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Wal-Mart Cost-Cutting Finds Big Target in Health Benefits
By Bernard Wysocki, Jr. and Ann Zimmerman - Staff Reporters
The Wall Street Journal
September 30, 2003

Restrictions, Tough Stance on Basic Claims Keep Its Outlays Below the U.S. Average

BENTONVILLE, Ark. -- Wal-Mart Stores Inc. is famous for cutting costs everywhere it can. Today a giant target for the world's biggest retailer is the health-care costs of its employees.

Wal-Mart makes new hourly workers wait six months to sign up for its benefits plan and doesn't cover retirees at all. Its deductibles range as high as $1,000, triple the norm. It refuses to pay for flu shots, eye exams, child vaccinations, chiropractic services and numerous other treatments allowed by many other companies. In many cases, it won't pay for treatment of pre-existing conditions in the first year of coverage.

The payoff: Last year, average spending on health benefits for each of the company's roughly 500,000 covered employees was $3,500, almost 40% less than the average for all U.S. corporations and 30% less than the rest of the wholesale/retail industry, according to estimates by Mercer Human Resource Consulting, a unit of Marsh & McLennan Cos.

As the nation's biggest private employer, with a U.S. payroll of 1.16 million, Wal-Mart could carry enormous influence with this approach at a time when all companies are struggling to contain the soaring cost of health care. In 2003, some 13% of U.S. employers trimmed health benefits, while 7% increased them, according to the Kaiser Family Foundation, a nonprofit research group in Menlo Park, Calif.

It's too soon to say whether Wal-Mart will pioneer a trend toward less-generous benefits. At the very least, other companies in the retailing industry, where margins are razor-thin, are watching Wal-Mart closely.

Soaring health costs "are absolutely an acute issue in the whole retail industry," says Blaine Bos, a principal at Mercer. "You've got to benchmark constantly what your competition is doing. And if you are in this industry, you certainly want to benchmark to Wal-Mart." Many companies are having employees pick up more of their health-care tab. Just recently, a top Wal-Mart rival, Minneapolis-based Target Corp., reduced health benefits for its part-time employees.

Wal-Mart says part of its philosophy is that the company should pay for catastrophic health expenses -- cancer treatments, organ transplants -- that could financially ruin an employee. It typically pays 100% of medical charges above $1,750 a year in out-of-pocket expenses; in addition to the deductible and premiums, employees pay 20% of medical costs up to $1,750. And Wal-Mart has no lifetime caps on coverage -- a benefit offered by just 42% of retailers and 47% of employers overall, according to Watson Wyatt Worldwide, a Washington- based consulting firm.

Tom Emerick, benefits vice president, says the company covers medical bills that exceed $100,000 each on at least 800 employees a year. A further 20,000 cases a year cost Wal-Mart more than $10,000 each. The company has paid for more than 300 organ transplants in the past five years, costing $1 million or more each.

Wal-Mart has been using a team of six people to scour every state for the lowest-cost networks of doctors and hospitals. In Colorado, for instance, Wal-Mart has contracted in the past two years with MMA, a Greenwood Village, Colo., managed-care provider that has a network of 7,000 doctors and 62 affiliated hospitals statewide. MMA calculates the cost of each medical procedure according to the market rates in 14 different regions in the state. Statewide rates tend to be higher.

Last week, Wal-Mart announced that it has ended its state contracts, such as that with MMA, in favor of a national contract with Blue Cross benefit plans to administer its health plan nationally. "The state-by-state analysis showed us we could save even more money by shifting to the Blues," says Mr. Emerick, referring to Blue Cross and Blue Shield.

Wal-Mart executives say shifting routine-care costs to employees keeps premiums down. The company has raised premiums 50% during the past two years, but an employee still can join the plan for $13 every two weeks, well below many employer-sponsored plans. That rate, however, comes with a high annual deductible of $1,000.

Wal-Mart offers other plans with higher premiums and deductibles as low as $350. About 90% of retailers and of U.S. employers overall have deductibles of $310 or less, according to Watson Wyatt. Wal-Mart employee premiums covered about one-third of the $3,500 spent per employee on health benefits last year, a share that experts at Segal Co., a benefits consultant, say is typical for large retailers.

The United Food and Commercial Workers union has made health benefits the centerpiece of its drive to unionize Wal-Mart's work force. One of the union's chief complaints is that Wal-Mart's plan discourages workers from signing up for coverage at all. The union cites, among other things, the company's six- month waiting period for new hourly employees, high deductibles, tight coverage restrictions and $50 charge every two weeks to cover spouses who could get insurance elsewhere.

About 60% of the roughly 800,000 employees eligible for coverage at Wal-Mart sign up, compared with 72% for the whole retailing industry, according to a 2003 survey by the Kaiser Family Foundation.

Company executives say they don't try to dissuade employees from taking coverage. Executives note that some retailers have even-longer waiting periods and don't offer health insurance to part-timers, who can join Wal-Mart's plan after two years on the job.

"When General Motors was the biggest company, it raised the bar on benefits and wages," says Al Zack, an official of the UFCW union in Washington. "Now Wal-Mart is the biggest, and it has lowered the bar."

"The problem is rising health-care costs," responds Jay Allen, Wal-Mart's senior vice president for public affairs. "We're grappling with it like everyone else."

Larry Allen (no relation to the Wal-Mart executive) and his wife, Jacque, were hired last year by a Las Vegas Wal-Mart as produce clerks and chose to forgo coverage, in part because they considered it too costly. They each earned about $8 an hour, so monthly health-care premiums of $200 would have eaten up more than 10% of their combined take-home pay.

Mr. Allen also was deterred by the plan's strict rules on pre-existing conditions. He previously had been treated for a liver disorder and high blood pressure, neither of which would be covered for at least a year under Wal-Mart's self-funded plan. Since the mid-1990s, these clauses have become less common in employer plans and remain in force for less than a third of new employees in self-funded plans, according to Kaiser. Such plans, common at most big employers, use corporate revenue and employee contributions to finance a menu of benefits.

Mr. Allen, 47, soon suffered a stroke and incurred $31,000 in medical bills. "I'm going to have to pay this debt, but I'm overwhelmed" by collection agencies, he says. This summer, he left Wal-Mart and took a job at the UFCW. He's now insured under a plan offered by the new employer of his wife, who left Wal-Mart last October.

Wal-Mart's benefits sometimes are a godsend. Two years ago, John and Tina Millwood's son, Simuel, was born with biliary artesia, a liver disease that required a transplant. Mr. Millwood, whose annual salary as a store assistant manager is $32,500, estimates that he has paid about $5,000 a year on health care since his son's birth. The child received $1.5 million of health care during his first year or so.

Seven months after Simuel was diagnosed and hours after he was placed on a transplant list, the Mayo Clinic told the Millwoods that a liver was available. Wal-Mart arranged for a private jet to fly the family from their East Texas home to Minnesota. Its health plan paid for the transplant, two months in the hospital, the parents' lodging during that time, several follow-up trips for additional operations and (for a year) a $1,000-a-month medicine bill that included costly antirejection drugs. Wal-Mart employees, through contributions to a special fund, also helped subsidize the family so Mr. Millwood could take two months off.

"For the rest of his life, Wal-Mart will pay his medical costs, because there's no lifetime maximum," says Mrs. Millwood, who quit her $22,000-a-year payroll-clerk job at a gas company to care for her son. The only thing Wal-Mart doesn't cover anymore is the current tab for his antirejection drug of $8,400 a year, so that's covered by Medicaid, the state and federally funded health program for the poor.

At the same time, Wal-Mart refuses to budge on items covered by most employers. Four out of five employees in the U.S. covered by self-funded health plans get contraceptive-drug benefits. Wal-Mart employees don't. The policy triggered a lawsuit by a female customer-service manager in Georgia, which has turned into a class-action lawsuit in federal court in Atlanta.

The plaintiffs claim that Wal-Mart's policy discriminates against women, forcing them "to choose between paying their own out-of-pocket prescription costs or risking unintended pregnancy." Janine Pollack, one of the plaintiffs' lawyers, says Wal-Mart has 500,000 female employees of child-bearing age, although only a portion of them are covered by the company plan. Still, if Wal- Mart loses a class-action suit, the cost of paying for contraceptives would be "tens of millions of dollars per year," she says. Wal-Mart executives say they are worried that giving in on birth-control pills, which cost about $30 a month, could invite pressure to pay for everything from eyeglasses to Viagra.

Wal-Mart also refuses to cover obesity surgery, which effectively reduces the size of the stomach to suppress appetite. About 120,000 Americans are expected to undergo the increasingly popular surgery this year, up from 80,000 in 2002, according to Frost & Sullivan, a consulting firm.

Robert Dean, a Tampa, Fla., internist who treats about 200 Wal-Mart employees, says he has been in frequent futile battles to get Wal-Mart to approve this and other procedures. He says employer insurance plans have paid in 29 of the 30 cases where he has recommended the procedure. The exception: Sherri Parker, who is 42, stands 5-foot-6, weighs 425 pounds and is the wife of a Wal-Mart night supervisor.

Ms. Parker has sent numerous letters to Wal-Mart and to public officials, pleading for help in getting the company to pay for her surgery. In one August 2002 letter, to her Congressman, Ms. Parker wrote, "The problem has been with me all my life, and is not going away. I am just getting bigger and bigger." Recently, however, she concluded that her quest to get Wal-Mart to approve the procedure is hopeless.

Mr. Emerick, the benefits vice president, says Wal-Mart doesn't cover obesity surgery because there is no consensus among doctors and insurers that it's medically safe and effective. He estimates that between 2,000 and 3,000 employees or family members would apply for the procedure each year, at perhaps $40,000 apiece. And "there's a really high rate of complications" that can cost up to $500,000 a patient, he adds. The company also fears that, with Wal-Mart's annual turnover rate of about 50%, workers would join the company, undergo the surgery and leave.

In the past few years, Aetna Inc., Cigna Corp. and other insurers have begun covering the procedure in cases of morbidly obese patients who can document failed efforts to lose weight by other means. On the other hand, United HealthCare, another major insurer, recently dropped obesity surgery as a covered treatment in its standard plans. United HealthCare stopped covering the procedure because, a spokesman says, there isn't enough peer-reviewed medical literature in the U.S. that the surgery is safe and effective.

Wal-Mart also is aggressive in controlling medical costs related to on-the-job injuries. The company says these claims are a related and additional expense on top of the 18% increase in its health-care outlays last year, a rise in line with industry averages.

Mittie Funderburk, 52, says she injured her back in 2000 while moving photo-lab merchandise in the San Angelo, Texas, Wal-Mart. She didn't report the incident until two months later, when growing numbness in one of her legs immobilized her. Her doctor prescribed surgery, and a second doctor, selected by Wal-Mart, concurred. Nevertheless, Wal-Mart fought the claim for months, first alleging Mrs. Funderburk hadn't reported the accident in a timely fashion and then arguing she didn't need the surgery.

The company finally relented and she underwent surgery in April 2001, eight months after being injured, and returned to work that August. But by January, Mrs. Funderburk says, she was crippled with pain and went on medical leave. After several epidural pain blocks failed to work, two doctors advised more- extensive surgery.

Wal-Mart fought even harder, as the Texas State Workers' Compensation Commission and its Independent Review Board sided with Mrs. Funderburk three times. But Wal-Mart refused to give up. In May, it appealed the commission's final decision supporting the need for surgery to the state district court in Travis County. The case is still pending.

Last June, Wal-Mart terminated Mrs. Funderburk because she had been off work for more than a year. "My doctor wouldn't release me to go back to work until I got better, and he didn't think I would get better without the surgery," Mrs. Funderburk says. Wal-Mart declined to comment on this or any other specific case.

She applied to have the state of Texas pay for the surgery and underwent a spinal-fusion procedure in July that cost $30,000. If Wal-Mart doesn't pay, the state agreed to pay for the surgery and then pursue Wal-Mart for reimbursement.

A Better Way to Size Up a Company
By Robert Barker - Business Week - Personal Business
October 6, 2003

Forget p-e ratios. "Enterprise value" can give you a clearer picture

Inquiring investors quickly run up against a serious limitation in the single most familiar tool used by stock analysts: the price-earnings ratio. Consider the current p-e's of two well-known rivals, J.C. Penney and Sears (S ) Roebuck. The other day, Penney's p-e was 19 and Sears' was 9.5. So buying stock in Penney must have been twice as costly as buying a stake in Sears, right?

If you doubt the utility of that conclusion, you're ready for a better way to size up companies and how their stocks are priced on Wall Street. It's called "enterprise value." Enterprise value, or EV for short, measures how much capital it would take to buy an entire public company. It can help you cut through a lot of the clutter -- in the case of Sears and Penney, far different balance sheets -- that can quickly render p-e ratios meaningless. "Enterprise value takes a broader view," says Peter Temple, a former securities analyst and author of a new book, Magic Numbers for Stock Investors (John Wiley & Sons, $29.95). "You could have two different companies in the same industry, making the same profit, but one would have a lot of debt and the other none at all." By looking through the lens of enterprise value, he adds, "the company with no debt would look cheaper."

Enterprise value doesn't appear in such investment classics as Benjamin Graham's and David Dodd's Security Analysis, but the ideas behind it do pop up in some of Warren Buffett's early letters to investment partners. The term didn't appear in either BusinessWeek or The Wall Street Journal before 1991.

So, precisely what is enterprise value? Simply stated, EV is the sum of a company's stock market capitalization plus its net debt. Stock market capitalization is a company's total shares multiplied by its stock price, and net debt is a company's total debt, minus its holdings of cash and marketable securities.

BUYING OUT DUPONT (DD ) In the diagram "Adding Up Enterprise Value", you can see just how EV is derived from financial statements. Suppose you wanted to find the EV of chemical giant DuPont. What would it cost you to buy it out? First, you would have to pay for all of the company's shares. With the stock at $41 and a billion shares outstanding, that comes to $41 billion. Next, you would have to add in the debts you would be assuming by taking over the company. DuPont has $5.9 billion in short-term debt, plus another $5.5 billion in long-term debt -- a total of $11.4 billion. With ownership, however, you also would get control of DuPont's cash reserves, $4.1 billion worth at last report. In theory, then, you could use DuPont's cash to pay off part of its debt, leaving $7.3 billion in net debt. Add that to DuPont's $41 billion in total stock market value, and you get $48.3 billion. That's DuPont's EV, or how much capital an imaginary buyer would need to own it free and clear.

Unless you're rich as Croesus and on a shopping spree, knowing a company's enterprise value won't help you much. You can learn a lot more by comparing EV to a measure of the company's earnings, much as a p-e ratio relates stock price to earnings. In this analysis, it's important to use earnings before interest and taxes, often called EBIT. The reason is that enterprise value assumes you've already paid off the company's debt and used its cash balances so there would be neither interest costs nor income.

BETTER BARGAIN To see how such a comparison might work, let's return to Sears and Penney. At $45 a share, Sears has a stock market value of $13.4 billion and a p-e ratio of 9.5. But because its balance sheet is laden with $29 billion in net debt, its EV comes to $42.4 billion, or nearly 13 times its $3.3 billion in EBIT. By contrast, Penney at $23 a share has a market value of $6.2 billion and a p-e ratio of 19, twice as high as Sears's. But because Penney owes a lot less -- its net debt is under $3.2 billion -- its EV comes to $9.4 billion and its EV- to-EBIT ratio is just 9.8. Seen in this fuller way, Penney, not Sears, represent the better bargain.

Another helpful exercise is to turn these figures upside down. Dividing EBIT by enterprise value indicates the percentage return that a theoretical buyer of an entire company might see. This percentage is sometimes called the "cash return" or "cap rate" for "capitalization rate," depending on which of several alternative profit measures -- EBIT, EBIT minus depreciation and amortization (EBITDA), or free cash flow -- that an analyst chooses to use in the numerator. What's it good for? Hummingbird Value Fund's Paul Sonkin uses cap rates to separate potential investments from poor-returning companies. As Sonkin puts it, "This helps me answer the question: 'If I could own the whole thing, would I want to own the whole thing?"'

Going back to Sears and Penney, Penney had the higher rate of return over the past four quarters. Its EBIT of $958 million divided by its $9.4 billion in enterprise value makes a return on investment of 10.2%. Work the same numbers for Sears and the past year's return comes to 7.8%. Likewise, you might compare DuPont and its rival, Dow Chemical (DOW ) Result: Dow in the past four quarters returned 3.7%, while DuPont saw 4.3%.

However enterprise value is used, its core strength is its ability to put companies with different capital structures on the same basis for analysis. What it won't do, of course, is foretell the future: How much will a company earn this year and next? Still, a rigorous application of EV analysis will tell you how much those profits are worth.

Wal-Mart Faces Key Test in Discrimination Case
By Emily Kaiser - FORBES.COM
September 21, 2003

CHICAGO (Reuters) - Wal-Mart Stores Inc. faces a pivotal hearing this week in a sex discrimination lawsuit that could become the largest ever and force the world's biggest company to pay female employees hundreds of millions of dollars.

The lawsuit, filed two years ago, accuses the largest U.S. private-sector employer of discriminating against women employees in pay, promotions and training, and retaliating against those who complained about the alleged abuse.

A judge in San Francisco is expected to hear arguments Wednesday on whether to certify a class of plaintiff that could include 1.5 million current and former female employees of the Bentonville, Arkansas-based retailer.

"The chance of certification is quite high," said Michael Selmi, a law professor at George Washington University, who has studied the effect of major discrimination cases on publicly traded companies.

Wal-Mart employs more than 1 million people in the United States and has been the target of dozens of lawsuits alleging wage-and-hour violations and discrimination.

Critics contend Wal-Mart's corporate culture, handed down from legendary founder Sam Walton, makes it difficult for women to advance. Lawyers for the women who brought the lawsuit said 70 percent of Wal-Mart's hourly employees are female, but women hold fewer than 15 percent of store manager positions.

The lawyers allege that female workers are routinely steered toward positions such as cashier, where there is little chance for promotion. According to court documents, several women employees said they were paid less than men for similar work. When they complained, managers explained that the men had families to support.

When Ramona Scott, who worked for Wal-Mart in Florida from 1990 to 1998, complained about men getting paid more for comparable work, the male store manager told her: "Men are here to make a career and women aren't. Retail is for housewives who just need to earn extra money," according to court documents.

50-POUND BAGS OF DOG FOOD

Wal-Mart denies a pattern of discrimination, and argues that the number of men in management positions reflects the higher number of applications it receives from men -- a defense that has been successfully used in other discrimination cases.

The retailer also argued that the class of 1.5 million women should not be certified because it would be too large and unwieldy. "No court has ever certified a class like the one proposed here. This court should not be the first," Wal-Mart said in court documents.

Spokeswoman Mona Williams said Wal-Mart is a good place for women to work "and we should not confuse these isolated complaints from a small group of women with the facts.

"Look at our growth and the fact that we promote women at the same rate they apply for jobs -- or better -- and you'll see that Wal-Mart provides more opportunities for women than any other employer in the country," she said.

But there are indications that Wal-Mart has known for years that it can be harder for women to get ahead. In Sam Walton's 1992 autobiography he said Wal-Mart's policy of moving managers around probably discouraged female applicants, and Wal-Mart should try to recruit more women.

Walton also noted that retailers often required managers to perform manual labor such as unloading trucks and hauling heavy merchandise out of the stockrooms -- tasks that could disqualify some women.

According to the court documents, that issue still comes up. Claudia Renati, who began working at a Sam's Club in California in 1993, was told she could not be a manager unless she could stack 50-pound bags of dog food. She could not.

Lawyers for the women in the Wal-Mart case are reluctant to talk settlement figures, especially when the judge has yet to rule on class certification, but if previous suits are any guide, the sum could conceivably climb into the billions.

Home Depot Inc., for example, settled a sex discrimination suit in 1997 for $104 million, and that case covered a relatively small 25,000 women.

If Wal-Mart were forced to cough up a comparable $4,000 per person, that would be $6 billion, although legal experts said a figure closer to $300 million was more likely.

Joseph Sellers, a lawyer with Cohen, Milstein, Hausfeld & Toll who is part of the team representing the plaintiffs, said District Judge Martin Jenkins probably will not decide on class certification for several weeks as he wades through piles of documents filed by both sides.

Labor lawyers around the country will be watching, and many say a successful discrimination claim against Wal-Mart could trigger many more lawsuits against other companies.

"If Wal-Mart is successfully attacked on this basis there will be a number of similar cases. This will be a way to attack the glass ceiling," said John Welsh, a labor and employment partner with law firm Testa, Hurwitz & Thibeault, and a former attorney with the National Labor Relations Board.

Levi, an American Icon, to Shut Last Plants in U.S.
By Leslie Earnest - Times Staff Writer
LOS ANGELES TIMES
September 26, 2003

Levi Strauss & Co., maker of a jeans brand so all-American that it became ingrained in the nation's identity, said Thursday that it would close the last of its North American manufacturing plants, laying off almost 2,000 workers.

San Francisco-based Levi, which is celebrating its 150th anniversary this year, said it would shutter two plants in San Antonio by the end of the year, displacing 800 workers there and marking the end of its U.S. manufacturing operations. The clothing firm will discontinue its Canadian operations in March, erasing 1,190 jobs at three plants in Alberta and Ontario.

The venerable company has been shifting its production overseas during the last two decades, and today uses about 500 contractors to produce its apparel in 50 countries, including Mexico, China and Bangladesh. Still, switching off the lights at its remaining U.S. factories symbolizes the struggle of an industry that has been battered by the forces of globalization.

Levi's announcement heaps more pressure on the Bush administration and Congress to do something to help U.S. textile and apparel manufacturers, which say they have lost 2.5 million domestic jobs in recent years.

On Thursday, several manufacturers and labor leaders announced the formation of a group called the Free Trade for America Coalition to lobby for changes in trade policy. That followed the bankruptcy filing Wednesday by Cone Mills Corp. of Greensboro, N.C., the largest U.S. denim-fabric maker.

"There's a lot of saber rattling going on right now on trade," said Kevin Burke, president of the American Apparel and Footwear Assn., an industry trade group. "Politicians have to answer to constituents who are wondering where the jobs are going."

Last year, 96% of the apparel purchased in the U.S. was made in other countries, up from 93% in 2001, according to Burke's group. Through June of this year, U.S. apparel imports increased 17%, with much of the clothing coming from Mexico, Central America and China.

The shrinking base of U.S. apparel factory jobs is apparent in Southern California. Clothing makers, which in 1996 employed nearly 104,000 workers in Los Angeles County, accounted for 64,000 jobs as of July.

Levi, for most of its long history, has stood apart from other apparel makers because few, if any, brands have been as linked to the American landscape. Levi's has been a symbol of a boundless American spirit since prospectors rushed into California 150 years ago and discovered not only gold but also newfangled work pants reinforced with copper rivets.

"As the miners went into the Sierra Nevada to pan for gold, Levi stood the test," said Peter Sealey, adjunct professor of marketing at UC Berkeley and former marketing head of Coca-Cola Co. "That was what created the whole image and history of the company."

The company also became synonymous with ethical business practices. In the 1950s, Levi stood apart from other factory owners when it integrated the workforce at its Virginia plant, refusing to create separate work spaces or accommodations for black employees, despite protests from the local white establishment.

When the privately held jeans maker started to manufacture some of its products overseas, it established strict anti-sweatshop guidelines with its contractors, which the company says it continues to enforce.

Closing down its remaining factories is the end of a long process for the parent of the Levi's and Dockers brands. In 1996 Levi hit an all-time record of $7.1 billion in sales and employed 37,000 employees worldwide. But since then, the company has seen its business slide.

Over the last seven years, Levi has closed dozens of plants in North America and Europe and slashed thousands of jobs as it struggled to reorganize. Just two weeks ago, the company said it was laying off 350 U.S. workers, mostly at its headquarters.

"We're in a highly competitive industry where few apparel brands own and operate manufacturing facilities in North America," Chief Executive Phil Marineau said. "In fact, we are one of the last companies to do so."

The jobs lost at Levi plants in North America are likely to shift to Latin America and Asia, the company said. Levi is simply adapting to a reality that many other U.S. apparel makers have had to face, said Burke of the apparel trade group.

"What you're seeing with Levi is just the economic reality of our industry," Burke said. "American consumers, when shopping for these products look at price and quality, and they don't necessarily look to where the product is made."

To many consumers, Levi has been a symbol of "confidence, sex, youth, rebellion, freedom, originality and authenticity," said Alex Wipperfuth, partner at Plan B, a San Francisco marketing firm.

"Those are the dimensions of Americana, according to Levi," he said. "I think the key issue is, will any of those fall away once people realize Levi is not produced in the U.S. anymore?"

The company, though it expressed concern about the jobs lost, said the final plant closures were just a continuation of Levi's shift in direction that began in the late 1990s, when the company decided to transform itself from a domestic manufacturer into a company focused on product design, sales and marketing. The San Antonio plant was producing less than 5% of the product needed for the U.S. market, company spokeswoman Linda Butler said.

"It's a painful business decision that is made, but it's made to be competitive and ensure the long-term success for the company," Butler said. "We are and have been for years a global company with a long history and deep American roots. And we still do. We still employ many people in the U.S." Currently, Levi has more than 5,000 workers in the U.S..

Levi has struggled for years to reverse a sales slide that began when the company's jeans lost favor among fashion-conscious younger shoppers, who buy most of the denim sold. Ultimately, the company found its products sandwiched between lower-cost alternatives sold by Sears, Roebuck & Co. and J.C. Penney Co. and high-priced options from trend-setting designers such as Tommy Hilfiger Corp. and Calvin Klein. Even more expensive choices sprang up, including brands such as Diesel and Seven that sell for more than $100.

The problem intensified as mass merchandisers, such as Target Corp. and Wal-Mart Stores Inc., began grabbing a huge chunk of the jeans market.

Levi struck back this summer, when it began selling a lower-priced Levi Strauss Signature brand in Wal-Mart stores. Today, Levi sells jeans ranging in price from $20 to $220 and still remains one of the top jeans brands among American youth.

Although the company has continued to struggle with intense competition and downward pressure on prices, it recently said it expected improved sales and profit for its fiscal third quarter, which ended Aug. 24.

Still, Levi, which is controlled by the family of founder Levi Strauss, is weighed down by $2.37 billion in debt and faces an Internal Revenue Service probe of some tax issues.

. Levi's American roots have been an important part of its marketing in the past, said Stephen Walker, president of Headmint Inc., a New York marketing firm. Walker, formerly with the London-based advertising agency Bartle Bogle & Hegarty, helped plan Levi's European marketing campaign in the mid-to-late 1980s, when the brand was flagging there. He worked on the brand for four or five years, creating ads that capitalized on Levi's image as an American icon.

The same agency is now creating similar ads for Levi in the U.S., he said.

"They're using advertising and marketing to perpetuate the myth that they're buying this authentic, classic American piece of clothing," Walker said. "Ultimately, the question probably will become, 'How much does the consumer care that the reality and the image are no longer aligned in any way?' "

Fees! Fees! Fees!
By Emily Thornton
With Michael Arndt in Chicago
Business Week Cover Story - September 29, 2003

Companies can't raise prices, so they're socking consumers with hundreds of hidden charges--and that's creating stealth inflation and fueling a popular backlash

America used to be the land of the free. Now, it's the land of the fee. Companies, hard-pressed for money, are taking every possible opportunity to nickel-and-dime people to death. Need a monthly brokerage account statement mailed to you? Ameritrade (AMTD ) may charge you $2 per statement. Want your hotel room cleaned? The Alexander Hotel in Miami Beach, Fla., will bill you an extra $2.50 daily for housekeeping. Have to return a new camcorder? Best Buy (BBY ) Co. will dock you 15% as a "restocking fee." Want to buy a season ticket for pro football? The New York Jets will make you pay $50 for the privilege of getting on their waiting list.

The U.S. economy has become sneaky. Inflation is officially low, but Americans face an ever-growing mountain of extra charges that are pushing up the true cost of purchases. No area is safe, from retail to finance to travel to sports. "You have companies charging fees for things that were free on an unprecedented scale," says Claes G. Fornell, marketing professor at the University of Michigan Business School.

The extra hits -- each one typically small by itself -- add up to big money. AT&T (T ) could bring in as much as $475 million by charging its long-distance customers a new 99 cents monthly "regulatory assessment fee." Fresh fees for services such as housekeeping will generate $100 million for hotels this year, according to PriceWaterhouseCoopers. Fees on consumers who pay bills online bring banks an estimated $2 billion. And credit-card late-payment fees -- up by 11% over the past year, on average -- could reach an astonishing $11 billion this year, estimates investment bank R.K. Hammer.

The fee frenzy is mainly an attempt by Corporate America to escape the brutal price wars of the past few years. Companies can't raise list prices without losing business, so they are burying higher charges in the fine print instead. "It's much easier to raise a price through obscure fees and surcharges than it is to raise a sales price," says Stephen Brobeck, executive director of the Consumer Federation of America.

The plethora of stealth charges makes it much harder for consumers to use the Internet to do comparison shopping, as they started to do in the late 1990s. The result is that apparently simple buying decisions are turning into a hopeless and discouraging labyrinth. In response, frustrated consumers are fueling a backlash, including the creation of new vigilante organizations to pressure companies to roll back fees.

The growing significance of extra fees means that inflation is understated. Surprisingly, many add-on charges are not reflected in the Bureau of Labor Statistics consumer price index. One reason is that many companies, especially in airlines and telecom, haven't provided the BLS with a full breakdown of their charges. In addition, fees for such things as credit-card late payments and airline-ticket changes -- both rising -- are not included in the government's figures. The implication: Fears of deflation may be overblown. Instead, the true rate of inflation, so important for setting monetary policy, is probably higher than the 2% or so that the BLS is reporting.

State and local governments are also willing participants in the fee game. Rather than hike taxes, politicians are hitting up Americans with a bewildering array of fees, fines, and penalties. Cash-strapped states will pull in $2.6 billion in new revenues this year by raising more than 200 different fees on everything from fishing licenses to fingerprint processing to driving with new tires. On Aug. 15, the fine for driving without possession of a driver's license in New Jersey jumped to $173, up from $44. Some of the charges are ridiculous: With some exceptions, blind Massachusetts residents will now have to shell out $10 once, and $15 every five years, for certification that proves they are legally blind.

Already, the new wave of consumer outrage is having serious consequences for politicians. One reason California Governor Gray Davis lost so much support was the popular outrage after he hiked car-registration fees that he had cut several years ago. They will triple this year, to an average of $234 annually, up from $76.

Corporations are feeling the heat as well. A string of suits involving fee abuses filed by class-action lawyers, state attorneys general, and private groups like the AARP are under way. New York State Attorney General Eliot Spitzer made Sears, Roebuck & Co. and EchoStar Communications (DISH ) Corp. pay millions of dollars to settle claims of excessive surcharges on recycling car batteries and undisclosed satellite-service termination fees. "We were not aware New York had a law capping the fee, and once we knew we changed it almost immediately," says Sears spokesman Bill Masterson. Echostar points out that there was no finding of wrongdoing and that it settled to avoid costly litigation. And a California Superior Court judge has ordered MasterCard and Visa to refund $800 million to customers for charging hidden fees on purchases made in foreign currencies. Visa denies the charges and is fighting the ruling. MasterCard plans to appeal the suggested restitution procedures.

There are other signs that popular dissatisfaction with fees may finally be having an impact. Fees for using ATMs have been a bane of consumers for years. On Sept. 3, Washington Mutual (WM ), one of the most aggressive retail banks in the country, stopped levying such charges on users of its ATMs in the New York area, even ones with accounts at other banks. Meanwhile, Congress is weighing tougher disclosure requirements for mutual-fund fees and for mortgage closing costs, which can be hundreds of dollars. "There are incredible abuses out there," says Housing & Urban Development Dept. Secretary Mel Martinez.

Fees have long been a fact of life in some industries, such as financial services and travel. Car renters, for example, are used to having their bills inflated by extra charges, such as gas-tank refill penalties.

But the urge to raise fees has gotten out of hand. One of the worst offenders is the telecom industry, which advertises cheap wireless and long-distance calling plans and then lards on extra charges that add 20% to consumers' cell- phone bills, on average. Many wireless-service providers are charging extra to help pay for new technology to enable customers to switch companies without giving up their phone numbers. Sprint PCS, for example, is charging 18 million customers $1.10 a month, which would amount to $238 million annually. Sprint refuses to confirm or deny the total. AT&T's regulatory assessment fee, charged to its long-distance customers, covers such items as property taxes and expenses associated with regulatory proceedings.

Phone companies justify their extra fees as the only way to cover expenses without losing customers. "Sprint's recovery of these costs via the surcharges will end when these costs are recovered as permitted by law," says spokesman Dan Wilinsky. Adds AT&T spokesman Bob Nersesian: "If you're advertising a higher rate based on your expenses, and your competitors are advertising a lower rate but adding various fees at the bottom of the line, what are you supposed to do?"

Other companies use charges to weed out unprofitable customers or to change their behavior. Some airlines have recently started charging passengers $50 for paper tickets and $25 for every bag over 50 pounds. Ameritrade's $2 fee for monthly statements encourages people to wait for free quarterly statements or to get updates on their accounts online. And most online brokerages impose an extra fee on small-time investors who do not make a minimum number of trades. E*Trade Group Inc. and TD Waterhouse introduced in 2001 "maintenance" fees on brokerage accounts. "Our customers have access to streaming quotes, a rich set of research tools," says Connie Dotson, E*Trade's chief communications officer. "If the account itself doesn't generate the revenues to offset the cost, then for that value we charge a maintenance fee."

Package-delivery companies such as United Parcel Service (UPS ) Inc. and FedEx (FDX ) Corp. have offset increased expenses by adding on fee after fee over the past few years. Starting in 1999, package-delivery companies charged $1 per package for deliveries to remote areas. Now, they tack on "fuel surcharges" for the gas in the planes, trains, and trucks used to deliver packages. These fees are broken out on bills for regular customers, though not always for infrequent ones. Indeed, Airborne (ABF ) Inc. has listed a 25 cents charge for handwritten airbills on its Web site even though the company says it doesn't charge it. "It covers us in case we do decide to charge the fee in the future," says spokesman Robert Mintz.

In the retail sector, fees take a different form. Target (TGT ) Corp. and Best Buy Co. make customers pay a "restocking fee" of 15% for the privilege of returning electronics items such as camcorders, laptops, and radar detectors. Although neither Target nor Best Buy will disclose how much they earn from such fees, it's not small change for consumers. Best Buy justifies the penalty as a way to discourage people who would take the camcorder, say, and return it after using it once. Target did not return repeated calls.

So many people have asked about these restocking fees that Massachusetts' consumer-affairs department posted an alert about the practices on the Web in August. It warned that some retailers made people pay such fees even when they bought a defective product. "That's illegal," says Tatum Zuckerman, at the state's consumer hotline.

Not to be outdone, the original leader in fees, financial services, is finding new ways to raise revenue from customers. The growing dependence of banks on fee income has spawned a new breed of consulting, such as at Houston-based Strunk & Associates LP, which helps banks find new sources of revenue. One example: offering protection against bouncing checks, for a fee. Strunk justifies such fees as a way to improve customer service.

No one can beat the credit-card industry for its fee inventiveness. Deadlines for paying bills have been shortened to as little as two weeks, and they're strictly enforced, producing more late fees. Not coincidentally, the number of credit-card issuers with $35 late fees doubled last year, says Consumer Action. People can avoid late fees by paying their bills over the phone or online. But some banks and credit-card companies charge for that, too. Washington Mutual charges virtually all of its customers a total of $60 a year to pay their bills online. And it costs $15 to pay bills at the last minute over the phone at MBNA Corp. and Providian Financial (PVN ) Corp. MBNA and Providian say it takes staff time to process these payments by phone and that customers can pay online for free.

It does make sense to charge a premium for added services that cost more to provide, rather than force all customers to pay the same amount, whether or not they use the extra services. Splitting out such fees helps keep basic costs low. One example: charging extra for airline food. United Airlines Inc. has been trying out making passengers on certain flights pay $10 for chicken sandwiches supplied by TGI Friday's and meals from Eli's Cheesecake. Northwest Airlines and US Airways Group Inc. have also started to charge for food. "It's proven to be extremely popular," says US Airways spokesman David Castelveter. "Customers have a choice."

But many fees have no such justification, and ultimately, the niggling could cost companies their customers. Consider Natalie Armstrong in Gorham, Me. She and her husband have been back to Sears only once since her husband Lester was ambushed in January by $29 in late-payment fees along with a $1 "service" charge from a Sears credit card for a $14 part for his saw. After he convinced one clerk that his payment was actually on time, the company hit him with $30 more in fees. In the end, he handed over $60 in cash to a salesperson. After being contacted by BusinessWeek, Sears pledged to refund the late-fee charges.

Some banks are backing down after a barrage of criticism. Bank of America stopped charging customers to pay bills online last May when it discovered it could get more of their business if it offered the service for free. Last December, Bank One (ONE ) Corp. ditched a $3 charge for no-frills checking-account customers to use a branch teller when it discovered that irate customers were bolting to rivals. "Imagine if you are a retail store and your goal is to sell sweaters, and you're charging admission," says Charles W. Scharf, president and CEO of retail banking, who changed the policy after he got his job in May, 2002. "It's counterproductive."

Still, many businesses are holding firm. The New York Jets responded to fans outraged over the waiting-list fee by announcing that people lucky enough to get season tickets could deduct the $50 they paid for waiting for them. The goal of the fee, says the Jets, is to prune the list to fans who are genuinely interested in buying tickets. "Some people aren't even alive who are on the list," says spokesman Ron Colangelo.

Nobody figures fees will be eliminated entirely. But as the country recovers from an era of corporate scandal, it's not too much to ask that companies keep prices easy to understand. That way people will know they're getting what they pay for.

Is Wal-Mart Too Powerful?
Business Week - Cover Story - October 6, 2003

Low prices are great. But Wal-Mart's dominance creates problems -- for suppliers, workers, communities, and even American culture

In business, there is big, and there is Wal-Mart. With $245 billion in revenues in 2002, Wal-Mart Stores (WMT) Inc. is the world's largest company. It is three times the size of the No. 2 retailer, France's Carrefour. Every week, 138 million shoppers visit Wal-Mart's 4,750 stores; last year, 82% of American households made at least one purchase at Wal-Mart. "There's nothing like Wal- Mart," says Ira Kalish, global director of Deloitte Research. "They are so much bigger than any retailer has ever been that it's not possible to compare."

At Wal-Mart, "everyday low prices" is more than a slogan; it is the fundamental tenet of a cult masquerading as a company. Over the years, Wal-Mart has relentlessly wrung tens of billions of dollars in cost efficiencies out of the retail supply chain, passing the larger part of the savings along to shoppers as bargain prices. New England Consulting estimates that Wal-Mart saved its U.S. customers $20 billion last year alone. Factor in the price cuts other retailers must make to compete, and the total annual savings approach $100 billion. It's no wonder that economists refer to a broad "Wal-Mart effect" that has suppressed inflation and rippled productivity gains through the economy year after year.

However, Wal-Mart's seemingly simple and virtuous business model is fraught with complications and perverse consequences. To cite a particularly noteworthy one, this staunchly anti-union company, America's largest private employer, is widely blamed for the sorry state of retail wages in America. On average, Wal- Mart sales clerks -- "associates" in company parlance -- pulled in $8.23 an hour, or $13,861 a year, in 2001, according to documents filed in a lawsuit pending against the company. At the time, the federal poverty line for a family of three was $14,630. Wal-Mart insists that it pays competitively, citing a privately commissioned survey that found that it "meets or exceeds" the total remuneration paid by rival retailers in 50 U.S. markets. "This is a good place to work," says Coleman H. Peterson, executive vice-president for personnel, citing an employee turnover rate that has fallen below 45% from 70% in 1999.

Critics counter that this is evidence not of improving morale but of a lack of employment alternatives in a slow-growth economy. "It's a ticking time bomb," says an executive at one big Wal-Mart supplier. "At some point, do the people stand up and revolt?" Indeed, the company now faces a revolt of sorts in the form of nearly 40 lawsuits charging it with forcing employees to work overtime without pay and a sex-discrimination case that could rank as the largest civil rights class action ever. On Sept. 24, a federal judge in California began considering a plaintiff's petition to include all women who have worked at Wal- Mart since late 1998 -- 1.6 million all told -- in a suit alleging that Wal- Mart systematically denies women equal pay and opportunities for promotion. Wal- Mart is vigorously contesting all of these suits.

Wal-Mart might well be both America's most admired and most hated company. "The world has never known a company with such ambition, capability, and momentum," marvels a Boston Consulting Group report. On Wall Street, Wal-Mart trades at a premium to most every other retailer. But the more size and power that "the Beast of Bentonville" amasses, the greater the backlash it is stirring among competing retailers, vendors, organized labor, community activists, and cultural and political progressives. America has a long history of controversial retailers, notes James E. Hoopes, a history professor at Babson College. "What's new about Wal-Mart is the flak it's drawn from outside the world of its competition," he says. "It's become a social phenomenon that people resent and fear."

Wal-Mart's marketplace clout is hard to overstate. In household staples such as toothpaste, shampoo, and paper towels, the company commands about 30% of the U.S. market, and analysts predict that its share of many such goods could hit 50% before decade's end. Wal-Mart also is Hollywood's biggest outlet, accounting for 15% to 20% of all sales of CDs, videos, and DVDs. The mega- retailer did not add magazines to its mix until the mid-1990s, but it now makes 15% of all single-copy sales in the U.S. In books, too, Wal-Mart has quickly become a force. "They pile up best-sellers like toothpaste," says Stephen Riggio, chief executive of Barnes & Noble (BKS ) Inc., the world's largest bookseller.

Wal-Mart controls a large and rapidly increasing share of the business done by most every major U.S. consumer-products company: 28% of Dial (DL ) total sales, 24% of Del Monte Foods (DLM )', 23% of Clorox', 23% of Revlon (REV )'s, and on down the list. Suppliers' growing dependence on Wal-Mart is "a huge issue" not only for manufacturers but also for the U.S. economy, says Tom Rubel, CEO of consultant Retail Forward Inc. "If [Wal-Mart] ever stumbles, we've got a potential national security problem on our hands. They touch almost everything....If they ever really went into a tailspin, the dislocation would be significant and traumatic."

Even so, Wal-Mart appears to be in no imminent danger of running afoul of federal antitrust statutes. The Robinson-Patman Act of 1936 was passed in large part to protect mom-and-pop grocers from the Great Atlantic & Pacific Tea Co., the Wal-Mart of its day. But contemporary antitrust interpretations eschew such David-and-Goliath populism. Giants like Wal-Mart have wide latitude to do as they wish to rivals and suppliers so long as they deliver lower prices to consumers. "When Wal-Mart comes in and people desert downtown because they like the selection and the low prices, it's hard for people in the antitrust community to say we should not let them do that," says New York University law professor Harry First.

CEO H. Lee Scott Jr. and other Wal-Mart executives are aware of the rising hostility the company faces and are trying to smooth its rough edges in dealing with the outside world. But they have no intention of tampering with its shopper-centric business model. "We don't turn a deaf ear to any criticism. We're most sensitive to what the customer has to say, though," says Vice- Chairman Thomas M. Coughlin. "Your customers will tell you when you're wrong."

Wal-Mart cites customer preferences as the reason it does not stock CDs or DVDs with parental warning stickers and why it occasionally yanks items from its shelves. In May, it removed the racy "lad" magazines Maxim, Stuff, and FHM. A month later, it began obscuring the covers of Glamour, Redbook, Marie Claire, and Cosmopolitan with binders. Why did Wal-Mart censor these publications and not Rolling Stone, which has featured a nearly naked Britney Spears and Christina Aguilera on two of its recent covers? "There's a lot of subjectivity," concedes Gary Severson, a Wal-Mart general merchandise manager. "There's a line between provocative and pornographic. I don't know exactly where it is."

Wal-Mart was the only one of the top 10 drug chains to refuse to stock Preven when Gynetics Inc. introduced the morning-after contraceptive in 1999. Roderick L. Mackenzie, Gynetics' founder and nonexecutive chairman, says senior Wal-Mart executives told his employees that they did not want their pharmacists grappling with the "moral dilemma" of abortion. Mackenzie was incensed but tried to hide it. "When you speak to God in Bentonville, you speak in hushed tones," says Mackenzie, who explained, to no avail, that Preven did not induce abortion but rather prevented pregnancy. Wal-Mart spokesman Jay Allen says "a number of factors were considered" in making the Preven decision, but he denies that opposition to abortion was one of them. "If anybody of any belief reads any moral decision [into] that, that's not right," he says.

CULTURAL GATEKEEPER
There is no question that the company has the legal right to sell only what it chooses to sell, even in the case of First Amendment-protected material such as magazines. By most accounts, though, Wal-Mart's cultural gatekeeping has served to narrow the mainstream for entertainment offerings while imparting to it a rightward tilt. The big music companies have stopped grousing about Wal-Mart and are eagerly supplying the chain with the same sanitized versions of explicit CDs that they provide to radio stations. "You can't have 100% impact when you are taking an artist to a mainstream audience if you don't have the biggest player, Wal-Mart," says EMI Music North America Executive Vice- President Phil Quartararo.

This year alone, Wal-Mart hopes to open as many as 335 new stores in the U.S.: 55 discount stores, 210 supercenters, 45 Sam's Clubs (UBS ), and 25 Neighborhood markets. An additional 130 new stores are on the boards for foreign markets. Wal-Mart currently operates 1,309 stores in 10 countries, ranking as the largest retailer in Mexico and Canada. If the company can maintain its current 15% growth rate, it will double its revenues over the next five years and top $600 billion in 2011.

That's a very big if -- even for Wal-Mart. Vice-Chairman Coughlin's biggest worry is finding enough warm bodies to staff all those new stores. By Wal- Mart's own estimate, about 44% of its 1.4 million employees will leave in 2003, meaning the company will need to hire 616,000 workers just to stay even. In addition, from 2004 to 2008, the company wants to add 800,000 new positions, including 47,000 management slots. "That's what causes me the most sleepless nights," Coughlin says.

At the same time, Wal-Mart will have to cope with intensifying grassroots opposition. The company's hugely ambitious expansion plans hinge on continuing its move out of its stronghold in the rural South and Midwest into urban America. This year, the company opened what it describes as "one of its first truly urban stores" in Los Angeles, not far from Watts. Everyday low prices no doubt appeal to city dwellers no less than to their country cousins. But Wal- Mart's sense of itself as definitively American ("Wal-Mart is America," boasts one top executive) is likely to be severely tested by the metropolis' high land costs, restrictive zoning codes, and combative labor unions -- not to mention its greater economic and cultural diversity.

A ZERO-SUM GAME?
Certainly, Wal-Mart will be hard pressed to continue censoring its product lines using the justification of customer preference. The market for profanity- laced hip-hop may be tiny in Bentonville, Ark., but it is big in Los Angeles. Overseas, the company does not presume to impose a small-town, Bible Belt moral agenda on shoppers. "We adopt local standards," says John B. Menzer, CEO of Wal- Mart's international division. Why, then, should Los Angeles be any different?

The fact is, Wal-Mart doesn't know for certain how the majority of its customers feel about Maxim, or any other magazine, for that matter. It appears that the company makes no scientific attempt to survey shoppers about entertainment content but responds in ad hoc fashion to complaints lodged by a relative handful of customers and by outside groups, which are usually but not always of the conservative persuasion.

On the other hand, the company seldom submits to community groups that oppose its plans to build new stores. The number of such challenges has increased steadily and is now running at about 100 a year. Wal-Mart's "biggest barrier to growth is....opposition at the local level," says Carl Steidtmann, Deloitte Research's retail economist. The Stop Wal-Mart movement has been bolstered of late by a series of academic studies that have debunked the notion that a new big-box store boosts employment and sales and property-tax receipts. "The net increases are minimal as the new big-box stores merely capture sales from existing business in the area," concludes a new study of Wal-Mart's impact in Mississippi. "I see it pretty much as a zero-sum game," says co-author Kenneth E. Stone, an economics professor at Iowa State University.

The most hotly contested battleground at the moment is Contra Costa County, near San Francisco. In June, county supervisors enacted an ordinance that prohibits any retail outlet larger than 90,000 square feet from devoting more than 5% of its floor space to food or other nontaxable goods. Wal-Mart promptly gathered enough signatures to force a referendum, scheduled for March. Complains County Supervisor John Gioia: "Local planning should be done by our locally elected board and not by a corporate office in Bentonville, Arkansas." Robert S. McAdam, Wal-Mart's vice-president for government relations, says corporate-sponsored referenda, which Wal-Mart has promoted elsewhere in California, are "a perfectly legitimate part of the process."

SUPERCENTER NATION
Meanwhile, the United Food & Commercial Workers union is stepping up its long- standing attempts to organize Wal-Mart stores, with current campaigns in 45 locations. For UFCW locals that represent grocery workers, the issue is nothing less than survival. The Wal-Mart supercenter -- the principal vehicle of the company's expansion -- is a nonunion dagger aimed at the heart of the traditional American supermarket, nearly 13,000 of which have closed since 1992.

Patterned after the European hypermarket, the supercenter is a combination supermarket and general merchandise discounter built to colossal scale. Wal-Mart didn't introduce the supercenter to America, but it has amassed a 79% share of the category since it moved into food and drug retailing by opening its first such store in 1988. Today, Wal-Mart operates 1,386 supercenters and is the nation's largest grocer, with a 19% market share, and its third-largest pharmacy, with 16%.

Wal-Mart plans to open 1,000 more supercenters in the U.S. alone over the next five years. Retail Forward estimates that this supercenter blitzkrieg will boost Wal-Mart's grocery and related revenues to $162 billion from the current $82 billion, giving it control over 35% of U.S. food sales and 25% of drugstore sales. Market-share gains of such magnitude in a slow-growth business necessarily will come at the expense of established competitors -- especially the unionized ones, which pay their workers 30% more on average than Wal-Mart does, according to the UFCW. Retail Forward predicts that for every new supercenter that Wal-Mart opens, two supermarkets will close, or 2,000 all told.

To the low-price, low-cost operator go the spoils. Isn't that how capitalism is supposed to work? Certainly, the supercentering of America can be expected to result in huge savings at the cash register. On average, a Wal-Mart supercenter offers prices 14% below its rivals', according to a 2002 study by UBS Warburg.

However, those everyday low prices come at a cost. As the number of supermarkets shrinks, more shoppers will have to travel farther from home and will find their buying increasingly restricted to merchandise that Wal-Mart chooses to sell -- a growing percentage of which may be the retailer's private- label goods, which now account for nearly 20% of sales. Meanwhile, the failure of hundreds of stores will cost their owners dearly and put thousands out of work, only some of whom will find jobs at Wal-Mart, most likely at lower pay. "It will be a sad day in this country if we wake up one morning and all we find is a Wal-Mart on every corner," says Gary E. Hawkins, CEO of Green Hills, a family-owned supermarket in Syracuse, N.Y.

For suppliers, too, Wal-Mart's relentless pricing pressure is a mixed blessing. "If you are good with data, are sophisticated, and have scale, Wal-Mart should be one of your most profitable customers," says a retired consumer- products executive. Unlike many retailers, the company does not charge "slotting fees" for access to its shelves and is unusually generous in sharing sales data with manufacturers. In return, though, Wal-Mart not only dictates delivery schedules and inventory levels but also heavily influences product specifications. In the end, many suppliers have to choose between designing goods their way or the Wal-Mart way. "Wal-Mart really is about driving the cost of a product down," says James A. Wier, CEO of Simplicity Manufacturing, a lawn-mower maker that decided to stop selling to Wal-Mart last fall. "When you drive the cost of a product down, you really can't deliver the high-quality product like we have."

Critics also argue that Wal-Mart's intensifying global pursuit of low-cost goods is partly to blame for the accelerating loss of U.S. manufacturing jobs to China and other low-wage nations. "It's hard to tease out, but Wal-Mart is definitely part of the dynamic, and given its market share and power, probably a significant part," says Jared Bernstein, a labor economist at the liberal Economic Policy Institute. The $12 billion worth of Chinese goods Wal-Mart bought in 2002 represented 10% of all U.S. imports from China.

For obvious reasons, Wal-Mart has de-emphasized the "Made in America" campaign that founder Sam Walton started in the mid-1980s to great promotional effect. "Where we have the option to source domestically we do," says Ken Eaton, Wal-Mart's senior vice-president for global procurement. However, he adds, "there are certain businesses, particularly in the U.S., where you just can't buy domestically anymore to the scale and value we need." In recent years, Wal-Mart increasingly has sought additional cost advantages by bypassing middlemen and buying finished goods and raw materials from foreign manufacturers. By contracting directly with a handful of denim manufacturers in Southeast Asia, the company has driven down the retail price of the George brand jeans it sells in Britain and Germany to $7.85 from $26.67. Says Eaton: "The mind-set around here is, we're agents for our customers."

"THE WAL-MART PHENOMENON"
 Wal-Mart's philosophy doesn't cut any ice with Wilbur L. Ross Jr., a financier and steel tycoon who soon will close on the purchase of beleaguered textile manufacturer Burlington Industries Inc. Ross contends that Wal-Mart is costing Americans jobs "not only as a business strategy, but as a lobbying strategy" -- that is, by using its influence in Washington to oppose import tariffs and quotas and promote free-trade pacts with Third World countries, including the Southeast Asian countries that supply Wal-Mart with denim. "Everybody is now scurrying around trying to find the lowest price points," Ross complains. "It's the Wal-Mart phenomenon."

High on a wall inside Wal-Mart headquarters is a paper banner with a provocative question in big block letters: "Who's taking your customers?" Beneath it, "Wanted" poster style, hang photos of the CEOs of two dozen of America's largest retailers -- Target (TGT ) Kroger (KR ) Winn-Dixie Stores (WIN ) Walgreen (WAG ), and so on. None looks very happy, perhaps because they know that the only way to get off the wall is to fail utterly. Although Kmart (KMRT ) is reorganizing under the federal bankruptcy code, a photo of its CEO continues to hang in Wal-Mart's rogues' gallery and no doubt will remain there for as long as Kmart operates even a single store.

Growth will only add to the clout that the Bentonville colossus now wields. There might well come a time, though, when Wal-Mart's size poses as much of a threat to the company itself as it does to outsiders. "Their biggest danger is just managing size," observes a longtime supplier. Adds Babson College's Hoopes: "The history of the last 150 years in retailing would say that if you don't like Wal-Mart, be patient. There will be new models eventually that will do Wal-Mart in, and Wal-Mart won't see it coming." Right now, though, Wal- Mart's day of reckoning seems a very long way off.

By Anthony Bianco and Wendy Zellner With Diane Brady, Mike France, Tom Lowry, Nanette Byrnes, and Susan Zegel in New York; Michael Arndt, Robert Berner, and Ann Therese Palmer in Chicago; and bureau reports.

Sears Hones Web site to Sharpen Sales Push
80% of appliance buyers look online
By Lorene Yue - Tribune staff reporter - Chicago Tribune
September 26, 2003

NEW YORK -- In an effort to boost sales and store traffic for the holiday season, Sears, Roebuck and Co. is revamping its Web site to include new categories and more detailed product descriptions.

While Sears has established itself as an online sales leader for hard goods, competitors have started to poach customers from key departments, most notably appliances.

So Sears is focusing on enhanced product details, since more than half of Internet users do research online before making a purchase. In appliances, for example, more than 80 percent of consumers go to the Web first to see what is available.

At an e-commerce conference in New York on Thursday, Alan Lacy, Sears' chairman and chief executive, said online revenue has become more important to the Hoffman Estates retailer.

One in five appliances--or roughly $1 billion in sales--bought at a Sears store is influenced by research done at the company's Web site, he said.

E-commerce analysts say the move by Sears is indicative of how shopping online has evolved.

Retailers have "spent the last couple of years learning what customers want," said Robert Leathern, a director and senior analyst for Nielsen/NetRatings, which tracks Internet usage. "You've seen a lot of company shopping sites add reviews and comments."

Starting Tuesday, new search functions on Sears.com should help shoppers quickly home in on what they want. A shopper searching for a dryer on the revamped site will get a quick inventory of what is available by brand (93 Kenmores), color (16 black, 126 white) and power source (103 gas, 99 electric).

When an appliance is selected, the buyer can scan the product photos, learn what might be needed to install the item and check delivery options.

If a shopper picks an appliance, Sears.com will bookend it with the next
higher- priced and lower-priced option to show shoppers what features they could get for more money and what they miss for a lower price.

Other e-tailers have also introduced improvements as the year heads into its final quarter. Earlier this week, Shopping.com Inc., formerly DealTime Inc., rolled out a new site that allows consumers to better compare products.

A day later, Yahoo Inc. said its shopping page would now provide more comparative data, buyer's guides and consumer reviews.

"One of the ways to add value is to organize information or allow consumers to organize information," said Donna Hoffman, a professor at Vanderbilt University and head of its e-commerce research center. "You need to put a lot of information out there, but you have to let consumers choose how to use it."

Despite the improvements at Sears.com, there is still one problematic category.

Sears.com does not sell apparel, and instead redirects shoppers to either Lands' End, which the company bought last year, or to one of Sears' specialty catalog Web sites.

Sears' executives are working on the problem, which they say is mostly tied to distribution issues, but an improved online apparel section will not appear this year.

Already one of the Internet's most-trafficked retail sites, with an average of 4.3 million new visitors each month, Sears hopes the new site will be a top destination for shoppers.

Even if the enhancements do not improve sales at Sears.com, Bill Bass, Sears' vice president and general manager of the direct retail division, said he will be happy if the site drives more shoppers to the stores.

"Forty percent of online sales are picked up in the store," Bass said. In the week before Christmas last year, 55 percent of online sales were picked up in a Sears store.

In the online shopping evolution, retailers have learned that access across channels--stores, the Internet and even catalogs--is what matters most.

"At the end of the day, it doesn't matter if you make the sale at the click," Hoffman said, referring to a Web site purchase. "It just matters if you make the sale."

While Sears officials decline to release specific sales figures, they said Sears.com posted a profit in 2002, a year ahead of expectations. And the e- commerce site, launched in 1997, will have a greater impact on sales now that shoppers can buy an item online and pick it up at any of its more than 800 stores, they said.

The most visible difference on the new Sears.com will be a cleaner home page, which is the first screen shoppers see when they call up the site. Category tabs across the top of the screen and a navigation menu down the left side will replace the laundry list of product lines that cluttered the home page.

Relocating those features eliminates the current need to scroll down to get the full view of the first page of Sears.com and allows the retailer to feature special deals and promotions in the center of the screen.

While Bass said the enhancements, particularly in the appliance department, help vault Sears.com ahead of other Web sites, there is more to be done.

"Some categories still need work," he said. "You can't stop or the competition is going to catch up."

SEARS RANKS ABOMG TOP ONLINE RETAILERS

Sears has benefited from consumers comparing and shopping for appliances online. On Tuesday, it will launch an expanded web site that includes new items and more appliance information.

Visitors in August 2003 to major retail internet sites, in millions

eBay.com 42.4
Amazon.com 26.1
Wal-Mart.com 9.2
Target.com 7.6
BarnesandNoble.com 7.1
BestBuy.com 6.8
Sears.com 5.3

Lacy Gives Inside Look On Sears
By: Mickey Alam Khan - Senior Editor - DM NEWS.COM
Sept. 26, 2003

NEW YORK -- It was a rare moment yesterday at the National Retail Federation's Shop.org annual summit for attendee retailers to probe Sears, Roebuck and Co. chairman/CEO Alan Lacy's thoughts on e-commerce.

Unusual for a leader of such stature, Lacy was candid about his $40 billion company's recent achievements in direct marketing, the most recent being the summer 2002 acquisition for $1.9 billion of apparel direct marketer Lands' End. Due diligence for that purchase acknowledged a key difference.

"Lands' End has a northern climate bias and does not have a multicultural customer base," Lacy said in the keynote session. "Sears has a southern climate bias and a multicultural customer base."

Still, as of Sept. 8 and a little more than a year after the acquisition, Lands' End apparel and gear are available nationwide in all Sears stores.

Also, the Sears and Lands' End customer files were compared to weed out overlap. Some files were moved to Lands' End, especially large and petite sizes.

Implemented in a phased manner, the integration gave Sears time to register which stores quickly gravitated to selling Lands' End merchandise. The in- market experience was invaluable.

Efforts are on to deliver more products at point of sale that are sold online. This is true as much for the Lands' End division's apparel as it is for Sears' hard-line products like tools and household appliances. The challenge, of course, is how to stock more items at store level.

Sears itself has undergone a serious repositioning in the past two years. Merchandise assortment has changed, as has the cost structure. New management is in. For example, Bill Bass moved from Lands' End after the sale to head both landsend.com and Sears.com.

"It's all about moving away from our department store culture and realizing our best customer was off-mall," Lacy said.

A difficult moment for Sears came when it realized that it was in two
businesses: retail and lending. So in July it agreed to sell its hefty credit card business for $3 billion to Citigroup.

"We sold it to create equity value for our shareholders," Lacy told a packed room of e-commerce executives.

The Sears credit card business has 60 million accounts and $30 billion in assets. Sears will partner with Citigroup to handle the credit accounts.

Not that Sears needed cash. It generates $1 billion in free cash flow yearly.

In the same bottom-line-driven spirit, Sears.com last year for the first time pulled in a profit. Millions of dollars were poured into the site since its launch in 1997. En route, the retailer invested in IT, infrastructure and new call centers.

Lacy admitted that Sears board members rarely spend much time discussing Sears.com or online issues.

"We're consciously silent about it," he said. "People are focused on our
full- line stores, and we had a big credit business. Once you talk about those two, there's not much capacity left."

So, the much larger Sears stores business gets more attention. But it helps to note that the online arm is in profit.

"Supporting the business from an investment standpoint is much easier," Lacy said.

Besides, kinks in the multichannel operation need working out. When asked about Sears' buy online, pick in-store policy, Lacy admitted that problems exist.

"It was very difficult," he said. "We didn't have a lot of systems tie-in. A lot of it is done manually in our stores ... the online channel thinks the item is in store, but the associate has to find the product and tag it for the customer and communicate it online."

Obviously, this manual involvement takes associates away from their regular chores in-store, "but 90 percent of the time we'll able to find the product and get it to the customer," Lacy said.

Sears.com lists 3,500 models of appliances online. And it is making it an integral part of the store associates' job to participate online and push sales to that channel, if necessary.

The Internet is not an end to itself for Sears. Through online marketing, it is a means to drive offline sales. In fact, the multichannel advantage is the best way for subordinates to sell CEOs on the value of investing more online.

"We have over 4 million preferred e-mail [opted-in] customers," Lacy said. "We're using it increasingly to market Sears, not just Sears.com."

He is not fazed much by spam. Sears customers want to hear from the brand, he said.

Lacy's prophetic skills were also tested at the Shop.org show. He was asked for his expectations of this holiday season.

"It'll be a better season than last year," he said. "That said, I don't think it'll be robust -- the economy, unemployment's still high. The impact of the [Bush] tax changes is new. I do think the online channel is going to be spectacular. But for the rest it'll be very, very tough."

Sears Plans to Expand Offerings on Web Site
By James Covert - Dow Jones Newswires
September 25, 2003

With know-how acquired from its Lands' End unit, Sears Roebuck & Co. said Thursday it will begin selling apparel on its own Web site by the end of 2004.

The Hoffman Estates, Ill., department-store chain said its Sears.com site will sell Lands' End clothing as well as the company's other apparel brands. Those include the Covington brand, which replaced a hodge-podge of little-known labels last year as Sears mounted an effort to turn around its notoriously weak apparel business. That effort included the $1.9 billion purchase of Lands' End, whose apparel was rolled out to all 870 of Sears' full-line department stores this month.

The Landsend.com site's operations won't be affected significantly by the changes at Sears.com, Bill Bass, vice president and general manager of Sears' catalog and Internet operations, said in an interview.

"We're still working on what features the Sears site will have versus the features on the Lands' End site," said Mr. Bass, who came to Sears from Lands' End last year as part of a series of trades in upper-level management at the two companies.

Both sites will offer the same selection of Lands' End clothing, and customers will be able to browse the two sites using the same shopping cart, Mr. Bass said.

However, plenty of details remain to be ironed out. The Lands' End site will continue to offer "a lot of personalization and customer service" that may not be as extensive on the Sears.com site, Mr. Bass said. The Sears Web site, in addition to offering other clothing brands found at Sears stores, will allow customers to buy Lands' End clothing on-line, and then pick it up at a Sears store -- an option that may not be available on the Lands' End site, Mr. Bass said.

While Internet retailers have been successful selling hard goods such as electronics and books, most have generally found apparel to be a harder sell. But with its virtual fitting rooms, high-quality images and true-to-life colors, Lands' End has been one of the few exceptions, Mr. Bass notes. While the Sears Web site will be somewhat different from Lands' End's, the company is confident it can make apparel sales profitable at Sears.com, Mr. Bass said.

"The problem Sears is trying to solve is, how do you have a store experience combined with Internet experience?" Mr. Bass said. "That's different than what Lands' End is trying to solve, which is combining a catalog with an Internet experience."

Sears also said Thursday it will relaunch its Web site next week, making it easier to navigate. An improved search engine will make it easier for customers to shop online for the appliances, tools, electronics and other so-called "hard line" merchandise that are currently offered on the site.

While Sears' Web site currently forces customers to search for items using multiple characteristics, the new site will be able to perform searches according to specific brands, colors and sizes, thus allowing customers to more easily narrow down their selections.

The site will also offer enhanced compare-and-contrast features, and printable pages of product specifications that will offer five times the information currently available on the site.

"You'll see multiple views on items -- refrigerators with the doors closed, the doors open, side shots -- anything that seems relevant," Mr. Bass said.

One in five of Sears' in-store appliance sales is completed with the help of research done on Sears.com, Mr. Bass said. About 40% of Sears' overall online sales are picked up in the store, he said.

Sears continues to dominate appliance sales in the U.S., boasting a market share of about 38%. But other big-box retailers, most notably Home Depot Inc., Lowe's Cos. and Best Buy Co. have been growing their appliance businesses rapidly over the past few years.

However, the Sears Web site faces real challenges ahead, particularly when it comes to pricing, said Rob Leathern, an analyst at Nielsen//NetRatings, a New York-based online research company. Searching on-line for a lawnmower last week, Mr. Leathern said that, after browsing Sears' Web site, he bought a model that was offered instead on Amazon.com Inc.'s site.

"It was $20 cheaper and the shipping was free," Mr. Leathern said.

Retailers' Lawyers in Debit Case Defend High Fees
Reuters - September 25, 2003

NEW YORK, Sept 25 (Reuters) - Lawyers who represented millions of retailers in a suit against Visa and MasterCard on Thursday defended their request to receive about $600 million in legal fees as part of their work in reaching the $3 billion combined debit-card settlement.

At a fairness hearing at the U.S. District Court for the Eastern District Court of New York in Brooklyn, plaintiffs lawyers defended the sum, which is 18 percent of the settlement plus expenses, saying it was in line with the court's precedent of considering a case's risk, difficulty and result when determining fees.

"This was a very, very difficult representation," said Lloyd Constantine, the lead lawyer for the retailers.

"We think we did a heroic" job on the case, he said.

The suit charged that Visa and MasterCard used market power to force higher debit card fees on retailers.

The suit was first filed by Wal-Mart Stores Inc. (nyse: WMT - news - people) and Sears, Roebuck and Co. (nyse: WMT - news - people) in 1996 but expanded to include millions of retailers by the time the case was settled in April.

When Constantine's law firm, Constantine & Partners, first requested the fees in August, it issued a statement saying the fees represented only 2 percent of the settlement's total value, taking into account the estimated savings that retailers would enjoy in the form of lower debit card costs over the next 10 years.

The court received 16 objections to the fees, mainly from small retailers, and lawyers arguing on behalf of those objections argued mainly that the fees, both as a figure and as a percentage of the settlement, were too high.

Constantine said there had been no objection "from any major merchant" to the fees.

In a statement Noah Hanft, MasterCard's general counsel, said: "We look forward to Judge John Gleeson's approval of the settlement, so we can put this lengthy litigation behind us."

Gleeson, who presided over the hearing, said he would take the objections under advisement.

Sears CEO Sees Holidays Improved, not Robust
Reuters - September 25, 2003

NEW YORK, Sept 25 (Reuters) - Retailer Sears, Roebuck and Co. (nyse: S - news - people) Chief Executive Officer Alan Lacy on Thursday said he expects the upcoming holiday season to be better than last year's but not robust, citing a tough economy and persistent unemployment.

"I do think the online channel is going to be spectacular," Lacy said, addressing a conference of online retailers.

Lacy added that the season would be "relatively tough" for the consumer apparel sector.

Another Sears' Veteran Stepping Down
By Sandra Jones - Crain's Chicago Business.com
September 23, 2003

Sears, Roebuck & Co.'s top hardlines merchant Lyle Heidemann, the last of the Big Store's veteran senior officers, plans to retire at the end of the year.

Mr. Heidemann, 58, executive vice-president and general manager of hardlines, announced his pending departure internally at Sears’ Hoffman Estates headquarters on Monday. A Sears spokesman confirmed Mr. Heidemann’s decision and says no replacement has been named, but Mr. Heidemann will be working this fall to ease the transition to new leadership.

Tina Settecase, vice-president and general manager of appliances, is a likely successor, according to retail observers. Ms. Settecase received credit last spring for her effort to recharge Sears' $7 billion appliance business, a crucial contributor to the stores’ sales and profits.

Sears’ appliance market share slipped to 38% from 41% last year as Home Depot Inc. and Lowe’s Cos. began selling washers, dryers and other large appliances at lower prices.

Mr. Heidemann began his career at Sears in 1967 as an assistant store manager. He was promoted to his current position in 1999. Ms. Settecase has worked at Sears for 31 years, according to a company spokesman. Mr. Heidemann and Ms. Settecase couldn't be reached for comment.

Sears Chairman and CEO Alan Lacy has completely overhauled his senior officer team since taking Sears’ top job in 2000. With Mr. Heidemann's departure, all but one of the 12 senior executives on his staff have left or been replaced.

Sears' Overhaul Rolls on with Sale of National Tire
By Lorene Yue - Tribune staff reporter - Chicago Tribune
September 23, 2003

Sears, Roebuck and Co. on Monday said it will sell its National Tire & Battery division, shedding yet another business line that executives said weighed down the company's ability to reclaim its top retail status.

TBC Corp. of Memphis will pay $225 million for all 226 NTB stores and an additional $35 million for inventory and assets. TBC, one of the nation's largest private-brand tire distributors, will also absorb most of NTB's 3,500 employees.

The deal, expected to close Dec. 1, will give Sears a pretax gain of between $50 million and $100 million.

For TBC, acquiring National Tire & Battery means an opportunity to enter new markets in Illinois, Texas, Missouri and Alabama. "They are good stores, but underrepresented in the market," said Larry Day, president and chief executive of TBC. "This is not by any stretch a fixer-upper."

TBC investors liked the deal, the second acquisition for the tire chain in the last six months. TBC shares gained more than 11 percent, or $2.57, to $25.32.

Sears was unable to expand National Tire & Battery, a unit started in 1997 to woo car enthusiasts who bypassed Sears Auto Centers.

Sales fell 4.1 percent last year at stores open for at least a year, and executives blamed an inability to effectively supply and market the chain.

"While it is a profitable business, it did not benefit from the support it needed from Sears," said Ted McDougal, a Sears spokesman. "There was separate branding."

In many cases, Sears was spending heavily to advertise and replenish merchandise in a market that had only one store.

Retail analysts are not surprised that Sears unloaded a division that was a departure from its core retail business.

"It was like a fly on an elephant," said Gary Ruffing, a retail consultant with BBK Ltd. in Southfield, Mich. "It didn't mean anything, but it was a distraction for the company."

Sears has been strategically divesting itself of operations that Chairman and CEO Alan Lacy considers non-essential to the Hoffman Estates company's future.

Lacy decided to sell Sears' profitable, yet troublesome, credit card portfolio for $32 billion in July to Citigroup--netting $3 billion for Sears. That cleaved the company in half and forced Lacy to focus on fixing the retail side, where growth has stalled in the past two years.

It's not the first time Sears put itself on a diet. In the early 1990s, Sears purged a number of financial offerings to focus on retailing. It spun off or sold Allstate Insurance Co.; Dean Witter, Discover & Co.; real estate broker Coldwell Banker ; and its Homart commercial real estate unit.

Failed retail concepts were put on the block later that decade. HomeLife was sold in 1998 to a venture capital group that ended up liquidating the company. Advance Auto bought Western Auto Supply Co. from Sears that same year.

Lacy, who become CEO in 2000, is reviving the past philosophy.

National Tire & Battery was "not something that was driving our business," McDougal said. "The business is not core to our strategy."

The NTB stores boasted higher-end tires and featured lounges where customers could plug in laptops. But the concept got off to a bumpy start, and Sears closed some stores in 1999.

"They couldn't make their return on the investment," said Josh Chernoff, consumer and global practice leader for management consulting firm A.T. Kearney in Chicago. "It was a unit that was struggling to make the returns that Sears wanted."

What appears to remain core markets for Sears are the specialty divisions that emphasize categories that helped the retailer earn its reputation as a place for hard goods.

Earlier this month, Sears announced it was spending millions to revamp The Great Indoors, a chain of cavernous stores devoted to interior home remodeling projects, in an effort to drive sales and profits. Three stores will close by the end of the year and one will be converted into a Great Indoors outlet, leaving 18 stores in 11 states.

Orchard Supply Hardware, a chain of 82 stores in California that sells home repair products and garden and nursery items, is poised for expansion. And sales at 250 Sears Hardware stores, which carry tools and home improvement merchandise, have been helped by the addition of appliances, McDougal said.

Sears' network of more than 750 independently owned dealer stores, which started out as merchandise pick-up centers for catalog sales but evolved into carrying limited Sears merchandise such as appliances, electronics and home improvement items, is the only division showing strong growth. Same-store sales at dealer stores rose 4.2 percent last year, according to the 2002 annual report.

On Saturday, Sears debuted in Utah what it hopes will be the answer to expanding its number of traditional stores.

Dubbed Sears Grand, the stand-alone store melds health and beauty, snacks and magazines with merchandise found at the more than 870 traditional Sears stores. Sears will build four more pilot stores in the next two years, then create a prototype that can be rolled out across the country.

"Whatever business we are in," McDougal said. "We need to grow it."

SEARS TRIMS ITS INVENTORY OF SUBSIDIARIES

The retailer has sold and spun off several subsidiaries in recent years, including:

NTB
Sale announced 2003. The chain, which targets upscale car owners, is being sold to TBC Corp. for $260 million.

Sears Credit Card Operation
Sale announced 2003. Sears is selling its $29 billion Sears card and MasterCard portfolio to Citigroup Inc.

WESTERN AUTO
Sold 1998. Sears acquired the auto parts dealer in the late 1980s to boost its stake in rural areas. It sold the money-losing subsidiary to Advance Auto Parts.

HOMELIFE FURNITURE
Sold in 1998. Sears sold a majority stake in the chain to Citicorp Venture Capital. HomeLife filed for bankruptcy in 2001.

ALLSTATE
Spinoff completed 1995. Sears spun off a portion of the insurance firm in 1993 and the remainder two years later.

TBC to Buy Sears Tire and Battery Business
FORBES.COM
September 22, 2003

CHICAGO, Sept 22 (Reuters) - Tire retailer TBC Corp. (nasdaq: TBCC - news - people) on Monday said it has agreed to buy Sears, Roebuck & Co.'s (nyse: TBCC - news - people) National Tire and Battery unit for about $225 million.

National Tire, which operates 226 retail tire and automotive centers in 20 states, currently generates annual revenue in excess of $425 million.

TBC, the nation's largest independent tire retailer, said it expects the deal to add to its earnings in 2004. It said adding the National Tire centers will give it a total of 1,144 locations.

TBC said it expects the transaction to close by the end of the year.

TBC Corp Signs Definitive Pact To Buy National Tire & Battery From Sears
DOW JONES NEWSWIRES
September 22, 2003

MEMPHIS -- TBC Corp. (TBCC) agreed to purchase Sears Roebuck & Co.'s (S) National Tire & Battery for $260 million in cash, including $35 million in inventory and additional assets.

National Tire & Battery has annual revenue of about $425 million, compared with TBC's 2002 revenue of $1.11 billion.

The deal is expected to close in the fourth quarter.

In a press release Monday, Sears said it expects to record a pretax gain on the sale of between $50 million and $100 million. In the fourth quarter of 2002, Sears had revenue of $12.52 billion.

In a separate release, TBC reiterated its 2003 earnings forecast of $1.40 to $1.45 a share, and said it expects the NTB acquisition to be accretive to 2004 earnings.

The purchase will increase TBC's national footprint by 25%, leaving it with a total of 1,144 locations. The company currently owns 357 stores, with an additional 561 outlets franchised under the Big O Tires brand.

The company estimated it will take about eight months to integrate NTB into its system.

Sears To Sell National Tire & Battery
September 22, 2003

HOFFMAN ESTATES, Ill., Sep 22, 2003 /PRNewswire via COMTEX/ --
Sears, Roebuck and Co. (NYSE: S) today announced it has entered into a definitive agreement to sell its National Tire & Battery (NTB) business to TBC Corporation (Nasdaq: TBCC) for total cash consideration of approximately $260 million. The cash consideration includes $35 million for assets TBC is acquiring as part of the transaction, which is expected to close in the fourth quarter of 2003, subject to customary regulatory review and closing conditions.

Sears expects to recognize a pretax gain in the range of $50 million to $100 million, which will be finalized upon closing. Proceeds from the transaction are intended to be used for general corporate purposes.

"This transaction is a further refinement of Sears' focus on our core business strategy," said Alan J. Lacy, Sears chairman and chief executive officer. "We believe this sale is in the best interests of Sears and its customers. National Tire & Battery will benefit from being a part of the broader 900- store TBC network."

Upon completion of the transaction, substantially all of the approximately 3,500 employees of NTB will become employees of TBC. National Tire & Battery operates 226 locations nationwide and currently generates annual revenues in excess of $425 million.

Spiegel Puts Distribution Complex on Auction Block
By Brian R. Ball - Business First of Columbus
September 22, 2003

The future of one of Ohio's largest distribution center complexes will be determined in the next 60 days as part of Spiegel Inc.'s bankruptcy court-directed Chapter 11 reorganization.

The Chicago-based retailer has put the 4.1 million-square-foot facility at 4545 Fisher Road on the seller's block, seeking at least $25 million for the complex. There is a chance Spiegel could hold onto the complex and lease it if that approach makes better financial sense for the company. The complex houses a 35,000- square-foot Eddie Bauer retail outlet and a 455,000-square-foot Sears garment distribution operation.

Retail distribution operations for Spiegel's Eddie Bauer and Newport News divisions will leave the complex this month for the company's Distribution Fulfillment Services complex in Groveport as part of the restructuring.

A comarketer of the property told Business First the bi-level distribution center is targeting users and investors as potential buyers. "It has some great appeal for traditional use as distribution or sorting," said Brad Johnson, the president of Columbus-based Centerpoint Development LLC, who has the 154-acre property co-listed with Keen Realty LLC of New York. "It has rail service and large electrical capacity for use as manufacturing." Johnson said final lease offers are due Oct. 29 and final purchase offers are due Nov. 12.

The complex dates to 1971, when Sears Roebuck & Co. opened a 3 million- square-foot distribution center for its catalog sales division. It added 1.1 million square feet in 1980. Sears left the catalog business in 1994, selling the property to Distribution Fulfillment Services a year later for $20 million, or about $5 a square foot. The property is valued on the Franklin County tax rolls at $37 million, or $9 a square foot. It would cost more than $200 million, or $50 per square foot, to build the complex today, Johnson said.

 "The facility is offered at a price way below its reproduction cost," he said. The complex includes 200,000 square feet of offices in addition to the climate-controlled industrial space, he said. Distribution Fulfillment Services may agree to keep its Eddie Bauer outlet and up to 500,000 square feet of distribution operations in the building for up to three years if the property is sold, according to the sales package. The Sears garment operation lease extends to May 2007 with two five- year renewal options.

Uncertain market "There's a potential, we hope, the purchase price could exceed the list price," said Johnson, who led Distribution Fulfillment Services to develop its Groveport facility in 1991-1992 and advised the company its March 1995 acquisition of the Fisher Road building.

Johnson said he has fielded inquiries about the property, but another veteran of the Columbus industrial market expects any list of prospective buyers and users to be short. "For Spiegel's purposes, it's a great property," said Tom Mechenbier, senior vice president and industrial marketer for Columbus Commercial Realty.

"It was a home run when they bought it." But the size of the building could make it a tough sell. "It's a rather unique property," he said, noting its double-decker configuration. "Someone has to figure out how to use it." Johnson's idea of converting the site into a manufacturing facility has merit, Mechenbier said, but he noted many factories in Ohio have been mothballed as production operations are moved overseas.

"The challenge most industrial brokers have had in the last two decades is how to convert manufacturing space into distribution space," Mechenbier said. "Now we have a distribution space proposed as manufacturing." Still, the lease-back possibilities with Spiegel and Sears, he said, might make it attractive to some investors. "It's a limited market, any way you shake it," Mechenbier said.

Sears' Grand Idea Set to Debut
By Lorene Yue Tribune staff reporter - Chicago Tribune
September 19, 2003

Milk, miter boxes and many things in between await shoppers at the 210,000- square-foot concept store as the retailer tries to reclaim market share

WEST JORDAN, Utah -- When Sears, Roebuck and Co. executives set out to create a new concept, they asked customers what they would want in a one-stop shop.

The result was a beefed-up Sears that sells just about everything from shampoo to stainless steel appliances.

On Saturday, shoppers in this Salt Lake City suburb will visit what could be Sears' next generation of retailing. At 210,000 square feet, more than twice the size of an average Sears and not anchored to a large mall, the Sears Grand in West Jordan is the first of five pilot stores set to open over the next two years.

Construction of regional malls, where Sears has most of its more than 800 stores, has stalled, forcing the Hoffman Estates retailer to find a new way to grow. Perhaps more important, Sears is testing the idea amid its major competitors, the big-box category killers that have taken market share from Sears in virtually all of its departments.

At Sears Grand, new merchandise categories are melded with traditional Sears products. There is what shoppers would expect from Sears: Kenmore appliances, Craftsman tools and a 10-bay auto shop for brake jobs, oil changes and tire sales. And then there is the new: food, pet supplies, greeting cards, books, plants, CDs and DVDs.

In one aisle, there is toothpaste and vitamins; at the back of the store are plasma screen TVs.

Although shoppers will not arrive until Saturday, those who have seen the store seem impressed with the new approach to retailing.

"I think it kind of changes the perception of what Sears was to what Sears is going to be," said Tami Ostmark, property manager for Jordan Landing, the shopping center where Sears Grand is located. "It's clean and structured, and they did a very nice job of merchandising. I don't feel like I'm walking into a Sears."

But skeptics say that Sears has fallen off many shoppers' radar screens, and it will be tough to get them to think of Sears as a place to buy toiletries and cat litter.

"Sears has some very serious issues--like who they are and who their customer is," said Steven K. Platt, a merchant banker and director of the Platt Retail Institute in Hinsdale.

"They are good for tools, appliances and some apparel. But the fundamental problem at Sears is that it lacks merchandise focus. If the retailer is not relevant, whether it is off the mall or not, it doesn't matter."

Sears Grand store designers planned the layout and displays to provide cross-selling opportunities and reinforce the idea that shoppers can get all they need in one place. Treadmills and athletic apparel are showcased with bottled water and Gatorade. Gym shoes are across the aisle from fitness gear.

"We've got the refrigerator, and we've got the milk," said Teresa Byrd, vice president and general merchandise manager for Sears' off-mall strategy. "Our intent is to satisfy what customers are asking for. We wanted a place that was close to home and provided one-stop shopping."

The racetrack layout, product offerings and checkout lanes at the front of the store make Sears Grand reminiscent of Target, Wal-Mart and Kmart.

But Byrd said Sears Grand is not a discount store. While prices on everyday items such as cosmetics and cola are comparable to the discounters, Sears Grand also sells Bosch appliances and other products not found at the low- price competitors.

Sears Grand stores are scheduled to open next year in Gurnee and Las Vegas.

Two more locations, planned for 2005, have yet to be determined. Each will vary in size and design, but the products will be the same.

Sears plans to take the results from all five stores to develop a prototype that can be used for the Sears Grand strategy.

At its first location in Utah, Sears Grand is surrounded by tough competitors in practically every merchandise category.

The new store will face off against a Kohl's in apparel and a Wal-Mart Supercenter in general merchandise. Both competitors flank the Sears store.

In addition, a Circuit City will challenge Sears in electronics, and Bed Bath & Beyond offers an alternative for home goods. A Lowe's across the street will test Sears' strength in appliances and home improvement supplies.

"We wanted to position ourselves in a destination area where we have so many of our competitors," Byrd said.

Sears is tired of losing consumers to those competitors.

Alan Lacy, Sears' chairman and chief executive, has said that the retailer's traditional mall-based stores have no trouble attracting shoppers from a 10- mile radius. But Sears worries about consumers who must drive farther.

Those shoppers typically pass many of Sears' competitors and opt to make their purchases there.

This Salt Lake City suburb also is home to the kind of consumer Sears Grand wants to attract--a 25- to 54-year-old shopper making between $30,000 and $80,000 annually.

West Jordan's population is expected to boom in the next five years, propelling it to Utah's second-largest city from fifth-largest.

Residents here are mostly married, have a median household income of $60,000 and live in houses with a median value of $160,000.

If Sears Grand can catch on in similar growing communities, it can brand itself as a destination as the community builds around it, Sears executives believe.

Yet even if Sears Grand is a hit, some retail industry analysts doubt it will be enough to put Sears back in the consumer spotlight.

"I don't know if they can take decades of heritage and turn it on a dime," said Bill Rodi, director of brand strategy for the Anthem Group in Chicago, a corporate branding firm.

And some consumers wonder if Sears Grand is sufficiently broad to be considered a true one-stop shop.

"I like this Wal-Mart because it has all the groceries," said Desiree Adams, who visits Jordan Landing for the supercenter and its Sam's Club sibling. But after eyeing the new Sears Grand, she said she will consider it for her shopping needs.

That's good enough for Sears' Byrd.

"We hope we surprise the customer," she said.

A different side of Sears

Key differences in Sears Grand compared to a traditional Sears:

Size: 210,000 square feet, nearly twice the size of an average Sears.

New departments include: Cosmetics, greeting cards, toys, plants, fresh-cut flowers, milk, pet supplies, health and beauty supplies, snacks, soft drinks, CDs and DVDs.

Traditional departments include: Appliances, electronics, fitness, lawn and garden, automotive, tools, home improvement, portrait studio, apparel, home furnishings and shoes.

Checkouts: Lanes at the front, similar to grocery stores.

Additional services: A cafe and one-hour photo shop.

Sears 'Grand' Store Taking on Wal-Marts of World
By Paul Foy - AP - Miami Herald
September 19, 2003

WEST JORDAN, Utah - Teresa Byrd stops inside the souped-up Sears Grand store at shelves of s'mores makers. The dessert maker includes a grill and heating fuel but a label warns, "food not included."

That's not a problem at this first-in-the-nation Sears Grand store, the largest of five that the nation's oldest retail chain plans to open over the next two years - including one in Gurnee, Ill.

"You can buy graham crackers, Hershey bars and marshmallows" a few aisles away, says Byrd, a Sears, Roebuck & Co. vice president for merchandise. "It's all available under one roof. You don't have to make another stop at a grocery or convenience store."

At Sears Grand, which plans an unadvertised "soft" opening Saturday in this suburb of Salt Lake City, shoppers at once can buy a Kenmore refrigerator and stuff to put inside it: milk, juice, ice cream and frozen pizza.

It has everything expected from Sears, including a 10-bay auto shop, plus more. There's lawnmowers, of course, but also grass seed, fertilizer and a plant nursery. It has Craftsman hand and power tools - plus an assortment of nails, screws, bolts and hangers rivaling Home Depot's.

A year-round toy department was yet another concession to focus groups Hoffman Estates, Ill.-based Sears consulted in Chicago and Salt Lake City.

Analysts say Sears has a lot riding on this new concept. For years the struggling retailer has been losing market share to big-box competitors such as Wal-Mart, Circuit City, Lowe's and Bed, Bath & Beyond - all of which surround Sears Grand in this booming suburb of young families.

"There's a lot of reasons why people don't go to Sears anymore," says former Montgomery Ward executive Sid Doolittle, now a partner at Chicago's Mcmillan/Doolittle Retail Consultants. For one thing, he said, nobody needs a refrigerator or television every day.

"They're working hard to turn around. This is not just a small experiment. If this doesn't work, they've really got a problem," Doolittle said.

Byrd won't pin Sears' future on this concept, calling it just a trial run in "one-stop shopping for busy families." Customers can order a cup of espresso from a cafe, push fancy carts equipped with a cup holder, have window blinds cut to order, get their eyes checked and film developed.

With 860 stores, Sears dominates regional malls, but Sears Grand is an "off- mall" concept. At 210,000 square feet, it's larger than the average Sears store, with extra-wide aisles in a racetrack layout.

The merchandise is neatly organized, but shoppers who need help can stop at one of 20 information kiosks for price checks, directions or assistance from one of 250 staffers.

Checkout lanes are at the front of the store, supermarket-style, instead of at the center of different departments.

The electronics department adds compact music disks and DVD movies to Sears' traditional hardware. Byrd points to a $2,000 Bose home theater base unit.

"Bose is a product you'll never find at mass discounters," she said. "This is another differentiator - a quality name brand, highly recognizable. There's a lot technology here."

Sears will open other Grand stores next year in Las Vegas and Gurnee, Ill. The locations of two more opening in 2005 have yet to be selected.

In Chicago, Changing of the Guard at Sears Tower
By Terry Pristin New York Times
September 17, 2003

CHICAGO - When Trizec Properties acquired a second mortgage on the 110-story Sears Tower in 1997, it looked as if the company had made a shrewd investment.

In exchange for its $70 million stake, Trizec (then known as the Trizec Hahn
Corporation) was to gain control this year of the tower, the nation's tallest building, with its 3.5 million square feet of space and a top-floor observation deck that is one of this city's major tourist attractions.

But the Sept. 11 terrorist attacks, the weak economy and a glut of new office space coming on the market changed Trizec's perspective on the black aluminum-clad building, which is made up of nine steel-framed shafts of varying sizes that were built to withstand the heavy Chicago gusts.

So last month, Trizec, a publicly traded real estate investment trust that is based here, sold its interest in the property to MetLife for $9 million. The insurance company's first mortgage payment on the building is due in 2005. Analysts say the company will owe $840 million, a number MetLife will not confirm. MetLife is now the property's sole owner, but Trizec will continue to lease and manage the property.

With $3.5 billion in debt, Trizec is more heavily leveraged than most REIT's. Timothy C. Callahan, Trizec's chief executive for the last year, said the sale of the building dovetailed with the company's strategy of reducing its debt. Had Trizec held onto the Sears Tower, the company would have added hundreds of millions of dollars of debt to its balance sheet as soon as it took possession of the building, he said.

"For us," said Mr. Callahan, a former chief executive of Equity Office Properties, the nation's largest office REIT, "that isn't necessarily a negative thing if we can point to value creation." But given that the Sears building was unlikely to appreciate in value before the mortgage had to be retired or refinanced, he said, "we felt that the investors would view this negatively."

Designed by Skidmore, Owings & Merrill as the headquarters of Sears, Roebuck & Company, the Sears Tower was the tallest building in the world from its completion in 1974 until 1996, when it yielded that distinction to the Petronas Towers in Kuala Lumpur, Malaysia, which are 33 feet taller.

In 1988, Sears, then undergoing financial difficulties, announced that it wanted to sell the tower. Unable to find a buyer, the company refinanced its debt on the property in a complex transaction that included a $600 million first mortgage from MetLife and a $215 million second mortgage from AEW Capital Partners, a Boston investment company.

But by 1994, the value of the building had tumbled to less than $500 million, and occupancy had slipped below 60 percent, forcing Sears to give up ownership. The property was placed in a trust, with AEW to gain control in 2003. Three years later, Trizec bought AEW's mortgage and paid an additional $40 million for the adjacent 1,100-car garage, a property the company still owns.

By 2001, the building's occupancy rate had climbed to 95 percent. After the World Trade Center was destroyed, however, there were fears that the Sears Tower was also a terrorist target, and since then, Trizec officials say, the building's occupancy rate has declined to 88 percent. The building has added a few small tenants, but can no longer charge a premium for its space.

Among the tenants that have either left, given up some of their space, or said they would leave or are considering leaving are Goldman Sachs (which is giving up 245,000 square feet, with eight years left on its lease); Universal Access Inc. (125,000 square feet); Unicare (151,000 square feet); Merrill Lynch (100,000 square feet); Fireman's Fund (87,000 square feet); and General Reinsurance (50,000 square feet).

Trizec and MetLife officials say that only General Reinsurance's departure can be directly attributed to security fears. They say, for example, that Goldman Sachs's relationship with its client, the Pritzker family, accounts for its decision to lease 200,000 square feet of space in a nearby 1.5-million-square- foot building, the Hyatt Center. That building is being developed by a partnership of the Pritzkers and Higgins Development Partners. A Goldman spokeswoman said that the investment firm decided to move to consolidate its two Chicago offices.

Mr. Callahan said that in contrast to many major cities, where construction cranes are scarce, downtown Chicago, particularly in the West Loop around the Sears Tower, is still undergoing a building boom. Aside from the Hyatt Center, which is expected to be completed in 2004, other buildings under construction include 111 South Wacker, with 1.1 million square feet; ABN AMRO, with 1.5 million square feet; and 1 South Dearborn, with 825,000 square feet. "A lot is being delivered between now and 2005," Mr. Callahan said, "and that will slow this market's recovery."

Brokers' estimates of downtown Chicago vacancy rates at the end of the second quarter ranged from 15.4 percent to 15.9 percent.

Michael J. O'Hanlon, an executive vice president at Grubb & Ellis, said that competition from buildings equipped with the latest communications and heat and air-conditioning technology has made it tougher for the Sears Tower to find new tenants or keep old ones.

Another broker, Alain G. LeCoque, a managing principal at Newmark Midwest, said the building's tight security evokes painful memories. "Every time you walk into that building, you think about 9/11," he said.

Last fall, after an appraisal, Trizec wrote down its investment in the Sears Tower from $70 million to $23.6 million and began discussions with MetLife in the hope that the insurance company would reduce Trizec's mortgage payments and extend the term of the loan. But instead, MetLife decided to take control of the building. Brian Fox, the chief marketing officer for MetLife Real Estate Investments, which has a $30 billion portfolio, said: "This made the most sense for both parties. It allowed us unfettered flexibility."

Mr. Fox said that in the last year, leases for about 260,000 square feet of space had been renewed and tenants had leased 60,000 square feet in expansion space. The Sears building, he said, "does have great long-term real estate fundamentals."

Trizec's decision to walk away from the Sears Tower has been well received among financial analysts.

Lee Schalop, a REIT analyst for Banc of America Securities, said that Trizec made the right move even though it was not facing a severe economic loss even if the Sears Tower lost more tenants. That is because the terms of its mortgage did not obligate the company to make loan payments that exceeded the building's cash flow. In addition, if Trizec had defaulted on its loan, all it would have lost was the building itself, Mr. Schalop said.

"This was a perception risk, not an economic risk," Mr. Schalop said. "This is a company that has had a number of issues in the investor community. Anything that makes them look like they have more problems than they actually have is undesirable."

James P. Sullivan, a senior analyst at Green Street Advisers, an independent investment research company in Newport Beach, Calif., that specializes in REIT's, was one of the first to urge Trizec to get rid of the property. He said that losing a trophy building - even in the city where a company is based - is of no consequence to a REIT.

"Prestige?" Mr. Sullivan said. "Who cares? Financial returns are much more important to Trizec shareholders than pretty pictures and tall buildings."

Judge Hears Age-Bias Suit by Agents at Allstate
By Joseph B. Treaster - New York Times
September 16, 2003

PHILADELPHIA, Sept. 15 — A lawyer for agents in a long-running age discrimination dispute against Allstate said today that company executives told the board in the summer of 1999 that summarily dismissing "low-performing agents" in a drive for greater efficiency was "not legally possible." It was the first face-to-face courtroom confrontation in the case.

At the hearing here in Federal District Court and in a later interview, a lawyer for Allstate, Edward F. Mannino, acknowledged that "low-performing agents" referred to older agents who had become less productive. He said the company decided against focusing on that category of agents.

Both sides went on to say that six months later, the company said it was dismissing its 6,200 employee agents — 90 percent of whom were over 40 — but would rehire them as independent agents, without benefits, if they signed a pledge not to sue for any violations of employment law.

Allstate said in the hearing, before Judge John P. Fullam, that the termination plan it announced in November 1999 was appropriate and legal. The plan did not specify any category of workers, company lawyers said, but applied to all remaining employee agents. Over the previous 10 years, Allstate had signed up about 9,000 independent contractors among more than 15,000 agents.

"Instead of getting rid of the lower performers, we got rid of everybody," Mr. Mannino said.

But Michael J. Wilson, a lawyer for the agents, asserted that Allstate had devised a termination plan that it expected would mostly push out older agents. Mr. Wilson said that in the board presentation, Allstate executives acknowledged legal and fairness issues if agents were forced to leave without an option, and settled on the plan to dismiss and rehire agents. He said that because the older agents were already eligible for pensions and other retirement benefits, Allstate assumed they would not work for less pay.

"Allstate was trying to get rid of the older agents," he told the court.

The agents say they are entitled to compensation because Allstate improperly deprived them of hundreds of millions of dollars in benefits. They also say employment law was violated because they were required to give up their right to sue if they remained as agents.

The Equal Employment Opportunity Commission warned Allstate before the agents were dismissed in June 2000 that it was probably illegal to require them to give up their rights, and it later sued the company. The two suits have been consolidated before Judge Fullam.

In court today, Allstate urged Judge Fullam to dismiss the suits. At the same time, C. Felix Miller, a lawyer for the E.E.O.C., appealed for summary judgment in the commission's favor. Lawyers for the agents urged the judge to broaden their case by certifying it as a class action to include all 6,200 employee agents rather than just the 29 who have lent their names to the suit.

Judge Fullam said in May that he had tentatively decided to raise the lawsuit to the status of a class action. Some participants said his actions today suggested he was still leaning in that direction. At one point, he allowed Richard C. Godfrey, a lawyer for Allstate, to argue against the agents' lawsuit rather than following the customary approach of permitting the agents' lawyers, who had brought the issue to the court, to state their case first.

"In light of my inclination to grant some kind of class action, I think it's appropriate for you to go first," the judge said to Mr. Godfrey. He did not elaborate.

The commission argues that requiring the agents to waive their rights to stay with the company was a form of pre-emptive retaliation. The commission and the agents say that the agents are under Allstate's control now, as before, but without benefits. Allstate says the old jobs were eliminated; the agents were not required to sign the release to keep a job but to obtain a new one.

"This is not a case of someone being asked to sign something to keep their job," Mr. Mannino said. "These jobs were gone."

Allstate also argues that the agents received an average of $280,000 when they were terminated. But Mr. Wilson said the agents gave up much more. They had been receiving an average of $165,000 a year in salary and benefits, he said.

Most of the four long benches in Judge Fullam's courtroom were filled today with Allstate agents. A team of eight lawyers represented them; Allstate fielded nine lawyers and a public relations specialist.

The agents sat quietly in suits and ties. Three years after their termination and two years after filing their lawsuit, one agent, Ronald Harper, from Thomson, Ga., said it was "very satisfying" to finally have their day in court. The judge gave no indication when he would rule.

Another re-Structure at Sears
By Sandra Guy - Business Reporter - Chicago Sun-Times
September 16, 2003

Sears Roebuck and Co. took another step toward jazzing up its long-suffering apparel lines with the acquisition Monday of the Structure menswear brand from Limited Brands, Inc.

The Sun-Times reported Sept. 4 that Sears planned to update its clothing assortment by adding new national brands and testing men's urban shops in 50 of its stores this fall. The strategy is critical because Sears will sell its credit-card business by year's end and must depend upon its retail operations.

Sears will start selling Structure-branded men's clothing by the end of next year.

Though the Hoffman Estates-based retailer will initially market Structure to men ages 20 to 35 -- the sons and younger brothers of Lands' End shoppers among them -- Sears might extend the brand to women's apparel and other merchandise.

"We're looking at all options," said Mindy Meads, Sears vice president of apparel, in an interview Monday.

"We see this [Structure brand] filling a void for a slightly younger customer who is looking for more updated fashion," Meads said.

Limited Brands, the parent company of Express retail stores, phased out the Structure brand name from its merchandise in 2001. It is in the final stages of replacing the marquees of its former Structure men's stores with nameplates for Express Men's.

The Columbus, Ohio-based retailer also has started building new Express stores that sell both men's and women's clothing. In the Chicago area, the new "dual gender" Express stores are at 913 W. North in Chicago, at Fox Valley Center in Aurora and at Westfield Shoppingtown Hawthorn in Vernon Hills.

Retail analysts said the Structure brand has value, even though the chain of men's stores was a money loser.

Sears paid less than $10 million for the Structure brand and related trademarks; it declined to disclose more details.

Sears' move makes sense because building a brand from scratch is expensive, said Wendy Liebmann, president of WSL Strategic Retail consultancy.

"It's not as if Sears is picking up something so old and tired that people would ask, 'What?'" Liebmann said. "[The Structure brand] was sold in many of the same malls where Sears has stores."

Howard Tubin, retail analyst with Cathay Financial, a New York-based brokerage firm, said Structure denim, cargo shorts and Polo shirts are more conservative than the latest fashions at Express Men's shops.

Sears is banking on the Structure brand appealing to men who buy its tools and appliances, Tubin said.

Carrie Shigetomi, who on Friday starts work as Sears' vice president, brand development, will ensure that Structure fills a niche distinct from Lands' End, Covington, Apostrophe, Canyon River Blues and the new Lucy Pereda line of Latina-themed women's apparel, Meads said.

Shigetomi, 44, most recently served as Calvin Klein's vice president of design administration and product development.

Retirees Alarmed at Threat of Cuts in Drug Benefits
By Robert Pear - New York Times
September 16, 2003

WASHINGTON, Sept. 15 — As Congress works on legislation to cover prescription drugs under Medicare, lawmakers have been deluged with complaints from retirees who fear losing drug benefits they already have from former employers.

Some lawmakers say this issue is emerging as the most immediate threat to the legislation.

Congress is frantically seeking ways to address the concern, by offering tax credits, subsidies or other incentives for employers to continue providing drug benefits to retirees. The tax credits would be available to employers who maintain drug coverage or supplement what Medicare provides.

Medicare generally does not cover outpatient prescription drugs. Some employers voluntarily provide such coverage though they are not required to do so.

In the last month, members of Congress say, they have realized that any Medicare drug benefit they may approve will have a profound effect on health coverage provided to retirees by former employers.

Representative Michael Bilirakis, the Florida Republican who is chairman of the Energy and Commerce Subcommittee on Health, said his constituents were "up in arms" over the possible loss of retiree health benefits.

"If we don't have a plan to keep that from happening," he said, "we will catch an awful lot of flak." He said he feared a repetition of events in 1989, when elderly people forced Congress to repeal a law charging them extra for Medicare coverage of catastrophic medical expenses. Many retirees already had such coverage.

At a town hall meeting in July, retirees told Representative Benjamin L. Cardin, Democrat of Maryland, that the proposed drug benefits were far inferior to what they had from former employers, including the state university and local fire departments.

"Congress says the new benefits are voluntary, but many people would lose coverage they have," said Francis A. Meehling, 76, who worked for the Baltimore Fire Department for more than 30 years.

About 12 million of the 40 million Medicare recipients have retiree health benefits, usually including some drug benefits. The Congressional Budget Office estimates that one-third of the people with such drug coverage could lose it under bills passed in June by the House and the Senate.

Many employers "would see enactment of a Medicare drug benefit as an opportunity to reduce the costs and risks of providing drug coverage," the budget office said in a lengthy report issued after the House and Senate passed separate versions of the legislation. Moreover, it said, the legislation provides "a clear financial disincentive for employers to supplement" the new drug benefit.

House and Senate negotiators are trying to reconcile the two bills. Both provide insurance to cover drug costs after a beneficiary's out-of-pocket spending reaches a certain limit. But costs paid by an employer are not counted as out-of-pocket spending. So it would be almost impossible for a person with retiree health benefits to reach the limit. As a result, Medicare would spend less, on the average, for a person with retiree drug benefits than for a person who lacks such coverage.

Alan V. Reuther, legislative director of the United Automobile Workers, said his group and other labor unions were urging Congress to give employers a tax credit to reflect the share of catastrophic drug costs that would be borne by employers rather than by Medicare. To qualify, an employer would have to show that the value of its drug coverage was at least equal to the value of standard drug coverage under Medicare.

The Employers' Coalition on Medicare, which represents large companies like Caterpillar, Dow Chemical and Verizon, strongly supports comprehensive Medicare legislation, including drug benefits.

But Edward J. Kaleta III, a lobbyist for Caterpillar who is chairman of the coalition, said: "Congress should not discriminate against our retirees because they have employer-provided coverage. Our retirees should be treated the same as other Medicare beneficiaries."

E. Neil Trautwein, director of employment policy at the National Association of Manufacturers, said many employers were already cutting retiree health benefits because of the costs.

"There's a looming crisis in retiree health care," Mr. Trautwein said. "Absent a life preserver from Congress, many retirees will lose coverage." Far from encouraging employers to drop coverage, he said, "the Medicare legislation will encourage employers to continue providing retiree drug benefits."

Dallas L. Salisbury, president of the Employee Benefit Research Institute, a private nonpartisan group, predicted that many employers, rather than eliminating drug benefits, would scale them back to supplement the new Medicare benefit.

Employers say they are wary of overreaching and will not insist on subsidies or tax credits that push the cost of the legislation above the amount allocated by Congress, $400 billion over 10 years.

Lobbyists for the elderly say that millions of older retirees could be at greater risk of losing employer-sponsored health benefits because of a provision in the Senate bill. This section says that employers can legally provide retirees over the age of 65 with health benefits that are inferior to those provided younger retirees.

In the past, federal courts have held such disparities violate the Age Discrimination in Employment Act.

Michele Pollak, a lawyer at AARP, the lobby for older Americans, said: "This provision would allow employers to reduce or even eliminate retiree health benefits for anyone over the age of 65. In the midst of a national debate about how to improve benefits, it's astonishing that anyone would think that's in the public interest."

Representative John F. Tierney, Democrat of Massachusetts, has introduced a bill that would generally prohibit employers from reducing retiree health benefits after a person has retired. "Large, profitable employers — even those who enticed employees into early retirement with assurances of health care coverage into old age — are reneging on their commitment," he said.

But employers note they are not legally obligated to provide retiree health benefits. In a letter to Congress, the employers' coalition said its members opposed any mandate and wanted a range of options, including the right to supplement any Medicare drug benefit.

Structure is Added to Sears' Fashions
By Lorene Yue - Tribune staff reporter - Chicago Tribune
September 16, 2003

Men's clothing label is aimed at younger buyers

Sears, Roebuck and Co. executives are hoping to groom a new generation of shoppers by buying the once-hip Structure clothing label.

Sears said Monday that it paid less than $10 million to buy the rights to the Structure name from Limited Brands Inc. of Columbus, Ohio. The deal does not include inventory or employees.

The Hoffman Estates retailer expects Structure--once a popular apparel brand that carved a niche between the conservative style of Polo and Banana Republic's safari look--will provide an inroad to young male shoppers, particularly those between the ages of 20 and 35.

That demographic is one that Sears feels is overlooked by its Lands' End and Covington labels popular among 35- to 55-year-olds.

"It fits a gap we see that is not in our assortment right now," said Mindy Meads, head of apparel for Sears and its Lands' End unit. "It's one piece we thought was a perfect fit."

Even so, the Structure label is not wrinkle-free.

Retail critics say it is a dying label that Limited Brands Inc. abandoned two years ago. When Limited launched Structure in 1987, it was well-received among male shoppers who liked the stylish clothes at moderate prices. The chain grew to more than 400 stores but started losing money in 1997 and never recovered.

Limited executives rebranded the name as Express Men's in 2001 and folded it into Express, its profitable clothing division that sold trendy women's fashions.

But Structure is still a recognized name among shoppers, and that could work to the advantage of Sears.

"Structure, although it has been out of the Limited portfolio, is a brand at least consumers will recognize," said Jeff Stinson, a retail analyst at Midwest Research in Cleveland. "It will be easier for Sears to gain traction, as opposed to developing a new brand."

Skeptics are not convinced that adding Structure to the Sears apparel lineup will help invigorate the softer, yet struggling, side of Sears.

For years, Sears has carved a reputation as the place to buy auto supplies, tools and appliances. Its private-label brands of Craftsman, Diehard and Kenmore rank among the most recognized names among consumers.

Retail industry watchers say Sears is desperately trying to replicate that success and name recognition with its apparel.

Sears is paring down its offerings to a few in-house basics--Covington, Apostrophe and Canyon River Blues. Two years ago it added Lands' End to the mix, and this fall the new Lucy Pereda will cater to minority shoppers.

Now, Sears hopes Structure will lure a younger audience.

"It's going to be hard to get those people into Sears," said Laura Ries, president of Ries & Ries, a marketing strategy firm in Washington, D.C. "They really see Sears as a stodgy place and not a place to buy hip clothes. Sears in most minds doesn't stand for fashion."

Carrie Shigetomi, who will join Sears on Friday as vice president of brand development, will be put in charge of designing and developing the Structure line. At her previous post at Calvin Klein she was vice president of design administration and product development.

Sears declined to elaborate on whether the Structure line, set to debut in stores by the end of next year, would expand beyond men's clothing.

Sears has tried to reach out to younger consumers before in a foray that ended as a marketing nightmare.

The retailer inked a deal in 1998 for an exclusive clothing line with Benetton USA. Sears plowed millions into the deal, including pricey fixtures to highlight the clothing.

But Sears pulled the plug on the deal shortly after the clothes hit the floor to disassociate itself from Benetton, which had launched a controversial advertising campaign that featured Death Row inmates.

Sears Acquires Structure Brand
Dow Jones Newswires
September 15, 2003

HOFFMAN ESTATES, Ill. (AP)--Sears, Roebuck and Co. (S) announced Monday that it has acquired all rights to the Structure apparel brand from Limited Brands Inc. (LTD) and said it will have Structure merchandise in its stores by the end of next year.

Sears said the price was less than $10 million but declined to provide more specifics.

The acquisition includes the brand Structure and related trademarks but not employees, retail locations or product.

Sears said Structure will complement its other national and private apparel brands, including Lands' End, Apostrophe, Covington and CRB. The move comes the week after Sears announced the launch of a new women's apparel line by Lucy Pereda, a Latina fashion designer and lifestyle expert.

"We are clearly focused on strengthening and broadening our apparel offering to new and existing customers," said Mindy Meads, Sears executive vice president for apparel. "That focus means continually adding new brands and merchandise that are in fashion and relevant."

Sears Adds Structure to Clothing Racks
Crain's Chicago Business Online
September 15, 2003

(Reuters) Sears, Roebuck and Co. Monday said it would buy the Structure men's clothing brand from Limited Brands Inc., the latest effort by the department store chain to infuse its clothing business with popular labels. Terms of the agreement were not disclosed, but Sears, based in Hoffman Estates, Illinois, said it anticipates the overall cost will be less than $10 million.

The deal includes the rights to the brand and related trademarks, but no physical assets.

Sears has not determined who will manufacture the line, but it expects to carry Structure merchandise in its stores by the end of next year.

"We will be doing our own sourcing with a blend of internal and external talent on the design side," Mindy Meads, Sears executive vice president of apparel, said in an interview.

Limited, based in Columbus, Ohio, in 2001 began phasing out the Structure brand, which targeted males aged 18 to 30. Sales had declined since the mid-to- late 1990s as the brand fell out of favor with label-conscious young men.

Stores carrying the Structure name were renamed Express Men's, mirroring the name of its sister chain for women.

But Meads said Sears' research showed that men ages 20 to 35 still had a high awareness of the Structure brand.

"Structure is a very strong name for that segment of the market and we feel we can provide design and sourcing to bring that alive in the store. And I think the customer will recognize that brand," she said.

Whether the Structure name can draw consumers to Sears stores depends on how much advertising muscle the retailer puts behind the brand, said Joe Grabowski, an analyst with Strong Capital Management, which owns about 1.4 million Sears shares.

It could be a more attractive and meaningful name than some of the other exclusive labels Sears has in its young men's department, he said.

Grabowski noted that Target Corp. has successfully resurrected dormant brands like Mossimo, but not without a meaningful investment in marketing.

Last year Sears acquired Lands' End, a mail-order clothing retailer, for $1.9 billion and rolled the line out to about half of its stores.

"It's had a difference in the total business in the stores carrying that brand, and we're very pleased with the response so far," Meads said.

Sears said Lands' End boosted its quarterly revenue in the latest quarter, and that the line would be available across the 870-store chain by this fall.

Christian Capitalism ... David vs. Goliath
By Carrie Coolidge - FORBES.COM
September 15, 2003

NEW YORK - Wal-Mart Stores has seen the light. The world's biggest retailer has discovered Christian-themed merchandise is one of the fastest-growing categories around. With offerings ranging from best-selling books and videos including The Purpose-Driven Life and Veggie Tales, Wal-Mart's annual sales from Christian-themed merchandise, which is estimated to already exceed $1 billion annually, is growing at a rapid pace.

The Good Book
On A Script And A Prayer
Book Value: As God is My Witness
That Old-Time Religion
Say A Prayer
Holy Real Estate
Dear Harper
Quiet Crusade

On a company-wide basis, Wal-Mart (nyse: WMT - news - people ) now offers 550 different Christian music titles and more than 1,200 Christian book titles. While Sears (nyse: S - news - people ) and Target (nyse: TGT - news - people ) sell Christian music, neither have pursued the Christian product category as aggressively as Wal-Mart, says C. Britt Beemer, chairman and founder of America's Research Group, a consumer behavior research and strategic marketing firm.

"Right now, this category is not even a drop in the bucket for Wal-Mart," says Beemer, referring to the retailer's revenue of $239.82 billion in 2002. "It will just keep getting bigger and bigger for them, which is why Wal-Mart is looking at this as a huge opportunity for the future."

It is not surprising the retailer is pursuing the Christian market. The folksy company's founder Sam Walton extolled the belief that each Wal-Mart store should reflect the values of its customers and support the vision they hold for their community. And the company takes its customers' demands very seriously. It recently made headlines when it put plastic blinders on several top-selling women's titles (because of customer complaints of
indecency) and banned entirely from its shelves magazines such as Stuff, FHM and Maxim, which use racy covers to attract young male readers.

Wal-Mart's foray into Christian-themed merchandise has not gone unnoticed by the 8,000 small Christian retailers scattered around the U.S. "These small retail businesses could easily double their business and still be at half of their potential if it were not for the fact that they are now facing Wal-Mart as a competitor," says Beemer.

Currently at $4.2 billion in annual sales--including Wal-Mart--how much bigger could the Christian retail business become now that Wal-Mart has taken notice? "Wal-Mart could easily grow the entire industry by 30%," says Beemer. "But it could also squeeze some Christian retailers out of business."

Wal-Mart's success is a double-edged sword for small Christian retailers. "The challenge that Christian retailers are facing is that this is both a ministry and a business," says Larry Leech, managing editor of Christian Retailing, a 48- year-old trade magazine based in Lake Mary, Fla., that covers the industry. "But when business hurts, then you don't have the finances to stay open to continue your ministry. So yes, there is some frustration."

One thing small retailers have in their favor is the fact that the big retailers, including Wal-Mart and Costco Wholesale (nasdaq: COST - news - people ), sell mostly new releases and do not have a very strong backlist of older titles. "Therefore they lack the depth and breadth of the small retailers," says Leech.

However, should an older title suddenly surge in popularity, you can be sure that Wal-Mart will soon be adding it to its shelves. "We are going to offer our customers what they are looking for," says Wal-Mart spokeswoman Karen Burk. "Every product we sell is based on customer demand. So if there is a demand for a particular title, we will make sure we have that product available."

"Wal-Mart strives to be a store of the community--where products reflect what the customers in that community want," adds Burk. "So the [Christian] category will continue grow relative to customer demand."

Retirees Angry at Lucent for Cuts
By Anna Marie Kukec - Daily Herald Staff Writer
September 12, 2003

The Lucent Retirees Organization Thursday lashed out at Lucent Technologies after the struggling telecom slashed medical benefits to management retirees to save about $75 million annually.

"Lucent executives inflict pain time after time on retirees and continue to pay themselves excessive salaries and maintain their expensive perks in the absence of a return to profitability," LRO President Ken Raschke said in a prepared release.

On Monday, Lucent Technologies filed with the U.S. Securities and Exchange Commission its plan to eliminate certain medical benefits that would impact about 60 percent of its 50,000 management retirees, including about 5,000 in Illinois. Lucent has 127,000 retirees, including 11,000 in Illinois.

In 2004, Lucent will eliminate reimbursement for management retirees and their dependents for the cost of Medicare Part B. Also, Lucent will discontinue subsidies for dependents of management retirees who retired after March 1, 1990, and whose base salary was $87,000 or higher.

In addition, dental coverage will be eliminated, but retirees can obtain it at group rates if they choose, said Lucent spokesman John Skalko.

"We have an obligation to maintain the viability of this company going forward," Skalko said Thursday. "It's tough to make these types of decisions, but we cannot avoid them any longer. We continually look at our expenses and where we can control them."

This year, Lucent paid $850 million toward medical coverage for retirees.

As for the comment about executive pay, Skalko said Lucent is doing what's necessary to get the company back on track. "We need good quality people in tough times," he said. "So we need to pay them competitive salaries and benefits."

Over the last five years, Lucent has made other changes to retirees' medical coverage, including increases in co-payments.

"This just means we're going to have to spend more money out of our pensions and our Medicare checks to retain the same health-care coverage," said LRO spokesman Ed Beltram.

Sears Taps Former Calvin Klein Exec
By Kelly Quigley - Crain's Chicago Business Online
September 12, 2003

Sears, Roebuck and Co. on Thursday said it hired former Calvin Klein Inc. executive Carrie Shigetomi as vice-president of brand development for the department store not exactly known for setting style trends.

Ms. Shigetomi, 44, joins Sears Sept. 19, taking a post that has been vacant for at least two years. Ms. Shigetomi will oversee design of Sears' private-label clothing and footwear, and handle brand building for national labels the Hoffman Estates-based retailer sells.

Most recently, she held a similar position at New York-based Calvin Klein, where she directed product development for men’s and women’s clothing and shoes.

“Carrie is highly regarded in the fashion industry,” Mindy Meads, Sears’ executive vice-president and general manager of apparel, said in a statement. “She will play a critical role in Sears’ strategy to build our national and private apparel brand offering.”

Before joining Calvin Klein in 1998, Ms Shigetomi held various roles with designers including Polo Ralph Lauren Corp., Liz Claiborne Inc.’s Ellen Tracy brand and Cole-Haan.

Ms. Shigetomi joins Sears as the company is revamping its retail operations to lure new shoppers and to appeal to a wider market. The retailer has added new lines of apparel, such as Lucy Pereda, and is changing store layout to make its “urban” styles easier for young men to find.

Made to Measure: Invisible Supplier Has Penney's Shirts All Buttoned Up
By Gabriel Kahn - Staff Reporter - The Wall Street Journal
September 11, 2003

From Hong Kong, It Tracks Sales, Restocks Shelves and Ships Shirts Straight to the Store

On a Saturday afternoon in August, Carolyn Thurmond walked into a J.C. Penney store in Atlanta's Northlake Mall and bought a white Stafford wrinkle-free dress shirt for her husband, size 17 neck, 34/35 sleeve.

On Monday morning, a computer technician in Hong Kong downloaded a record of the sale. By Wednesday afternoon, a factory worker in Taiwan had packed an identical replacement shirt into a bundle to be shipped back to the Atlanta store.

This speedy process, part of a streamlined supply chain and production system for dress shirts that was years in the making, has put Penney at the forefront of the continuing revolution in U.S. retailing. In an industry where the goal is speedy turnaround of merchandise, Penney stores now hold almost no extra inventory of house-brand dress shirts. Less than a decade ago, Penney would have had thousands of them warehoused across the U.S., tying up capital and slowly going out of style.

The new process is one from which Penney is conspicuously absent. The entire program is designed and operated by TAL Apparel Ltd., a closely held Hong Kong shirt maker. TAL collects point-of-sale data for Penney's shirts directly from its stores in North America, then runs the numbers through a computer model it designed. The Hong Kong company then decides how many shirts to make, and in what styles, colors and sizes. The manufacturer sends the shirts directly to each Penney store, bypassing the retailer's warehouses -- and corporate decision makers.

TAL is a no-name giant, the maker of one in eight dress shirts sold in the U.S. Its close relationship with U.S. retailers is part of a power shift taking place in global manufacturing. As retailers strive to cut costs and keep pace with consumer tastes, they are coming to depend more on suppliers that can respond swiftly to their changing needs. This opens opportunities for savvy manufacturers, and TAL has rushed in, even starting to take over such critical areas as sales forecasting and inventory management.

On the weekend Ms. Thurmond made her purchase, the same Atlanta store sold two sage-colored shirts of similar size but of another Penney house brand, Crazy Horse. That left none of this size and color in stock at the store. Based on past sales data, TAL's computers determined that the ideal inventory level for that brand, style, color and size at that particular store was two. Without consulting Penney, a TAL factory in Taiwan made two new shirts. It sent one by ship, but to get one in the store quickly, it dispatched one by air. TAL paid the shipping but sent a bill for the shirts to Penney.

Instead of asking Penney what it would like to buy, "I tell them how many shirts they just bought," says Harry Lee, TAL's managing director.

TAL was born in 1947 after Chinese border guards blocked Mr. Lee's uncle, C.C. Lee, from importing state-of-the-art weaving machines to Shanghai for fear they would hurt the local textile industry. So the uncle set up shop in Hong Kong, then under British rule. With low-cost Asian manufacturing, TAL thrived. It supplies labels such as J. Crew, Calvin Klein, Banana Republic, Tommy Hilfiger, Liz Claiborne, Ralph Lauren and Brooks Brothers. Harry Lee, 60 years old, joined the family business 30 years ago after earning a Ph.D. in electrical engineering in the U.S. and serving a stint at Bell Labs.

Now, TAL is negotiating a deal to manage Brooks Brothers' shirt inventory the same way it does Penney's. For Lands' End, TAL stitches made-to-measure pants in Malaysia and flies them straight to U.S. customers, with a shipping invoice that carries the Lands' End logo.

These retailers have been willing to cede some functions once seen as central because TAL can do them better and more cheaply. Rodney Birkins Jr., vice president for sourcing of J.C. Penney Private Brands Inc., describes as "phenomenal" the added efficiency Penney has been able to achieve with TAL. Before it started working with TAL a decade ago, Penney would routinely hold up to six months of inventory in its warehouses and three months' worth at stores. Now, for the Stafford and Crazy Horse shirt lines that TAL handles, "it's zero," Mr. Birkins says.

With decisions made at the factory, TAL can respond instantly to changes in consumer demand: stepping up production if there is a spike in sales or dialing it down if there's a slump. The system "directly links the manufacturer to the customer," says Mr. Birkins. "That is the future."

Retailers across the board have sought to lower the amount of inventory they hold, both to cut costs and to reduce goods sold at a markdown. That means working more closely with suppliers. Wal-Mart Stores Inc. has pioneered a system that opens its computer system to suppliers all over the world. Suppliers can track how their items are selling overall and even at individual stores. They can anticipate demand and communicate better with Wal-Mart buyers. But Wal-Mart still handles all the warehousing and distribution, and it stops short of allowing its suppliers to place their own orders.

The degree of power Penney turned over to TAL is radical. "You are giving away a pretty important function when you outsource your inventory management," says Wai-Chan Chan, a principal with McKinsey & Co. in Hong Kong. "That's something that not a lot of retailers want to part with."

Penney, too, was reluctant, and took the step only after building up trust over years of working with TAL. But Penney now has let TAL take the arrangement a step further: designing new shirt styles and handling their market testing.

TAL's design teams in New York and Dallas come up with a new style, and within a month its factories churn out 100,000 new shirts. For a test, these are offered for sale at 50 Penney stores. Not nearly all will sell, but offering a wide array of colors and sizes helps to provide a true test of consumer sentiment. After analyzing sales data for a month, TAL -- not Penney -- decides how many of the new shirts to make and in what colors.

Because TAL manages the entire process, from design to ordering yarn, it can bring a new style from the testing stage to full retail rollout in four months, much faster than Penney could on its own.

The system in effect lets consumers, not marketing managers, pick the styles. "When you can put something on the floor that the customer has already voted on is when we make a lot of money," says Penney's Mr. Birkins.

Like the retailer, TAL changed its methods in response to economic pressures. TAL has seen the price of its shirts fall almost 20% over five years as low- cost textile manufacturing exploded in China's Guangdong province. It could jump even more in 2005, when textile-importing nations such as the U.S. must complete a phaseout of import quotas for countries in the World Trade Organization. Most of TAL's manufacturing is in places with higher wages than Guangdong, such as Thailand, Malaysia, Taiwan and Hong Kong. So "our customers need a reason to buy from us," Mr. Lee says.

Learning by Failing

TAL learned the supply-chain business the hard way. In 1988, a U.S. wholesaler that handled its shirts, Damon Holdings Inc., failed. Mr. Lee, fearing a loss of sales and figuring he understood the wholesaling business, bought Damon. The result was "a big shock." A manager TAL had put in charge of Damon went on a buying spree, and soon its warehouses were crammed with two years' worth of shirt inventory that was going out of style. Shirts that cost $10 to make had to be sold for $3. By the time TAL closed Damon in 1991, it had lost $50 million.

But the experience started Mr. Lee thinking about a way to do business more efficiently, by linking his Asian factories directly with U.S. stores. "The failure gave us a head start," he says.

Around the same time, TAL had begun supplying Penney with house-brand shirts. Mr. Lee saw that Penney was holding up to nine months of inventory, twice what most competitors kept. "You didn't have to be a genius to realize you can do a lot better than that," he says. Visiting Penney headquarters in Plano, Texas, he floated a radical solution: Why not have TAL supply shirts directly to Penney stores instead of sending bulk orders to a Penney warehouse?

Mr. Birkins was skeptical. But he saw that savings could be huge. It cost Penney 29 cents a shirt to have its warehouse workers sort out orders in the U.S. TAL could do it for 14 cents.

And such a system would let Penney respond more quickly to consumer demand. This had been a problem for the retailer, which often needed months to restock hot-selling styles. Stores ended up missing sales of these styles while holding less-popular models that they had to move at a discount.

Mr. Birkins pitched the idea to his Penney bosses. It met a brick wall. Each division found fault with it. Executives who ran warehousing said the plan could prove disastrous if TAL didn't deliver on time or to the right stores. Technology people worried that the computer systems wouldn't be compatible. The plan sat for several years, until a senior Penney manager began a push to improve efficiency by reducing inventory across the board. "We used that as our wedge," Mr. Birkins says. "That turned it."

It took TAL a year to set up the system in Asia. Mr. Lee then began by supplying a single Penney store in Kansas City, Mo. He enlisted a Chinese numerologist to choose an auspicious day: June 20, 1997. Factory workers toasted the occasion with champagne. Things went smoothly, and within months, TAL was delivering shirts directly to all of Penney's stores in North America. Inventory levels dropped.

There was one clear downside: If a store sold out of a style of shirts, it couldn't quickly get some more from a regional warehouse. So TAL agreed to sometimes send shirts to stores by air freight -- a costly step but one TAL would take to keep the customer happy.

Soon Mr. Lee saw another opportunity. Penney's sales forecasts often missed, sometimes overestimating shirt needs by as much as two months' worth. Sales forecasting is one of the most difficult tasks for retailers, yet one that's increasingly important to get right as inventories get tighter. Penney blames the problem on older-generation software.

Convinced he could do better, Mr. Lee pitched an even more outlandish idea: Why not let TAL staff in Hong Kong forecast how many shirts Penney's stores would need each week? This time, Penney executives were listening.

Mr. Lee was operating on a simple premise. If he could get sales data straight from the stores, he could take the consumer's pulse and respond instantly, ordering more fabric and increasing production where needed. Penney buyers would just be in the way. "I can do all the pieces of the puzzle," he says.

On 'Autopilot'

He hired dozens of programmers, who designed a computer model to estimate an ideal inventory of house-brand shirts for each of Penney's 1,040 North American stores, by style, color and size. Penney provided him with goals for how often stores' inventory should be replenished, then stepped back and let him do the rest. "It's on autopilot," says Mr. Birkins, "and TAL is the autopilot."

TAL's computer model began to outpace the Penney system still used for the retailer's other merchandise. For some shirt models, stores could now keep half a much in stock as they had previously.

The system hasn't been flawless. Ming Chen, a manager at TAL's Taiwan factory, recalls a few occasions when TAL underestimated Penney's needs significantly. She says the factory "sacrificed other customers" to rush out Penney's order first and sent some shirts by air freight to be sure they arrived on time. Costing 10 times as much as ocean shipping, sending shirts by air was "a painful decision," she says. "But sometimes you have to decide which customers you're going to take care of."

Sitting in his Hong Kong headquarters, in a neighborhood whose factories have given way to office space, Mr. Lee is thinking of ways to push his idea to the next level. He would like to form a joint venture with Penney that would manage the supply chain for some other manufacturers that supply the retailer. TAL has already started doing this with underwear. "Why not consolidate it all here?" he asks.

Mr. Birkins says Penney is seriously considering the idea.

Sears Names Carrie Shigetomi Vice President Brand Development
PRNewswire
September 11, 2003

HOFFMAN ESTATES, Ill., Sept. 11 /PRNewswire/ -- Sears, Roebuck and Co. (NYSE: S) has named Carrie Shigetomi to the post of vice president, brand development, effective Sept. 19. She will report to Mindy Meads, Sears executive vice president and general manager, apparel.

Shigetomi, 44, most recently served as Calvin Klein's vice president of design administration and product development, where she oversaw the design and product development of the company's women's collection, men's collection, cK men's and women's, and shoes and accessories.

"Carrie is highly regarded in the fashion industry and a proven leader with deep experience in brand building," Meads said.  "She will play a critical role in Sears' strategy to build our national and private apparel brand offering."  Before joining Calvin Klein in 1998, Shigetomi held various executive design and product development positions with Polo Ralph Lauren Leathergoods, Ellen Tracy, and Cole-Haan. Early in her career, she was a successful entrepreneur, designing and manufacturing jewelry with sales to major department stores and better specialty stores.

Shigetomi is a 1980 graduate of New York University in art education with a concentration in jewelry.

Employees Paying Ever-Bigger Share for Health Care
By Milt Freudenheim - New York Times
September 10, 2003

People in employer-sponsored health plans are paying 48 percent more out of their own pockets for care than they did three years ago, according to an authoritative new study, and the cost will be even higher next year.

Almost two-thirds of large employers raised the amounts that employees are contributing to the cost of their health plans this year, and 79 percent say they will do so again in 2004, according to the study, by the Kaiser Family Foundation and the Health Research and Educational Trust.

Other health care experts are projecting that 2004 will be the fourth straight year of double-digit increases in health insurance premiums.

The steady climb in costs has made health care benefits a hot issue in labor negotiations this year, and it has put pressure on Congress to reach agreement on adding a drug benefit to Medicare. The sponsors of the study said yesterday that health care costs were also a significant drag on the economy.

"Workers pay substantially more, companies raise prices and they hire fewer people," said Drew Altman, president of the Kaiser Family Foundation, which specializes in health care issues.

Out-of-pocket spending for insurance premiums, deductibles and drug co-payments rose to $2,790 this year for a typical employee with family coverage, from $1,890 in 2000, Mr. Altman said.

Over all, according to the Kaiser study, health care premiums rose 13.9 percent this year, the biggest increase since 1990, outpacing the 11 percent rise in spending for hospitals and doctors, and far ahead of the 2.4 percent increase in manufacturers' prices. The increase was 15.6 percent for small employers with fewer than 300 workers.

Health care economists say that the rising costs reflect advances in drugs and health care technology and a loosening of managed care restraints during the prosperous 1990's.

Employers still pay the bulk of the costs — typically at least 75 percent. But the study found that most employers are shifting more costs to workers, in hopes of lowering the expense by discouraging heavy use of doctors, hospitals and prescription drugs.

Deductibles and co-payments for hospital care, which were uncommon only a few years ago, were required by 4 in 10 plans this year, the study found, and higher co-payments for expensive prescription drugs have been widely adopted.

"Given the state of the economy and the rapid rate of inflation, I don't think we have seen the worst of increased cost-sharing with employees," said Jon Gabel, vice president of the Health Research and Educational Trust, a nonprofit group based in Washington. The study is based on the responses of 928 employers to a survey about their health care spending.

In a typical example, state employees in Ohio will face increases in deductibles, co-payments for doctor visits and some drugs, and higher ceilings on out-of-pocket costs next year. But in a tradeoff with the state employees' unions, Ohio has postponed a 50 percent rise in the workers' share of insurance premiums to July 2005.

Benefit consultants said the health care inflation rate would slow somewhat next year — in part, they said, as workers respond to higher out-of-pocket costs by curtailing their use of some expensive drugs and avoiding some less- than-urgent hospital procedures.

"The rate of elective surgeries such as knee surgery is declining," said Kenneth Sperling, a health care consultant with Hewitt Associates.

In addition, spending on allergy drugs is declining after the switch of Claritin to nonprescription status. Employers expect a similar cost dip for ulcer and heartburn remedies when Prilosec, another widely used drug, becomes available in stores without a prescription next week. The switch to over-the- counter sales, however, usually means that the drugs are no longer covered by health plans, so consumers must pay the full price.

Still, based on early insurance contracts reported by large employers, the increases in premiums for the coming 12 months will be substantial.

"It does look bleak again, looking forward to 2004," said Joseph Martingale, a health benefits consultant with Watson Wyatt. Mr. Sperling said he expected the increase in premiums to fall below 12 percent.

The slowdown in spending for drugs and hospitals is good news for large employers, which typically pay medical bills directly, even if the paperwork is handled by an insurer.

But insurers and health plans have not passed those savings along to small businesses. Because their premiums were based on last year's health costs, "2003 was a very profitable year for the managed care industry," Mr. Sperling said.

Employers' health plans cover 175 million people, including 160 million workers and their families and 15 million retirees.

According to the new study, 65 percent of employers increased the amount that employees pay for health insurance this year, 47 percent raised employees' payments for prescription drugs, 34 percent increased deductibles and 34 percent raised co-payments for doctor visits.

Mr. Sperling, the Hewitt consultant, said many large employers added $100 deductibles for hospital visits three years ago. This year, most of the 300 companies that he monitors raised the deductible to $200, and one in four large employers is planning a further increase to $250 in 2004, he said.

Company Health Plans Try to Drop Families

Employees With Spouses, Kids Face Surcharges
As Employers Search for New Cost Controls
By Vanessa Fuhrmans - Staff Reporter - The Wall Street Journal
September 9, 2003

As employees re-enroll in company benefit plans this fall, many will have to contend again with higher premiums and out-of-pocket charges. But those paying the family rate may get walloped even worse.

Overwhelmed by double-digit rates of increase in health-care costs, a number of major employers are realizing that the bulk of those expenses don't come from employees themselves but from their spouses and children. So they are looking for ways to make families foot more of the bill -- or drive them elsewhere.

Some companies are sharply raising the premium for family members. Others are adopting "incentives" to nudge working spouses off their health plans. And a small but growing number of employers are going so far as to refuse to cover spouses who work for companies with similar health plans.

The tentative contract agreement that Verizon Communications Inc. and its unions reached last week includes a $40 monthly fee for employees whose working spouses decline comparable health-care coverage at their own company. Boeing Co. already charges workers an extra $100 a month if their working spouse or domestic partner chooses Boeing's health plan rather than that of their own employer. In January, General Electric Co. will start charging more for large families than small ones, an approach that numerous other employers have already taken. Next year, the State Teachers Retirement System of Ohio, which pays benefits to more than 100,000 retired teachers and their families, will stop subsidizing the premiums of spouses or other dependents.

THE FAMILY PLAN

Here are some of the things employers are doing to pare the number of spouses and children in their employee health plans:

• Surcharges on working spouses who can get comparable health benefits through their own employer

• Refusing to cover working spouses who have comparable benefits at their own company

• Charging more to cover large families than small ones

Driving the effort are the numbers, which are striking. Large companies that have relatively generous family heath benefits can find that as much as 70% of their health bill covers spouses' and children's expenses, according to Tom Beauregard of Hewitt Associates, an employee-benefits consulting firm. "More employers are looking at how many dependents are on their plans and whether they can control costs by driving some of them elsewhere," he says.

The tactics appear to be working. In a survey to be released Tuesday, the Kaiser Family Foundation found that 33% of workers elected to take family health coverage through their company this year -- down from 39% just two years ago. The percentage of companies that fully subsidize family medical premiums dropped to 15% in 2003 from 27% in 2001, according to the foundation, an independent health-care research organization.

Labor unions are fighting the measures. But eager to preserve the most generous health benefits possible for workers themselves, a number have ended up ceding to management's efforts to target working spouses. Though Verizon's unions agreed to the surcharge on working spouses, they won a pledge from the company to continue to pay 100% of employees' health-insurance premiums. The United Food and Commercial Workers Union in northeastern Ohio agreed this year to a contract provision that requires working spouses to take health-care coverage at their own company if it's available. The policy applies to employees at Giant Eagle, CVS, Rite Aid and other chains with contracts with the union. In exchange, the union says it has won contracts that preserve the health-care benefits of employees.

Many such policies regarding working spouses include conditions that prevent a spouse from being forced onto a worse health plan. In many cases, a spouse has to be a full-time employee somewhere else, earn at least a certain amount or have equal or better benefits at his or her own company in order to be subject to the policy. The Verizon surcharge, for example, doesn't apply for spouses who earn less than $25,000 annually or who would be forced to pay more than $900 a year for coverage through their own employer.

In a recent survey by Hewitt of more than 540 companies, 31% said they would consider at some point requiring working spouses to take their own employers' plans, and 6% are already doing it. Employers say legality isn't an issue, but they do say such policies can be difficult to enforce. Employers say they can legally require employees to sign a statement that they're truthfully disclosing their spouse's health-care options. If an employee is found lying, that could be grounds for terminating a policy, or even job.

A more common move is "tiering" family plans -- so that employees with large families pay more than those with just one or two kids. At GE, employees currently pay the same monthly amount for families of all sizes. As of January, though, an employee who earns $45,000 must pay $14.84 per week in 2004 to cover a family of three or more versus $11.78 to cover a family of two. (Currently, that employee would pay $8.71 a week to cover a family of any size.) Roughly 70% of firms in the Fortune 500 charge employees with larger families more, a company spokesman says.

If the myriad premium schedules are too much to crunch, many employers provide help in recalculating benefits or offer online services through their employee- benefit managers. As premiums, co-pays and deductibles rise, so do the benefits of flexible-spending accounts, a benefit offered by many employers that allows workers to set aside pretax dollars to use for out-of-pocket medical expenses.

Even small changes in a company's family or spousal benefits are reason to recalculate whether it's wise for couples to split up or stay together on benefits plans, and whose plan should cover the kids. Jennifer Overstreet and her husband, Richard, both work in Newnan, Ga., at Excel Corp., a meat- processing company. Two years ago, Ms. Overstreet found it cheaper to go on a separate plan with their six-year-old son, since Richard is a smoker and has to pay a higher premium. But after the birth of a daughter last year, they reworked the numbers and discovered they would save $30 a month in premiums if the whole family came under the same plan.

Value Shoppers End Sears' Sales Decline
By Lorene Yue - Tribune staff reporter - Chicago Tribune
September 5, 2003

A shopping spree for Sears, Roebuck and Co.'s home appliances, men's clothing and back-to-school accessories helped the retailer end a two-year streak of falling sales.

Sears said Thursday that it produced a 3.9 percent same-store sales increase in August. That marks the first monthly gain since August 2001, when Sears reported a 0.2 percent increase followed by 23 consecutive months of declining sales.

Same-store sales, which measure activity at stores open for at least a year, are considered the traditional gauge of a retailer's performance.

Sears' sales for the four weeks ending Aug. 30 also surpassed Wall Street's expectations, as did August sales reported by many other retailers.

Analysts were calling for a modest 0.6 percent gain from Sears, which sells goods ranging from lawn mowers to lingerie.

Alan Lacy, Sears' chairman and chief executive, credited a new home-appliance marketing program and an extended growing season for boosting sales of lawn and garden items.

The company, like most retailers, saw sales buoyed by improving economic conditions during the back-to-school season.

Still, few analysts are ready to declare Sears out of the woods yet as its executives continue to reposition the company for top-line growth.

Despite the improved August sales, Sears' same-store sales for 2003 are trailing last year's by 3.1 percent.

While Sears executives were pleased with the August results, they remained cautious about future forecasts. Sears expects to report flat same-store sales in September.

Investors didn't celebrate the August sales improvements. Sears' shares fell $1.07 Thursday, closing at $45.28.

"Consumers did not buy the product," said Kurt Barnard, president of Retail Forecasting in Upper Montclair, N.J. "They bought the price tag."

That would explain better-than-expected August sales at value-priced retailers like Wal-Mart Stores Inc., Target Corp. and J.C. Penney Co.'s department stores.

Wal-Mart's 6.9 percent sales increase topped Wall Street's expectations of a 4.9 percent gain, and J.C. Penney's 6.5 percent beat the 2.1 percent estimate.

Despite declines at Target's Marshall Field's and Mervyn's stores, the retailer racked up a 5.7 percent increase thanks to strong back-to-school sales at its discount stores. Wall Street analysts were expecting a 3.8 percent gain.

Not all the retail news was positive Thursday.

Downers Grove-based Spiegel Inc., which filed for Chapter 11 bankruptcy protection in March, continued to struggle with sales.

Spiegel's net sales dropped 30 percent in August, and same-store sales at its Eddie Bauer division fell 7 percent.

Specialty apparel stores struggled in August with once-hot names of Abercrombie & Fitch and American Eagle Outfitters reporting double-digit declines.

"If you grow like gangbusters, especially when you're just one brand, at some point, you're going to hit the wall," said Stephen Hock, marketing professor at University of Pennsylvania's Wharton School.

While some retail industry watchers view back-to-school sales as a harbinger of how the holidays will shape up, Michael Niemira, vice president at Bank of Tokyo-Mitsubishi in New York, said there are too many unknowns to be able to draw that conclusion.

"It depends on how strong the economy is, whether interest rates move higher and whether gas prices move higher," said Niemira, who tracks retail sales for the bank.

Sears to Move 300 Mall Stores to Free-standing Sites
By Sandra Guy - Business Reporter - Chicago Sun-Times
September 4, 2003

Sears Roebuck and Co. plans to move about 300 of its smallest stores out of malls to free-standing sites, CEO Alan Lacy said Wednesday.

The plan depends upon the success of Sears' new stand-alone format, called Sears Grand, which is twice the size of a Sears store inside a mall.

The first 150,000-square-foot Sears Grand store is slated to open in October-- not September as originally announced--near Salt Lake City.

Sears Grand stores will have the same major product categories found in Sears stores, such as tools, appliances and home fashions.

But the Sears Grand stores also will sell toys, greeting cards, auto accessories, plants and seeds, CDs and DVDs, a limited selection of groceries such as pop and snack foods, and health and beauty products such as toothpaste, shampoo and hair spray.

The 300 smaller Sears stores, about 38 percent of the department store base, cannot carry full lines of merchandise, Lacy said.

"For the next year or two, we will be in store pilot mode," Lacy said. "After that, a high level of store growth becomes possible."

Will Sears Be Able to Make Apparel Brands Distinctive?
By Sandra Guy - Business Reporter - Chicago Sun-Times
September 4, 2003

Sears, Roebuck and Co. will test the popularity of men's "urban shops" in 50 of its stores this fall, featuring such labels as FUBU, Icewear and Russell Simmons' Run Athletics sportswear.

But will Sears' emphasis on its array of products and its new efforts to coach and motivate its sales force be enough in today's cutthroat retail world?

Shoppers looking for DieHard batteries and Craftsman saws will soon find out.

Sears is set to add new national brands to its apparel lineup next year, said Mindy Meads, whose roles include both executive vice president and general manager of apparel for Sears, and executive vice president for merchandising and design at Lands' End. (Sears acquired Lands' End for $1.9 billion last year.)

Though Meads declined to provide names of the new brands during a recent interview with the Sun-Times, she left no doubt that Sears' clothing assortment will change.

A key challenge is to appeal to Latinos and African Americans, who make up a significant share of Sears' shoppers.

One step in that direction is Sears' new exclusive women's collection designed by Lucy Pereda, a Cuban-born home-fashions guru known as the Hispanic Martha Stewart.

The line launches Sept. 15 in 227 Sears stores in urban markets, including Chicago, New York, Los Angeles, Miami, Dallas, Houston and San Antonio. Of Sears' 870 full-line stores, about 25 percent are in communities where at least 15 percent of the population within a 10-mile radius is Latino.

"It's important to really look at what we offer so we can attract all of our customers and (sell) the products they specifically want," said Meads, who is hiring her own fashion team at Hoffman Estates headquarters.

Meads commutes between Hoffman Estates and Lands' End headquarters in Dodgeville, Wis., where she was promoted July 30 to a third role--"office of the president"--which she shares with two colleagues. The president's office replaced the CEO position held by David Dyer, who left Lands' End Aug. 1 to become CEO of Tommy Hilfiger Corp.

Meads' immediate task is to make each of Sears' apparel brands distinctive enough to stand on its own. Each brand in Sears' newly redesigned department stores is highlighted with large, photo-like posters and brand names, so shoppers can quickly find their preferences.

* Lands' End apparel is aimed at Sears' typical appliance shopper: a 35- to
55- year-old with a yearly income of more than $75,000 and, in many cases, a graduate degree. Signs in Sears' revamped appliance and tool departments advertise the Lands' End brand.

* The Covington brand, which replaced a mishmash of eight apparel labels a year ago, has been refashioned into a hipper brand to appeal to 25- to 45-year-old shoppers.

* Apostrophe, introduced in the mid-1990s, is Sears' line of women's "career" clothing that can be worn in the office or to go out after work.

* Canyon River Blues is Sears' line of denim fashions for juniors, young men and children.

A key testing ground for Sears' strategy will take place in downtown Chicago. By March 2004, the Sears store at 2 N. State St. will be surrounded by high- flying clothing stores H&M (Hennes & Mauritz), Forever 21 and Nordstrom Rack, in addition to veteran State Street stores such as Old Navy, Filene's Basement, Carson Pirie Scott and a revamped Marshall Field's.

Retail analysts caution that Sears first must get shoppers to look at clothes.

Heather Brilliant, retail analyst at Chicago-based Morningstar, said the Sears store at a mall in the far northwestern suburbs was "dead" when she toured it on a recent Monday afternoon.

Part of the problem is the nationwide decline in mall shopping. Increasingly, people look for quick in-and-out shopping trips to stand-alone stores like Target and Kohl's.

Brilliant said Sears should emphasize its stores' locations at the outskirts of malls, which can make for quick access.

For now, Sears is counting on its store redesign, which features shopping carts, central checkout areas and more self-service displays, to better compete against discount rivals ranging from Kohl's to Home Depot.

Sears also has repositioned its appliance sections with a price-match guarantee, a new "casual" dress code for salespeople, and a greater selection of lower-priced and take-home products. The changes boosted August sales at stores open at least a year, the company reported.

Yet Meads has no illusions about her challenge in turning around Sears, which has reported 23 straight months of year-over-year sales declines through July.

She is credited with helping Dyer, the former Lands' End CEO, turn that company around. She joined Lands' End in 1991 as vice president and general merchandise manager of women's apparel, working for Dyer, who was then executive vice president of merchandising.

"The customer wanted newness," she said.

Meads considers that turnaround her biggest accomplishment.

"We created a team that had alignment and synergy; I call it my 'all-star team,'" she said. "We were creating a vision together. Everyone was on the same page. I kind of feel like deja vu."

Sears Sees Uptick, Touts Urban Fashion Plan
By Kelly Quigley - Crain's Chicago Business Online
September 4, 2003

Sears, Roebuck & Co. on Thursday reported its first monthly sales uptick in nearly two years and said it is retooling the way it markets and sells men’s fashions in order to strengthen its appeal to young Latinos and African Americans.

Over the next couple of months, Sears will begin testing a new "urban" apparel format in 50 of its full-line stores, including 16 in the Chicago area, a spokeswoman said Thursday. The idea is to make it easier for young Latino and African American men to find the hottest clothing brands, which are now spread throughout the store.

"We want to raise awareness that we have the cool brands they want," the spokes-woman said. "We've always had them, but they’re hard to find." Latinos and African Americans represent a good portion of Sears’ shoppers so it's logical for the retailer to zero in on that market, said retail analyst Heather Brilliant of Chicago-based Morningstar Inc.

"A lot of their stores are situated in areas (near large Hispanic or African American populations), so the idea makes sense," she said. "It could help bring more men into the stores."

Sales uptick

Sales of men's apparel in stores open at least a year rose in the mid-single digits last month, Sears reported Thursday. However, strong demand for home appliances was the main driver for an overall 3.9% boost in same-store sales in August. The uptick comes after 23 months of same-store sales declines.

Hoffman Estates-based Sears, the country’s largest department store chain, said total sales rose 4.1%, to $2.05 billion from $1.97 billion a year ago. Results exceeded CEO Alan Lacy’s initial expectations that sales at stores open a year or longer would be flat.

Sales came in ahead of expectations, in part because customers responded well to changes Sears made to its home improvement business, including more competitive pricing, a price-match policy and an expansion of the brands of appliances.

"In addition, wet weather extended the growing season in most regions, which fueled continued strong increases in Sears’ lawn and garden business," Mr. Lacy said in a statement Thursday.

The company said it expects September sales to be flat with last year.

Tooling a turnaround

As Mr. Lacy looks to turnaround lagging retail performance, one of his ideas is to expand the company’s 200 to 300 "undersized" mall-based stores that don't carry as much merchandise as their larger counterparts.

At the Goldman Sachs Global Retailing Conference Wednesday, Mr. Lacy said the conceptual plan would call for expanding the small stores within existing sites or moving them to freestanding locations. A spokesman said a decision won't be made for a couple years, and would depend on the success of the company's new stand-alone Sears Grand format set to launch in October.

Morningstar's Ms. Brilliant said stand-alone stores have worked well for other retailers like Wisconsin-based Kohl’s Corp. and Minnesota-based Target Corp., and could possibly work for Sears as well. She warned, however, that expanding smaller stores in an attempt to be "everything to everyone" could result in excessive inventory, which would hurt Sears.

Wal-Mart's August Sales Exceed Forecasts; Target, Sears, Nordstrom See Improvement
A Wall Street Journal Online News Roundup
September 4, 2003

Retail sales were broadly higher last month, as the nation's biggest retailers got a boost from back-to-school shopping despite the power outage that paralyzed much of the Northeast and Midwest.

Wal-Mart Stores was among August's biggest winners. The discounting giant beat revised forecasts -- both Wall Street's and its own -- to post same-store sales growth of 6.9%.

Last week, Wal-Mart had raised its August same-store sales view, saying it expected 4% to 6% growth for outlets open at least a year; the previous forecast was growth of 3% to 5%. Analysts polled by Thomson First Call were expecting a 4.9% rise.

For the September five-week period, the company is estimating comparative sales will increase by 3% to 5%.

The Bentonville, Ark., company said net sales for the latest four-week period were $19.5 billion, an increase of 14% over the $17.2 billion posted last year. For the year to date, sales totaled $140.1 billion, for an increase of 11%.

The Wal-Mart division's sales last month were $13.4 billion, up 14% from a year earlier. Same-store sales in the unit rose 6.6%. The division's sales thus far this year are up 10% at $95.3 billion. Sam's Club sales for the four-week period were $2.7 billion, up 11%. Same-store sales rose 8.2%. Club sales for the first thirty weeks of the year rose 8% to $19.1 billion.

Also seeing impressive growth last month was Wal-Mart's biggest rival, hip discounter Target. The Minneapolis company said that same-store sales rose 5.7%, and that overall sales increased 12%. Analysts polled by First Call had expected same-store sales growth of 3.8%.

Discounter Kohl's saw August same-store sales expand by 3.2%, and overall sales were 16% better than last year. But the company, which is based in Menomonee Falls, Wis., failed to meet Wall Street forecasts for same-store sales growth of 3.8%.

Sears, Roebuck said that comparable sales in its Sears stores increased 3.9%. The Chicago company cited strength in appliance sales, and said that continued wet weather nationwide gave a lift to its lawn-products business. Men's apparel, tools and paint also saw modest growth.

Like Wal-Mart and Target, Sears's performance far outstripped the expectations of Wall Street. A First Call survey found analysts had expected same-store sales to increase just 0.6%.

Nordstrom saw strong gains, as same-store sales for the Seattle department- store operator jumped 3.2%, better than the 2.1% growth expected by analysts polled by First Call. Sales of apparel, cosmetics and shoes were all strong.

Nieman Marcus reported same-store sales growth of 7.6%. The company, which operates Nieman Marcus and Bergdorf Goodman stores, said that sales in Texas and the western U.S. were particularly strong.

Also seeing a healthy increase in sales was J.C. Penney. The department-store operator said same same-store sale climbed 6.5%, benefiting from back-to-school shopping. Apparel and jewelry sales were particularly strong.

The Plano, Tex. retailer said same-store sales at its Eckerd Drug Stores rose 0.4%. Catalog and online sales fell 2.1%. For September, the company expects both comparable department-store sales and catalog and online sales to show growth in the low single digits, and comparable Eckerd sales to be essentially flat.

Federated Department Stores, whose stores include Macy's and Bloomingdale's, said sales were 0.6% slimmer than a year ago. That was nonetheless a smaller dip than analysts had expected -- the consensus First Call forecast was for a decline of 1.3%. The Cincinnati company noted that its sales likely would have been even stronger were it not for the massive blackout. Looking ahead, it said that September same-store sales would likely be down 1% from last year's levels.

May Department Stores' sales also slid last month. Same-store sales fell 3.2%, and overall sales decreased 1.1%.

Meanwhile, apparel retailer Gap said that same-store sales increased 4%, a turnaround from the year-ago decrease of 2%. Despite the turnaround, sales were somewhat weaker than the company had forecast at the outset of the month.

Sears CEO: Co Responding To Hot Appliance Competition
Dow Jones Newswires
September 3, 2003

NEW YORK -- Sears Roebuck & Co. (S) has recently boosted its appliance sales by responding more aggressively to competition from Home Depot Inc. (HD), Lowe's Cos. Inc. (LOW) and Best Buy Co. (BBY), Sears' top executive said Wednesday.

With its 39% share of the appliance market in jeopardy, Sears has begun to lower its prices, offer more aggressive financing packages and is improving service and fixtures at its stores, Chairman and Chief Executive Alan J. Lacy told investors at a retailing conference hosted by Goldman Sachs & Co.

Sears said last week it expects its August sales at stores open at least a year to be better than originally forecast, citing improved appliance sales. Lacy on Wednesday declined to comment on the company's August sales which will be announced Thursday.

"We need to be more competitive," Lacy said.

Sears is improving its assortment of name brand appliances, Lacy said. And is offering a wider selection of lower-priced appliances.

On the customer service side, Lacy said the chain is instituting programs that rank its stores and sales associates regularly in terms of selling prowess. The company has also instituted a new, more casual dress-code for sales associates.

Lacy also talked about the company's new "Sears Grand" store concept. A pilot store measuring 150,000 square feet will open this fall in Salt Lake City and the company will test a handful more over the next year or two.

The stores will add "transactional items" to the kinds of merchandise found at Sears stores currently, Lacy said. For example, while regular Sears stores carry lawn and garden products, they don't offer fertilizer, grass seed or plants; the consumer electronics section at Sears doesn't sell CDs or DVDs, and few toys can be found in the children's section.

While Sears is also considering adding some nonperishable food items to the new format, Lacy told investors that the Sears Grand concept won't compete with traditional mass merchandisers like Wal-Mart Stores Inc. (WMT) and Target Corp (TGT).

"This is not going to be a grocery store," Lacy said. "This is not going to be a super Target or a super Wal-Mart."

Many Don't See the Benefit of Prescription-Drug Bills
By William M. Welch, USA TODAY
September 3, 2003

PRINCETON, N.J. Like many of her friends, 71-year-old Claire Krulik has carefully calculated what she spends on prescription medicines and how much help she can expect if Congress agrees to add drug coverage to Medicare.

Her stark conclusion: She would be better off without either of the dueling plans facing the House and Senate this fall. Both include a complicated array of premiums, deductibles, co-payments and gaps in coverage. Krulik, who takes medicines for diabetes, high blood pressure, asthma and other ailments, gets her drugs from Canada, where they cost up to 50% less. "For me, it wouldn't be worthwhile," she says of the potentially historic drug-benefit legislation moving through Congress. "I'd still be better off getting my medications from Canada."

For members of Congress returning this week from a month-long summer break, sentiments such as Krulik's may slow progress toward what looked like a political triumph two months ago, when the House and Senate passed differing Medicare expansion bills. Most lawmakers think Congress needs to come up with a compromise plan in the next two months. After that, the 2004 presidential campaign is likely to make agreement more elusive.

There are huge risks both for Republicans, who lead Congress and have promised action, and Democrats, who have long urged an expansion of the Medicare program that serves 41 million Americans. On one hand, failure to reach agreement could cause backlash among seniors, a politically powerful group. On the other hand, passage of a drug benefit could backfire if it's seen as too complex or too stingy.

Both bills incorporate President Bush's proposal to devote $400 billion over the next decade to the drug benefit. But at best, that would cover less than one-quarter of seniors' drug spending, which health analysts project at $1.8 trillion over that period.

So far, seniors appear skeptical about the existing proposals to add prescription-drug coverage through private insurers. A new USA TODAY/CNN/Gallup Poll indicates that an overwhelming majority of seniors and others believe what Congress is offering would not do enough to help the elderly pay for prescription drugs. Slightly more people think the plans would make things worse than those who think they'd make things better.

Among the questions raised here in New Jersey and elsewhere during the past
month: Why would the drug benefit offer only limited assistance to most seniors? Why would it not take effect until 2006, long after the next election? And how might it undermine drug benefits some seniors already receive through private coverage?

The cool reaction among seniors is only one obstacle to the first major expansion of Medicare since 1965, when the national health system for Americans 65 and older was created to cover doctor's bills and hospital stays. Also standing in the way: the different philosophies of Democrats and Republicans, which go to the heart of what Medicare will look like in a decade.

Democrats, who take credit for Medicare's creation, have long favored making it more generous by adding prescription-drug coverage. They are determined to preserve seniors' "entitlement" to health coverage that came with Medicare's creation. And under the Senate bill, the federal government would offer drug coverage directly if private insurance was unavailable in any part of the country.

Republicans have long favored cost controls and an increased role for the private sector within Medicare. They want to force Medicare to compete with private insurers. Under the House bill, which they had difficulty passing by one vote because Democrats opposed the GOP's approach, government-run Medicare eventually could become more expensive to beneficiaries than private insurance.

A history of failure

"A Medicare deal will be very difficult to do," says Robert Laszewski, a former health insurance executive and now a consultant. "Either conservative Republicans are going to have to agree to forgo the fundamental changes to Medicare they say are necessary, or the Democrats ... are going to have to agree to end the 40-year Medicare entitlement."

Both parties are aware of how difficult changing the nation's health care system can be.

In 1988, President Reagan signed bipartisan legislation designed to protect seniors against catastrophic medical expenses, including high drug bills. The measure had passed with great fanfare as the biggest expansion of Medicare since its inception.

But when middle- and upper-income seniors studied the details, they revolted at the prospect of paying a surtax of up to $800 a year for benefits that some already had through private insurance. One of the authors, House Ways and Means Committee Chairman Dan Rostenkowsi, D-Ill., ran into an ugly scene when seniors surrounded his car and rocked it outside a Polish-American center in Chicago. Congress quickly retreated; the law was repealed in 1989.

Ten years ago, President Clinton, assisted by first lady Hillary Rodham Clinton, attempted an even larger health-care change aimed at assuring health insurance for all. But the concept's initial popularity gave way to criticism from all sides as its 1,342 pages of details came under scrutiny. Its insurance- purchasing cooperatives, caps on premiums and mandates that employers pay for workers' coverage were opposed by powerful interest groups, including the insurance industry and small business. Many Americans who had health insurance saw a chance that they could lose benefits under the new system. After a yearlong debate, Congress did not act.

The lessons of both experiences color this year's debate. Congress has been careful to assure seniors that anything passed would be voluntary. They could choose to purchase or ignore the new drug coverage. They could stay in traditional Medicare or opt for one of the new managed-care plans that would be created with federal subsidies to private insurers.

Yet some of the same dangers remain. Just as Republicans ridiculed the Clinton plan for its complexity, Republicans' attempts to transform Medicare are being mocked in convoluted flow charts by Hillary Clinton, now a Democratic senator from New York. Other critics warn that the changes could force seniors to confront complicated choices difficult for anyone to sort through, particularly the elderly.

"It's going to confuse everyone who tries to deal with this," says Marilyn Moon, a health economist and former trustee of the Medicare system. "It's important to make sure that we don't make something so convoluted that when we throw this party, we have no one come."

Another lesson of the past is that changes should not jeopardize existing coverage. One in three retirees now have supplementary insurance provided by former employers that covers part of their drug costs. The Congressional Budget Office has estimated that one-third of them could lose those benefits if Congress provides a Medicare drug benefit.

"I can see what's going to happen," says Timmi Jones of Indiana, Pa., who showed up at a recent town hall meeting there held by Sen. Rick Santorum, R-Pa. She says the new federal benefit would prompt her husband's former employer to end the supplemental coverage they now enjoy in retirement. "They're going to drop us as quick as they can," she says.

Seniors do the math

If Congress acts, every Medicare beneficiary will face a calculation on whether the drug benefit would be worthwhile. Several outside groups, including the Kaiser Family Foundation and AARP, the nation's largest organization of seniors, offer help on the Internet.

Both the House and Senate bills estimate that premiums will cost $35 a month initially and rise in later years. The House bill includes a $250 annual deductible, the Senate $275.

Under the House bill, seniors would pay 20% of their annual drug costs from $251 to $2,000. The Senate's version would require seniors to pay 50% of their drug costs from $276 to $4,500.

Both versions then have a gap in coverage where they offer no benefit, a feature derided by critics as a "doughnut hole." Under the House version, seniors would pay all their own drug expenses from $2,001 to $4,900 a year, then pay nothing above that amount; seniors with annual incomes of more than $60,000 would have higher costs. Under the Senate version, seniors would pay all their own drug costs from $4,501 to $5,813, then would pay 10% of all additional spending.

AARP, formerly known as the American Association of Retired Persons, opposes the House bill as an assault on Medicare's guarantee of health coverage for seniors. It isn't enthusiastic about the Senate bill either; it's urging Congress to improve on both in talks this fall.

Bill Novelli, AARP's executive director, sees it as a test of the group's effectiveness and ability to represent its 35.5 million members. He says the drug benefit will be limited, but he's encouraging seniors to view action this year as a start and accept that some assistance is better than none.

"We're not trying to kill it. We're trying to make it happen," Novelli says. "There's still negativism out there. ... But among those who are listening and thinking about it, I think the tide is turning toward more positive."

Dean Sprague, 63, a retired railroad worker in North Platte, Neb., says he and his wife Carrie, 68, spend about $6,000 a year on drugs for their ailments. He estimates it would be about $14,000 a year if not for free drug samples their doctors provide them.

Sprague is angry at drug companies for charging high prices and doesn't like the gaps in coverage that would result from either plan. But he would participate if Congress passes a drug benefit. "I'd be a fool not to, because if the drug companies stopped the samples, I couldn't get them," he says.

Bill Mayer, 68, a New Jersey AARP volunteer, has made a similar calculation. He gets a variety of medicines by mail from a pharmacy in Canada, a move that cut his annual costs from $3,711 to $1,936. With either the House or Senate plan, Mayer would spend more for drugs than he does now. But he says any Medicare benefit for drugs is better than none. "I would participate," Mayer says. "I think a lot of seniors would."

Krulik, a widow who retired to a condominium in Monroe Township a decade ago after a lifetime in Brooklyn, is among the one-third of Medicare recipients who lack any prescription drug coverage. Her expenses would total about $6,000 a year at her local drug stores. She was able to cut that in half by faxing her prescriptions to a Canadian drug store her niece found on the Internet a practice that remains illegal, despite some efforts by local, state and federal officials to legalize it.

But she is frustrated by the costs. "Now that I'm retired and able to enjoy life a little, I can't," she says.

Sen. John Breaux, D-La., is optimistic that Congress can help — despite the differences between the two bills pending there. "There has to be a middle ground," he says. "The only thing we've been able to deliver is excuses. If we get this close and can't get it passed, then shame on us."

Kohl's Keeps 'em Coming In
By Thomas Lee - St. Louis Post-Dispatch
August 31, 2003

"I can find anything I need for anybody in my family," said Kathy Bucking of St. Peters, who shops at Kohl Department Store with Maxwell Datillo,4, for his birthday present.

It's hard to get excited about retail stocks, especially those of department stores that are struggling to improve sales.

So, it's no small feat that Kohl's Corp., a retailer with the soul of a department store but the brain of a discounter, should continue to wow Wall Street with its impressive sales growth and seemingly invincible business model.

Even as retailers are shuttering unprofitable stores, Kohl's is continuing its expansion across the country. Kohl's has opened 52 stores since October 2002. And this October, the company will open two more stores in the St. Louis region, at 9701 Watson Road in Crestwood and 2120 Troy Road in Edwardsville.

Kohl's entered the St. Louis market in 1999, and it operates eight stores in the area.

Kohl's stock has leaped 29 percent since June to Friday's close at $63.26 a share.

"Kohl's remains our favorite long-term investment in the broad-lines retail sector because of its superior long-term growth rate," said George Strachan, a retail analyst with Goldman, Sachs & Co. in a recent research note.

Over the years, Kohl's success has come at the expense of some department stores, which are scrambling to copy Kohl's easy-to-shop stores, focused merchandising and disciplined pricing.

"As (Kohl's) expanded into new markets, they have created turbulence for the midpriced apparel retailers," said Michael Collins, vice president of retail for Bain & Co., a consulting firm based in Boston.

Flush with the success of the economic boom that marked the late 1990s, midpriced department stores sought aggressively to expand into higher-end markets while playing down the moderate business, said Lois Huff, senior vice president for Retail Forward Inc., a consulting firm in Columbus, Ohio.

Kohl's, based in Menomonee Falls, Wis., filled that void quickly.

Much of Kohl's success depends on its laserlike focus on its key consumer: working mothers, she said.

According to a recent Retail Forward report, about 74 percent of consumers who shop at least once a month at Kohl's are 25 to 54 years old, compared with 56 percent for Sears, Roebuck and Co.; 59 percent for J.C. Penney Co., and 60 percent for traditional department stores.

About 79 percent of Kohl's customers are married, 10 percentage points higher than Target Corp. and traditional department stores. And about 55 percent of Kohl's customers have children under 18, compared with 49 percent for Wal-Mart Stores Inc.

Georgian's Age Bias Suit Could Open Floodgates
By Jim Auchmutey - The Atlanta Journal-Constitution
August 31, 2003

THOMSON -- Ron Harper sells insurance out of a small brick building next to the Popeyes in this east Georgia town. He loves to grow tomatoes, raise chickens and tell stories in a drawl as froggy as a summer night. With his white fishing cap and gray golf shirt, he looks like someone headed for the lake or a practice tee.

He certainly doesn't look like someone who would be leading a legal fight against one of the nation's largest insurance companies -- an insurer whose policies he still writes.

"I never dreamed I'd be involved in anything like this," he says.

Harper, 51, is the most outspoken plaintiff in a lawsuit that some legal experts regard as a potential landmark age discrimination case. Four years ago, in a reorganization of its sales force, the Allstate Insurance Co. told 6,200 employee agents that they were being terminated, their benefits discontinued, their pensions suspended. The agents -- more than 90 percent of them 40 or older -- were given the option of staying with Allstate as independent contractors, but only if they signed a form waiving all claims against the company, including any litigation related to age discrimination.

Harper signed the release and sued anyway, along with 28 others. AARP, an organization for Americans 50 and older, enlisted as co-counsel for the agents. If a federal judge in Philadelphia certifies the agents as representatives of the larger class, as he said he was inclined to do in a recent ruling, AARP lawyers believe it could become the largest age discrimination employment case in U.S. history.

"This could be the one we've been waiting for," says Raymond F. Gregory, a Massachusetts employment lawyer who wrote a book on age bias in the workplace. "This could change the whole atmosphere on age discrimination in this country."

Allstate, the nation's second-largest auto and home insurer, is mounting a full-scale defense. "Age had nothing to do with this," says Barry Hutton, the sales vice president who oversaw the reorganization. He says the changes affected all employee agents, regardless of age, and were undertaken to streamline operations and make the company more nimble in the face of competition.

The agents argue that the conversion targeted a class of older employees whose benefits had become an inconvenient expense. "This was a cost-cutting initiative from Day One," says Michael Wilson, one of the plaintiffs' lawyers, who estimates the reorganization is saving the insurer at least $200 million a year -- a figure Allstate disputes.

A hearing is set for Sept. 15 before Judge John P. Fullam. Now 81, he was appointed to the federal bench by Lyndon B. Johnson, the president who signed the Age Discrimination in Employment Act into law.

Complaints on rise

A feud between a Fortune 500 company and some of its sales personnel might not seem a matter for public concern. Lawyers and insurance agents? Let 'em tangle, many people would say. But population trends suggest that the infighting at Allstate is a sign of things to come, with implications far beyond the world of actuaries and underwriters.

Next year, the youngest of 78 million baby boomers, those born between 1946 and 1964, will turn 40. That means that every member of a generation accounting for about half of the U.S. work force will soon be covered by federal age discrimination laws.

The Equal Employment Opportunity Commission, the agency that enforces those laws, reports a 24 percent increase in age bias complaints over the past two years -- a rise it attributes to the graying job pool and to widespread layoffs in a down economy.

Lodging complaints is one thing; making them stick is quite another.

"Courts tend to be more skeptical of age claims," says Tom Osborne, an attorney with AARP Foundation Litigation.

Age was an afterthought in the development of employment discrimination laws. When Congress passed Title VII of the Civil Rights Act of 1964 -- the statute that bars discrimination based on race, religion and sex -- the lawmakers were unsure of what to do about older people. They tabled the matter for further study and didn't address it with legislation until three years later.

Age bias is still treated differently, Osborne says. Judges usually set a higher bar for evidence in age cases because they involve a class that everybody will belong to if they live long enough. Moreover, many federal courts hearing age lawsuits won't consider "disparate impact" -- the argument that while a policy might not intentionally harm older workers, it can still be discriminatory because it affects them in disproportionate numbers. The Supreme Court ruled years ago that disparate impact is permissible in other types of bias cases.

The upshot for the agents?

"They're going to have a hard time making their case," says Charles Shanor, an Emory University law professor who was general counsel of the EEOC during the late '80s.

'The job in a box'

Ron Harper, a pair of reading glasses perched atop his thatch of white hair, reaches behind his desk and pulls out a cardboard container large enough to hold a layer cake. "Preparing for the Future," reads a label on one side. Agents have another term for it: "the job in a box."

In November 1999, Allstate sent packages like these to more than 6,000 employee agents and summoned them to conference rooms across the country. The boxes were full of binders rewriting the terms of the agents' relationship with the company. In essence, they were given six months to decide whether to leave Allstate or remain without the benefits they had enjoyed as employees -- take it or leave it.

"They fired us," Harper says. "That's how I think of it."

The dilemma brought back unpleasant memories of another corporate passage in his life.

The son of a tractor salesman, Harper grew up on a small chicken farm near Gainesville. He started bagging groceries at 16 and worked his way up to become a district manager for the Big Star chain in Augusta.

In the late '70s, the chain was bought by Grand Union, a New Jersey company that started closing stores and selling assets as part of a merger. Harper had to tell longtime employees that they were losing their jobs. The company offered him a management position in another city, but he didn't want to move. He remembers getting a parting check for $186.05 -- the cash value of his pension.

"That was for 14 years," he says. "I bought some slacks and took my wife to dinner."

Harper started over with an independent grocer and then became a manager with Food Lion. As he entered his late 30s, though, he was growing tired of the long hours and unpredictability of the grocery trade. An insurance agent friend told him Allstate was hiring.

The company had begun in the 1930s as an offshoot of Sears, Roebuck and had become one of the nation's largest insurers by selling policies out of its stores under the famous slogan "You're in good hands with Allstate." By the 1980s, Allstate wanted to move agents out into the community to go head to head with its archrival, State Farm. To staff the offensive, Allstate recruited employee agents who accepted lower base pay and commissions in exchange for generous pensions, subsidized health insurance and the promise of a long-term relationship. Allstaters didn't retire, it was said; they died.

Harper signed a contract with the company in August 1989. He was assigned to Thomson, a town of 6,800 near Augusta that had no shortage of insurance agents. He relocated there with his wife and two sons and says he spent thousands of dollars of his own money on advertising and office expenses. He didn't write many policies at first, but in a few years he was able to build a respectable book of clients worth more than $700,000 in annual premiums. He says he never cleared more than $50,000 a year, but that was good enough to win vacation trips from the company and to qualify for one of its awards, the Honor Ring.

Harper opens an album and turns to a photo of a younger, darker-haired version of himself riding on a bus with other agents on their way to tour the Bacardi rum distillery in Puerto Rico.

He manages a smile. "I thought I had a job for life."

Competition heats up

Legally speaking, hardly any jobs are for life. Courts have consistently held that employers can hire and fire at will for almost any reason except those specifically barred by law, like discrimination. Harper had been at Allstate a decade when he learned what that could mean.

The '90s were a tumultuous time for the company. Sears sold 20 percent of its stake in 1993 and divested itself of the remainder two years later. By the late '90s, the newly independent Allstate was under pressure from aggressive rivals, like Geico and Progressive, that sold directly to the public through toll-free numbers and the Internet.

At Allstate headquarters in Northbrook, Ill., executives decided they needed to take a closer look at their army of 15,200 full-service agents.

"We had something like 11 types of agents with different contracts for each program. It got so complex," says Hutton, the sales manager who oversaw the operation. "We felt like we had to move faster if we were going to compete."

In the reorganization, Allstate offered employee agents four options: They could become independent contractors and stay with the company, they could sell their book of clients and leave, they could leave with an enhanced severance package, or they could refuse to sign the release and leave with a much smaller severance package.

That three-page release waiving all claims against Allstate has become the focus of a legal battle between the company and the federal lawyers who police employment discrimination.

Allstate maintains that the release is no different from exit documents many firms require laid-off employees to sign to receive severance pay. The EEOC disagrees, saying that this release is another animal altogether because workers were required to surrender their rights to keep their jobs.

"I'm not aware of another company doing anything quite like this," says Felix Miller, the lead lawyer in a suit the EEOC filed against Allstate. "If we allow this, it could eviscerate the effectiveness of employment discrimination law in this country. Companies could make their employees sign away their legal rights every week just to get a paycheck."

Harper agonized over the release. He waited until the six-month deadline had almost expired before he finally gritted his teeth and scribbled his name.

By then, he was already organizing a counterattack.

'Secret decoder ring'

On the day after the agents were told of their termination, Harper logged onto the computer in his study and e-mailed some fellow Allstaters to commiserate. On the opposite wall, he could see a rack of shotguns, a reminder of the days when he had time to go deer hunting. Now he was after bigger game.

"Insurance agents are usually pretty isolated from each other," he says. "Allstate didn't count on us getting together."

The forum Harper created to rally his colleagues is an Internet newsletter and chat room he calls Runningclock. When he started putting it out in November 1999, he had a mailing list of three; now it exceeds 2,000. Clockers message Harper for a password -- a "secret decoder ring," he calls it -- and receive a dossier of updates and commentaries almost every day. When the lawsuits began to fly, Allstate's attorneys were so curious about the Clock that they dispatched a computer specialist to Georgia to search Harper's hard drive (with his consent).

To the agents who feel their company wronged them, Harper has become something of a hero. When he spoke to a convention of the National Association of Professional Allstate Agents, they gave him a standing ovation.

"We felt so alone when this happened," says Sylvia Crews-Kelly, 57, a former Allstate agent in the Tampa area. "It was like, 'Oh my God, what are we going to do?' Then I saw Runningclock. I couldn't believe that one little old Southern boy with a computer was making so much trouble for such a big company."

Another former agent, 54-year-old Rick Peterson of Augusta, says that he felt too "old and depressed" to sue until Harper started working on him. "Ron wouldn't leave me alone," he says. "He told me they were screwing us and we had to do something about it. He's the heart and soul of this thing."

Since the agents filed suit two years ago this month, Harper has had a paradoxical relationship with the company, to say the least. He still speaks highly of Allstate insurance -- "a good product," he says -- but he has harsh words for the corporate leadership. Harper plans to sell his book of clients this fall and perhaps become an independent agent. In the meantime, he half- expects to arrive at the office any morning and discover that he's been disconnected from the company's computer network.

"If they could put me on the dark side of the moon," he laughs, "I'd be eating green cheese."

Hutton, the Allstate executive, says there has been no move to oust the Georgian. "As far as I know, our business relationship with Mr. Harper is working," he says.

But the legal relationship has only grown stormier. A few months after the agents filed their action, Allstate sued Harper and 27 other plaintiffs, saying that they had unjustly enriched themselves by signing the release and accepting a "transition bonus" of at least $5,000 apiece.

The countersuit upset Harper's wife of 31 years, Terrie Harper, an independent insurance agent who worries about lawyers swooping down on their assets. She was mortified when a process server interrupted a backyard cookout to slap her husband with a subpoena. She's proud of him for taking a stand but longs for the day when he can leave the "good hands" people and get on with his life.

"When he hits me in the middle of the night," she says, "I know he's dreaming about the case."

MetLife Takes Over Ownership of Sears Tower
By Dean Starkman - Staff Reporter of The Wall Street Journal
August 29, 2003

MetLife Inc. acquired ownership of Sears Tower, the nation's tallest skyscraper, after fellow mortgage holder Trizec Properties Inc. declined to take title, a reflection of the weak office market in Chicago.

The two companies had been in talks for months about ownership of the 110-story landmark, which is 89% occupied but is struggling with low demand for office space and tenants' lack of enthusiasm for high-profile properties after the terror attacks of 2001.

Trizec, a real-estate investment trust based in Chicago, controlled the building through a $70 million second mortgage purchased from another lender in 1997. Under terms of the complex note, legal title was to pass to Trizec in January.

The tower has been the source of financial stress for its owners practically since Sears, Roebuck & Co. built it in 1974.

Struggling with a severe real-estate downturn, the department-store owner put the building into a trust in 1994 and put two mortgages on the property, MetLife's and the one acquired by Trizec, which carried the right to acquire ownership.

But the value of the building sagged over time, analysts say, essentially wiping out Trizec's equity position. Taking title to the building would have added more debt to a landlord that analysts already consider overleveraged. After initially scoffing at the idea of walking away from the building, Trizec management began to openly consider it and then took a $46.2 million write-down on the $70 million investment in the fourth quarter, signaling a changing view of the tower's value.

MetLife of New York, which holds a $766 million first mortgage on the property, paid $9 million to Trizec for its interest. Trizec will continue to manage the property.

A Showdown at the Checkout for Costco
By Amy Tsao - Business Week Online
August 28, 2003

It's under fresh assault from a revived Sam's Club, which is tapping parent Wal-Mart's buying power to slash prices. Can Costco stay ahead?

Over the past several years, while Sam's Club seemed an orphaned division of megastore-focused parent Wal-Mart, warehouse shopping club Costco proved itself the better investment. Sam's trailed Costco in earnings and same-store sales growth. Things are changing, though. Results are improving at Sam's, and Wal-Mart (WMT ) has turned to the warehouse concept as a growth vehicle. Sam's appears intent on becoming the low-cost price leader in warehouse stores. Many investors have a healthy respect -- some call it fear -- for what a dominant industry leader such as Wal-Mart can do to the competition when it commits to becoming No. 1.

FEELING THE HEAT. A revived Sam's is taking a toll on Costco (COST) and its investors. On Aug. 5, Issaquah (Wash.)-based Costco told investors in a sales update that price competition from Sam's are hurting margins, as are rising overheads. It warned that earnings per share for the quarter ending Aug. 31 would be closer to $0.46 to $0.48, down from its original projection of $0.54 to $0.56. In the two days following the lowered guidance, investors pushed Costco stock down by 21%, to $29. The stock now trades at around $31.

Costco chief executive, James Sinegal, downplays the increased pressure from Sam's. "The term 'price war' is a little overdramatic. There's been tightening of pricing, but that moderates from time to time," Sinegal says. "I'd say it's a sharpening of prices."

Sam's turnaround is impressive and may be gaining momentum, aided by a newly installed management team. Wal-Mart cited Sam's -- and the company's discount stores in foreign markets -- as the main drivers of its 21% earnings growth for the quarter ended July 31. The Sam's division, which accounted for about 7% of Wal-Mart earnings in 2002, reported a 12.8% jump in earnings, to $309 million for the quarter. With better marketing to its small-business customers and sharp cuts on merchandise prices, Sam's said it saw increases in both store traffic and the average amount each customer was spending.

READY FOR WAR. For now, Costco is still stronger on the top line than its rival. Same-store sales (those at stores open at least a year) rose 8% in July, while Sam's chalked up a 5.1% increase. The figure for Sam's represents a jump from a paltry 1.9% increase in the same month a year ago. And it's not inconceivable that Sam's, with $31.7 billion in 2002 sales, could overtake Costco, which had $38.8 billion in its fiscal 2002 year.

Sam's aggressive pricing could force Costco to respond in the same manner. Profit margins are already slim for both companies. And Wal-Mart has started to buy product from suppliers for both Sam's and Wal-Mart stores, allowing Sam's to lower prices while still making a nifty profit. In the quarter ended July 31, Sam's operating margin was about 3.6%. Analysts expect Costco's operating margin to be closer to 3% for its quarter ending Aug. 31.

A price war doesn't signal disaster, but investors would have an increasingly hard time justifying a premium for Costco's shares. "Costco believes it has faced the worst of price pressure from Sam's, but we're skeptical," says Standard & Poor's analyst Jason Asaeda (Asaeda doesn't own shares in either outfit and S&P performs no banking services.) He recommends avoiding the stock because Costco has yet to provide details on how it plans to improve merchandise margins.

UNHEALTHY TREND. Pricing pressure is unwelcome news for Costco, since its health-care and worker-compensation costs are surging. Jeff Tryka, analyst at Delafield Hambrecht, worries that Costco's plan for 8% to 10% earnings growth in fiscal 2004 could fall short if it continues "trying to compete on price with Sam's" and rising benefit costs don't come under control. "This price war has just begun. We could see it last well into [2004]," Tryka says. He has the only sell rating on the stock among Wall Street analysts, figuring the stock is worth $24 -- 23% below the current price. (Tryka doesn't own Costco shares.)

Worker compensation costs in California have been a problem special to Costco, which has 37% of its employees in that state. The occurrence of injuries isn't especially higher there, just the cost of paying for them. To help remedy that, CEO Sinegal is actively lobbying. "We're down here meeting with people right now," the CEO says. "We're trying to come up with some sort of solution that will alleviate that." Yet California is awash in political uncertainty amidst a tempestuous gubernatorial recall effort, and even Sinegal is doubtful that legislative change will take place soon, conceding that "it won't be anything rapid."

Costco is known for putting employee and customer interests first. It picks up much of the cost for employee health plans. And to the benefit of customers, it doesn't sell goods at more than 14% above the price it paid for them. While such efforts are popular, shareholders end up paying a price, says Tryka, in the form of lower profit margins. "Management is focused on consumers and employees to the detriment of shareholders. To me, why would I want to buy a stock like that?"

COSTLY CONCERN. Sinegal defends Costco's practices and insists some margin improvement will occur in 2004. "When your customers and employees are happy with you, you can't be going too far wrong," he says, noting that Costco has a long track record of earnings growth. Sinegal argues that higher labor costs to pay for employees who help unload carts at busy stores will show a return in the form of improved traffic flow. As for health-care expenses, Costco says it will provide details on efforts to reduce such costs on its next earnings call in October.

Many investors aren't giving up on Costco. Eric Jemetz, senior equity analyst at New Amsterdam Partners, says: "Costco has had a long history of [good] return on invested capital." It trades at a "reasonable multiple," Jemetz adds. Costco trades at a 2004 price-to-earnings ratio of 19, vs. a historical average p-e of 25. (Costco is a holding in New Amsterdam funds. Jemetz does not own the stock.)

Still, with Wal-Mart's industry heft behind Sam's efforts to take the top spot in this industry, Costco needs to focus on improving profit margins and keeping its shareholders happy.

Sears Exec Says Great Indoors Chain Still Has Growth Ops
By Mary Ellen Lloyd - Dow Jones newswires
August 28, 2003

CHARLOTTE -- The head of Sears Roebuck and Co.'s (S) chain of home-decor stores said The Great Indoors remains "a terrific growth opportunity" that can succeed with a little fine-tuning.

Jeff Jones, Sears senior vice president and general manager of The Great Indoors, said in an interview that changes afoot include a revamped marketing strategy, new warehouses and some in-store changes intended to improve customer service and sales.

Earlier Thursday, Sears said that by year end, it would close three, underperforming stores and convert one to an outlet, while making several operational changes to improve profitability for the remaining 18 stores in the chain. Sears expects an after-tax charge of $75 million to $100 million in the fiscal third quarter for expenses related to the changes.

Jones said Sears Chairman and Chief Executive Alan Lacy and the executive team "are being very patient with my team."

Sears Roebuck and Co. likes that the chain serves "an underserved market" and that it doesn't take a lot of sales from traditional Sears stores in the same market, Jones said.

"These customers are much more affluent ... than what the typical (Sears) store would serve," he said. "There's sizable growth to be achieved."

Jones said Sears executives recognized The Great Indoors had a solid sales base and "great customer reaction," as shown by average chain-wide sales of $30 million a year per store.

But after expanding from one store in 1998 to as many as 22, the chain "was not performing in sales or in profitability or in cash flow as they had hoped for," Jones said.

Sears said in its second-quarter filing with the Securities and Exchange Commission that it was considering changes to the Great Indoors, including the option of closing the stores.

The chain has made progress toward profitability in the last six months. Now, the closing the underperforming stores and the other changes planned should accelerate the improvement, Jones said. The stores slated for closing or conversion to an outlet either in markets with weak demographics for the chain or had poor location.

"We're closing the gap on profitability very fast," he said. "It's not going to take us that long - maybe months to a year and a half in the worst case."

He said The Great Indoors recently scrapped millions of dollars worth of television and, for the most part, radio advertising in favor of a more direct appeal.

"We've picked up on the science that Land's End has used so well," said Jones, who came to Sears from his former job as Land's End chief operating officer. He has been overseeing The Great Indoors since December.

Marketing will target two key customer groups in the 35-to 50-year-old age range. Those with annual household incomes between $50,000 and $125,000, and those who earn more than $125,000.

The chain, on Wednesday, mailed some 600,000 oversized, magazine-like publications to $100,000-plus households within 30 miles of stores, Jones said. It could ship as many as 1 million copies as it repeats the marketing campaign in the fall and winter to drive customer traffic to stores.

Sunday newspaper inserts were also revamped "to be more of a magazine style, but also very promotionally driven," Jones said.

Jones said the marketing won't really attempt to boost phone and Internet sales.

"We actually believe right now that this is not a strong Internet-ordering product line," he said. "We do much better with the customer coming to the store."

By Thanksgiving, customers will notice that stores in all locations will have the addition of design centers - which serve as the center for coordinating installation and services. Among the 18 stores remaining open, three currently have design centers.

New shelving will allow more merchandise to be sold directly from the floor rather than a product pickup area in the store. And displays will allow more bulk purchases - a set of dishes, for example, rather than only individual plates and cups, he said.

The Great Indoors will add more private-label products, too, in such categories as plumbing, bed, bath and broadloom carpeting, he said.

The chain also plans to boost foreign-product sourcing, thanks to a direct- import warehouse that opened in Los Angeles about six week ago, Jones said. A year ago, The Great Indoors did virtually no importing, but he expects to boost imports to a third or a half of merchandise in the main part of the store over time.

"That allows us to get better prices and better value for our customers," Jones said.

The chain will also add a second warehouse, probably in the Midwest, over the next eight weeks that will be used to replenish stores more quickly so they don't have to carry as much inventory. The Great Indoors typically has about $3.5 million worth of merchandise on the floor, and about that much in inventory in the back room, he said.

Wal-Mart Hopes Health Tests Will Increase Customers, Sales
By Ann Zimmerman - Staff Reporter - The Wall Street Journal
August 28, 2003

Wal-Mart Stores Inc. is adding neighborhood health screener to the list of services and supplies it offers, both to raise awareness and bring in more customers.

On Sept. 6, the Bentonville, Ark., discount retailer is offering free blood- glucose tests at all of its 2,900 stores nationwide, as part of a month-long campaign to raise awareness of diabetes.

A growing health problem in the U.S., diabetes is a disease in which the body doesn't produce or properly use insulin, and is often associated with obesity. According to the American Diabetes Foundation, about 17 million Americans suffer from the disease, but one-third of them are undiagnosed.

"No one has ever done a nationwide free health screening on this scale before -- 400,000 to 600,000 people are expected to be treated," says Matt Lucas, who works on the Wal-Mart account for Novartis Consumer Health of Parsippany, N.J., a division of Novartis AG.

Certified health screeners will administer the test, which consists of pricking the finger or arm, and testing the blood-sugar level in a home-testing kit. People with above-normal scores will be encouraged to see their doctors. The procedure takes two minutes and normally costs between $15 and $30, according to Bob Edens, chief financial officer of Interfit, a Houston company that is staffing the event.

Depending on how the testing goes, Wal-Mart said it will consider future company-wide health screenings, possibly bone-density tests for osteoporosis and cholesterol-level checks. On Sept. 19 and 20, Wal-Mart is also holding a women's health event.

"No doubt, from an awareness perspective, we expect these events to prompt sales," says Danette Thomson, a Wal-Mart spokeswoman.

 

Sears Announces Strategic Refinement to Enhance Profitabilty, Productivity of Great Outdoors
DOW JONES NEWSWIRES
August 28, 2003

HOFFMAN ESTATES, Ill. -- Sears, Roebuck & Co. (S) expects to book charges of $75 million to $100 million in its fiscal third quarter under a plan to close three of its Great Indoors home decorating stores and revamp a fourth location.

Last month, the retailer lowered its full-year earnings forecast, saying it would likely earn $4.80 to $5 a share excluding any effect from a plan to sell its credit-card business to Citigroup Inc. (C). Costs from changes at The Great Indoors unit weren't included the July 17 forecast.

A Sears spokesman said the company would discuss the effect the charges will have on its full-year forecast when it reports results for the fiscal third quarter, which ends in September.

He said the cuts will affect 350 of the approximately 2,700 workers at the unit.

The retailer said in a press release Thursday that a bulk of the charges will likely be for noncash write-downs.

Sears plans to close Great Indoors stores in Cincinnati and the Texas cities of Arlington and Willowbrook and to convert a location in Shelby, Mich., into an outlet format. The closings, which Sears expects will occur by the end of the year, will leave 18 Great Indoors stores in 11 U.S. markets.

The company also plans to make changes at existing stores by improving inventory management and refining the merchandise they carry.

The chain, which sells products to aid in remodeling as well as items such as dishes, towels, glassware and electronics, competes with Home Depot Inc.'s (HD) Expo Design Center stores.

Sears, which opened its first Great Indoors in Denver in 1998, said Thursday that the plan affirms its commitment to the chain. The company noted that the stores generate more than $30 million in sales a year.

Overall, Sears posted revenue of $41.4 billion last year.

The spokesman said a few of the chain's new locations have incorporated the changes that will be made at other stores. He said, however, that it is too soon to tell what effect the changes will have.

In July, revenue from the company's off-mall division fell slightly as a mid-single-digit decrease at Great Indoors offset improvements at the company's hardware stores and dealer stores.

Even Without Sears Card, Mayor Revels in Tax Discount
By Winnie Hu - New York Times
August 28, 2003

Mayor Michael R. Bloomberg went to a Sears in Queens yesterday to publicize the city's week of no sales tax on clothing under $110. Of course, until the city and state moved to plug budget holes this spring, there were 52 such weeks a year.

City and state officials reinstated the sales tax on less expensive clothing and shoes in June, after a three-year exemption. At the same time, they also increased the sales tax rate, bringing the combined sales tax in the city to 8.625 percent from 8.25 percent.

Still, the mayor was not one to let a technicality stand in the way of his shopping.

With journalists noting his every move at the store in Rego Park, Mr. Bloomberg headed straight for a rack of denim jackets with fake fur collars. He scooped one up, saying it was for his younger daughter, Georgina. It was $29.99, marked down from $40.

The mayor took it to the cash register, where a saleswoman, Carlene Edwards, was waiting to help him.

Was that all?

He replied, "I'm going to pay cash for it, so you'll have some real money."

But when Ms. Edwards told the mayor he could get a $10 discount by applying for a Sears credit card, he changed his mind. He filled out an application, showed his driver's license, and provided his phone number and social security number to Ms. Edwards.

Then, after all that, the billionaire mayor could not be approved for instant credit and had to forgo the discount. So he handed over a $50 bill. The mayor's aides said later that he had been approved for a Sears credit card. "I assume that they checked him out and found that he has good credit," said Edward Skyler, Mr. Bloomberg's press secretary.

Even so, savvy shoppers will note that the mayor still saved $2.59 in sales tax.

"There's no reason that people should leave the city to go shopping for clothing," Mayor Bloomberg said at the store. "The best values are here, the best selection is here, and you don't have a long commute that would be expensive just to save a few bucks on sales tax."

But wouldn't New Yorkers shop at home if the sales-tax-free week were extended to the full year again?

The mayor replied that "we'd like to go back to it, but the fact of the matter is we need to pay for services." He also pointed out that the sales tax on clothing priced under $110 will expire in June 2004.

The mayor's shopping trip to Queens was the highlight of a busy day in which he returned to business as usual after a whirlwind trip to Israel. His private jet landed at Kennedy International Airport shortly before 5 a.m., and the mayor stopped off at his Upper East Side town house long enough for a shower and a shave, aides said.

Then he was en route to the Columbia-Presbyterian Center of New York Presbyterian Hospital, where he visited a police captain who had been shot in the stomach early yesterday morning. The mayor stayed about 45 minutes.

From there, he went to City Hall and was at his desk by 7:45 a.m. He was briefed on the legal battle with the state over the city's proposed bond sale, and then he found time to catch up on e-mail and paper correspondence before going shopping.

At the Sears store, several shoppers were already taking advantage of the sales-tax-free week, which began on Aug. 26 and runs through Sept. 1. Several of them stopped to watch the mayor make his purchase.

"It may not seem like a huge savings but everything adds up," said Terri Meyers, 25, an unemployed advertising consultant whose arms were weighed down by jeans and T-shirts. "The mayor would know that if he bought more than just one jacket."

EEOC Faults Allstate on Rehiring of Agents
By Joseph B. Treaster - New York Times
August 27, 2003

Allstate has experienced a setback in the long-running dispute over its efforts to convert its career agents into independent contractors to streamline its business and cut costs.

The insurer is already facing separate federal lawsuits by the agents and the Equal Employment Opportunity Commission.

Now the commission has determined that Allstate violated federal laws against age discrimination when it refused to let some agents take lower-paying jobs elsewhere in the company to keep their benefits.

The latest development involves just some of the 6,200 agents who were told that they had to choose between becoming independent contractors, without traditional benefits but with increased sales commissions, and leaving the company.

About 2,200 left and some of them — lawyers estimate the number at about 40 — applied for lower-paying jobs at Allstate.

But Allstate, according to the agents and company documents, refused to take the agents on for at least a year, until their chance to extend their old benefits had expired. More than 90 percent of the agents were older than 40.

Some of the agents complained to the commission. In a letter to Allstate and the agents dated last Thursday, Lynn Bruner, a district director for the commission who has been overseeing the dispute, said that Allstate's policy of refusing to rehire the agents in lesser jobs while signing up younger workers "discriminated against persons age 40 and over."

Evidence in the case, Ms. Bruner wrote, showed that the company's action "was not justified by a legitimate business purpose." She did not elaborate.

In her letter, Ms. Bruner said the agency would now try to negotiate a settlement covering this part of the dispute. Efforts toward settling other aspects of the case have so far failed.

A spokesman for Allstate, Michael J. Trevino, said the company disagreed with the commission's finding. "We know that age had absolutely nothing to do with Allstate's rehire policy," he said. Now that the one-year waiting period has passed, he said, "those terminated agents, regardless of age, are today eligible for rehire, even though they are older now."

Speaking for the agents, Michael J. Wilson, a lawyer with the firm of Zevnik Horton in Washington, said the latest decision showed that the federal agency was "looking at every aspect of this program and saying, `Allstate, what you did is illegal in multiple respects.' "

Allstate, the second-largest insurer of homes and autos behind State Farm, has been sued in federal court in Philadelphia over other accusations of age discrimination by the Equal Employment Opportunity Commission and, separately, by the agents. In May, a federal judge tentatively agreed to certify the agents' lawsuit as a class action, sharply raising the pressure on Allstate to consider settling.

The dispute began when Allstate gave the agents until the end of June 2000 to accept an offer to become independent contractors or leave.

To stay on, however, the agents were required to sign a pledge not to sue the company for any kind of employment discrimination. A few months later, acting on complaints from agents, the equal opportunity agency declared that requiring an employee to sign away rights to keep a job amounted to "unlawful retaliation." The agency filed its lawsuit in late 2001.

One agent who tried to take a lower-paying job to save his benefits, Thomas Kearney of Chicago, said he worried that as a contractor, routine business expenses would overwhelm him. So he decided to sell his book of clients and try to be hired at one of the company's telephone centers for a job that he estimated would have paid about $26,000 a year. He said he had been making $65,000 as an agent and could not find a job with similar pay.

When he gave up his job as an agent, Mr. Kearney was approaching 50 and had two daughters, age 12 and 15. . If he could have stretched his relationship with the company until his next birthday, he would have qualified for subsidized life and family health insurance indefinitely. Returning to work within the year would also have meant continued contributions by Allstate to his pension. But Mr. Kearney's application was turned down.

"It's abusive to take somebody in their prime years and then say they don't need you anymore," he said in a telephone interview.

"There's a moral contract and they shattered that. This is a step toward justice."

Sears' Appliance Gains May Wash Away Sales Slump
By Lorene Yue - Staff Reporter - Chicago Tribune
August 27, 2003

Sears, Roebuck and Co. said Tuesday that strong appliance sales have put it on track for positive August sales, likely snapping a two-year spell of slumping results.

Officials said that sales at stores open for at least a year, the traditional measure of a retailer's performance, are running ahead of earlier expectations that forecast flat sales. What remains to be seen is how much of a gain Sears will be able to scratch out, said Ted McDougal, a Sears spokesman.

The company has not posted positive monthly same-store sales since August 2001. Sears has struggled to grow sales as competitors become more savvy and time- crunched consumers avoid sprawling shopping centers where the company has most of its 870 department stores.

Missing from the final tally are results from the few selling days before the Aug. 30 end of the four-week period. Sears is scheduled to release August sales results Sept. 4.

Retail analysts are not ready to declare a turnaround under way, however, particularly since sales dropped so sharply last August. Although many retailers struggled with a weak economic environment, same-store sales at Sears fell 11.1 percent in August 2002. Analysts say Sears will have to make up a lot of ground to staunch the losses.

"The comparisons are easy to make [against] last year," said Walter Loeb, an analyst with Loeb Associates in New York. "One month does not a year make."

Sears is not alone in expecting an increase for August. Wal-Mart Stores Inc. bumped its expected increase in August same-store sales to 6 percent from a previous 3 percent to 5 percent, thanks to strong back-to-school apparel sales, and Target Corp. said business at its discount stores is well above the 4 percent and 5 percent plan.

While Sears officials said sales of denim clothing have been strong during the pre-school season, the retailer is hanging its improved fortunes on a new home appliance marketing program.

The program, launched in late May, was designed to fend off competitors who have snatched some of Sears' market share for the first time in at least a decade.

Sears' officials said better prices, a price-match policy, a revamped appliance department and broader selection of "take-home-today" items gave the company an edge.

"They probably sold more air conditioners as the weather finally warmed up," Loeb said.

And while Sears' new appliance program may have stopped its market-share erosion, retail analysts remain concerned over how the so-called softer side can fare against favorites of Kohl's Corp. and Target stores.

"The fashion aspect still needs some more strength," Loeb said. "I'm still concerned about their apparel sales, and I'm not sure they have tightened that operation to show a full turnaround."

Sears officials added that August sales were also spurred by a program that encouraged consumers to spend their income tax credit checks with the retailer. Consumers could apply the check to a purchase or a credit card payment.

Sears Sees Better-Than-Expected Sales
Reuters
August 26, 2003

NEW YORK (Reuters) - Sears, Roebuck and Co S.N , the largest U.S. department store chain, on Tuesday said August sales at stores open at least a year were tracking ahead of expectations.

Sears said same-store sales for the four weeks ended Aug. 30, were helped by strength in the home appliance category.

Earlier this month, Sears forecast that its August same-store sales would be flat with a year ago.

Sears has reported 23 straight months of negative same store sales.

In May, the Hoffman Estates, Illinois-based company said it would be making changes in its home appliance business, including more competitive pricing, expanded selection, and a comprehensive price-match policy.

"I don't think their appliance business was ever broken, but the competition was just getting so good," said Joe Grabowski, an analyst with Strong Capital Management.

Sears had been under pressure to improve its appliance business, as big-box chains like Home Depot HD.N and Lowe's Cos Inc. LOW.N lured its customers away by having more items in stock and with promotions like free shipping, zero- percent financing.

Retailers Getting Out of Credit Card Business
By Dina ElBoghdady - Staff Reporter - Washington Post
August 26, 2003

For at least two decades, retailers used the lure of easy store credit to drive sales, even if it meant extending the option to consumers with low income, poor payment records or no credit history at all.

As long as the economy was good and the credit card holders were employed, retailers took their chances on risky borrowers and charged hefty interest rates and fees to make up for it.

But in a shaky economy, the formula has failed -- prompting at least seven retailers this year to turn over the administration of their credit card operations to third parties, according to industry analysts.

Circuit City Stores Inc., one of the nation's largest consumer electronics chains, became the most recent example this month when the Richmond-based company put up for sale the money-losing portion of its credit card operation. The retailer said the unit's high default rates and sinking profits were drains on its finances and a distraction from its retail business.

The announcement came about a month after Sears, Roebuck and Co., a pioneer in the credit card business, said it would sell its troubled credit card division to Citigroup Inc. for about $3 billion, probably later this year.

"We've entered into a new era in the finance world," said Robert McKinley, chief executive of CardWeb.com, a Frederick , Md. firm that tracks the industry. "Around 2001, when people started losing their jobs, one of the first things they would stop paying on was their credit cards. Ever since, it's been a real learning experience for the industry. It got out of control for these retailers."

Spiegel Inc., one of the nation's oldest catalogue operators and owner of the Eddie Bauer clothing chain, filed for bankruptcy protection in March, in part because its credit card business had failed. It has since started offering private-label credit cards through a third party, Alliance Data Systems Corp.

Last year, Saks Inc. sold its private-label credit card business to consumer lender Household International Inc. for more than $300 million. J.C. Penney Co. sold its credit card operations in 1999 for nearly $4 billion to GE Capital, General Electric Co.'s financial arm.

Sears's decision got the most attention because the retailer had the largest private-label program in the country. When Sears started issuing MasterCards three years ago, it became the 10th-largest issuer of bank credit cards, according to the Nilson Report, a payment card trade journal based in California.

Like Sears, many retailers that entered the credit card business offered cards that could be used only in their stores. The goal was to boost sales and improve customer loyalty by handing millions of consumers new buying power and added convenience.

Some began expanding into MasterCard and Visa cards after Congress allowed them in 1987 to form federally chartered, limited-purpose credit card banks.

By having their own banks, retailers for the first time could issue general- purpose cards. And because the banks were federal, they could charge interest at the highest rate permitted by the states the banks were in.

Before 1987, retailers that offered private-label cards were only allowed to charge the highest interest rates permitted by the state the cardholder lived in. Because the states had different ceilings, these cards were a cumbersome business for national chains.

With the general-purpose card, retailers gained flexibility and a new revenue stream generated outside their own establishments.

But some of them also gained a lot of headaches. The banks they owned tried to expand their portfolios by chasing after risky borrowers.

Sears tried to convert many Sears credit account holders to Sears Gold MasterCard starting in 2000. While the basic Sears card is primarily for Sears purchases, the MasterCard can be used elsewhere and permits balance transfers and cash advances.

Consumers who took advantage of those perks had high default rates, Sears belatedly discovered. The company needed to raise its bad-debt reserve by $189 million late last year in part to deal with the bad credit, the company said.

The portfolio that Circuit City is trying to unload -- which includes Visa and MasterCard -- lost $29 million in the first quarter and suffered default rates in the mid-teens, said Bill Cimino, a Circuit City spokesman. First North American National Bank, Circuit City's wholly owned subsidiary since 1991, amassed the portfolio through direct-mail -- as opposed to in-store -- solicitations.

By contrast, the default rate for the portfolio that Circuit City created in its stores was around 5 to 6 percent, Cimino said. That portfolio -- which includes Circuit City-only cards and Circuit City Visa -- was profitable in the first quarter. And it's not on the selling block, at least not yet, company officials said.

"What we found when we looked at the two portfolios is the [in-store] portfolio is made up of people with higher credit quality than the bank card portfolio," Cimino said.

Circuit City presumably knew that, which is why it was charging interest rates in the 20 percent range as well as hefty annual fees for the bank card portfolio, analysts said.

To consumers, the sales of credit card divisions should be invisible in most cases. For instance, the Sears Gold MasterCard should continue to have the Sears name on it after Citigroup acquires the portfolio, said Edgar McDougal, a Sears spokesman.

And Sears sales clerks will continue pitching the cards because Citigroup agreed to pay Sears at least $200 million annually for 10 years for the new accounts and sales on credit that Sears employees are expected to generate.

Why would Citigroup, or any other credit card issuer, want to take on an unstable portfolio?

Because buying one comes cheap at this point, said David Robertson, publisher of the Nilson Report. And as the credit card market continues to consolidate, the largest issuers are ever more dependent on scale of operations for profitability, Robertson said.

"Credit goes roughly in five-year cycles," Robertson said. "You could make a case that things have bottomed and Citigroup will have bought at the bottom and will be able to rise with that business."

CPI Cancels Exclusive Deal with Sears
By Rick Desloge - St. Louis Business Journal
August 25, 2003

CPI Corp. has eliminated its exclusive relationship with Sears, Roebuck & Co. after operating Sears Portrait Studios for nearly 50 years.

The move frees CPI to strike a deal with other retailers, while maintaining its Sears operations, David Pierson, chairman and chief executive of the company, said during an Aug. 15 investment conference. The change in the Sears arrangement comes as CPI faces flat sales, mounting losses and more competition in the portrait business.

So far, CPI has no deals in the works with any other retailer, Pierson said, but he added: "The runway is now clear for us to look at and potentially pursue other opportunities.... We obviously believe that is very good news."

John Race, a principal with DePrince, Race & Zollo Inc. in Orlando, Fla., one of CPI's major shareholders, said he believed CPI executives have explored various possibilities with other retailers, and said CPI will benefit from the move.

"They had a very good idea of who (among retailers) they wanted to talk to before the conference call," Race said. "I don't think there's been a new Sears store built in the last 10 years. They (CPI) had tied their wagon to one horse, one that was not moving."

Race said the portrait business has been profitable, but CPI had no way to expand under terms of its deal with Sears.

DePrince, Race & Zollo holds 419,200 shares of CPI, or 5.2 percent of CPI's stock, according to CPI's proxy.

CPI has agreed to provide Sears a minimum level of revenue through 2008, when the current exclusive agreement would have ended, Pierson told the investor conference. Pierson and Jack Krings, president of the portrait studio division, did not disclose their minimum level of performance at Sears.

A spokesman for Sears in Chicago, Larry Costello, said the change will not impact customers who shop at 870 U.S. Sears stores. "We're presenting this option to CPI as a way of helping ensure a financially stronger partner company," Costello said.

Sears closed ten stores last year and opened 15.

CPI announced the change in its agreement with Sears at the same time it disclosed a loss of $826,000 on sales of $61 million for its second quarter of 2003. For the first six months of the year, CPI has lost $5.3 million on sales of $117 million, flat sales from the same six-month period a year ago. For 2002, CPI earned $6.5 million on revenue of $308 million. The company's stock was trading at $16.55 a share when the market closed Aug. 19.

CPI has provided professional portrait photography for Sears customers since 1959 and has been doing so exclusively since 1986, according to CPI's annual report. The company operates 1,023 studios throughout the United States, Canada and Puerto Rico, under license agreements.

The Sears relationship has been an integral part of CPI's growth for nearly the last half century, one that has helped it gain a strong position in the portrait studio market, but it is not the only place the company hopes to grow. CPI also has started expanding into Mexico, where the company has five stores, primarily in Chihuahua in northern Mexico. CPI also started a mobile photography business that has expanded to 27 markets. However, the company does not have unlimited capital to expand on all three fronts, CPI executives said.

The removal of the Sears exclusive arrangement potentially will allow CPI to compete with Wal-Mart, its fastest-growing national competitor, Pierson told the conference.

"Wal-Mart's (portrait studio) store count growth has been 300 stores in the last 12 months -- a third of our store count in a year," Pierson said.

Major retailers, including Wal-Mart, contract with rival portrait studio operators, according to CPI. Wal-Mart uses PCA International, based in Charlotte, N.C. Lifetouch of suburban Minneapolis handles portraits for J.C. Penney, and Olan Mills handles Kmart.

Pierson said CPI's losses so far this year came as the company increased its staff and boosted its advertising spending. Still, the company said its average sale per customer increased to $66.78, an 8 percent gain over the $61.56 CPI saw for the same period last year. Krings said CPI's total sales with Sears have fallen from what they were a few years ago, though he did not disclose by how much.

People familiar with the CPI arrangement with Sears said the two had annual agreements through 1998. It was during that year CPI contemplated taking the company private. As part of that transaction, one of CPI's financial sources wanted a longer-term arrangement with Sears and asked for a 10-year exclusive contract. CPI later abandoned plans to go private but the provision for the 10- year contract with Sears remained, a CPI source said.

"As we went into the discussion of the removal of exclusivity, on both sides, no one was looking to get rich. We were just looking to protect each other. In our case, to give us room to grow beyond Sears, in their case to be comfortable we would concentrate on the Sears business," Krings told the investment conference.

CPI also is focusing on a "new mom" promotion, where new mothers are given discount photo packages during the spring and Easter sitting sessions. "If we have taken good care of those new moms, and I'm sure we have, we'll see them again for Christmas portraits," Pierson said.

Sears to Offer Lands' End Items at all U.S. Stores
Akron Beacon-Journal - Associated Press
August 25, 2003

HOFFMAN ESTATES, Ill. - Sears, Roebuck & Co. said it will begin offering items from its Lands' End Inc. unit at all Sears stores nationwide starting this month.

Lands' End products will be available at 870 Sears stores, more than double the roughly 400 stores where the items had previously been offered, Sears said Monday.

Lands' End, a leading catalog and Internet seller of clothing, makes apparel for men, women, and children as well as accessories, home goods, luggage, and corporate gifts.

Sears, the Hoffman Estates, Ill., department store chain that had revenue of $41 billion in 2002, purchased Lands' End in June 2002. It introduced Lands' End merchandise at 183 stores in 10 markets five months later, then expanded the number of stores by 217 this past March.

The rollout to Sears' 870 full-line stores coast-to-coast will be complete late this month, Sears said.

Insurance Demands a Long-Term Perspective
By Stan Hinden - Special to the Washington Post
August 24, 2003

Ten years ago, at age 66, I decided to buy a $100,000 term life insurance policy. At the time, I was an employee of The Washington Post and had about $100,000 of company life insurance coverage. But I knew that when I retired I would lose my Post insurance. And I wanted to prepare for that day.

My new $100,000 term life policy cost $1,756 a year, and I became used to seeing the annual premium notice arrive each June.

This year, the notice came as usual. But when I opened the familiar envelope and looked at the bill, I nearly fell out of my chair. The premium for the coming year wasn't $1,756. It was $9,000! After I looked at the bill for the

third time, I decided that it must be a mistake, a computer glitch, something I could straighten out with a phone call.

But as I started to dial, I decided instead to try to find a copy of my policy and see what it said about the premiums. I hadn't seen it in years, and I had no recollection of what it said.

When I read it, I was shocked. The term policy called for level premium payments of $1,756 a year for a period of 10 years. But in the 11th year, the annual premiums would begin to rise dramatically. In subsequent years, the annual premiums would be $9,000, $10,000, $11,000, $12,000 and higher.

In fact, if I had been able to pay those huge amounts, I would have paid a total of $100,000 -- the same amount as the death benefit -- within seven more years.

There was no way I could afford to keep the policy, even though I had paid out $17,560 already, with nothing to show for it.

I called several other insurance companies to ask about new coverage. Given my age and health history, I was told, a $100,000 term policy would cost about $10,000 a year. So, I am not likely to find new life insurance at an affordable price.

Needless to say, my wife, Sara, wasn't happy about my losing the insurance and she asked me how this could have happened.

The truth is that I had totally forgotten the terms of the policy. And I'm not surprised I did. The events of the past 10 years have gone by like leaves in a windstorm: my retirement from the Business section of The Post, my heart bypass surgery, the start of the Retirement Journal column, the writing of my book, "How to Retire Happy," plus a zillion personal and family events, happy and unhappy.

But even if I had been aware that the clock was ticking on my insurance policy, what could I have done about it? Not much, I think. I had considered buying a "permanent" cash-value policy. But that would have cost $4,000 a year -- a lot more than I could spend.

A longtime friend, financial planner Dixie Butler, head of U.S. Advisors Inc.
in McLean, told me not to feel guilty. "You used the dollars you had to work with and did the best you could," she said. Many of her clients, Butler said, use term insurance to "insure a need" until they can accumulate additional wealth and become less dependent on insurance.

Moreover, Butler said, "you should feel great. You're still alive, and nobody had to collect on your policy."

In that sense, I guess, the 10-year term policy did fill a need. It covered us during a crucial transition in our lives, from working full time to retirement, downsizing from a house to an apartment, and trying to figure out how much money we would have to see us through the retirement years.

Fortunately, I had also bought an $85,000 cash-value policy many years earlier and still have it.

If, at age 66, I made any mistake, it was that I did not think far enough ahead

to what our financial situation might be 10 years or even 20 years into the future. Sure, it's hard enough to anticipate what's going to happen tomorrow, let alone 10 or 20 years from now. But, on the other hand, isn't that what retirement planning is all about?

Of course it is. So, I asked financial planner Christopher N. Brown, president of Commonwealth Advisory Group of Gaithersburg, "What is the proper role of life insurance in family financial planning and, especially, in retirement planning?"

"The primary purpose," Brown replied, "is to create a pool of income-producing assets for a spouse and/or children in the event of the premature death of the other spouse. This applies for retirees as well as couples in their thirties and forties. All other issues, such as using life insurance as an 'investment'
or establishing an inheritance for children, are secondary."

The need for life insurance, Brown continued, will vary with each individual. "Retirees who are married," he said, "need to review their financial situation and determine how much income a surviving spouse would lose."

Such income losses, he noted, frequently result from reductions in Social Security payments. For example, a husband may receive $1,500 a month in benefits while his wife gets $1,000 a month, for a total of $2,500 a month. If the husband dies, his widow would get his $1,500 payment but she would lose her $1,000 payment. That represents a 40 percent drop in family income.

A substantial loss of income also can result from reductions in pension or annuity payments. That happens when a spouse has chosen to take his or her payments under a "single life" option. If the husband, for instance, has chosen a "single life" option, he will get the maximum monthly payment for as long he lives. But after his death, his spouse will get nothing.

Under a "50 percent survivorship" option, the retiree receives a smaller monthly payment. But after his death, his widow will get 50 percent of that payment each month.

In order to avoid any loss of pension or annuity income at all, the retiree must take a "100 percent survivorship" option. That would give the retiree the smallest monthly payment of all. But after his death, his widow would continue to receive that same amount of money.

All of these factors play a role in the eventual need for life insurance to enhance the income of the surviving spouse, Brown said. "If the loss of income is too great," he said, "then life insurance may be needed in retirement. But if retirees have substantial assets, they may not need life insurance."

There are two basic types of life insurance:

Term insurance provides a simple death benefit. As in my case, the premiums may stay the same for 10 years or more. But when the stated term is up, the cost rises rapidly. Indeed, I was forced to give up the $100,000 policy because it became too expensive to carry.

Cash-value insurance, as the name indicates, builds up a cash fund during the life of the policy. Cash-value insurance comes in several varieties, including whole life, universal life and variable universal life. These differ by options, investments and flexibility.

Generally speaking, term insurance is less expensive than cash-value insurance.

Brown suggests that a mix of term and cash-value insurance may provide the best long-range protection for many people. Young couples, especially those with children, should consider taking out a sizable amount of relatively cheap term insurance, so they can provide for their family's needs in the event of an untimely death of one spouse.

When the couple is older and able to afford higher insurance payments, Brown said, they should then consider cash-value insurance, which can carry them through their retirement years.

That plan makes sense to me. And it reinforces the main lesson I learned from my $9,000 premium shocker. As difficult as it may be, think long-term when it comes to your future financial and insurance needs, and especially when it comes to deciding how you will take your pension and annuity payments. If you don't think long-term, you may shortchange yourself and, especially, your spouse.

Stimulate, Not Suffocate, Great Indoors
By David Greising - Chicago Tribune
August 24, 2003

If you've paid any attention to the retail game lately, the following scenario will sound familiar.

In fact, let's play a little guessing game. Which fancy-schmancy new retail concept am I describing below?

The new store concept was to appeal to upscale, trendy customers and make lots of money by selling big-ticket items at fat margins.

The dream customer would have $75,000 in household income. The average store might sell $50 million in merchandise a year. It would feature only high-end items such as Casablanca fans and Sub-Zero refrigerators.

And there would be 200 stores in the country by 2005.

None of it came to pass.

The income threshold for targeted customers now starts at $50,000, a 33 percent decrease. Per-store sales are believed to be well below $50 million. Fans from Hunter and fridges from KitchenAid now are among the lower-cachet offerings.

The parent company won't reveal a growth target anymore. But after adding 29 stores in the last two years, for a nationwide total of 52, only two will be added in 2003.

I know what you're thinking. This sounds an awful lot like Sears, Roebuck and Co.'s Great Indoors concept. That's the one Sears might put out of its misery by the end of the year.

Sorry, wrong guess.

The description above isn't a Sears concept. Not at all. The concept in question is Expo Design Center, progeny of the highly successful Home Depot chain.

All of which makes a couple of fairly simple points. First, not even Home Depot has designed a big winner in the high-end, big-box designer store market.

Second, and more important, if well-regarded Home Depot can remain committed to its concept, maybe long-lost Sears should consider doing so, too.

Sure, Expo hasn't been the runaway hit Home Depot thought it would be. But Chief Executive Bob Nardelli said last year that the unit was marginally profitable. And the cutback in store openings, while substantial, reflects at least in part a revelation that customers will drive a half hour and more to get to the stores. So Home Depot doesn't need to build stores as densely as it does its namesake stores.

Alan Lacy, chief executive of Sears, has embraced the Great Indoors concept like someone who has picked up a kid with a dirty diaper. The kid might be cute and all, but it's hard to find something to embrace when there's so much not to love.

And after all, Great Indoors wasn't Lacy's idea in the first place. It was the pipe dream of his predecessor, Arthur Martinez.

In a visit to the Tribune earlier this year, Lacy explained that the stores are too expensive to build--in some cases because of underground parking garages that were used to give stores a flashier street presence. He thought the inventory selection needed work. He thought store designers had gotten too carried away with costly, built-in displays that were expensive to install, expensive to remove and limited Sears' ability to quickly adapt to customer demands.

The talk inside Sears' Hoffman Estates' headquarters is that the Great Indoors is already dead. That it's only a matter of time before the funeral.

Officially, the company expresses confidence that Great Indoors can be fixed. But few who know the company really believe it.

Here's hoping the skeptics are wrong.

Lacy has already subtracted enough from Sears' future. He sold the credit card business this year, netting nearly $6 billion in the deal, which should leave him with enough money to keep investing in Great Indoors.

He has bet Sears' future on retailing. That's a risky proposition given Sears'  troubles in its mainline stores and its failure with so many other concepts, from off-mall furnishings to stand-alone tire and battery stores.

Killing Great Indoors would leave him mainly with Sears' main-line stores, an unproven off-the-mall concept--and nowhere else to go.

There is talk Lacy may soon hire a new merchandising executive. He should. Fast.

Even as he does so, he should keep finding ways to make the Great Indoors chain work.

As a former chief financial officer, the bean counter in Lacy must want to shut down an experiment that hasn't yet worked and is costing plenty. But Lacy needs to listen to his inner merchant.

The Great Indoors needs more work. But it's work Lacy must do for the future of Sears.

Sears to Repay Consumers who Overpaid Car Battery Fee
By Eric Durr - The Business Review (Albany)
August 21, 2003

Sears Roebuck and Co. will pay $105,000 to 50,000 to New York residents who were overcharged fees when they bought new car batteries, state Attorney General Eliot Spitzer announced Aug. 21.

Under New York law when people buy new car batteries they are charged a fee if they do not turn in an old battery. The "incentive" to turn in old lead-acid batteries rather than discard them was contained in the 1990 Lead Acid Battery Recycling Law.

The law puts the maximum fee which retailers can charge, and keep, at $5 per battery. Sears was charging customers $7 per battery, according to Spitzer's office.

In addition to agreeing to repay customers, Sears will pay $10,000 in civil penalties, Spitzer's office said.

The settlement applies to people who purchased car batteries between 1999 and March 14, 2003, and did not turn in their old batteries, said Christine Pritchard, a spokeswoman for Spitzer.

Sears representatives were not immediately available for comment.

"My office will continue to monitor the acts of auto parts distributors to ensure that they are properly complying with the state's 'return incentive' statute in order to protect both consumers and the environment," Spitzer said in a written statement.

The same law which allows companies to charge a fee when customers do not turn in old lead-acid batteries, also requires that they accept the used batteries, and dispose of them for nothing, said Pritchard, a spokeswoman for Spitzer.

When notified by Spitzer's office that it was charging more than allowed by law, Sears immediately lowered the charge to five dollars, according to Spitzer's office.

Any portion of the $105,000 that is not repaid to consumers who were overcharged will be donated to West Harlem Environmental Action; and the New York City Coalition to End Lead Poisoning Inc.

Similar settlements were reached earlier this year with AutoZone, Inc. and Advance Stores Company Inc. In this case the firms were charging fees of $8, and $10, respectively, Pritchard said.

Consumers who want a rebate will have 45 days to file with Spitzer's office.

Towering Expectations Grip Shares of Sears
By Ken Brown and Amy Merrick
Staff Reporters - The Wall Street Journal
August 20, 2003

Investors Have Bid Up Stock Despite Disappointing Sales

March began ugly for Sears, Roebuck & Co.

The company announced that February same-store sales fell 9.4%, Standard & Poor's lowered Sears's credit rating, the company warned that earnings would drop and the retailer's share price hit a 20-year low.

Then Sears announced that it would sell its massive credit-card operation. Suddenly one of the market's biggest dogs became an investor darling, and the stock, bolstered by a successful sale of the unit, has more than doubled from its low of $18.50 on March 14. As of 4 p.m. Tuesday in New York Stock Exchange composite trading, Sears shares were at $44.69 each. The retailer's shares have outperformed those of every other major discounter and department store for the past six months.

"This is an interesting development," says Charles O'Shea, an analyst at Moody's Investors Service, referring to the credit-card sale. "It's a laser beam on the retail business right now and it's a tough business out there."

This new focus could be bad news for Sears' stock. Investors have bid up Sears shares more on hope than fact -- same-store sales, an important industry measure of sales at stores open at least a year, and retail operating income are down this year. Sears management has been trying to lower expectations for a much-anticipated second-half rebound. In addition, the deal in which Sears sold its credit-card business to Citigroup Inc. turns out, on closer examination, to be less impressive than many investors initially thought. Finally, Sears debt holders and the credit-rating agencies are worried that Sears will squander the cash it is getting from the deal on massive share buybacks or an acquisition, leaving the company's balance sheet in weaker shape than they would like.

Sears's woes have been well documented. Same-store sales have fallen for 23 consecutive months in the face of stiff competition, most recently from Home Depot Inc. and Lowe's Cos. in appliances. This, the company says, should begin to change in the second half of this year. It has a new strategy to revive appliance sales, and, most important, the company expects to be selling merchandise from Lands' End, which it bought in June 2002 for $1.86 billion, in all of its 870 stores by the end of September. Apparel and appliances account for 50% of Sears' sales.

But at the same time, Sears lowered earnings expectations for the year to between $4.80 and $5, down from $4.95 to $5.15 and said it expects same-store sales to be roughly flat for the year. "They have some challenges as just a stand-alone retailer," Mr. O'Shea said.

One reason for renewed investor confidence in Sears is the company's solid balance sheet, which was bolstered by the sale of the credit-card business to Citigroup for $32 billion, a 10% premium to Sears' $29 billion in credit-card receivables. Not only will the deal allow Sears to pay off nearly all of its debt, but the premium paid by Citigroup was a vote of confidence in the retailer, which was hit last year by big losses on its credit cards. Sears shares jumped 9.2% the day after the deal was announced.

But on closer examination, that premium was less than Sears initially let on. In its conference call describing the deal, Citigroup executives said the deal excluded $600 million of accounts that were effectively worthless. That means Citigroup really paid $32 billion for $29.6 billion in receivables, or an 8% premium.

Glenn Richter, chief financial officer at Sears, says the actual amount excluded was $300 million, which puts the premium at 9%. The fact that the deal's premium was slightly lower than advertised gets at a larger point that is of deep concern to Sears bond holders: What is the company going to do with its cash? Sears executives say they will use it to extinguish nearly all of its $28.5 billion in debt. "We will pay down $27 billion in some form or fashion," says Mr. Richter.

Bond investors have cheered Sears' intention to pay down debt. At the end of January, Sears benchmark bonds traded at a yield that was 3.5 percentage points above Treasurys, while today they are at 1.1 percentage points above Treasurys. Some of those gains can be attributed to the broad rally in corporate debt, but now Sears debt trades fairly close to the debt of rival Federated Department Stores Inc., a company that has performed better than Sears.

But some bond investors are concerned Sears won't use its cash to aggressively pay down its debt. Such a scenario could turn the company's strong balance sheet, which separates it from other struggling retailers, into a less pristine one.

In addition, the company's cash pile isn't as big as people think it is. That is because paying off Sears's debt isn't a cost-free exercise -- Sears says the cost could be $600 million, depending on how and when the company decides to retire the debt. Sears has been hedging its interest-rate exposure with a swap transaction, which it will unwind as the debt is paid off. That swap portfolio happens to be valued at $600 million, offsetting the cost of paying off the debt, Sears says.

Another drain on the cash could come from Sears' pension fund, which is underfunded by $1.1 billion. "We are contemplating doing some things in terms of accelerating our funding," says Mr. Richter. Sears will put at least $300 million pretax into the fund this year, and may put an additional $800 million pretax into the fund.

But the big worry is that Sears will use its cash to boost its share price. Indeed speculation among bond investors is that Sears, which needed to keep them happy so it could sell bonds to finance its credit-card operations, feels it doesn't need them anymore. "They don't have to be nice to the bond market anymore," says Bonnie Baha, who oversees corporate investment-grade bonds at Trust Company of the West. "They don't have to keep a stellar commercial-paper rating or a stellar bond rating." She has been selling Sears bonds and holds about $15 million of the retailer's bonds.

In many recent cases, bondholders -- the worrywarts of the investment world -- have proven themselves to be much better at spotting trouble than stock holders. Sears points out that it still expects to have about $1.5 billion in debt on its balance sheet, and a spokesman says the company doesn't expect its relationship with bondholders to change.

Still, bondholders are worried about what Sears will do with its cash. One possible temptation would be boosting the company's share price through a big share buyback. "Earnings per share has to grow somehow and when the 'E' is not contributing, there's one way to do it," says Suzanne Foley, an analyst at Credit Sights, an independent credit research firm.

Sears has bought back $1 billion of shares this year and Mr. Richter says the company hopes to give $4 billion to $4.5 billion back to shareholders, either through a buyback or dividend.

For bond investors, a Sears revival could be a mixed blessing. If Lands' End turns out to be a great deal for Sears, it could go shopping again, potentially squandering its cash on a less-successful acquisition. If the Lands' End deal doesn't help sales, Sears could be under pressure from shareholders to boost the stock price through a buyback, which also could be costly.

"At this point," says Ms. Foley, "I just want to have some sort of comfort about what they're going to do with the bonds."

Grocers' Strategy: Be What Wal-Mart Is Not
By Constance L. Hays - The New York Times
August 20, 2003

DALLAS - Bill Breetz Jr., a towering longtime grocer who runs the Southwest for the Kroger Company, was on the march. Crossing a vast expanse of peaches, melons and the rest of the produce aisle in a recently remodeled Kroger supermarket here, he checked on a woman cooking stir-fry meals-to-go at a kitchen set up near the back of the store.

He had already inspected the floral section and glanced up at the outdoor furniture, which near the end of its prime selling season sits atop the aisles in the cavernous store near the Highland Park neighborhood. Next on his tour: the 2,500-bottle wine section, which has a full-time wine steward.

Like most supermarket executives, Mr. Breetz spends much of his time looking over his shoulder at Wal-Mart, the newest entrant in the local grocery wars. And the Highland Park store makes Kroger's strategy clear: to be the anti-Wal-Mart, with a formula that combines a deep selection of luxury foodstuffs with a high level of service in an upscale setting.

Indeed, for nearly every supermarket chain in Dallas — as for merchants in other parts of the country where Wal-Mart has barreled into the grocery business — holding the retailing behemoth at bay is a primary concern.

Texas was one of the first targets for Wal-Mart's 200,000-square- foot "supercenters," which sell groceries alongside general merchandise. Today, the company has more stores of all kinds in the state — 163 supercenters, 68 Sam's Club warehouse stores and 52 Neighborhood Markets — than in any other. Around company headquarters in Bentonville, Ark., an hour's plane ride from Dallas, when anybody asks, "Why are there so many Wal-Marts in Texas?" the answer they get is: "Because it's big."

Since no other retailer of any stripe can come close to being as big as Wal- Mart, grocers here are trying to distinguish themselves by appealing to a class audience rather than a mass audience. Some try to loft their produce to a new level, and others hawk their natural-food sections. But all are betting that while Wal-Mart may win on price, they can win on something else.

Mr. Breetz does not like to talk about market share. But in Dallas, Kroger eked out a small gain in market share last year — just under 1 percentage point — against rival stores, according to statistics compiled by Banc of America Securities. Wal-Mart, however, increased its market share by 4.6 points.

Even so, the results in Dallas were prettier than across the rest of the country. In markets where Kroger has traditionally held the lead, its market share fell by 1.5 percentage points in head-to-head competition with Wal-Mart supercenters.

Wal-Mart's impact has been "like the Black Death," said Mark Husson, a retail analyst for Merrill Lynch. "The plague comes to your village, and everybody gets sick, but not everybody dies." In 1994, Wal-Mart had just 2 percent of grocery sales in Dallas. Today, its share has grown to 16 percent.

Dallas grocery shoppers run the gamut from food stamp recipients to infotech millionaires. But it appears that it is the upscale shoppers whom the grocery chains are fighting hardest to keep: the two-career couples moving into new neighborhoods springing from one-time farmland; the well-off retirees choosing to stay in Plano, a well-off suburb; and the 20-somethings who are not into self-denial.

In the town of Frisco, part of the Dallas-Fort Worth "metroplex," Albertsons opened a store in June in a neighborhood where many homes, let alone most amenities, are still under construction. Though dust swirled in the air outside the store, inside it was stocked with items like $15.99 jars of tortilla soup from the Mansion at Turtle Creek, a famed Dallas restaurant. There is an olive bar, a German food section and exotica like stalks of sugar cane.

"We're really a neighborhood market," declared Wayne Denningham, Albertsons' Dallas-Fort Worth division president, as he toured the pin-neat store. Merchandise is chosen based on the population within three miles of the store, he said, and when customers want something — more horse feed in one store, or more olives in this one — Albertsons will answer the call. He insists that this is something Wal-Mart, where much of the ordering is handled at headquarters, cannot do.

Beyond that, Albertsons is emphasizing its produce, from grapes to gladioli flown in from Michigan, to entice shoppers. "We're really all about fresh," Mr. Denningham said. "We want our stores to scream `Fresh.' " The produce array in Frisco is impressive, as are the prepared salads, freshly baked cakes and squadrons of Cajun-spiced roast chickens.

As for the help, clerks are supposed to "scream `Service,' " Mr. Denningham said. Providing service is one way to not be Wal-Mart, he added. "Anybody can sell pork and beans," he added.

Across town, in a three-year-old Wal-Mart supercenter just east of the Dallas-Fort Worth Airport, Trent Crowe, a Wal-Mart district manager, was strolling through the grocery aisles with the store manager, James Bozard. Unlike its grocery rivals, Wal-Mart does not advertise prices for a particular store, city or region. Once a month, the company puts out a set of national specials, known as rollbacks, and there are also weekly price cuts on some groceries. But no local ads on radio or television or in newspapers are budgeted for any market.

"With some competitors, they'll have a $10 purchase and with it, you get a watermelon for a dollar," said Mr. Crowe, who supervises eight stores in Dallas. "That's a gimmick. We don't do gimmicks. But we'll give them the watermelon for a dollar."

The clientele at this Wal-Mart is such that Mr. Bozard, a refugee from Winn- Dixie ("We brought him over, Wal-Mart-ized him, and now he's running a store," Mr. Crowe said), found he could not sell air-conditioners, no matter the price. "Everybody around here has central air," he explained. But the locals snap up tubs of crumbled blue cheese and squeeze bottles of cranberry-honey mustard, two items featured recently in the store.

While he admits that nearly all of the buying for the Dallas stores is done from company headquarters, Mr. Bozard does have some freedom to add to the "plan-a-gram," as the store layout is known. Not every Wal-Mart, after all, has a free-standing tank filled with lobsters, which Mr. Bozard's customers buy with alacrity, even at $12.33 a pound. "Six- to 12-pound lobsters — that's what we sell the most of," he said.

But it is no cakewalk, even with such demand for crustaceans. "We have to be on our toes," Mr. Crowe said. "We take items and drive sales with them. Our competitors are getting better at being item-driven merchants as well."

Shoppers' expectations keep rising, as well, as is evident in the aisles of the year-old Central Market store on Coit Road in Plano. They crowd like honeybees around displays of starfruit, organic beets, frozen duckling and imported chocolate, as well as more predictable pyramids of Tide.

The selection attracts not just affluent Dallas city dwellers but also picky suburban shoppers

"I just finished reading this book called `What Would Jesus Eat?' and we came here to shop," said Christy Barber, a music teacher in the Frisco public schools who was combing the aisles with her husband, Daniel, and their two children. "We were shopping here before that, but this just solidified it."

The book outlines a diet of grains, vegetables and fish, "basically the opposite of the way Americans eat," she said. "It's based on scripture and also on science." To buy everything she needed for the diet, Mrs. Barber said, she had to come to Central Market, owned by the privately held H. E. Butt of San Antonio; for paper towels and other essentials, she planned to stop at the Wal- Mart on the other side of Coit Road.

That particular Wal-Mart's proximity to Central Market has posed special problems for Mr. Crowe, the district manager. On a recent trip through Central Market, he noticed that organic eggs were selling out. Wal-Mart did not have any organic eggs for sale. "We weren't currently carrying them," he said. "Now we are."

That is a typical Wal-Mart response to a competitor, he added. "We'll get the item in, we'll put signs in to say it's a new item, and we'll go out and beat them in price," he said.

For most of Wal-Mart's competitors, the No. 1 challenge is retaining the loyalty of established customers. Club cards are a common tactic, with their offers of deep discounts on selected products — though many shoppers seem to have acquired a card for every chain.

At Kroger, the shelf price of a 100-ounce jug of Tide is $8.69, but holders of a Kroger card would pay just $5.99. At Tom Thumb, a chain owned by Safeway, the same jug of Tide was regularly $8.69, but was on special for $5.99. At Albertsons — which offers a variety of special offers and clubs, like a cereal club that gives free boxes once a certain threshold of purchases has been reached — the Tide was marked $7.99, or $7.49 for cardholders.

At Wal-Mart, the big tub of Tide was selling recently for $5.48.

"I've been all over," said Mr. Crowe of Wal-Mart, "and this is as competitive a market as there is. No one's giving us anything."

Sears Cuts 650 Jobs at Headquarters
By Mike Comerford - Business Writer - Daily Herald - Suburban Chicago
August 19, 2003

Calling it part of an "ongoing process to reduce costs," Sears, Roebuck and Co. confirmed Monday that it has laid off 650 workers this year at its Hoffman Estates headquarters and more job cuts may be in store.

The so-called jobless recovery looks to be the "ongoing process," according to Jane Laystrom, director of the Barrington Career Center, a not-for-profit agency which assists people in finding jobs.

"We've seen a lot of Sears people," said Laystrom, adding that 21 former Sears workers are in her case files. "And we've seen a lot of Motorola and Kemper people too."

Chicago-based Exelon Corp. said earlier this month that it is laying off 1,900 workers. Kemper Insurance once employed 2,100 people in Long Grove alone; now it is selling its main operations, letting go of hundreds of jobs as it winds down. Motorola's staff is down 60,000 worldwide from its peak.

And some analysts say Sears' layoffs are not likely to end with the latest round.

"Their cost structure is out of whack with their competitors at Target, Wal-Mart and Kohl's," said John Melaniphy, president, Melaniphy & Associates, a Chicago-based retail consulting firm. "I don't think they're finished, either. There's no question that their headquarters had gotten fat."

In March, Sears warned that layoffs were coming but did not estimate the size of those cuts. In 2001, it cut 5,950 jobs company-wide. After the most recent cuts, Sears has between 5,000 and 6,000 workers in Hoffman Estates, about 140,000 in total, according to Sears spokesman Chris Brathwaite.

In July, Sears announced it was selling its profitable credit unit to Citigroup Inc. in a deal valued at $3 billion.

Since 1911, Sears has been lending to its customers so they could buy its big ticket products. Without its credit unit, Sears will be going it alone, without the source of 60 percent of its profits.

Yet Sears reported recently that sales last quarter were flat and it anticipates a similar quarter ahead.

"If sales aren't increasing, costs better be coming down," Melaniphy said.

While both the economy and productivity continue to grow, unemployment still hovers above 6 percent and the unemployed are remaining out of work longer.

"I'm sure we're going to see more Sears people now," Laystrom said. "It's happening and I don't know how it is going to be reversed."

Indoors' Future Cloudy...Sears Reviewing its Options for Underperforming Home Decor Stores
By Jim Kirk - Staff Reporter - Chicago Tribune
August 19, 2003

Sears, Roebuck and Co. appears closer to hitting the brakes on its The Great Indoors stores--one of its trendier but woefully underperforming formats.

Saying that the financial performance of its 21 big-box home decor and remodeling stores has not met the expectations of the company, Sears "initiated a review to determine actions that would improve the profitability and productivity of the format," according to a Securities and Exchange Commission filing submitted earlier this month.

The company said the review may lead to a restructuring of The Great Indoors format, store closings or a combination of both.

But several executives close to the concept say the chances of it growing further are likely dead.

Insiders said the company in the past has talked to other retailers, including big-box hardware chain Lowe's, about selling the retail concept. However, there appear to be no near-term prospects for a deal, insiders said.

A Sears spokesman said that there are no plans to sell the concept and denied the company was looking to end it.

"This format is very, very popular with our customers," said Chris Brathwaite, director of media relations at Sears.

Brathwaite said that, by the end of the year, Sears will come to a determination as to how to put the necessary changes in place to improve its performance.

Sears' latest disclosure of financial problems with its much-ballyhooed The Great Indoors is another sign of the company's struggle to find a viable retail concept outside of its full-line stores, which are also suffering from competition and shifts in consumer buying habits. Consumers are moving toward specialty concepts and away from large malls.

On paper, The Great Indoors concept, envisioned by former Sears Chief Executive Arthur Martinez, seemed like a no-brainer. With more consumers spending hundreds of millions of dollars each year to repair and decorate their homes, the concept appeared to be the off-the-mall strategy Sears had been seeking. The Great Indoors displays aisles of possibilities for every room in the house, at nearly all price levels, Martinez was so giddy with the concept that in late 1999 he said that Sears-- pleased with the early returns on the stores--was looking to build 150 stores "as quickly as possible."

But the initial stores--which were built as large as 160,000 square feet-- proved to be too big. And the concept of multiple rooms of ready-made decor was too much for too few customers, according to analysts.

The concept also has struggled with quality levels in the use of outside contractors, analysts said. "It's another mass-merchant concept," said George Whalin, an analyst with Retail Management Consultants. "It's too much. [Home Depot's decor chain] Expo is more focused. It's positioned at a much higher end with more exclusive product and more hand-holding. They do that very well."

Signs of pullback

There were signals last year that Sears was ready to at least scale back the concept under Alan Lacy, the current CEO. Lacy told analysts last fall that Sears was tinkering with the size of the formats--making new stores smaller and more flexible. And new store openings last year and this year slowed to a crawl.

In a more distressing sign, Sears earlier this year pulled the plug on much of The Great Indoors' advertising, making the stores virtually invisible to consumers, most of whom must make the store a destination shopping trip.

The news follows another ugly sales quarter for Sears. Its second-quarter specialty-store revenues, including The Great Indoors, fell 5.1 percent, due mainly to comparable-store sales declines across most of the specialty formats.

Sears has Grand plans

Lacy's growing impatience with The Great Indoors is surprising few internally. He would rather pursue his own off-the-mall strategy, called Sears Grand, which would be closer to a Wal-Mart Supercenter than a home-decorating store.

Said one insider: "Alan is buying time until Grand gets off the ground."

Proposed at 200,000 square feet, Sears Grand would offer everything from flowers to electronics to food under one roof, challenging not only Wal-Mart, but also such chains as Best Buy and Toys "R" Us.

In addition to the test store near Salt Lake City slated to open this fall, four other prototypes are reportedly planned, including one in north suburban Gurnee.

Debit-Case Plaintiffs' Lawyers Submit Their Bill:
$558 Million

By Kara Scannell and Jathon Sapsford - Staff Reporters
The Wall Street Journal
August 19, 2003

The lawyers who negotiated a $3 billion debit-card settlement for the nation's
biggest retailers have submitted their bill: $558 million, including expenses.

The settlement reached in May brought an end to a seven-year legal battle that produced nearly 400 depositions, five million documents, and 54 expert reports, and changed the way credit-card companies charge retailers to process their cards. In the case, the retailers, including Sears, Roebuck & Co. and Wal-Mart Stores Inc., accused Visa USA Inc. and MasterCard International Inc. of overcharging them to process debit-card transactions.

The settlement has thrown into question the future of interchange, or the fee that the two associations, and the banks that own them, charge retailers to accept cards issued with the Visa or MasterCard brands. Under the settlement, those fees will be open to negotiation from the beginning of next year.

The payment, if approved by the federal judge overseeing the case, would be among the highest paydays for a plaintiffs law firm involved in a class-action suit, according to Edward F. Sherman, professor of law at Tulane University, who isn't involved in the case. However, it falls short of attorneys' fees paid in some of the large mass tort cases, including the billions of dollars antitobacco lawyers netted in fees for winning settlements against the big tobacco companies.

Lloyd Constantine, partner of Constantine & Partners, speaking on behalf of the other 29 plaintiffs' firms, said, "The court will determine what is fair. All we have done is set out the criteria that had been traditionally applied by courts in making this decision."

Representatives for plaintiffs declined to comment. A fairness hearing is scheduled for Sept. 25.

The suggested payment is fitting because of the difficulty of the case, length of time involved and the inherent risk of taking on the case, legal experts say. Constantine & Partners, an antitrust boutique, which said it devoted more than half of its time over the past seven years to the case, is expected to get about half of the awarded fees.

In addition to the $3 billion compensatory payment, which will be paid to retailers over 10 years, the long-term benefit of not having to pay the
debit- card processing fees ranges from $25 billion to $87 billion, according to a petition submitted to Judge John Gleeson, who is overseeing the case in U.S. District Court in Brooklyn, N.Y.

In the petition, the plaintiffs' lawyers asked for 18%, or about $540 million, of the present value of the $3 billion settlement, below the typical 20%-30% awarded in class-action suits. They also said the compensatory relief and $18.7 million sought for expenses, which went to pay largely for expert witnesses, accounted for just 2% of the long-term benefit to retailers.

The dispute between the retailers and the two associations was the biggest of a series legal actions that resulted when the Justice Department, in a separate dispute accusing Visa and MasterCard of antitrust violations, disgorged reams and reams of documents about the inner workings of the credit-card industry. Those documents became fodder for consumer lawyers.

The Great Indoors is Out in the Cold
By Sandra Jones - Crain's Chicago Business
August 18, 2003

Sears Launching Internal Review of Decor Stores

Alan Lacy is raising the ax over Arthur Martinez's brainchild.

The Sears, Roebuck and Co. chairman and CEO has signaled that he's out of patience with the Great Indoors, a money-losing chain of big-box home decorating and remodeling stores conceived by his predecessor five years ago as the answer to Sears' growth woes.

Mr. Lacy has ordered an internal review of the operation, with a view toward restructuring the unit or closing stores, according to a recent Securities and Exchange Commission (SEC) filing.

Mr. Martinez's 1998 vision of the Great Indoors as a 200-store chain that would give Sears a growth vehicle to match the likes of Home Depot Inc. and Target Corp. has yielded to Mr. Lacy's 2003 reality of a 20-store chain with no profits and shrinking sales.

Mr. Lacy, who took over as CEO in October 2000, put the brakes on Great Indoors' expansion last year, and his latest move has observers discounting the unit's chances of survival.

"Unless they come up with some epiphany, I don't imagine it will be part of the company a year from now," says Jeanne Ernst, portfolio manager at Gardner Lewis Asset Management, a Chadds Ford, Pa.-based investment firm that holds 518,840 Sears shares. "It has a good customer reaction, but they just can't seem to figure out how to make money."

To many observers, the pullback reflects the increasing influence of Edward Lampert, the Connecticut multimillionaire whose RBS Partners L.P. has in recent months become Sears' second-largest and most influential shareholder with an 11% stake. (State Street Bank & Trust Co., the trustee for Sears' employee 401 (k) savings plan, holds slightly more shares.)

Slow, steady influence

Pouring millions of dollars into an unproven store concept — each Great Indoors store costs $20 million to $25 million to build — wouldn't sit well with Mr. Lampert, analysts say. The investor, who took control of Michigan-based Kmart Corp. when it emerged from Chapter 11 bankruptcy in May, favors slow-growth businesses that generate a lot of cash for shareholders, rather than consuming it in expansion campaigns.

"That is very consistent with Lampert's philosophy," says Joseph Grabowski, an analyst at Strong Capital Management Inc. in Wisconsin. "You do what you have to do to maintain the core store, take the cash flow, ignore growing the top line and just buy back shares — and we'll all get rich."

Mr. Lampert and Mr. Martinez did not return phone calls seeking comment.

"The concept has been wildly popular with consumers," says a Sears spokesman. "It's a matter of figuring out how to make it profitable."

Aside from its financial problems, the Great Indoors doesn't fit with Mr. Lacy's strategy of focusing on Sears' core mass-merchandising business. The typical Sears customer isn't likely to pay $100 for a shower curtain or $8,500 for a Thermador professional range, both available at the Great Indoors.

Plugging the fiscal leak at the Great Indoors also will allow Mr. Lacy more freedom to focus on his own growth vehicle, a Target-style stand-alone discount store dubbed Sears Grand.

Mr. Lacy has been retreating from the Great Indoors for the past 18 months, initially slowing down the rollout and, earlier this year, stopping construction of a smaller prototype store in Austin, Texas. In an earnings conference call with analysts last month Mr. Lacy confessed that Sears hasn't "got the profit model right."

The Great Indoors got off to a bold start when it debuted in a Denver suburb in 1998. Customers raved about its eye-popping designs: rows of full-scale, luxurious kitchens and bathrooms decorated to the hilt. The stores even have Starbucks kiosks.

Sears intentionally kept its name off the marquee and away from any Great Indoors advertising, hoping to attract customers who would otherwise shun Sears. As the economy soared, so did sales, rising by double-digit percentages each year through 2000. Mr. Lacy made the Great Indoors the centerpiece of the Hoffman Estates-based retailer's April 2001 investors meeting in Detroit, opening up one of the newest stores nearby for a grand tour.

But by early 2001, sales at stores open at least one year began to slow, and by 2002 they were falling. In July, Great Indoors same-store sales declined by a mid-single-digit percentage, a bigger drop than the 0.8% slip in same-store sales companywide.

Great Indoors stores generate an average of less than $20 million a store, making for a $350-million-to-$400 million business, analysts estimate. Sears declined to disclose sales figures, but acknowledges in its SEC filing that the stores have "not met the expectations of the company."

Likely outcomes

In January, Mr. Lacy tapped Lands' End Inc. Chief Operating Officer Jeff Jones to take over the Great Indoors operation, replacing Bob Rodgers, who left the company. Mr. Jones, who joined Sears last year as part of Sears' $1.8-billion acquisition of the Dodgeville, Wis.-based catalog house, has been charged with figuring out how to make the most of the Great Indoors assets.

Hardware industry sources say Lowe's Cos. has been discussed as a potential buyer, but it's unlikely that the North Carolina home improvement chain would be willing to take on Great Indoors' high cost structure and inefficient distribution system.

The more likely scenarios are to either merge the stores into Sears Grand (the pilot store will debut next month in Utah) or shutter the operation and take a writeoff, analysts say.

"We're probably in an area where it doesn't pay to maintain the existing operation," says David Novosel, managing director of Banc One Capital Markets in Chicago. "You either beef it up or scale it back."

To be sure, the all-in-one home decorating and remodeling format has been a bust throughout the industry. Home Depot is retreating on its Expo Design Center, a 53-store chain launched in 1991, slowing the rollout of new stores and shifting away from pricey items. And House2Home Inc., a California-based warehouse-style home store, went out of business last year.

David Abella, an analyst at New York-based Rochdale Investment Management Inc., calls Great Indoors "a distraction," and says Sears should "put the focus back on their core business."

Maytag Starts Repair Business
Chicago Sun-Times
August 15, 2003

Sears, Roebuck and Co. is getting new competition in the appliance-repair business from Maytag.

Maytag announced Thursday it has formed a new business to provide in-home appliance repair for all major brands in select markets.

A Sears spokesman said Thursday that the Hoffman Estates-based retailer will continue to "invest in and grow" its service repair business, which generated $2.2 billion in revenue in 2002.

Maytag Forms New Business to Fix Machines
The Associated Press
August 14, 2003

NEWTON, Iowa -- Maytag Corp. has formed a new business to provide in-home appliance repair for major brand appliances.

The company currently services only its own brands.

"We are enthusiastic about the potential for this new business and the extension of the Maytag name and reputation for dependability to an area outside of manufacturing," said Ralph Hake, Maytag chairman and chief executive officer.

Maytag officials appointed a team to study the industry and in the past year the team recommended creation of the new business.

"With the changing marketplace, consumers today have fewer appliance service options," said Steve Benton, vice president, Maytag Services. "Maytag's brand and heritage create a unique opportunity to provide consumers with a quality service alternative."

The new company plans to support all major brands in select markets, including a new agreement with Samsung Electronics America. The agreement authorizes Maytag Services as a service center for warranty and out-of-warranty service on Samsung appliances.

As the new company grows, Maytag Services will seek other clients and comprehensive service support relationships, the company said in a news release.

Newton-based Maytag is a leading manufacturer of home and commercial appliances including Maytag, Amana, Jenn-Air, Jade, Hoover and Dixie-Narco brands.

Wal-Mart, Aware Its Image Suffers, Studies Repairs
By Constance L. Hays - New York Times
August 14, 2003

Wal-Mart, concerned about its public image, is using a consultant to analyze that image and has commissioned radio and television ads to try to reverse criticism from local officials, consumers and others.

It is the first time that Wal-Mart, known for parsimony in its business practices, has invested in "reputation research" — using polling techniques, focus groups and phone interviews — and then spent more money to try to repair the distressing aspects of what it found.

The project began about two years ago at the suggestion of Wal-Mart board members, a company spokesman said, and is continuing. Regular updates are being given to the board, with one scheduled next month. The company's relationships with consumers, employees, bankers and community leaders have all been examined by the consultant, Fleishman-Hillard, a part of the Omnicom Group. Last but not least will be its ties to suppliers, who make and deliver billions of dollars' worth of goods to Wal-Mart stores.

Such an effort indicates concern at Wal-Mart's highest levels about fallout from the company's rapid growth and enormous economic influence. With that ascent has come scrutiny of Wal-Mart's penchant for hiring part-time workers as well as its treatment of female employees, the subject of a pending federal lawsuit, and its resistance to organized labor.

Community opposition to building Wal-Mart stores has been vociferous in some places, and muttering is heard from time to time among manufacturers, which say they are being constantly pressed to sell their goods to Wal-Mart at low prices.

The project found that many people view Wal-Mart as a place of dead-end jobs, and that its performance as a corporate citizen leaves much to be desired. "They didn't see us as involved in the community as they might like," Wal-Mart's chief spokesman, Jay Allen, said. "They didn't give us good marks on listening. Sometimes it was as basic as the parking lot was not clean, and that's not treating the community with respect."

To reverse the impression about its jobs, Wal-Mart is broadcasting three ads nationwide that portray it as a great place to work. Two of the ads feature women who work at Wal-Mart discussing their job satisfaction. "They give you opportunity to advance," says one, a black department manager who persuaded her daughter to give Wal-Mart a try.

Another, a white mother of two who is a district manager in charge of several stores, says, "It's not easy to have a career and a family, but my job makes it a lot easier to do both." As the camera panned over her tranquil home, she said she hoped to "set a good example for my boys, that they can go out and achieve absolutely anything."

The ads, produced by GSD&M of Austin, Tex., also part of Omnicom, are appearing at a time when Wal-Mart is on the defensive over its treatment of female employees. A group of them filed a discrimination lawsuit against the company 18 months ago in federal court in Washington, and a hearing to determine whether the suit should become a class action, covering all of the women working at Wal-Mart, has been scheduled for next month.

So far, the television ads have focused on correcting what Wal-Mart maintains is a false impression about its jobs. But a lawyer for the plaintiffs said he thought the ads were a direct result of the lawsuit.

"The telling thing is that the ads are even here," the lawyer, Joseph Sellers, said. "My sense is that Wal-Mart has never run ads like this before, and that the timing is more than coincidental." The lawsuit includes accounts from many women, he said, about being told that "they were unsuited to management," and from others "who said they were told that the hours are too long, you should be home with your children."

Mr. Allen, the Wal-Mart spokesman, insisted that the research, rather than the lawsuit, prompted the ads featuring the women. But he added: "We would acknowledge that we need to get better as an employer. The lawsuit has certainly heightened our awareness of that."

Among bankers, Mr. Allen said, Wal-Mart's image included problems that some consumers and local officials had cited, including low-paying jobs. "But it didn't really have an impact on the way they looked at Wal-Mart as an investment," he said. "Their questions were: Can Wal-Mart continue to grow in the United States, and are we well positioned to capitalize on the international opportunities that we have?"

Wal-Mart workers generally gave the company high marks, Mr. Allen said. But pay and benefits did not get much applause. "People always want to make more money," he said. "Really, what you see for the most part is people want to be treated well. They want to be treated fairly. They want to develop on the job."

The lawsuit contends that women were often overlooked or ignored when it came time to promote cashiers and others to management positions. In January, Mr. Sellers said, the company began its first formal system for inviting people to apply for vacancies in an important management-training program. His attempts to find out more about the program were batted away by company lawyers, who said it was "attorney work product" and therefore not to be offered as part of discovery.

"It was clear that they were inaugurating this with the help of lawyers," Mr. Sellers said.

A Wal-Mart spokeswoman, Sarah Clark, called the January change "an enhancement" to a program already in place.

More television ads are planned around other findings from the Fleishman-Hillard research, Mr. Allen said. Among the positives were that many people think Wal-Mart has a good reputation and that "we were easily the first retailer you think of with low prices," he said. "Even people who don't like us or respect us would not argue that we have the lowest prices."

The negatives, though, also caught everyone's attention at the company's highest levels and are now pushing it to make changes.

"We need to do these things," Mr. Allen said. "At the same time, we can't change who we are. We can't change what makes Wal-Mart Wal-Mart."

Planning Strategies Crucial to Overall Retirement Funds
By Ray Martin, CBS.MarketWatch.com
Aug. 12, 2003

NEW YORK (CBS.MW) - Employer provided health care coverage has often been the most reliable form of coverage for medical and prescription drug costs for retirees.

But the number of large employers offering health insurance coverage to retirees age 65 and older is rapidly declining, according to a report recently released by Health Affairs, which looked at an annual Mercer/Foster Higgins survey.

The number of employers with 500 or more employees who provide retiree medical benefits fell almost 60 percent, to 23 percent in 2001 from 57 percent in 1987.

If this trend continues, employer provided health care would go the way of the dinosaurs. Paying for health insurance coverage during retirement adds to the strain on the savings of a generation of future retirees who, by many measures, aren't even close to reaching the savings they will need for a secure retirement.

For those retirees fortunate to have health insurance coverage provided by their employer, employers have cut back benefits, passed on more costs to their retires, or both.

Future costs unfunded

The costs of coverage for health care in retirement are considerable.

In an EBRI Issue Brief released earlier this year, future retirees would need to save an additional $87,000 to $558,000 to have the funds needed to pay for health and prescription drug coverage from age 65 to age 90. The amounts needed more than double for those expected to live to 100.

One of the items on the chopping block is prescription drug coverage, as employers struggle to contain the rising cost of drug benefits. Medicare, the government health insurance program for retirees, currently offers no drug coverage.

The Senate has proposed a government mandated prescription drug program to be included under Medicare, but its prospects to become law are dimmed by the costs to taxpayers and the impact to those retirees with employer provided benefits.

Planning before retirement

Faced with the near certainty that a future retirement will not include employer sponsored health benefits, near retirees need to consider their options and include a strategy for covering their health care and drug needs years before they enter into retirement.

Workers nearing retirement need to find out what, if any, retiree health benefits are available from their current employer. If considering changing jobs, they should look for an employer who provides access to some form of retiree health care coverage.

Some employers offer pre-retirement tax-favored savings programs, including retirement medical accounts and pretax savings programs, which can help older workers save for health costs in retirement.

Employer retirement programs and savings programs can be particularly advantageous since workers can save for future health care costs with pre-tax income while employed, whereas retirees must pay for their health insurance costs from after-tax retirement income.

Non-working spouses should consider reentering the workforce to seek employment with a firm that provides retiree medical benefits or savings programs. In the least, late stage working couples, or DINKS (dual income, no kids) can put the extra income to work by building up their savings to better prepare for the additional financial burden of medical costs in retirement.

Pre-retirees need to look at the amount of medical care they use today and factor this into their savings projections for retirement. If they plan to retire before age 65, since they will not be eligible for Medicare coverage, they will need to seek full health insurance coverage and will need to consider how pre-existing conditions might affect the cost and availability of health insurance coverage.

Congress mandated the types of Medicare Supplemental Insurance Plans, or Medigap coverages that health insurance companies must offer if they want to sell policies to retirees that supplement Medicare health benefits. Medigap policies types H, I and J which offer some prescription drug coverage, should be considered.

But many health insurance companies, faced with higher than anticipated claims, are exiting this business, stranding a growing number of retirees with fewer options. Those nearing retirement should check out the Medicare Personal Plan Finder on the Medicare.gov Web site to see what coverage, if any, is available from health insurers in their area.

Retirees with prior military service should also check with the Veterans Affairs Administration as to the medical and drug benefits they are entitled to. Often the drug benefits are provided at lower costs than what can be provided under employer provided benefits programs.

Also, lower income retirees should look to see if they qualify for prescription drug affordability programs, such as Pfizer's Share Card program, which provides a $15 flat fee for their prescription drugs, or Johnson & Johnson's Together Rx Card, which can provide savings ranging from approximately 20 to 40 percent off the price of prescription medicines

The reality is that for many workers nearing retirement age, the only viable strategy will be to continue working so that they remain covered under an employer's health insurance program and can continue to save enough to pay for future medical expenses.

Certified Financial Planner Ray Martin writes on personal finance for CBS.MarketWatch.com and also appears on the "The Early Show" on CBS. He is co-author of "The Rookie's Guide to Money Management."

Change Due as Sears Sheds Money Machine
By Lorene Yue - Tribune staff reporter - Chicago Tribune
August 10, 2003

All about merchandising after credit business' sale

When Alan Lacy first talked about selling Sears, Roebuck and Co.'s credit card business, he compared Sears' plight to that of an invading army that burns its own ships to convince its soldiers there is no turning back.

Three weeks ago, Citigroup Inc. agreed to pay $3 billion for the credit side of Sears, and now there's no turning back for Sears' chief executive either.

After decades of leaning on hefty margins from lending money to its shoppers, Sears has trimmed down to a pure-play retailer. But Sears is light on executives with merchandising experience and heavy on bosses from the finance side.

So Lacy has to answer a key question: Does anybody at Sears know how to sell?

"He does not have, at least at the moment, a visionary merchant leading the charge of creating a compelling, conceptualized merchandising business," said Arnold Aronson, a former CEO of several department store chains and now a managing director of Kurt Salmon Associates.

"While Sears is looking for a new epiphany, they've had companies above them, below them and on either side of them eating their lunch," he said.

Some retail experts say Sears has not had a real head merchant since Robert Mettler, the department store veteran behind the "Softer Side of Sears" fashion push, was shown the door in 1999 after apparel sales faltered.

His job was assumed by Mark Cohen, then Sears' marketing chief, but after Cohen was dispatched to head Sears Canada in early 2001, the chief merchant job was empty for almost two years. Mettler is now CEO of Macy's West, one of the industry's leading department store chains.

The recent defection of David Dyer has done nothing to calm the concerns about lack of merchandising depth.

Dyer, a respected apparel executive who was credited with injecting more fashion into Lands' End's staid khakis and cardigans, jumped ship Aug. 1 to become head of Tommy Hilfiger Corp., the upscale preppy brand looking to reinvent itself. Dyer had been part of Sears' top management for little more than a year, coming on board when Lands' End was acquired by Sears for $1.9 billion.

Dyer is not the only recent departure.

Kathryn Bufano, a department store veteran who arrived in 2002 to head Sears' apparel business, was shown the door in April despite the strong start of the Covington classic brand she helped launch.

Veteran merchants

Lacy defends the quality of his management team and says Sears has plenty of veteran merchants who know what it takes to succeed.

"I am a bit frustrated with the perception that we are a weakened player in this industry. We have a very strong position in the merchandising category," Lacy said during a recent interview. "People don't understand the strength of this business."

The numbers tell a different story.

Sales at stores open at least a year--the traditional measure of a retailer's performance--have fallen for 23 consecutive months, a pattern that would signal severe trouble at any chain.

Sears predicted that its sales would not grow much in the first half of 2003, but promised investors that top-line growth would return in the second half. It hasn't so far.

In July, Sears' sales fell slightly, while several of its closest competitors-- Kohl's Corp., Target Corp. and J.C. Penney Co.--posted solid increases. And few retail experts expect that Lacy will be able to deliver on that promise anytime soon with the economy continuing to limp along and little new in Sears' stores to tempt consumers.

Even with that dismal showing, Sears has been able to post profits during Lacy's nearly three-year tenure because of aggressive cost-cutting and big profits from the credit-card business. The plastic side of Sears may have produced only 13 percent of Sears' $41.4 billion revenue last year, but it generated more than 60 percent of the company's operating profit.

Lacy contends that same-store sales are a superficial measure of Sears' performance. Instead, investors should be paying attention to the company's ability to make more money as it moves less merchandise.

"We had record profits that were not driven by cost-cutting," Lacy said. "Cost- cutting did nothing. All of our profits came through margin-expansion."

But if Sears is going to do more than just watch its sales slide, it is going to have to show some flair, retail experts say.

"Can Sears legitimately evolve into a sharp retailer that is fulfilling the needs of today's shopper, not yesterday's shopper?" asks Aronson. "Loyalists alone aren't going to carry Sears to the finish line."

Because Lacy is a finance guy who admits he is no merchant, much of the pressure to change the trajectory of Sears' business falls on the shoulders of Mark Cosby.

Late last year Cosby was named president of the company's full-line stores, a new super-merchant position that oversees both Sears' lagging apparel business and its relatively robust appliance, tools and electronics business.

Fast food background

But Cosby's background was not in retail. It was in fast food. As the chief operating officer of fried-chicken purveyor KFC, Cosby's major accomplishment included rolling out co-branded eateries that featured KFC and Taco Bell or KFC and A&W under the same roof. He also was credited with KFC's rollout of popcorn chicken, a popular new item on KFC's traditional menu.

Fried chicken to fashion?

Critics wondered what Lacy was thinking, while supporters argued that Sears needed a fresh perspective.

They also contended that Cosby's experience was more relevant than it appeared on the surface. Managing an hourly workforce in a restaurant chain is not that different from the challenge of delivering good service in retail stores, they said.

Still, eight months into his tenure, Cosby has not laid out a new retail vision or announced further refinements to Sears' stores.

Of course, an extensive store renovation campaign ended only months before his arrival, and Sears already had decided to edit its apparel selection with a focus on classics.

Even so, Cosby's cautious debut is in sharp contrast to Allen Questrom's running start at J.C. Penney.

In his first eight months, the former CEO of Federated Department Stores Inc. and Barneys New York Inc., closed 50 under-performing stores and shook up Penneys' merchandising ranks, ordering the troops to get more fashion-forward looks on the floor.

More recently, Penneys has drawn kudos for partnering with trendy Gen X apparel maker Bisou Bisou to create an exclusive line for Penneys. The company did the same with BCBG Max Azria Group, another leading brand among thin 20-somethings.

Questrom didn't do it alone, of course, but he set the tone and the direction, retail experts say.

Given the retail industry's fierce price cutting, it is not surprising that many chains are led by finance whizzes, said Bobbie Lenga, head of the retail division of Russell Reynolds, an executive search firm in Chicago.

Many retail executives are trained to boost profit margins, and that is a completely different mindset from buying merchandise that will fly off the shelves, she says.

"When you tend to focus on the financial, you lose the creativeness and you lose the intuitive sense," she said. "Then you get stores with a lot of the same things and that are a lot more promotional. It becomes less about differentiation and more about price."

Sears complains that too much attention is being put on Cosby and not enough on his two chief lieutenants--Mindy Meads and Lyle Heidemann.

Heidemann, a company veteran, is doing a respectable job of maintaining Sears' dominant share of the home appliance market, which remains around 40 percent despite increasing competition from home centers such as Home Depot and Lowe's.

Meads is a well-respected and experienced merchant who joined Sears as part of the Lands' End acquisition. She remained head of merchandising for the Dodgeville, Wis., catalog company until Bufano's departure, when she was given the equivalent of a second full-time job--buying apparel and home fashions for Sears' 870 stores.

"Mindy Meads is unquestionably one of the best merchants in the industry," said Derek Leckow, retail analyst with Barrington Research in Chicago. Her risk-taking paid off at Lands' End when items she introduced, such as Capri pants and slip-on moccasins, became best sellers, he added.

Lacy is another fan. "Mindy is a superb merchant," he said.

But even her supporters wonder if one person can handle the grueling workload overseeing Lands' End's billion-dollar clothing line as well as Sears' complicated apparel offerings for men, women, juniors and children.

"It's a big role, there's no doubt about it," said Lenga.

Meads says she can handle it as long as she can attract the right people to her team. That's what she is focused on now.

"The first piece is always to focus on the customer and understand who that is. Then you really need to focus on the product," Meads said.

Executives with different backgrounds play role in retail revitalization

How Will Sears' Latest Strategy Fare for Chain?
Daily Herald - Suburban Chicago
August 10, 2003

Associated Press
NEW YORK - At a time when some analysts are questioning whether large department store chains can survive as they currently exist, Sears, Roebuck and Co. is among the chains tinkering with its department store model.

Lord & Taylor's recent announcement that it would close 32 stores was the latest in a long series of moves department stores have made to revive their business.

But despite all their efforts, these retailers don't seem to have a reason for being in the eyes of some consumers.

The department store industry, which has lost market share to discounters for more than a decade, has tried all sorts of tricks from speeding up checkouts to unveiling new fashion labels, but sales are still stagnating.

Meanwhile, chains including Wal-Mart Stores Inc., Target Corp. and Kohl's Corp. have wooed customers away with compelling merchandise, boosting their sales even during the economic downturn.

That will make it harder for department stores to win shoppers when the economy strengthens.

"They have tried to do different things, but so far nothing has worked," said Michael Niemira, vice president of Bank of Tokyo-Mitsubishi Ltd.

Part of the problem is that department stores have found themselves so caught up fighting discounters on price that they seem to have forgotten about consumers like Laura Coyner, who shop for higher-end merchandise.

"They tend to a carry lower line of products than they used to," said Coyner, of West Palm Beach, Fla. "I think their target is more median income and want those people to shop at those parts of the stores. They need to carry better lines."

So far this year, department stores posted a 3.9 percent decrease in sales at stores open at least a year, known as same-store sales. Same-store sales are considered the best indicator of a retailer's health.

By comparison, discount stores registered a 2.3 percent gain, while apparel chains had an increase of 2.9 percent, according to the Bank of Tokyo- Mitsubishi Index. Wholesale clubs posted a same-store sales increase of 4.7 percent.

Many department stores, such as Sears, have tried to mimic Kohl's discount-department store hybrid approach by creating central check-outs and offering shopping carts.

The Hoffman Estates-based retailer, the largest department store chain in the nation, announcing recently that it is shedding its credit card business so it can focus more on its struggling stores.

In an effort to lure customers back, it is building prototype stores that look more like its stand-alone competitors. One such store is being built at Gurnee Mills.

Its cut the number of vendors and lines. And it has added its own lines such as Covington and, after buying it last year, Lands' End.

Thus far it hasn't worked. July sales at stores open at least a year were slightly down, making it 23 straight months of slumping sales. Sears predicted August sales will be flat.

Clearly, analysts say, department stores across the category need to do more.

"They have to improve their customer service especially when no one is there to help you," said Tara McDonald, 29, from Hoboken, N.J., adding she prefers small discount shops.

Kurt Barnard, president of Barnard's Retail Consulting Group, said department stores used to compete with other department stores. But "today, department stores battle it out with warehouse clubs, discount stores and most everybody else, on price."

Department store chains are trying a variety of fixes, with mixed results.

Federated Department Stores Inc. - which operates such stores as Bloomingdale's and Macy's, and is considered the industry's leader in innovation - said recently it plans to stop fighting a price war. Instead, it will step up inventory of its brands and other high-end products.

Same-store sales at Federated have improved in the past few months.

May Department Stores Inc. is also focusing on bolstering such labels as Kate Spade and Valerie Stevens.

However, May's same-store sales were down 7.1 percent so far this year, the worst performer in the department store sector, according to the Bank of Toyko- Mitsubishi Index.

Hal J. Upbin, chairman, CEO of apparel maker Kellwood Co., which only does a small business with Lord & Taylor, was surprised that it's taking this long for department stores to be making these drastic store cuts.

"They need to cull out, as we do, underperforming divisions," he said.

• Daily Herald Business Writer Mike Comerford contributed to this report.

Maytag's Shift Heightens Job Worries
Daily Herald - Suburban Chicago
August 10, 2003

Associated Press DES MOINES, Iowa - First, Maytag Corp. moved two parts plants to Mexico; now, a refrigerator plant is headed there.

The relocations to Reynosa, Mexico, all announced in the last two years, have intensified fears that Maytag might export even more jobs to countries with cheap labor.

A company that grew from a small-town farm equipment manufacturer to the
third- largest appliance manufacturer in North America, Maytag is drawing bitter criticism for moving jobs outside the United States.

Chief Executive Ralph Hake, who joined the Newton, Iowa-based company in June 2001, is getting much of the blame.

"Maytag has always sold their name as the American classic," said Sue Wilson, a former Maytag employee who now works for the International Association of Machinists and Aerospace Workers, one of the unions that represents Maytag workers.

"Maybe Hake doesn't understand the heritage he's inherited, but the board of directors certainly understands that and to me they've sold the soul of their name to the lowest bidder," she said.

Hake, who declined to be interviewed for this story, told analysts in a conference call last month Maytag has no plans to shut more U.S. factories. He stressed that most of Maytag's large appliances continue to be assembled in the United States, although some parts are made offshore.

And even with the Reynosa plant in operation next summer, some 90 percent of Maytag's refrigerators will still be made in the United States, Hake said.

"Our goal is to grow enough to have all our plants running well," he said. "I do not anticipate multiple plant shutdowns or restructuring here," he said.

Keeping production local, however, may be difficult.

"Particularly in this environment, people are really focused on value right now," said David MacGregor, an analyst at Longbow Research, who believes Hake is doing a good job.

Lower prices means less profitability unless companies like Maytag can find ways to cut costs.

On July 15, Maytag said second-quarter earnings dropped 63 percent to $25.2 million from $68 million at the same time a year ago.

Since January, Maytag has cut 510 jobs or about 8 percent of its 20,200 work force. That follows more than 300 cuts in 2001.

Maytag has two parts factories already in Reynosa and is preparing to move some refrigerator manufacturing operations to a 160,000-square-foot plant now under construction. The refrigerator plant is being built on 62 acres recently purchased by Maytag in a Reynosa industrial park.

Mexico has become a popular destination for manufacturers. About 204 companies, including Black & Decker and Whirlpool, one of Maytag's biggest rivals, employ 70,000 workers in the Reynosa area.

Both Maytag and Whirlpool are sold by Hoffman Estates-based Sears, Roebuck and Co.

There are about 10 industrial parks in Reynosa filled with "maquiladoras" - companies from outside Mexico that take advantage of special government programs offering cheap taxes, little regulation and low-cost labor.

Workers in the Mexican industrial plants earn from $2.60 to $3 per hour including benefits. The average wage at the Galesburg, Ill., plant where the refrigerator operations currently are, is around $15 an hour.

Mind is What Matters at Museum for 70 Years
By Bill Cunniff - Chicago Sun-Times
August 8, 2003

Back in 1933, you could get a fine dinner for 60 cents. A movie ticket was 35 cents. A new Ford automobile was $495. And in 1933, the Museum of Science and Industry opened its doors for the first time.

"The museum has touched the lives of nearly 170 million people," said museum president David Mosena. "For seven decades, we have developed one-of-a-kind exhibits that spark the imagination, ignite a thirst for knowledge and encourage scientific exploration.

"We can only guess how many youngsters--right here--decided to become doctors, engineers, architects or computer programmers."

The idea to develop a hands-on museum in Chicago that would allow people to explore science and technology first belonged to visionary Julius Rosenwald, the chairman of Sears, Roebuck & Co. The philanthropist pledged $3 million toward the creation of the museum.

"I would like every young [person] in Chicago to be able to see working models-- visualizing developments in machines and processes--which have been built by the greatest industrial nation in the world," Rosenwald said.

The museum opened in the summer, during the Century of Progress World's Fair. Early exhibits included a milking machine, printing presses and a reproduction of a coal mine.

"No dusty spaces, no forbidding glass cases, no exhibits frozen in time. It was the first interactive museum in North America," said Mosena.

"Much has changed since we first opened our doors in 1933," he added. "Who could have imagined Mars rovers, wireless communication or genetic engineering back then?

"But in seven decades, our mission has not changed. We work to inspire the inventive genius in everyone who enters our doors."

Here are some of the museum's most popular exhibits:

*In the Coal Mine, visitors descend 50 feet in a real hoist to the bottom of a mineshaft.

*During a 15-minute guided tour through a real German submarine, visitors can walk through the captured U-boat's five sections. (Soon, the museum is going to shut down the submarine exhibit for a yearlong preservation project.)

*In 1934, the Pioneer Zephyr train embarked on a nonstop trip from Denver to Chicago that changed the course of railroading.

*The world-famous Fairy Castle was created by a star of silent films, Colleen Moore, and is filled with miniature treasures.

*In the 3,500-square-foot Great Train Story, trains chug along between Chicago and Seattle. A replica of the Sears Tower is 14 feet high.

*Visitors can digitalize their bodies and get inside the "Internet in Networld."

*Guests experience a four-minute mission to destroy enemy missile launchers in F-14 Tomcat Flight Simulators.

*Movies are screened on the giant five-story domed screen at the Omnimax theater.

Sears Sees Flat Sales in August
Crain's Chicago Business Online
August 7, 2003

(Reuters) Sears, Roebuck and Co., the largest U.S. department store chain, on Thursday reported a 0.8 percent decline in July sales at U.S. stores open at least a year, its 23rd straight monthly drop but a smaller decline than expected.

The company also said it expected August same-store sales to be flat compared with a year ago.

The Hoffman Estates, Illinois-based retailer said total sales for the four-week period ended Aug. 2 reached $1.92 billion, down 0.3 percent from a year ago. Sears, which has grappled with sluggish demand for apparel and increasingly tough competition in home appliances, had forecast a low-single-digit decline in July same-store sales. The company said on Thursday apparel sales were strong in July.

The company also said it had higher major appliance revenues, even though cooler weather cut into sales of air conditioners.

Group Seeks to Scuttle Sears, Citibank Deal
By Kelly Quigley - Crain's Chicago Business Online
August 6, 2003

A national consumer advocacy group is trying to block Citigroup Inc.’s acquisition of Sears, Roebuck and Co.’s financial services business, alleging the deal would subject more consumers to the New York-based bank's unfair lending practices and aggressive bill-collecting techniques.

New York-based Inner City Press/Community on the Move (ICP) said it filed 35-page objections with the Illinois Insurance Department and the Office of the Comptroller of the Currency (OCC) in Washington, D.C., and has requested hearings with both agencies. The OCC has authority to block the deal.

"This proposal would expose more than 20 million more consumers to Citigroup's predatory lending," Matthew Lee, executive director of Fair Finance Watch for ICP, said in a statement. Representatives from the group were not available for further comment.

New York-based Citigroup agreed last month to buy Sears’ financial services for $3.4-billion. The deal, expected to close by the end of the year, would make Citigroup the largest issuer of store credit cards in the country. In addition, it gives Citigroup more opportunities to sell its other financial services products, such as home-equity loans, to Sears customers.

That's troubling to ICP, which claims Citigroup has a dismal record of providing mortgage loans to minorities in urban areas. ICP also criticized Citigroup's investment banking unit Salomon Smith Barney for "questionable subprime lending" and said its Citibank subsidiary practices redlining and is "disparate in its small business lending."

A Citigroup spokesman did not return calls seeking a response to those allegations.

In its Aug. 4 filing with the Illinois Insurance Department, ICP noted that consumer protection has already been an issue within Sears’ credit card operations. The organization referred to events in 1999, when the collection subsidiary of Sears pled guilty to federal bankruptcy fraud related to its collection efforts and accepted a $60 million fine to settle the investigation.

A Sears spokesman said the company is aware of the ICP filings, and considers them a normal part of the transaction. He said Sears does not expect the group's objections will interfere with the timing of the deal.

An Illinois Department of Insurance spokesman said the agency received the filing but hasn't reviewed it.

ICP has challenged other bank acquisitions in the past. Most recently, it filed objections against Wells Fargo & Co.’s planned takeover of Pacific Northwest Bank in Washington and Bank of Grand Junction in Colorado, also citing predatory lending practices.

The non-profit advocacy group focuses on fair access to credit and insurance, community reinvestment, corporate accountability and environmental justice.

Sears Tower Owner Looks for Payment in Giving it Up
By Thomas A. Corfman - Tribune Staff Reporter - Chicago Tribune
August 6, 2003

In a twist, Trizec Properties Inc. is likely to get a check from the lender when it hands back Sears Tower to MetLife Inc., which holds the massive mortgage on the 110-story skyscraper.

Negotiations drag on between the insurer and Chicago-based Trizec, which wants to transfer title to the tower to avoid default in 2005, when more than $760 million in debt and accrued interest comes due. As a part of the deal, Trizec will retain the lucrative management of the 3.7 million-square-foot tower.

Although the building is now current on its interest payments, Trizec executives have concluded that Sears Tower's value will not exceed the debt when it comes due.

The broad outlines of the giveback were reported last month by the Tribune. Executives with both companies on Tuesday acknowledged the talks during separate conference calls with analysts but declined to comment about specifics.

Trizec executives, who in June thought a deal would be reached by now, pushed back that timetable.

Chief Executive Timothy Callahan said, "We do anticipate a conclusion over the next month or two."

Lee Loaner, MetLife's chief investment officer, said, "There won't be any surprises if something does happen."

But unexpectedly, the deal will include New York-based MetLife buying out Trizec's interest in the tower, sources said.

The amount of the MetLife payment could not be determined. Representatives of both firms declined to comment.

Although lenders rarely, if ever, write checks when they are forced to take back title to a property on the verge of default, the complicated ownership structure of the tower may force MetLife's hand.

Trizec gained control of Sears Tower in late 1997 when it bought a $215 million second mortgage on the building, paying just $70 million. In November, Trizec wrote down its initial investment in the tower to $23.6 million.

MetLife executives on Tuesday explained why the company has not written down its loan on the property.

"One, it is paying [interest,]" said Loaner. "Two, we believe the collateral value exceeds the