Dominated by Clinton appointees until recently, the agency has filed more than 400 discrimination lawsuits annually in three of the last four years.

But Republicans are on their way to gaining a majority on the agency's five-member board. Cari M. Dominguez, the current chairwoman, appointed by President Bush, has begun to emphasize mediation over litigation. Legal experts say the number of lawsuits is likely to decline.

At Allstate's annual shareholders meeting in Chicago on Thursday, Edward M. Liddy, the chief executive, called lawsuits "a plague on corporate America."

"We conduct ourselves in a most ethical way," he said.

Barry L. Hutton, an Allstate vice president, said it was common for companies to require departing employees to promise in writing not to file lawsuits.

But Mr. Miller, the lawyer for the E.E.O.C., said the big distinction in Allstate's case was that most of the agents were not leaving the company. "This was a situation where you were signing a release in order to stay," he said.

Sears Starts Lands' End Tender Offer
From the Reuters Newsroom - May 17, 2002

Sears, Roebuck and Co., the No. 4 U.S. retailer, Friday said it had begun a tender offer for all shares of catalog and Internet specialty clothing retailer Lands' End Inc. Sears is offering $62 cash for each Land's End share, or a total of $1.9 billion. Sears said the tender offer will expire June 14. Morgan Stanley is the dealer-manager for the offer, and Mellon Investor Services LLC is serving as the depositary for the offer.

Sears, which recorded revenue of more than $41 billion last year, aims to revive its apparel business through the Lands' End acquisition. Its shares closed Thursday at $56.75 on the New York Stock Exchange, where they have a 52-week trading range of $29.90 to $56.90. Lands' End shares ended at $61.84.

Proposed Deal Could Help Both Retailers' Web Sites

By Bob Tedeschi - New York Times
May 14, 2002

If Sears, Roebuck's planned acquisition of the catalog and Internet retailer Lands' End goes as planned, analysts say, the e-commerce operations of both companies, already among the leaders in their respective online categories, may benefit.

"While Sears has been focused on how to tie e-commerce to their stores," said James Crawford, a retail analyst with Forrester Research, "Lands' End is very focused on improving the customer experience online. They'll be very complementary, in that there's not a lot of overlap in what they're trying to do with e-commerce."

The Sears Web site ranks third among department store retailers' sites, behind Target's and Wal-Mart's. Sears says its site helped produce $500 million worth of store sales last year, mostly in "hard lines," like appliances and power tools, which require a good deal of research before a customer buys.

Sears largely abandoned its conventional catalog business in the 1990's and has made its Sears.com Web site more of a marketing medium than a mail-order business. A full 40 percent of the products that Sears sells online are picked up by customers at the stores.

Lands' End has a reputation for e-commerce innovation, rolling out such offerings as a custom clothing feature that lets customers essentially tailor garments to suit their bodies. Its Web site was responsible for $327 million, or 21 percent, of the company's sales last year, making it one of the few success stories in an online category that has been nearly bereft of good news.

Neither Sears nor Lands' End would comment yesterday on how they would merge their Web operations. But because the two companies have such divergent approaches to e- commerce, analysts said there would be little opportunity to save money by integrating the two.

According to Michael Petsky, principal of Petsky Prunier, an investment firm in New York that specializes in mergers and acquisitions in the direct marketing industry, Sears essentially shut its internal catalog division in the mid-90's. It has instead chosen to work with "catalog syndication" companies, which actually operate warehouses and fill customer orders, he added.

So Sears owns little of its own warehouse and distribution capabilities for direct sales through Sears .com and its catalogs, Mr. Petsky said, and it has little in the way of assets to merge with the publishing, warehousing and customer service divisions of Lands' End.

Sears could conceivably make more money on catalog and Internet sales by handling them internally through the Lands' End distribution system. But Mr. Petsky said such an approach would be difficult, given that the Lands' End system was set up to sell and distribute shirts and trousers, not stoves and tires.

In the early going, the bigger online beneficiary of the merger will probably be Lands' End, which will be able to market its Web site to Sears.com visitors, to the 130 million customers in the Sears database and to recipients of the 90 million newspaper inserts that Sears distributes each week.

While many analysts were enthusiastic about the proposed acquisition, some cautioned that the move might be too similar to Federated Department Stores' $1.7 billion purchase of the direct marketer Fingerhut in 1999. That merger quickly ran into trouble, but Fingerhut had problems that Lands' End does not. Fingerhut foundered on a mountain of bad credit card debt, and its low- budget products proved a poor match for Federated, the parent of Macy's and Bloomingdale's.

Despite such cautionary tales, there will probably be more deals between direct marketers and department stores in the near future, said Mr. Petsky, the analyst. "We're seeing a big uptick in mergers and acquisitions activity, focused on direct marketers," he said.

Many traditional retailers realized that they could not successfully build Internet and catalog operations of their own, Mr. Petsky said, but they have come to appreciate the wisdom of selling to customers through different channels. And while there have been few Internet retailers worth picking up from the dot-com trash heap, he said, some traditional catalog companies with Web sites, like J. Jill and Spiegel, have generally retained their value.

"Many major marketers," Mr. Petsky said, have the money "to do substantial direct marketing deals."

Martha Stewart Wares to be Sold in Canada
Reuters Company News - Monday, May 13, 2002

Martha Stewart Living Omnimedia Inc. (NYSE:MSO - News), the media and merchandising company headed by style guru Martha Stewart, on Monday said Sears Canada Inc. (Toronto:SCC.TO - News) will become the exclusive Canadian retailer for the Martha Stewart Everyday brand.

New York-based Martha Stewart entered a multiyear merchandising agreement with retailer Sears Canada to distribute the brand label in 2003 upon expiration of its current arrangement with Zellers Inc., which launched the brand in Canada.

Martha Stewart Everyday brand label collections in the bed and bath, housewares, gardening, textiles, and seasonal products will be available at Sears Canada stores and through Sears Canada's catalog and Internet site in summer 2003.

Sears Canada's merchandising approach and multiple channels of distribution, including the catalog and online services, are among the reasons the retailer was chosen to replace Zellers, Martha Stewart said.

In the United States, Martha Stewart Everyday is distributed through bankrupt discounter Kmart Corp. (NYSE:KM - News) Martha Stewart has stated its intention to stand by Kmart, but it is allowed by contract to talk to other retailers in the event of a bankruptcy. In the first quarter, closures of Kmart stores hurt Martha Stewart's earnings.
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Sears Buys Lands End for $1.9 Billion
Reuters - May 13, 2002

Sears, Roebuck and Co., the No. 4 U.S. retailer, said Monday it agreed to buy Lands' End Inc., the largest specialty catalog and Internet retailer, for about $1.9 billion, in a bid to revive its laggard apparel business.

Under terms of the deal, which has been approved by both retailers' boards, Sears will pay $62 a share for Lands' End, representing a 21 percent premium over Friday's closing price. Sears will assume an unspecified amount of debt.

The agreement ends years of speculation that the two retailers were in talks to merge. Lands' End had been contemplating opening its own stores, and Sears is in the process of overhauling its clothing unit, which has underperformed its appliance and tool business.

Shares of Dodgeville, Wisconsin-based Lands' End rose more than 22 percent to $62.52 in preopen trading on Instinet, compared with Friday's close at $51.02. Sears shares fell to $49.80 in preopen trading from $51.81 at Friday's close.

``I think this is one of the smartest moves that could have been made,'' Kurt Barnard, president of Barnard's Retail Consulting Group, said. ``It will give Lands' End enormous distribution and it will greatly enhance Sears' apparel business. Lands' End is a household name.''

Sears has struggled to revive its apparel business in recent years. The retailer has lost customers to discount chains like Wal-Mart Stores Inc. and off-the-mall chains like Kohl's Corp.

Sears will put some Lands' End products into many of its 870 department stores by autumn and is expected to complete product roll-out to stores by fall 2003.

Lands' End, known for its conservatively styled casual clothes, shoes and home goods, will continue to offer all its products through its catalogs and Web site.

"We were drawn to Lands' End's brand strength across all apparel categories, including men's, women's and children's,'' Alan Lacy, Sears chief executive officer, said in a statement.

David Dyer, Lands' End CEO, will continue to head up the Lands' End business, reporting to Lacy after the deal closes.

Dyer also will assume responsibility for Sears' existing customer-direct business, which includes sears.com, catalogs and specialty merchandise.

Lands' End founder and Chairman Gary Comer and certain other Lands' End shareholders have agreed to tender their shares, representing about 55 percent of the outstanding common stock.

The tender offer requires that at least two-thirds of the fully diluted shares be tendered as well as other approvals. The deal is expected to be completed in June. Lands' End will become a wholly owned subsidiary of Sears and will keep its headquarters in Dodgeville.

Lacy said the deal does not change Sears' outlook for 2002, and the company stuck by its forecast for earnings per share growth of 17 percent above the $4.22 it earned in 2001.

The transaction is expected to be slightly dilutive to break-even in 2002 and 2003.

Sears' Lacy on Purchase of Lands' End and Sales (Transcript)

Bloomberg - Hoffman Estates, Illinois, May 13, 2002

Alan Lacy, chairman and chief executive of Sears, Roebuck & Co., talks with Bloomberg's Rachel Katz via telephone about the department-store company's agreement to buy Lands' End Inc. for about $1.9 billion in cash, the likely impact of the purchase on clothing sales and the company's earnings outlook.

(This is not a legal transcript.
Bloomberg LP cannot guarantee its accuracy.)

KATZ: Hello, and welcome to the Bloomberg Forum. This is Rachel Katz.

I'm speaking with Alan Lacy, chief executive of Sears, Roebuck and Company, which, today, announced it agreed to buy catalogue and Internet retailer, Lands' End for about $1.9 billion. Hi, Alan. How are you?

LACY: Doing well, thank you, Rachel.

KATZ: Thanks for joining us. Why is this a good fit for Sears?

LACY: Well, it's a good fit really on two dimensions. We're buying a great company. Lands' End is a wonderful company, that is growing very rapidly, and that we can help them grow faster, giving them access to our extensive customer relationships. And then, secondly, we're buying a great brand. The Lands' End brand is very well renowned for its quality and value. And we think having that brand in our stores will provide a very good point of differentiation and draw to our soft line assortments, particularly for our more affluent hard line shoppers, and also in attracting new customers for our store.

KATZ: What Lands' End products are you going to be offering into your stores and online?

LACY: Well, we're going to be basically focusing on their best selling items, and we're going to be introducing them into our men's, women's and kid's departments, as well as our home fashions department as we go forward. We do anticipate having, you know, 15 to 20 percent of the floor space in those departments devoted to Lands' End product, which will be a very compelling assortment; the customer will notice. And we think that we're going to be able to draw, once again, lots of new customers to our store, and then have a product that connects better with our existing customers on both the hard line and the soft line side.

KATZ: Sears has acknowledged in the past that it has had difficulty inducing apparel sales. How do you think this is going to help?

LACY: Well, I think that, you know, one of the issues that we've had is that our proprietary brands and soft lines just haven't had that customer recognition and draw power that ideally one would like to have. And while we have some important and national brands in our assortment, and those continue to be important to us, I must add as well, that what we really have lacked is the powerhouse brand in soft line that really stands up to the same kind of brand that we have on the hard line side with, for example, Kenmore, Craftsman and Die Hard. In hard lines, we have national brands of best value and better prices available exclusively at Sears, and Lands' End is very much of the same ilk in that it's a best product at better prices that will now be available exclusively at Sears.

KATZ: What portion of Sears' sales comes through apparel at this point?

LACY: Well, of our $41 billion corporate sales in total domestically, about $6 billion of our revenue is apparel.

KATZ: Do you have any targets that you're looking to grow that to?

LACY: Not specifically, other than we'd like it to grow as rapidly as we can. We'd also like the rest of our business to grow as rapidly as it can. So we're really not solving for some mix. We really want all of our store and our operations to do well.

KATZ: How are you planning to finance this purchase?

LACY: Well, we will issue, basically, debt. We have several hundred millions of excess cash available right now, but we'll be placing about $1.5 billion worth of debt to fund the transaction. A third of it will be through the asset-backed market and two-thirds of it will be through the unsecured, longer-term market.

KATZ: Do you expect this to have much impact on your credit rating currently?

LACY: Well, the rating agencies will review this transaction, and I'm sure they will announce their point of view once the transaction closes.

KATZ: Now, Sears over the past decade or so has cut back on its large catalogues and began focusing on specialty catalogues. How does the Lands' End purchase further that strategy?

LACY: Well, I think, that, as we've talked about the last year or so, we really have three principal growth strategies in our company. The Sears Gold MasterCard in our credit business, the Great Indoors is our freestanding retail format, and our direct to customer business. We have a substantial one already. Most notably, in terms of our online activity, both in terms of how it influences in-store sales, as well as how much we sell online, and we think adding Lands' End just gives us more critical mass in direct to customer. And given our very extensive customer relationships and information, that we're going to really be able to satisfy our customers on a very direct basis, very satisfactorily as we go forward.

KATZ: And what effect do you expect the acquisition to have on earnings over the next three years?

LACY: Well, for 2002, it will be modestly dilutive, but we reaffirmed our guidance for the full year this year with 17 percent earnings growth. So we're very comfortable that our current business momentum is quite strong and that the dilution is fairly minor for this year; 2003 is relatively neutral; and 2004 we expect it to be significantly accretive.

KATZ: Any particular Lands' End items that you personally like most, or are you a regular customer there?

LACY: Well, I've got a very substantial and increasingly substantial wardrobe of Lands' End product. And I think that particularly their men's dress shirts are extraordinarily a good quality, a good value; and for the weekend wear, their khaki slacks are a great value, as well.

KATZ: Now, just in a separate announcement, Sears Canada today said it will be - it will start selling Martha Stewart Everyday house wares starting next summer after discount chain sellers decided to drop the line. What do you expect this to bring to Sears' Canada stores?

LACY: Well, I think the Martha Stewart brand is a very important brand in the home fashions arena. And we think that Sears Canada is a very good partner in relationship for Martha Stewart. We can express her brand across a wide variety of product categories up there and very much against the better shopper.

KATZ: Now, apparently Zellers thought it wasn't selling quite as well as some of their other products. What are your hopes for pushing sales of this at Sears?

LACY: Well, I think, Sears Canada thinks it will be a very important part of their business from a revenue standpoint. I don't know that we've disclosed exact revenues at this stage, but it's going to be a very important product line for us.

KATZ: Can we expect to see more Martha Stewart items in Sears' U.S. stores in the future?

LACY: Well, in the U.S. we have her paint, but that's all we've got, as you may be aware. She has a relationship with Kmart that is exclusive and that excludes a number of retailers, including ourselves, so until that changes, the paint business is all that we've got.

KATZ: Well, thank you very, Alan. We certainly appreciate your taking some time to speak with us.

This has been Rachel Katz with the Bloomberg Forum, speaking with Sears, Roebuck and Company Chief Executive Alan Lacy.

***END OF TRANSCRIPT***

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Sears Agrees to Buy Lands' End for About $1.9 Billion
Bloomberg News - May 13, 2002

Sears, Roebuck & Co. agreed to buy Lands' End Inc. for $1.9 billion, gaining a catalog and Internet retailer known for polo shirts, khakis and deck shoes as the largest U.S. department-store chain tries to boost clothing sales.

The $62-a-share offer is a 22 percent premium to Lands' End's closing price Friday. Sears will issue about $1.5 billion in debt to fund the acquisition, Chief Executive Alan Lacy said in an interview. The transaction may reduce profit this year and next, and raise it in 2004, Sears said.

Sears will start selling Lands' End apparel in some of its 870 department stores this fall to capture more upscale shoppers. The retailer is trying to persuade customers who shop at its stores for appliances and electronics to give clothing a try, too. Lacy has been remodeling stores and developing private brands as clothing sales dropped in the past five quarters, analysts said.

"Sears has shown no expertise in apparel,'' said David Abella of Rochdale Investment Management Inc., which holds 92,377 Sears shares in about $1 billion in assets. Rochdale sold Lands' End this year. "My concern for Sears is that they're paying a lot for it, but you have to pay for a top brand."

Allstate Rate Increases

Daily Herald - Arlington Heights, IL - May 12, 2002

Allstate CEO explains 'storm' behind rate hikes
By Dave Carpenter Associated Press

Tougher times in the insurance industry are prompting Allstate Corp. to do something Wall Street likes and consumers won't: raise rates aggressively.

At the forefront of an industrywide trend, the nation's second-biggest personal-lines insurer had homeowners' rate hikes averaging 20 percent approved in 23 states in the first quarter - and is seeking more - with expensive mold claims being a significant factor.

Automobile premiums also are being increased, albeit more moderately, as Allstate moves to emerge from a lengthy period of sluggish earnings and revenue.

Edward Liddy, the chief executive officer, acknowledges the homeowners' rate hikes in particular are dramatic, but says the industry is adjusting out of necessity after years of offering relatively low-priced policies.

Higher rates are only part of the changes under Liddy, who reorganized the agent-based network and added Internet sales capability and round-the-clock call centers soon after taking charge in 1999.

Liddy is steering the company increasingly into financial services - efforts complicated by the skittish economy and lower investment returns. He also has overseen a change in underwriting strategy that includes the use of credit scoring - a controversial evaluation of financial stability - where allowed by state regulators.

Here are excerpts from an interview last week with the 56-year-old Liddy:

Q. Why have you raised rates sharply now, not a year ago or a year from now?

A. It really is a function of what's happening to the industry.

We had last year kind of a perfect storm, if you will - the escalation of material costs that it takes to repair a home, the escalation of labor costs because of the large number of remodels, reconstructions, home- building, etc., and a lot of very bad, inclement weather. And then finally, there are, particularly in the state of Texas, some emerging issues related to mold, and the trial bar has in fact gotten hold of mold as an issue.

All those things came together in the last year and a half, and it's caused us to have to dramatically increase the cost of homeowners' insurance.

Q. When and how will Allstate start showing sales growth that meets Wall Street's expectations?

A. Our goal is to grow the top line of our property- casualty business in the high single-digit range. That's really all you can do in this business. If you try to grow faster, then it's very much a take-market-share gain and you wind up hurting the bottom line in order to grow the top line. So if we can get from (the current) 51/2 percent into the 6 to 7 to 8 percent range, we'll be in quite good shape. And I think you'll see those levels later in the year, again particularly as rate increases begin to roll forward.

Q. How long will it take to turn around the homeowners business?

A: We'll have it done by the middle of next year. ... A homeowner's policy is a 12-month policy, so when it comes to rate increases and changes to offset the impact of mold, for some folks you won't get to them until 12 months, and then the effect of that will take another full 12 months to be seen.

Q. How is the company responding to the mold issue?

A: We've done a couple things, and I think we've done them fairly quickly. We've revised our policy forms to put a limitation on mold. The regulators (in Texas) have now reinserted the words 'sudden' and 'accidental.' We also have fairly dramatically increased our rates down there.

Q. Do you have the critical mass to be a big player in financial services?

A: We do, because of what we're trying to do in financial services. Our goal really is not to be all things to all people. It's to have real strength in the protection area of financial services, and in the retirement planning and asset management area of financial services. And then a small piece of the banking business. We have no interest in the brokerage business or the credit businesses.

We're targeted at middle America, where a lot of firms don't have the infrastructure to be able to go. We have that because we really have 12,000 agents out there.

We've been in the life insurance business, or financial services, since 1954. That business generated about $500 million of operating income after tax last year. So some people get the impression that we're just coming to this party late, but we've been a major player in this area for awhile.

Q. When do you think you might overtake State Farm to become the largest personal-lines insurer?

A: It's not our goal to get bigger than State Farm. We want to be better than them and we'd like to be more profitable and we'd like to provide better customer service. If we're able to do all those things, I think we will in time be larger than we are right now, and that could mean that we're bigger than State Farm.

Home Depot Plans to Expand Its Showroom for Appliances

By Chad Terhune - Staff Reporter of The Wall Street Journal
May 13, 2002

Home Depot Inc. is rolling out a larger appliance showroom in as many as 350 stores this year, part of a new store design and a bid to move up from No. 4 in the appliance business.

Nearly three years after getting into appliances, the nation's largest home-improvement retailer had a 3.9% market share in the first quarter, according to research firm Stevenson Co. in Louisville, Ky. That is up from 2.6% a year ago.

The new showroom, which was tested in 53 stores in several markets, including Las Vegas, will feature 150 to 200 appliances on the floor compared with about 75 models now relegated to a single aisle in the back of most stores. Two-hundred existing stores will be retrofitted for the new look and many of the 200 stores opening this year will feature it as well. Atlanta-based Home Depot has more than 1,350 stores in North America.

Sears, Roebuck & Co., Hoffman Estates, Ill., is the appliance leader, with a commanding 40.7% market share, an increase from 39.6% a year earlier, according to Stevenson Co. data. Lowe's Cos., Wilkesboro, N.C., is second with an 11.4% share, up from 8.2% a year ago. Best Buy Co., Minneapolis, hung on to third place with 6.2% in the first quarter, compared with 6% earlier.

Despite the sluggish economy, appliance sales have remained fairly solid. Lowe's has said that consumers have continued to buy more expensive models, unlike in previous economic downturns. Lowe's appliance sales increased 30% last year to $2.5 billion. Industrywide appliance shipments are up 5.2% year to date, compared with flat growth in 2001, said Dan Wewer, an analyst at Deutsche Bank.

Home Depot's showroom idea is taking a page from what Sears and Lowe's already do. "If Home Depot wants any competitive advantage, they have to put more resources into the category," Mr. Wewer said. "Lowe's is a great one to copy."

In addition to the expanded showroom, Home Depot is testing a new distribution system in the Atlanta market that promises to shorten appliance delivery of in-stock products to within 24 hours. Home Depot, with fewer models in the stores now, relies on manufacturers to make many of its customer deliveries within 48 hours. Lowe's, for instance, already guarantees next-day delivery.

Sears to Acquire Lands’ End

By Dave Carpenter - Associated Press
May 13, 2002

In a bold attempt to revive its long-struggling retail business, Sears, Roebuck and Co. is buying catalog retailer Lands' End Inc. for about $1.9 billion, the companies announced today.

The announcement sent Lands' End shares up more than 20 percent in early trading while Sears shares slipped.

Lands' End is the largest specialty apparel catalog company and the biggest Internet seller of apparel in the United States.

Under a deal expected to be completed in June, it will become a wholly owned subsidiary of Sears, continuing to be headquartered in Dodgeville, Wis.

"This transaction brings together two of the great names in American retailing, and in the process strengthens both companies and brands," said Alan Lacy, Sears chairman and chief executive.

"Needless to say it’s a lot of money, but ... strategically it takes us another step on the journey of our turnaround at Sears," Lacy told analysts in a conference call this morning.

The move comes with Sears, the fourth-largest U.S. retailer, in the midst of an overhaul of its 870 full-line stores after years of lackluster apparel sales.

With discount chains such as Kohl’s and Target having taken away some of its business in recent years, Sears is easing away from the traditional department-store model and adding more discounting, more self-service and an increased emphasis on home appliances, a longtime strength. It also is adding a Sears-only clothing line under the Covington name this fall.

Hoffman Estates-based Sears will introduce a selection of Lands' End products into many of its stores by this fall and is expected to complete product rollout to stores by fall 2003. Lacy said Lands' End apparel will complement the Covington brand.

Lands’ End, with $1.6 billion in revenue in 2001, will continue to offer its complete product line direct to customers through its catalogs and online at www.landsend.com.

"Our business operations will remain in place as they exist today and we expect this partnership will provide meaningful growth opportunities," Dave Dyer, Lands' End CEO and chairman, said in a statement.

Gary C. Comer, Lands’ End’s founder and chairman, will remain in charge of the business, reporting to Lacy after the transaction closes. He also will assume responsibility for Sears’ customer-direct business, which includes sears.com, catalogs and specialty merchandise.

Under terms of the deal, Sears will make a tender offer for all shares of Lands' End stock for $62 a share in cash. That is a 21.5 percent premium over Lands’ End’s closing price of $51.02 a share on Friday in trading on the New York Stock Exchange.

Retail analyst Bernard Sosnick of Fahnestock and Co., commenting on the conference call, called Sears' acquisition a "brilliant strategic move."

Comer and other shareholders have agreed to tender their shares, representing about 55 percent of the outstanding common stock. The tender offer requires that at least two-thirds of the fully diluted shares be tendered.

Forbes magazine, in its latest ranking of the richest people, estimated Comer’s wealth in March at $1 billion.

Lacy said the transaction, which has approval of both companies’ boards of directors, does not alter Sears outlook of a 17 percent earnings increase for the year.

Companies Trim Health Benefits for Many Retirees
By Milt Freudenheim -New York Times
May 10, 2002

Hundreds of thousands of retired workers who used to have generous health benefits from large companies are digging deeper into their own pockets this year. Surging inflation in medical costs is draining hundreds of millions of dollars from corporate profits, and many large employers are responding by cutting back on health care benefits for retirees or requiring them to pay more for coverage.

The reductions in health benefits stem mainly from sudden sharp increases in employer spending on prescription drugs last year. Drugs account for 40 to 60 percent of  employers' overall spending on Medicare-age retirees' health care. At the same time, far-reaching cutbacks by Medicare health maintenance organizations ó which used to provide generous benefits, including drug coverage ó are forcing employers to pay for retirees' drug coverage, since traditional Medicare does not cover the cost of most drugs.

As a result, current health care costs for retirees are soaring 18 percent a year, on average, according to the United States Chamber of Commerce. And large companies' liabilities for future health care costs for retirees are rising as much as 34 percent.

Margaret Cleary, 80, who retired from the Morgan Guaranty Trust Company unit of J. P. Morgan & Company in 1986, is well aware of the effect of rising drug costs on retiree benefits. The monthly deduction for her Medicare H.M.O. from her $550 pension check  jumped to $128.74 from $50 this year, she said, more than she could afford.

She dropped the H.M.O. and chose a less expensive plan even though it had no coverage for the prescription drugs she said she needed to control diabetes and problems with her blood pressure and cholesterol levels. Medicare  recipients like Mrs. Cleary can select traditional Medicare coverage  or join a Medicare H.M.O, where they are available.

A spokesman for J. P. Morgan Chase said a retiree in her position could have selected a new company-subsidized policy that would cover  only drugs, instead of the more comprehensive coverage she had. But Ms. Cleary said that when she renewed her health plan last December, she did not understand that her H.M.O. would raise its rates. "I was paying $50 a month," she said. "I didn't think they were going to make it $129."

The soaring costs for employers are reflected in enormous charges recorded recently by large companies in the annual spring crop of reports to shareholders. The Ford Motor Company, for example, said in its latest annual report that it subtracted $1.92 billion from last year's pretax income to reflect expected payments for 150,000 retirees in the United States, mostly for medical costs. That was an increase of 24 percent, or $370 million, from $1.55 billion the year before.

General Electric, General Motors, Verizon, Boeing and other companies that long have provided extremely generous health plans for tens of thousands of retirees  are also especially vulnerable, as their recent annual reports make clear.

Many large companies are increasing their forecasts of future health care liabilities because their current costs are rising more rapidly than they expected, according to Richard Ostuw, a health care expert at the benefits consulting firm Towers Perrin. And since accounting rules require companies to reflect their future health care liabilities as a reduction in current earnings, just as Ford has, companies are trying to limit the damage to profits by demanding larger co-payments, raising deductibles and limiting coverage for retirees.

The prospects for retiree health benefits are even dimmer for younger workers at medium-size companies, with several hundred to a few thousand employees. Many of these companies have stopped promising retiree health care coverage to new hires. Small companies rarely pay for any health care at all for retirees.

Several health care experts say costs for retirees will keep rising, unless the government provides tax relief for the employers or a taxpayer-financed drug benefit.

Lorraine Sablan, 70, a retired aerospace worker at Allegheny Teledyne in San Diego, said the premiums subtracted from her $669 a month pension rose 80 percent on Jan. 1, to $90.16. The company shut the plant where she worked in 1994."If it keeps going up, we won't have a pension," she said.

Dan Greenfield of Allegheny Technologies, the parent company, which has 20,000 retirees but only 10,700 active workers, said, even though his company was relatively small, "health costs are a big number, and even in a low inflationary environment, it continues to rise."

Trying to rein in health care costs for its retired workers, Ford recently informed the 50,000 retirees not covered by  union contracts that beginning next month they will pay premiums of $5  to $150 a month, depending on the size of family covered and the  retiree's eligibility for Medicare. If they do not want to pay a premium, they can still choose a plan with a high deductible.

Ford also estimated that its commitments were $25.43 billion on Dec. 31 for the full extent of its future costs for retiree health care and other nonpension benefits, including life insurance.

Altogether, companies reported total liability for future retiree health care costs of $400 billion, said Laura Champagne, a senior consultant on benefits for the United  Automobile Workers union. For some companies, she said, their future  liability for retiree health care was greater than their net worth, before they began cutting back on benefits.

Almost two-thirds of companies with 5,000 or more employees still provide some health benefits for retirees, according to the latest Kaiser Foundation- Commonwealth Fund  study. But only 3 percent of small companies with fewer than 200  workers do so.

Retirees now pay all or part of the costs in 8 out of 10 company health plans, according to a national survey of costs in 2001 by Mercer Human Resource Consulting. In the mid-1980's, about half of all  companies covered all their retirees' premiums.

"Companies are concerned about how their balance sheets are going to look after two down quarters last year and the events of Sept. 11 and the big increases we've been seeing in health care costs," said Kate Sullivan, a health policy expert at the  United States Chamber of Commerce. "Employers are looking at any way  they can to shave off some of those costs," she said.

James Foreman, a health care expert at Towers Perrin, said companies "tend to be somewhat optimistic" when they put together their estimates of the future cost of benefits.  "Then they are under pressure to manage the plans to produce the  savings," often by limiting benefits, he said.

Mr. Foreman said 4 in 10 companies that pay for retirees' health needs have said they will not go above a ceiling, or cap, in payments. These limits have not affected  coverage at many companies in the past, but this year, many are  reaching their limits for the first time.

Alan Sefcik, a vice president for human resources at AT&T, said that management retirees who were hired after March 1, 1990, hit the company's spending limits this year. The caps were  $3,950 for those over 65 with families and $1,725 for individuals in  that age bracket. Retirees under age 65 had a limit of $7,550 for  families and $3,700 for individuals. As a result, management retirees now pay monthly premiums of $21 for health insurance for families and $14 for individuals.

The company's union retirees have a different deal. In recent negotiations, AT&T, which is struggling with financial losses, and the Communications Workers of America and the International Brotherhood of Electrical Workers  tentatively agreed to open new health care savings accounts for retired union members to help them if their costs reach their cap  during the next 18 months.

Some company officials do not hide their frustration with rising health care costs. "Our high cost per retiree is really driven by the fact that the health care industry does not have a focus on quality or cost," said Tom Croskey, an executive director of labor relations at General Motors. G.M. reported $3.72 billion as its net expense for retiree health and life insurance obligations for 2001, a $600 million increase from 2000.

 

Sears Annual Meeting
Sears Issues Cautious Outlook
Reuters Business Report - May 9, 2002

Sears, Roebuck and Co. said on Thursday the U.S. economic outlook remains unclear and its own outlook is cautious, after reporting lower April sales earlier in the day.

For the remainder of the year, we clearly see an uncertain economy," Chairman and Chief Executive Alan Lacy told the annual shareholders' meeting of the No. 4 U.S. retailer.

"I think there was hope that the economy would be getting stronger right now," he said. "I think that's a bit problematic, so we've stayed very conservative in our outlook in terms of overall business growth."

Sears, known for its own brands such as Craftsman tools and Kenmore appliances, has tried to concentrate on boosting profitability despite lackluster sales.

One shareholder asked Lacy if he would be interested in recruiting Martha Stewart if the household goods diva were to sever her marketing relationship with bankrupt retailer Kmart Corp. (NYSE:KM - news).

Lacy cited Stewart's exclusivity agreement with Kmart that prevents her from selling her products through other retailers.

"If for some reason it was possible for us to talk with her, we always have an interest in attracting strong brands to our store," he said. "She has a strong brand, and we would like to explore opportunities, but until something happens with Kmart, that's not a relevant question."

Sears has carried Martha Stewart Everyday Living paint for several years, but the bulk of her products are sold through Kmart.

Sears said on Thursday that sales at its domestic stores open at least a year, or same-store sales, fell 2.8 percent in April as clothing sales remained weak. Same-store sales were down 2.9 percent in the first quarter.

Sears repeated its earlier forecast of a 17 percent increase in profits in 2002 from last year's $4.22 a share, excluding noncomparable items.

In the first quarter, Sears' profits excluding one-time items reached a record $300 million, or 93 cents a share. But net income in the quarter fell 38 percent to $110 million, or 34 cents a share, as profits were sapped by charges from accounting changes and costs to remodel Canadian stores.

CHALLENGES

Sears, which traces its history back to 1886, has been struggling lately to distinguish itself in a shifting retail environment. Challenges include threats from discounters like Wal-Mart Stores Inc. (NYSE:WMT - news) and specialty retailers like Home Depot Inc. and Best Buy Co. Inc.

"Sears is a unique business," Lacy said. "We're not a department store, but we're also not a discount store."

Shares of Sears closed down 40 cents at $52.45 Thursday on the New York Stock Exchange, still not far below their 52-week high of $55.40.

Shareholders at the annual meeting at the company's headquarters in the Chicago suburb of Hoffman Estates, Illinois, approved two advisory proposals, one on the election of directors and one on "poison pill" anti-takeover defenses.

The shareholder proposals, opposed by Sears management, both passed by margins of about 60 percent, but Sears spokeswoman Peggy Palter noted the proposals were not binding on the company.

Sears directors currently serve staggered three-year terms. Under the proposal, all directors would have to stand for election annually. Similar proposals have appeared on the proxy statement ballot for several years, and one received 51 percent of the votes at the 2000 annual meeting, according to supporters.

The other proposal that received a majority of votes asked that the directors seek shareholder approval before adopting any poison-pill defense, which critics say insulates management and reduces shareholder value. Sears does not currently have a poison pill in place.

MARTHA STEWART Coming to Sears?????

 Sears Would Consider Adding Martha
By Alby Gallun, Crain's Chicago Business News
 May 9, 2002

Sears Roebuck & Co. would be interested in carrying the Martha Stewart brand in its stores if she ever ended her exclusive relationship with bankrupt retailer Kmart Corp., Sears Chairman and CEO Alan J. Lacy said Thursday.

"She has a strong brand, and we would like to explore opportunities," Mr. Lacy said, responding to a question from a shareholder at the retailer's annual meeting at its Hoffman Estates headquarters.

Yet he pointed out that Sears can't explore opportunities now because the home furnishings and lifestyle doyenne has a long-term agreement with Michigan-based Kmart that prevents other retailers from carrying her brand. Some retail industry observers have raised questions about the future of that relationship following Kmart's Chapter 11 bankruptcy filing in January.

Landing the brand would be a coup for Sears, which has been weak where Ms. Stewart is strong.

A spokeswoman for Martha Stewart Living Omnimedia Inc., the New York-based company Ms. Stewart heads, was unavailable for comment.

April proved to be a challenging sales month for Sears, which reported flat revenues of $2.2 billion, even with the year-ago period. Sales at stores open more than one year declined 2.8% year-over-year.

Sears said its hardlines continued to perform well, including strong sales growth in home appliances. But the retailer gained little from the Easter holiday falling in March rather than April, as apparel sales sagged. Softline results in most merchandise categories fell below expectations, the company said.

Sears: A Slippery Slope Made of Plastic

By Robert Berner, Chicago and Heather Timmons, New York -
Business Week - May 6, 2002

Is the giant retailer relying too heavily on its credit-card business?

Sears, Roebuck & Co.'s core business peddling appliances, tools, and clothing has always gotten a big boost from the company's credit-card arm. These days, though, those old favorites aren't much more than a sideline--the venerable Chicago retailer is essentially a finance company. Last year, its finance arm brought in nearly 70% of the $2.3 billion in operating income, up from 58% in 1999.

Sears' reliance on lending to offset sagging merchandise sales is sure to keep growing. Chief Executive Alan J. Lacy pushed hard to develop the business even before taking the top post in 2000. As chief financial officer, he rolled out the Sears MasterCard to tap income from purchases at other merchants. Now, the company has 22 million MasterCard accounts, making it the 13th-largest issuer. Lacy's latest move is to charge Sears store card customers variable rates. The already lofty 21.9% fixed rate is going up to prime rate plus 17.15% in July. So, when interest rates pick up, the business will be as profitable as ever.

The stock market loves it. Lacy's financial bent coupled with a focus on cost-cutting has helped boost Sears stock 60% in the past 12 months, to $53 on Apr. 24. Never mind that revenues from Sears' retail business dropped 1.4% in the first quarter of the year--revenues from the finance division were up 26%.

But the rapid growth in its credit-card lending, particularly to low-to-middle-income customers, is raising some red flags. Sears is aggressively expanding its credit-card lines when many rivals are cutting back. "Many companies serving a similar customer base have gotten themselves into trouble," says William Ryan, an analyst with Ventana Capital, an independent research firm. Metris Cos. and Providian Financial Corp. were forced by the Office of the Comptroller of the Currency to cut back lending after posting higher-than-expected losses. Sears Credit Services President Kevin T. Keleghan says Sears customers are more creditworthy. He points to Sears' low charge-off rate--5.43% of receivables, compared with an industry average of about 6.5%--as proof of its skill at judging customers: "We have the lowest write-offs in the industry right now," he says.

It's not quite that simple. Sears extends credit through an Arizona-based bank subsidiary but transfers accounts to its parent. So, neither the OCC nor the Federal Reserve regulate the whole company. Sears waits until loans are 240 days late before writing them off; for regulated banks the cutoff is 180 days. Keleghan says that by waiting longer, Sears recovers more losses.

Still, investors may want to be wary. The last time Sears stepped on the credit pedal, under former CEO Arthur C. Martinez, the results were a disaster. He nearly doubled the rate at which Sears issued its own store cards in the mid-'90s, fueling sales. But defaults began to soar by 1996, hurting earnings in 1997 and 1998. Martinez appointed Lacy to clean up the mess.

Now, Lacy is applying the gas. Although the MasterCard carries a lower rate than the Sears store card, he aims to make up profits by encouraging customers to borrow more. The tactic seems to be working. In the first quarter, MasterCard receivables more than tripled from a year ago, to $6.3 billion. Outstanding credit lines jumped 30%, to $250 billion.

But the MasterCard gains are cannibalizing store cards, where receivables fell by 14.7%. Lacy is trying to offset the drop by tacking on fees as well as raising rates. Last July, Sears upped the interest on its store card to 21.9% as the Fed cut rates. This summer, Sears will test cash advances, a novelty for store cards, and charge 18.15% above prime. The high rates lead some to suspect Sears is lending to risky borrowers who can't get credit elsewhere. Sears says customers are attracted by discounts on merchandise, but skeptics question that. "Sears must feel that the people they have on that card are a captive market and it might as well milk them as hard as possible," says David A. Wyss, chief economist at Standard & Poor's.

Lacy's dilemma: He isn't getting profit from top-line growth. Sales at existing stores have fallen the past five quarters. Nowhere is the drop more pronounced than in apparel sales, which have fallen for 16 straight months. In an effort to end the slump, Sears in the fall will launch Covington, a classically styled clothing line. It is also taking cost-cutting measures. But as long as sales decline, it's hard to boost margins that way. Although Sears cut costs by $90 million in the first quarter, its store operating expenses remained essentially flat as a percentage of sales.

Lacy's plan to eke more profits from the Sears store card could even crimp sales. As rates move up, sales may slow in Sears' one strong area, home appliances, where it has a 40% market share. Sears derives over half of its finance income from such big-ticket items. But Lowe's Cos., No. 2 behind Sears with a 10% market share, still has a 21% fixed rate on its own store card, vs. Sears' 21.9%--a gap that is likely to widen when rates start to rise. Last year, Lowe's gained market share faster than Sears, according to market research firm Stevenson Co.

Turning to the MasterCard isn't a long-term solution to Sears' problems, either, says Brian James, a retail analyst at investment firm Loomis, Sayles & Co. Sears is pushing into a highly competitive arena, where its costs of acquiring new customers will ultimately rise once it has tapped existing customers. "Lacy is tweaking the credit side of the model when he has a gaping wound on the other side of the business," James says. Lacy may be buying some time with his finance push, but he can't mask Sears' deteriorating retail business forever.

Ex-Sears Exec Climbs Ladder at Macy's

by Susan Chandler - Chicago Tribune
May 4, 2002

Robert Mettler was the "Softer Side of Sears."

His department store roots gave Sears, Roebuck and Co. credibility with apparel-makers who were leery of selling their brands to the maker of Die-Hard batteries and Craftsman tools. And his creation of private-label brands such as Canyon River Blues put Sears back in the game with moderate apparel giant J.C. Penney Co.

Then-Chief Executive Arthur Martinez was so pleased with his efforts that Mettler was named head merchant of softlines and hardlines in late 1996.

But when Sears' turnaround stalled in 1999, and the Sears board demanded a change, someone had to go. Mettler was it. Despite the less-than-ideal circumstances of his exit, it didn't take Mettler long to find another job. Three months later, he was hired as president of Macy's West, the fastest-growing division of Federated Department Stores.

Now, it looks like Sears did Mettler a big favor. He was named CEO of Macy's West this week, effective June 1, succeeding Jeremiah Sullivan.

Given the slump in the department store sector, the promotion puts Mettler, 61, even more squarely on the hot seat.

What should department stores do to get customers shopping again? They have to be differentiated, Mettler says. They have to be relevant.

"Customers want to be able to get in and out and feel good about the money they spent," Mettler says.

Few retail executives would disagree, but not many department stores are different, compelling or fun these days. Macy's West may be one of the exceptions.

The chain has done a good job of attracting kids and teenagers, something some said was a losing game because the young set doesn't want to shop with their parents.

Macy's has flouted the conventional wisdom by bringing disc jockeys into its juniors department on the weekends. Some of the deejays are kids. Boys and girls
can play foosball there, too. The area feels different than the rest of the store. Macy's opened up the ceiling and brought in funky fixtures.

On the adult apparel side, Macy's West is having great success with fashion brands such as Hugo Boss and Gianni Versace for men and Eileen Fisher and DKNY for women, upscale lines that aren't found everywhere. It can't keep Seven Jeans, a current cult brand, in stock. At about $150 a pair, that's quite an accomplishment.

The business that isn't performing well: moderately priced mainstream lines that can be found everywhere--usually marked down 20 percent to 30 percent.

Although he can't get rid of all of them, Mettler is thinning their ranks.

"If we don't compete effectively, that's not a good use of our assets," he says. "Price is never a differentiator."

Even though their businesses are very different, Mettler and Sears CEO Alan Lacy agree on one thing: There are too many private label apparel lines out there that
don't mean anything to customers.

Sears has announced it is scrapping eight of its low name-recognition brands--some of them created during Mettler's reign--and introducing a new one this fall called Covington.

The key to success will be both a sustained marketing push and an ongoing effort to keep Covington fresh, Mettler says. The process could take 10 years, he adds.

"It's going to be difficult but maybe they can pull it off," Mettler says.

Sears Looks Beyond Shopping Malls for Store Locations
Bloomburg - May 3, 2002

Sears, Roebuck & Co. plans to open a greater number of stores outside shopping malls as it benefits from shedding unprofitable businesses, Chief Executive Officer Alan Lacy said.

The largest U.S. department-store chain is remodeling stores and plans a new clothing line, and will open more stores as it boosts profit, Lacy said in a presentation to the Executives' Club of Chicago.

Expansion in malls is limited because fewer are being built. Sears's mall-based stores face competition from companies such as Wal-Mart Stores Inc. and Home Depot Inc., whose sites are often between shoppers' homes and malls, Lacy said.

"They are often more convenient to our customers than making the trip to the regional shopping mall,'' Lacy said.

Time to Deliver: Sears CEO
By Alby Gallun - Crain's Chicago Business
May 03, 2002

With Sears Roebuck & Co.'s turnaround plan in place, now it's all about getting execution right, Chairman and CEO Alan J. Lacy said at an Executives' Club of Chicago breakfast Friday morning.

"The execution risk here over the next six months or so is what keeps me and my management team up at night," Mr. Lacy told the audience assembled at the Palmer House Hilton Hotel.

Since October 2000, when he took over as the top executive at the Hoffman Estates-based retailer, Mr. Lacy has overseen a major restructuring plan aimed at cutting costs that has reduced Sears' salaried headcount by more than 20%. Now, the question is whether Mr. Lacy can boost the top line through better marketing and merchandising and a major store-remodeling program.

Mr. Lacy said the company in the past "spent way too much money advertising what's on sale at Sears versus why to come to Sears," a practice he aims to change with an ad campaign launched last year with the tagline "Sears: Where Else?"

On the merchandising side, he said Sears has focused on "exiting and editing" its product lines, getting out of the cosmetics business last year, for instance. And the company has high hopes for its new Covington apparel brand, which it plans to roll out in September, replacing eight other store brands.

Perhaps the biggest challenge Sears faces is executing Mr. Lacy's plan to remodel about 600 of its full-line stores to make them less cluttered and more shopper-friendly. The new stores feature centralized checkout stations, improved layouts and simplified signage.

"We've had an inconsistent and overly complicated store," he said. "We've made it more complicated than it needed to be."

Mr. Lacy dismissed a question about the company's heavy reliance on its credit-card business; which accounted for nearly 70% of its operating profit last year; noting that the unit provides a steady stream of cash that can be reinvested in other businesses.

With the company's shares up 40% over the past 12 months, it doesn't seem to be a major concern of investors, either. At midday, Sears shares were down $1.12 at $51.78.

Segal Warmer than Sears on Great Indoors

By Susan Chandler - Chicago Tribune
April 27, 2002

The decision by Sears, Roebuck and Co. to slow the rollout of its Great Indoors home remodeling chain has some retail experts scratching their heads.

The Great Indoors is the best-looking store that Sears has ever produced, and its timing couldn't be better. More Americans than ever are interested in upgrading their homes and have the money--or the borrowing capacity--to do so.

But recently, the Great Indoors has stumbled. Its same- store sales have declined for four out of the last six months. And Sears' investor relations folks have been making noise that things better turn around soon or the Great Indoors could find itself out in the cold.

In a March 7 research report, Merrill Lynch retail analyst Daniel Barry says Sears is "prepared to walk away" from the decorator store concept unless results improve. That was a very poor paraphrase of the conversation Sears had with Barry, according to Sears spokeswoman Peggy Palter.

Chief Executive "Alan Lacy is prepared to walk away from any business that doesn't show appropriate returns, but there are no imminent plans for the Great Indoors," Palter says. "We're actually very comfortable and confident we'll be able to turn that into a successful format."

Still, Sears' frustration with the Great Indoors leaves retail veteran Gordon Segal shaking his head.

Legendary for his patience, Crate & Barrel founder Segal has spent two years tinkering with his first spinoff concept in nearly 40 years--CB2.

"You have to give it a few years," he counsels. "These big companies go in and they want to get it right right away. This is an art form."

Segal, who really likes the Great Indoors, wonders whether Sears' ambivalence stems from a change in regime. After all, it was former CEO Arthur Martinez who promised there would be 150 Great Indoors in five to eight years. One of Lacy's first acts was to rein in that aggressive growth plan.

Indeed, only 7 new Great Indoors are opening this year, including two in Houston that were supposed to open last year but were postponed because of serious flooding.

What Segal thinks probably doesn't matter to Lacy, except in this regard: The Great Indoors and Expo Design Center, Home Depot's entrant in the home remodeling game, were vying for the space that Segal owns in the former Homemakers building at North and Clybourn Avenues, Lincoln Park's hot home furnishings retail zone.

Segal says he chose Expo over the Great Indoors for the lease because "I wasn't sure if Sears would stick with it if Arthur left."

We sure hope Sears proves him wrong. By the way, the Expo in Lincoln Park opens Saturday.

Turnaround Twins: Levi and J.C. Penney
Business Week - April 24, 2002

Gregg Hammann, chief customer officer at Levi Strauss, explains how improvements at Penney are helping both companies

Levi Strauss Chief Executive Philip Marineau, who arrived in 1999 from PepsiCo, has been struggling to revive the jeans maker, whose sales have fallen some 40%
in the past five years. The privately held company reported net income of $151 million for the fiscal year ended Nov. 25, down 32% from the prior year. Sales fell 8.3%, to $4.3 billion. Since 1997, Levi has closed 29 domestic factories, and it's shuttering 6 more this year.

Marineau is working to fix problems in virtually every part of the business. He's overhauling the product line, which had become stale and overly dependent on tired
styles dating back to the '80s. He has improved Levi's supply chain and increased on-time deliveries to major customers such as J.C. Penney, Sears Roebuck, Kohl's, and Federated Department Stores. Those moves are helping to improve Levi's once-frayed relations with retailers.

While working through its own turnaround, Levi Strauss also is keeping an eye on J.C. Penney. The department-store chain is the largest retail distributor of Levi's clothing, and the future of the jeans company depends in part on Penney's ability to buff up its stores, operations, and marketing (see BW, 4/29/02 "A Speedy Makeover at Penney's"). Since Allen Questrom became Penney's CEO in 2000, Levi Strauss likes what it sees.

BusinessWeek Correspondent Louise Lee recently spoke with Gregg Hammann, Levi Strauss's chief customer officer, to discuss the ways Penney is improving its performance and how that helps Levi. Edited excerpts from their conversation follow:

Q: What's your overall assessment of Penney's turnaround?
A: The turnaround strategy is making tremendous progress. Penney went to centralized merchandising 12 months ago, which has helped it from an efficiency standpoint. It has more fashionable merchandise. Marketing and promotions are more targeted and more
compelling to the target: families.

Q: What's particularly appealing about the current advertising?
A: You see all the elements of a family -- [kids,] teens, adults. It shows there's a place for everyone at Penney. It has done a great job of creating ads that fit well with what's in the store.  

Q: How does the new centralized buying system help Penney and Levi?
A: Centralized buying lets Penney react quickly to the marketplace and get product out there in all stores. Before that was put in, it could take four to six months for a product to get to all stores. A few stores here and there would buy a product, and stores in some markets would want it at different times.

Last year, Penney decided that it wanted the Superlow jeans [for teen girls] in all stores, and it put in orders in a matter of weeks. Because of centralized buying, it could react quickly as a chain. So all stores had Superlow at the same time. Centralized buying lets Penney have consistent store presentation and a consistent look.

Q: How has Penney improved the presentation of Levi's products?
A: It used to be that jeans would be folded up and stacked along a wall. Now, stores are putting Levi's new young men's Flyweight jeans, made of a light, flexible fabric, on hangers by the aisle. And it's using new mannequins: They almost look like they're alive. The mannequin wears the Flyweight jeans and is in an action pose as though he's riding a skateboard. Plus, there's a sign saying, "Can you do this in your jeans?" People stop and look.

Q: What have such improvements done for Levi sales at Penney?
A: Penney's sales of Levi product have turned around. Sales had fallen every year by about 3% to 5% for the past four years. But in 2001, sales rose in the high single digits for both Levi and Docker products [also made by Levi Strauss].

Q: How else has the relationship between Penney and Levi changed?
A: It used to be a transactional, "Here's the jeans, here's the price." And the jeans just got folded up and put against the wall. Now, a focus for both of us is to be collaborative. We're both companies in turnaround. We've met three times with Penney's key executives, and we've got another meeting in May. Questrom himself attends some of these meetings.

Recently, the marketing vice-presidents for both Penney and Levi got together and walked through five stores in different markets to discuss how they could improve presentation. That kind of meeting just wouldn't have happened two years ago.

Net Profit Drops 38% for Sears

By Sandra Guy - Business Reporter - Chicago Sun-Times
April 19, 2002

Sears, Roebuck and Co. said Thursday it will introduce a big-and-tall men's shop and a closet-organizing section in its department stores--two previously unannounced aspects of the retailer's massive redesign.

Sears CEO Alan Lacy talked about the initiatives during an announcement of the company's fiscal 2002 first-quarter earnings. The results were consistent with a preliminary version issued last week that far surpassed Wall Street's expectations and sent Sears' stock soaring to a four-year high.

At one time, Hoffman Estates-based Sears offered a greater variety of special sizes for men, but the selection had gradually been cut back. Now, customers are again asking for the selections, Sears spokeswoman Peggy Palter said.

"We want to work on building specialized areas of apparel," Palter said of the initial rollout of the men's shops.

The men's shops will debut in 350 Sears stores by this fall.

Lacy said the new apparel brand Sears will introduce this fall across men's, women's and children's clothing lines will replace eight brands Sears now carries, including Crossroads, Fieldmaster and Trader Bay.

Sears officials have yet to reveal the name of the new brand, but analysts have speculated it may take the place of the existing Crossroads brand.

Shoppers will get their first glimpse of the label with the children's apparel line, which will debut in time for back-to-school sales, Lacy said.

Also, Lacy told analysts Sears is cutting the expense of building The Great Indoors stores, the retailer's high- end home-decor store.

The Great Indoors stores that have opened this year are "a couple million bucks cheaper" than those opened last year, and the new prototype to open in 2003 will "take the investment level down another step," Lacy said.

Sears initially spent $16 million to $25 million to build each Great Indoors store. The savings will be realized in a way that's invisible to customers, such as changing the building materials and displays, Palter said.

Lacy said he sees no need to speed up construction of The Great Indoors because he doesn't believe Sears is in a race against rival Home Depot's Expo Design Center.

The cost cutting and department store redesigns are part of a strategy Lacy unveiled last October to move away from the traditional department-store format.

The makeover at Sears' 870 full-line department stores, besides cost-cutting and administrative staff reductions, includes more discounting, more self- service, fewer brands and increased emphasis on home decor, home appliances and fitness equipment.

Revenues rose to $9.04 billion from $8.86 billion, thanks to a 26 percent increase from credit and financial products. Merchandise sales and services, which account for 85 percent of revenues, slipped 0.6 percent, to $6.77 billion from $6.81 billion, hurt by sales declines at department stores, the company said.

Same-store sales will fall by a percentage in the low- to mid single digits for the rest of the year, largely because renovations at the company's stores are likely to inconvenience customers during the second and third quarters, said Chief Financial Officer Paul Liska.

As Sears revealed last week, its first-quarter net profits tumbled 38 percent because shoppers bought less clothing and the value of two acquisitions dropped.

But the retailer's efforts to improve margins and trim expenses paid off in a big leap in operating earnings and a four-year high in its stock price.

In trading Thursday, Sears shares rose 4 cents to close at $53.75 on the New York Stock Exchange. The share price has risen 42 percent in the past year.

Net earnings were $110 million, or 34 cents a share, down from $176 million, or 53 cents a share, a year earlier.

The decline resulted from $190 million in charges, primarily for an accounting rule change that eliminates goodwill amortization. Sears also took charges for converting Eaton's stores to the Sears Canada name and for selling part of its investment in Advance Auto Parts.

Excluding the charges, Sears said operating earnings rose 107 percent to $300 million, or 93 cents a share, matching the number it previewed last week.

Lacy said the quarter provided positive early results from Sears' strategic initiatives, including getting out of unprofitable product lines and overhauling inventory.

Sears said it still expects 2002 operating earnings to beat last year's by 17 percent, as announced last week.

But Lacy emphasized Thursday that the company remains cautious due to the uncertain economic outlook ''as well as the business disruption and execution risk inherent during the implementation of our full-line store strategy.''

Sales at stores open at least a year fell 2.9 percent, led by declines in apparel. Same-store sales have fallen in 10 of the last 11 months. The retailer also had costs related to changes in accounting for past acquisitions.

''They should really focus on the top line now,'' said Nicholas Gerber, who manages the $1.5 billion Ameristock fund, which includes 386,000 Sears shares. The company should consider opening more stores, he said. Sears has said it plans to open eight stores this year.

Excluding expenses and an investment gain, profit would have been 93 cents, Sears said. On that basis, the company met the average estimate of analysts surveyed by Thomson Financial/First Call.

Gross margin, or sales minus the cost of goods sold, at the retail and services division widened to 26 percent of sales from 24.3 percent, Liska said. The company has cut most of the 4,900 positions it previously announced it would trim and discounted fewer items because it had lowered inventory, which helped profit.

Credit card balances at the end of the quarter increased 5.1 percent to $27 billion from the year-earlier period. Sears has switched about 19 million of its 60 million card holders to its Gold MasterCard, which offers a higher credit line and can be used at other merchants. Shoppers' increased use of the card is expected to boost interest income and fees, Sears has said.

''The Gold MasterCard continues to be a valuable growth vehicle for us,'' Lacy said.

Sears had costs of $208 million, or 64 cents, for a change in the way it accounts for the value of acquisitions, and expenses of $40 million, or 13 cents, for converting Eaton's stores to Sears Canada stores. It also had a gain of $58 million, or 18 cents, for selling part of an investment in Advance Auto Parts.

Rulemakers last year changed the accounting for goodwill created in acquisitions. Goodwill represents the portion of an acquisition price that exceeds the book value of the business purchased. Companies previously expensed goodwill quarterly. Now they must regularly evaluate the goodwill on their books to see whether the value has declined.

Sears bought Orchard Supply Hardware in 1996 and the businesses that became National Tire & Battery in 1988.

Sales of home appliances and product-repair services rose, while revenue from credit and financial products increased to $1.39 billion.

Per-share profit minus some costs is still expected to increase about 17 percent this year, from $4.22 last year. That would equal profit of $4.94 a share.

Unusual Items Wallop Sears' Bottom Line
By Susan Chandler - Chicago Tribune Staff Reporter - April 19, 2002

Sears, Roebuck and Co. reported a large drop in first- quarter earnings Thursday as one-time charges battered its bottom line and shoppers spent fewer dollars in its stores.

The Hoffman Estates-based retailer reported net income of $110 million, or 34 cents a share, down 37 percent from $176 million, or 53 cents a share, a year earlier.

The decline resulted from after-tax charges totaling $190 million, or 59 cents a share, primarily related to accounting changes for goodwill.

Without those unusual items, Sears' profit more than doubled to $300 million, or 93 cents a share, consistent with the retailer's forecast issued last week, which sent Sears' stock soaring to a four-year high.

Investors weren't quite as enthusiastic when they saw the full report. After declining almost $1 per share in early trading, Sears' stock closed up 4 cents a share to $53.75.

Sears Chief Executive Alan Lacy said the quarter provided evidence that his strategic initiatives were paying off, including reducing salaried store personnel, exiting unprofitable merchandise lines and trimming inventories.

"This is an exceptional quarter," he said in a conference call.

Sears managed to eke out a 2 percent increase in revenue as a 26 percentincrease in its credit card proceeds surpassed a slight drop-off in merchandise sales and services. Total revenue rose to $9.04 billion from $8.86 billion last year.

Despite a volatile employment market, the outlook for Sears' $27 billion credit card portfolio is "stable," said Paul Liska, Sears' chief financial officer. But Sears increased its bad debt provision by $37 million, or 11 percent, in the first quarter. The company also wrote off 5.4 percent of its receivables as uncollectible, up from 5.1 percent last year, because of a spike in customer bankruptcy filings.

Sears said it still expects 2002 operating earnings to beat last year's by 17 percent, but Lacy warned other changes will cause "significant disruption" in stores later this year.

More than 800 Sears stores are being retrofitted with centralized cash registers at exits. And Sears will be installing closet shops and big-and-tall men's shops in more than 300 stores this fall.

Sears will clear space by getting rid of eight private- label clothing lines, Lacy said, and a new in-house brand, whose name hasn't been revealed, will debut this fall in men's, women's and children's apparel.

Sears Appliance Technicians Taking Computers to Heart

By Barbara Rose - Chicago Tribune Staff Reporter - April 18, 2002

Russ Molitor is asleep when a computer at a Sears product repair center dials a laptop in his northwest suburban home and sends his work schedule for the day.

By the time he finishes brewing coffee, the 30-year-old serviceman for Sears, Roebuck and Co. has consulted the laptop for a color map of the day's route and a list of customers.

His first call is with a homeowner in Glen Ellyn who says her dishwasher is "making noise." She plans to pay cash for the repair, and she prefers that he enter by a side door. As Molitor heads out his driveway, his laptop begins reading him driving directions.

Although much of the buzz about mobile computing has focused on consumer applications, such as buying movie tickets or making dinner reservations on the go, mobile technology's biggest influence has been inside corporations.

Companies such as Sears are putting computers in the hands of repairers not only to make them more efficient but also to streamline and speed basic functions, such as billing, to save millions of dollars.

"The technology, even though it's not perfect yet, is good enough to drive very significant value," said Martin Dunsby, a partner at Deloitte Consulting in Atlanta. "There are substantial paybacks even on expensive systems."

Sears' experience with mobile technology, starting in the early 1990s, illustrates how far "m-business" has evolved. Workers' attitudes toward the new technologies have changed dramatically through the years, and companies have rallied to the benefits of having a mobilized workforce.

The retailer's HomeCentral operation says it is the largest appliance repair company in the country, with 13,000 technicians who make 11 million in-home repairs a year.

Sears won't disclose how much it has saved since it began equipping service reps with laptops and cellular phones in 1993, but it says the payback has more than covered its investment.

One easily quantifiable gain: Sears now saves more than $3 million annually in the cost of telephone calls to order parts.

Molitor is part of a pilot group testing Sears' newest wireless systems, a $70 million investment in hardware and software that the retailer expects to roll out to the rest of its technicians by next year's first quarter.

The hardware includes sturdy laptops with color touch screens and glow-in-the-dark keyboards by Itronix Corp., a Spokane, Wash.-based maker of rugged mobile computers. Sears' service vans have been converted into wireless network base stations using equipment developed by Calgary, Alberta-based Wireless Matrix Corp.

A software team of 15 at Sears' headquarters in Hoffman Estates created applications that run on a Windows 2000 platform.

Among the software improvements: a more powerful search engine that can sift an inventory of 5 million parts using descriptions, an image, product, brand or code number.

Service reps can rotate images in schematic drawings or blow up a single part by running a finger around it on the laptop's touch-screen, leaving the schematic displayed behind it.

Sears expects a payback on the new technology in three years, a timetable that Deloitte's Dunsby suggests may be conservative based on his experience with similar projects.

Molitor's assessment of the new technology: "It makes the job easier."

Search tools

He likes the new search tools and the global positioning technology.

"Ninety-five percent of the time the computer leads me right to the customer's door," he said.

All the information he needs to estimate repair costs, order parts, fix appliances, bill customers and process payments is available on his computer's hard drive or via wireless networks that connect him with Sears' computers.

Antennas hidden in a dome on the service van's roof connect the van with a business data network operated by Cingular Wireless. When Molitor is making a repair, his laptop communicates with the van over a shorter-range wireless network.

A 13-year Sears veteran, Molitor remembers a time when he started his morning by driving to a service center to pick up a batch of work orders, then sat down to figure his route and call all his customers. At the end of the day, he drove back with his completed paperwork.

"You basically shuffled your paper all day like a deck of cards," he said.

Reaction was lukewarm, at best, when Sears decided that it would remove the paper by introducing cell phones and laptops to a workforce that had no experience with keyboards or computer mice.

"The old guys were totally against it," Molitor said. "We buddied them up with younger guys."

But within about three months, he said, "if their computer broke they were whining."

The transition was not easy.

"You were literally changing your culture overnight," said David Sankey, Sears' director of process and technology for product repair services. "There were a lot of people who needed a lot of help."

There were technical hurdles as well.

"There was really no mobile computing wireless business then," said project director Bill Miller, himself a veteran service rep. "Nobody was writing software for a wireless platform. We had to bring all the vendors together to create our own solution."

Biggest benefit
Miller and others understood that the biggest benefit would come from automating processes to reduce errors--a move that could bring service reps closer to their holy grail: a single visit per repair.

Today, computers in Sears' 80 product repair centers around the country map the most efficient routes and schedules for service reps based on technicians' specialties, ZIP codes, workloads and customer preferences. Workloads are balanced to avoid overtime, and schedules can be changed on the fly.

As service reps complete repairs, their laptops access information offloaded via the routing offices from customer databases in Columbus, Ohio; a parts database in Dallas; and financial accounting and other systems at headquarters. Customer files include records of previous service calls--including alerts such as "mean dog in back yard"--and warranty information.

An area of biggest improvement is electronic parts ordering.

Molitor recalls tying up customers' phones while he waited on hold for Sears employees to hunt through catalogs for parts.

"Certainly our customer satisfaction suffered, and it was an expense to us," Miller said.

Now, if a laptop indicates a part is not available on a technician's truck, the part is ordered automatically when a customer receipt is printed from the service rep's laptop.

"The shift in organizational mind-set is a big one," said Dunsby of Deloitte. "Instead of the field-service people being completely dependent on the back office, now you're empowering them to make decisions on behalf of the customers."

2 Plans to Avoid A Chain Wreck

Sears Re-Tools, Penneys Fashions Comeback

By Dina El Boghdady - Washington Post Staff Writer
April 18, 2002

J.C. Penney and Sears, Roebuck and Co., the first national department-store chains, captivated Middle American shoppers throughout most of the past century, then lost them to rivals in what seemed like the blink of a decade
-- the past one, to be exact.

But at the start of the 21st century, these value- oriented retail dinosaurs have adopted radically different strategies to reclaim shoppers who thought they had perhaps outgrown broad-line retailers. And each chain can point to evidence of some initial, if mixed, success.

Both companies have initiated turnaround plans under relatively new management teams roughly within the past two years. The idea is to combat a relatively recent retail phenomenon, the hourglass: With specialty stores siphoning customers from above and discounters siphoning from below, J.C. Penney and Sears are stuck in the very skinny middle, collecting the scraps.

Their newest strategy: Cut costs, renovate stores, improve the merchandise that sells and get rid of what does not.

But that's where the similarities end. The two chains are moving in different directions as they search for new niches in an increasingly crowded retail field. And their approaches are about as different as the people who lead them.

Sears, the more traditional everything-under-one-roof department store, no longer wants to be a department store.

"We're trying to move away from that now," Alan Lacy, the company's chief executive, told analystsrecently. "But we're also not trying to become a discounter. We feel we have the opportunity to really be a new Sears."

The new Sears will focus more on the appliances and tools that made it famous and less on clothing, distancing itself from the "Come see the softer side of Sears" direction launched in 1993.

J.C. Penney chose the opposite tack. The 100-year-old retailer dropped just about everything but clothing and home furnishings. Appliances, auto services, paint, hardware, fabrics and garden products -- all got axed in 1983.

Today, Penneys' main mission: Add pizazz to its mundane clothes to win back the thrifty 30-to-50-year-old female shoppers.

"J.C. Penney was merchandising to the lower- and middle- income consumer without recognizing that she had developed a more upper-class taste," especially during the prosperous 1990s, said Candace Corlett,a principal at WSL Strategic Retail, a New York consulting firm.

"Consumer self-perception changed so that even lower- income consumers felt more affluent," Corlett said. "But they walked into J.C. Penney and felt like budget shoppers."

Enter Allen Questrom, often described as the consummate merchant prince.

Questrom came to J.C. Penney in September 2000 as chairman and chief executive after holding similar posts at Barneys New York, Neiman Marcus and Federated Department Stores, the last of which he helped lead out of bankruptcy.

Already in his tenure, in the fourth quarter of last year, J.C. Penney has made a $95 million profit, reversing the previous year's money-losing streak.

The Plano, Tex.-based company expects to post its fifth consecutive quarterly increase next month in sales at its department stores open at least a year.

That's quite a turnabout from Questrom's early days there.

With Penneys, Questrom inherited a retailer that had lost at least 60 percent of its merchants in a wrenching move of its headquarters from New York to the Dallas area in the early '90s, said Robert Buchanan, an analyst at A.G. Edwards.

Questrom was "horrified to find that only one of his six general merchandising managers had experience at buying goods for his or her respective areas," Buchanan wrote in a report.

Another drawback was the company's decentralized operations. Since its founding, Penneys has instilled an entrepreneurial spirit in its managers, allowing each store to act on its own, buy its own merchandise and do its own advertising.

The centerpiece of Penneys' revamp is its effort to centralize the system within 14 distribution centers by 2003 so that each store doesn't have its own assortment, pricing and look.

Questrom has taken particular interest in decluttering the stores and narrowing the clothes assortment, which many analysts say already looks more fashionable.

To get the word out, J.C. Penney raised its advertising budget by $100 million last year when everybody else was cutting, Questrom said in a speech last month at Southern Methodist University.

As for the company's top managers, almost all are outsiders with strong merchandising experience.

"Our accountants and financial people are key to making us make money, but they can't make the business work," Questrom said. "We have to have the business to be worked by people who sell and buy merchandise."

Lacy, the top executive at Hoffman Estates, Ill.-based Sears, falls into the former category -- a money man. Before he was named chairman and chief executive in December 2000, Lacy worked in the credit and finance parts of the Sears business for about seven years.

"He's a financial whiz with a feel for what drives the bottom-line profitability," said Burt Flickinger of Reach Marketing, a retail consulting firm in Westport, Conn.

Boosting the bottom line means laying off 4,900 workers at Sears, or about 22 percent of the workforce, by the end of this year.

It also means scaling back rollout of the new Great Indoors home-remodeling stores. Only seven will open this year instead of 10 to 15, in addition to the crowd- attracting store that opened in Gaithersburg.

That was part of the turnaround plan Lacy unveiled in October.

Sears had already dropped certain offerings, such as installed floor coverings, cosmetics, bicycles and custom window treatments.

But as some parts of the business go, others grow. Sears plans to roll out chain-wide the "Tool Territory," a space dedicated to 18,000 tools in 72 brands.

And even though it's losing 570 brands of clothes, it hopes to unveil a mega-brand of classic clothes for women, men and children this fall.

The cost-cutting, coupled with better inventory controls, may pay off. In the fourth quarter, net income for Sears rose to $494 million from $442 million a year earlier.

Sears plans to announce better-than-expected first- quarter earnings today, driven by its retail business.

Earlier this month, Sears projected 34 cents per share in the first quarter if certain restructuring and accounting costs are included. Without those expenses, Sears would have earned 93 cents, up from 45 cents a year earlier and higher than the financial community expected.

But same-store sales at Sears dropped every month last quarter, declining 4.7 percent in March.

Anne Brouwer, a partner at the Chicago retail consulting firm McMillan Doolittle, said she does not believe Lacy has disclosed his entire plan for the company just yet.

After all, he got a later start than J.C. Penney, which began rolling out some of its initiatives in January 2000, before Questrom joined.

"But there's a key question on whether a major turnaround can occur at Sears without a merchant at the helm," Brouwer said. "This business is about satisfying consumers, and cost-cutting is not generally felt in a positive way by the consumer."

Lori Wilking, an analyst at H&R Block, wonders if Sears can keep pace with the competition.

"Sears is still presented with the ongoing challenge of having its customers shop the entire store," Wilking said. And even though it plans to improve its presentation, Wilking added, its healthier rivals will be doing the same.

Both Sears and J.C. Penney have more to worry about than just their department stores.

Of the $41 billion in revenue Sears collected last year, about 13 percent came from its credit card business.

J.C. Penney also owns the Eckerd drugstore chain, which some analysts say is not a good match. J.C. Penney was pressured to sell Eckerd for about $3 billion a few years back, Questrom said. But today, it's probably worth about $6 billion, he said.

Allstate 1st Quarter Net
Dow Jones News Wires
April 18, 2002

Sears' 1st-Quarter Operating Profit Doubles
Dow Jones Newswires - April 18, 2002

Sears Profit Off on Charges
Chicago Business - April 18, 2002

In March, Allstate said it was aggressively seeking rate increases in its homeowners and auto businesses in 2002 as it struggles with high loss costs at its property- liability operations.

 

Sears Shares Rise After Profit Forecast Increased
Hoffman Estates - April 11, 2002

Sears First Quarter Estimate
New York Times - April 11, 2002

Sears Profit View Boosts Shares
Reuters Newsroom - April 10, 2002

Sears, Roebuck and Co. Wednesday estimated first-quarter profits will beat the Wall Street consensus forecast by more than 50 percent as savings from job cuts and other restructuring activities increased earnings at its retail business.

The news drove shares of the No. 4 U.S. retailer up as much as 8 percent to their highest level since July 1998.

Sears said it expects first-quarter earnings of 93 cents a share before special items, up from 45 cents a year earlier.

Estimates from eight analysts polled by Thomson Financial/First Call averaged 61 cents a share, from a range of 54 cents to 67 cents.

Sears said first-quarter operating earnings in its retail business were up $104 million from a year ago. It also said it expects a 20 percent increase in earnings from its credit business.

"All of our businesses did well in the first quarter,'' Chief Executive Alan Lacy told Reuters. ``The first quarter had very strong gross margin expansion in our retail business; it had very good cost take-out based on the restructuring activities.''

In October, Sears announced a broad three-year restructuring for its 860 department stores. The plan included cutting 4,900 salaried jobs, trimming unprofitable product lines and overhauling its apparel business.

Lacy said the company is ``more than halfway through'' the work force reductions, with many of them taking place before the 2001 holiday season.

Sears also made plans in January to cut about 3,600 field positions, eliminating three to five jobs in each of its department stores. A spokeswoman for Sears said she did not know how many of those jobs had been cut.

2002 OUTLOOK RAISED

Including items, Sears said it expects first-quarter earnings of 34 cents a share, down from 53 cents a year earlier.

Items expected in the latest quarter include a noncash charge of 64 cents a share from an accounting change, an 18-cent gain from the sale of an investment in Advance Auto Parts and a 13-cent charge related to Sears Canada's plan to convert Eaton stores.

Sears also raised its forecast for full-year profit growth to 17 percent from a previous outlook of 13 percent to 15 percent. The company earned $4.22 a share in 2001.

Sales at domestic stores open at least a year fell 4.7 percent in March from a year earlier, Sears said. It had forecast a low single-digit decline on a percentage basis. Total sales in March fell 1.8 percent to $2.52 billion.

Kurt Barnard, president of Barnard's Retail Consulting Group, said investors should not worry about the sluggish sales growth.

"They are very much on the right track,'' he said. "Alan Lacy is turning the whole company around. He's giving away a little bit now in order to benefit later on.''

Sears cautioned that the economic outlook for the balance of the year is still uncertain.

Lacy said some Sears stores are undergoing remodeling, and he expects "significant'' sales disruptions in the second and third quarters. The company expects to complete the project by the fourth quarter, the key holiday shopping season.

Fifty of Sears 860 stores will be remodeled, while about 400 will be fitted with centralized check-out stations. Currently, cash registers are located at the back of departments, a company spokeswoman said.

The retailer said it bought back 8.2 million of its shares totaling $427 million in the quarter. In the fourth quarter ended Dec. 29, it had 325.5 million shares outstanding.

Sears shares were up $2.96, or 5.8 percent, at $54.16 in early afternoon New York Stock Exchange trade after rising as high as $55.20 earlier in the session.

Sears Critics: Time to See Lacy's Vision

By Susan Chandler, Chicago Tribune staff reporter
April 7, 2002

Wall Street investors love Sears, Roebuck and Co. Chief Executive Alan Lacy. They respect his down-to-earth demeanor. And they applaud his aggressive bottom-line pledge to boost Sears' operating earnings by more than $1 billion within three years.

But critics say investors appear to be overlooking a serious deficiency at the nation's third-largest general merchant: Sears doesn't have a strategy for growth. Lacy hasn't been opening many new stores and he has been less than precise in describing how he will bring more customers to Sears' existing franchise, they add.

Moreover, Lacy's frequent statement that Sears is going to do less of what customers don't want and more of what they do want is too vague to be helpful, says James Schrager, professor of strategic management at the University of Chicago's Graduate School of Business.

"It's cocktail party chatter, not a strategy," he said. "It's not measurable because we don't know what the `whats' are--what customers want more of and what they don't. Sears' strategy has to be about how to grow given the incredible competitiveness of the current retail world."

To this, Lacy says critics aren't paying enough attention to the important restructuring process Sears is in the middle of.

"That's like saying, `Why can't you change the tires while the car is going 60 miles an hour?'" he said in an interview. "Our core business was not working properly. Job 1 is to restructure and reposition it. We're currently in full flat-out execution of that."

In the 18 months Lacy has held the top job, he has been busy, announcing plans to trim 4,900 jobs, or 20 percent of Sears' salaried workforce. He has called a halt to expansion of off-the-mall chains such as Sears Hardware and National Tire & Battery and exited ill-fitting businesses such as termite extermination. He also has taken his foot off the gas on Sears' promising new retail concept, the Great Indoors, saying the stores are too expensive to build.

But such moves are short-term tactics, not long-term strategy, which is a big-picture game plan laying out what Sears wants to stand for and how it is going to achieve that.

There are great dangers of soldiering on without a clearly defined strategy, retail experts agree.

"If you want to see how it works, just look at Kmart," Schrager warns.

The strategies of Sears' most successful competitors are fairly straightforward propositions. Wal-Mart Stores Inc. is about "low prices--always." Target Corp. is about cheap chic, and Kohl's Corp. is about saving money on department store brands.

Even Sears' floundering competitor, J.C. Penney Co., has a mission. Allen Questrom, Penney's new CEO, said recently that his chain is now going to be about "Neiman Marcus fashions at J.C. Penney prices."

As for his merchandise vision for Sears, Lacy says it's not easy to encapsulate because of the diversity of Sears' lines.

"It's always going to be a collection of merchandise and service activities that if it wasn't called Sears, would be perceived illogically," Lacy said. "If it wasn't Sears, would you really buy tires from the same place you buy your lingerie?"

Good question, critics say. But they still haven't heard Lacy explain how all those pieces tie together into a compelling place to shop.

The tag line in its latest advertising campaign, "Sears. Where Else?" is evidence of the ambivalence gripping Sears, says Laura Ries, co-author of "The 22 Immutable Laws of Branding."

The commercials "don't convey a clear message," Ries said. Instead of assuming people know why they should be shopping at Sears, Sears needs to be drawing them in with a clear, concise reason to go there.

Ries concedes that it isn't a simple task, but she says it can be done if Sears plays to its strengths. "It is a strong brand in the mind of many consumers," she says. "It still stands for something--hard goods, tools, appliances and batteries."

The lack of a strong direction poses more than just a financial risk for Sears, observers say. It is creating a muddle down the ranks in Sears' sprawling field organization, which is bearing the brunt of Lacy's job- cutting.

Some Sears store managers say the one strategy they can discern is that Hoffman Estates wants to be more like Kohl's, the moderate-price apparel and housewares chain from Menomonee Falls, Wis. To be sure, Sears already has copied Kohl's non-traditional shopping carts that also serve as baby strollers. And now Sears is pulling checkout counters out of departments and centralizing them at store entrances, just as Kohl's does.

But without Kohl's store design, product mix and winning corporate culture, that's a mission destined to fail, critics say.

"The message is cost-containment, not customer service," says one former Sears manager who stays in touch with the organization. "If you're not growing the business, you're dying."

So far, Sears has been doing a lot more shrinking than growing under Lacy's regime, which will celebrate its second anniversary this fall.

Last year, revenue from Sears' 860 full-line stores declined 2.9 percent to $24.4 billion as same-store sales fell 3 percent. So far this year, same-store sales have declined in both January and February and appear to be on track to do the same in March.

Part of that is due, no doubt, to tactical decisions to exit certain merchandise lines that weren't meeting Lacy's return-on-investment criteria such as cosmetics, skin care and bicycles.

Meanwhile, the only category that Sears has added is mattresses. Sears also says it is increasing the space it devotes to appliances and home fashions, two strong franchises.

Where does Lacy expect to generate that impressive growth in operating earnings? A big chunk of it will come from administrative cost reductions with fatter profit margins on apparel, credit cards and other businesses providing the rest.

Indeed, top-line growth isn't a high priority, Lacy says. During an October meeting with Wall Street analysts, Lacy projected 2002 revenue would be flat, because of a slow economy and exit of certain merchandise lines.

He also announced a pullback on the rollout schedule for the Great Indoors, which Wall Street considered among Sears' best off-the-mall prospects for growth. Sears had been planning to open as many as 15 of the home remodeling stores this year, but that number was cut in half because high construction costs were dragging down return on investment.

Lacy stands by his guns that revenue growth is overrated.

"We've got an industry that is overly in love with the top line as the judge of success and failure," he said. "If something doesn't work, we're going to step up and fix it."

Such conservatism has resonated with analysts who were tired of high-flying unfulfilled promises made by Lacy's predecessor, Arthur Martinez.

Fifty percent of the analysts following Sears now have a "strong buy" or "buy" recommendation on the company's stock, compared with only 27 percent in March, 2000, months before Lacy was named CEO.

Since Lacy assumed the top job at Sears, the company's stock price has risen from around $35 per share to more than $48, almost a 42 percent increase. It now sells at a very respectable price-earnings ratio of 22, higher than May Department Stores Co., Neiman Marcus Group and Talbots Inc.

Veteran retail consultant Sid Doolittle attributes the rise to the market's current proclivity for cost-cutting messages.

"This is not a bad time to be working on productivity. That seems to be what the market is looking for," said Doolittle, a partner with Chicago's McMillan/Doolittle. "But gradually, as the economy recovers, the drumbeat will increase. The pressure will build for Sears to say what it will be like."

It's not a surprise that Lacy--who rose through the ranks on the finance side--isn't managing for growth, Doolittle adds.

Indeed, Lacy saw first-hand the downside of aggressive growth when he was drafted to bail out Sears' stumbling credit card operation. His mission: Work down sky-high levels of bad debt created after new accounts had been added by the millions during the mid-1990s.

In Lacy's defense, it is far from simple to devise a 21st Century strategy for Sears, a merchant with roots in the 19th Century, retail consultants say.

And the retail world is far more crowded today than it was in the mid-1990s when Sears spent millions trying to upgrade its fashion offerings and jazz up its marketing under the umbrella of "The Softer Side of Sears."

Back then, the strategy was clear: Sears was going to be a player in the fashion world, carrying trendy looks in season at affordable prices. The direction also was clear--Sears was going to be more like a department store in order to differentiate itself from discounters such as Target and Wal-Mart.

But after several early years of impressive sales gains, the Softer Side momentum stalled because middle-class, middle-age women never really bought the message that Sears was a place to shop for themselves. Martinez spent his last two years at Sears trying to figure out what to do next.

Now experts say it's Lacy's job to find a new mission for Sears if the company is to do more than survive.

Sears, Rivals Report Weakness
Reuters - April 1, 2002

Federated Department Stores Inc., parent of Macy's and Bloomingdale's, Monday lowered its same-store sales forecast for March, saying sales were weaker than expected in the last week of the month.