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August  2005 - September 2005 

Sears name dragged through DeLay case
By Becky Yerak – Staff Reporter – Chicago Tribune
September 30, 2005

Retailer had been cleared on contributions, but some believe publicity could hurt the company

The indictment of House Majority Leader Tom DeLay in a Texas campaign finance scandal has dredged up attention that Hoffman Estates-based Sears, Roebuck and Co. thought it had put to rest last year.

Sears had been one of several corporations identified as giving money to the conservative Republican power broker's Texas political committee.

A Texas law prohibits corporate donations to candidates for state offices, and a grand jury in Texas charged this week that money from Sears and others to DeLay was funneled through the Republican National Committee and back to Texas legislative candidates.

People who track campaign finance issues disagree over whether the front-page coverage Thursday of DeLay's indictment, which mentioned Sears by name, will have a chilling effect on corporate contributions to politicians.

"Given how companies like Sears have been pulled into this because of their contributions, it could make people think twice about running that risk," said Mike Surrusco, director of ethics campaigns for watchdog group Common Cause.

But another campaign finance watcher said that while DeLay's fundraising efforts with businesses might be hamstrung, companies will continue to donate to campaigns because that's the way the game is played, and companies tend to be pragmatic.

"Scandals come and go, but what it may affect is corporate giving to Democrats," said Larry Noble, executive director for the Center for Responsive Politics, a non-profit group that studies money in politics.

"If companies begin to believe Democrats have a shot at taking back one or both houses, they may start giving more to Democrats."

Sears' involvement in the case ended in December, when prosecutors in Travis County, Texas, dismissed charges alleging the retailer made an illegal campaign contribution.

After the case was dismissed, the company agreed to strengthen its policies against making illegal contributions and to sponsor a program at the University of Texas about laws governing political contributions, a Sears spokesman said.

Sears pointed out that the dismissal of the charges cited evidence indicating there was no intent on the part of Sears to violate Texas law.

While campaign finance watchers disagree whether corporations will curb their contributions, they do agree on one thing: Sears didn't contribute $25,000 to DeLay's Texans for a Republican Majority Political Action Committee in 2002 because of its interest in Texas politics.

Many of the contributions "appear to have been given by companies that have little interest in Texas elections but had a great deal of interest in currying favor with House Majority Leader DeLay," said Fred Wertheimer, president of watchdog group Democracy 21.

More than 90 percent of the corporate money raised by the DeLay fundraising group was from sources outside of Texas, said Craig McDonald, executive director of Texans for Public Justice, which had filed a complaint against the group.

"It was given by people who wanted access to Tom DeLay," he said. "It wasn't about making nice with Texas legislators."

For its part, Sears declined to comment on what it hoped to receive in exchange for the contribution, or whether it would change its giving policies, issuing only a brief statement.

"Sears contributes to candidates in both political parties who have strong voting records on business issues impacting our company, who believe in a free enterprise system, and who support the retail industry," Sears spokesman Chris Brathwaite said Thursday.

Tilted to GOP

But in recent years, Sears has given overwhelmingly to Republicans, according to the Center for Responsive Politics.

In the 2006 election cycle, Sears Holdings Corp., the entity formed by the March merger of Sears Roebuck and Kmart Holding Corp., has contributed about $73,000 to federal candidates and parties. Of that, 71 percent has gone to Republicans.

In 2004, Sears gave $322,000, of which 67 percent went to Republicans.

In 2002, before new campaign finance laws took effect, Sears gave $768,000, of which 84 percent went to Republicans.

Compared with other industries, however, retailers are lightweight contributors, the center said.

In the 2004 election cycle, retailers spent $16 million on contributions. That compares with $181.6 million spent by lawyers and law firms, the center found.

At least one retail consultant doesn't think the matter will be toxic for Sears, assuming that shoppers are even cognizant of the retailer's donations to politicians.

No harm likely

Britt Beemer, chairman of America's Research Group, didn't think DeLay's indictment would hurt Sears or any of the other contributors.

"The companies are all reputable," Beemer said. "If it were Enron money, that would be something else, but the public will be pretty forgiving because it's not bad-company money."

DeLay, who was second in the House hierarchy to Illinois Republican and Speaker of the House Dennis Hastert, has criticized the charges and said he is innocent. He called the indictment, brought by a Texas Democrat, "political retribution."

Political giving

*Sears Holding Corp. contributions
Source: Center for Responsive Politics

Wal-Mart to Take Controlling Stake in Seiyu
Forbes.com
September 30, 2005

Wal-Mart Stores Inc., the world's biggest retailer, will raise its stake in the Japanese retailer Seiyu to more than 50 percent from 42 percent at a cost of as much as nearly $600 million, Seiyu said Friday. The move will make Seiyu a Wal-Mart subsidiary and expand Wal-Mart's influence in the world's second biggest retail market.

Since arriving in Japan in 2002, Bentonville, Ark.-based Wal-Mart has been gradually raising its stake in Seiyu, which operates more than 400 stores here.

Under a partnership with Seiyu, Wal-Mart has been gradually introducing its computerized systems, cost cutting program and global-supply chain to its Japanese stores by remodeling stores and opening large-scale supermarkets, which are still relatively rare here.

Seiyu will issue new ordinary and preferred shares totaling 115 billion yen ($1 billion), and Wal-Mart will purchase up to 67.5 billion yen ($597 million) worth of the shares, while the Japanese bank Mizuho Corporate Bank Ltd. and possibly other investors will acquire the rest, the Tokyo-based supermarket chain said.

The capital investment is subject to shareholders' approval in December 2005, according to Seiyu.

The move reflects Wal-Mart's commitment to the Japanese market at a time when Seiyu has been struggling and losing money.

Seiyu's losses for the fiscal first half widened nearly fourfold from a year ago to 10.59 billion yen ($94 million) due to sliding sales. It is forecasting a loss for the full fiscal year, although it had hoped to return to the black this fiscal year.

"This investment is intended to give Seiyu increased financial stability and continue strengthening Wal-Mart's presence in the second largest retail market in the world," John Menzer, president and chief executive of Wal-Mart International, said in a statement.

Seiyu shares jumped 35 yen, or nearly 15 percent, to 271 yen on the Tokyo Stock Exchange Friday. While the announcement was made after the market closed, word of a possible deal seemed to have spread beforehand.

Seiyu Chief Executive Noriyuki Watanabe said becoming "a full member of the Wal-Mart family" will offer a stable financial base, allowing Seiyu to accelerate remodeling stores and opening new ones. It will also bring cheaper prices, he said.

"Seiyu will grow by providing great value of quality fresh food and other everyday necessities for our customers and making sure we cater to their local needs," he said in a statement.

Watanabe, who became chief executive this year after his predecessor resigned to take responsibility for the losses, said he expected no management overhauls as a result of the planned changes. Details of the new share issues will be decided in early November, Seiyu said. Watanabe served as president of Seiyu from 1998 to 2001.

Wal-Mart has widespread international operations, including Mexico, Germany, South Korea and Canada. But it has not scored a big hit yet in Japan, where the retail market is extremely competitive and shoppers tend to be finicky.

Carrefour SA of France, the world's No. 2 retailer, abandoned the Japanese market earlier this year after it failed to woo buyers.

Once a total novelty in Japan, Wal-Mart-style gigantic stores are becoming gradually more accepted in this nation, which had been dominated by mom-and-pop stores for decades. Some Japanese retailers are starting to imitate Wal-Mart methods. Wal-Mart has also learned that it needs to cater products to the local market, and some of its fashion items, for example, have not done as well as they have elsewhere.

Wal-Mart officials have said success in Japan will take time.

DeLay’s Prosecutor Offered “Dollars for Dismissals”
How Ronnie Earle works.
By Byron York – White House Correspondent – National Review
September 29, 2005

EDITOR'S NOTE: Travis County, Texas prosecutor Ronnie Earle, the man behind Wednesday's indictment of House Majority Leader Tom DeLay on state campaign-finance charges, has also indicted several corporations in the probe. But last June, National Review's Byron York learned that Earle offered some of those companies deals in which the charges would be dismissed — if the corporations came up with big donations to one of Earle's favorite causes.

Here is that report, from June 20, 2005:
Ronnie Earle, the Texas prosecutor who has indicted associates of House Majority Leader Tom DeLay in an ongoing campaign-finance investigation, dropped felony charges against several corporations indicted in the probe in return for the corporations' agreement to make five- and six-figure contributions to one of Earle's pet causes.

A grand jury in Travis County, Texas, last September indicted eight corporations in connection with the DeLay investigation. All were charged with making illegal contributions (Texas law forbids corporate giving to political campaigns). Since then, however, Earle has agreed to dismiss charges against four of the companies — retail giant Sears, the restaurant chain Cracker Barrel, the Internet company Questerra, and the collection company Diversified Collection Services — after the companies pledged to contribute to a program designed to publicize Earle's belief that corporate involvement in politics is harmful to American democracy.

Some legal observers called the arrangement an unusual resolution to a criminal case, at least in Texas, where the matter is being prosecuted. "I don't think you're going to find anybody who will say it's a common practice," says Jack Strickland, a Fort Worth lawyer who serves as vice-chairman of the criminal-justice section of the Texas State Bar. Earle himself told National Review Online that he has never settled a case in a similar fashion during his years as Travis County district attorney. And allies of DeLay, who has accused Earle of conducting a politically motivated investigation, called Earle's actions "dollars for dismissals."

YOU'VE BEEN A BAD, BAD CORPORATION
On September 21, 2004, a grand jury in Travis County indicted three associates of DeLay — John Colyandro, the head of DeLay's political-action committee, Texans for a Republican Majority (TRMPAC), Jim Ellis, a DeLay aide and officer of the committee, and Warren Rebold, a Washington fundraiser. The indictments received front-page coverage, with a number of commentators suggesting that Earle was moving toward ultimately indicting DeLay.

Receiving less attention was the grand jury's decision to indict the eight companies for making allegedly illegal contributions to TRMPAC. In addition to Sears, Cracker Barrel, Questerra, and Diversified Collection Services, the group of indicted companies included Bacardi USA, Westar Energy, Williams Companies, and the trade group Alliance for Quality Nursing Home Care. Under Texas law, corporations are not allowed to contribute directly to political campaigns, but are allowed to fund the administrative expenses of a political committee.

After the indictment, Earle announced that his prosecutors had uncovered "the outline of an effort to use corporate contributions to control representative democracy in Texas."

The companies denied wrongdoing. Two sources with extensive knowledge of the case involving one of those companies, Sears, spoke at length to NRO and say that Sears executives were convinced the company had done nothing illegal when it contributed $25,000 to TRMPAC. Given that, according to the sources, Sears lawyers were not interested in a plea bargain to end the case. "We were pretty confident that we would win," one source says.

When the company's representatives spoke to Earle, they discovered that the prosecutor was not as adamant about prosecuting them as his public words might have suggested. Indeed, the sources say Earle was willing to drop the charges, providing Sears met a few of his conditions.

First among those, according to the sources, was that Sears make a significant contribution to an organization known as the Center for Deliberative Democracy at Stanford University. The Center is devoted to something called "deliberative polling," which was developed by a Stanford professor (and Earle acquaintance) named James S. Fishkin.

Deliberative polling, according to Fishkin, is designed to measure public opinion on issues about which many members of the public are essentially uninformed. According to the Center's website, it works like this:

Deliberative Polling is an attempt to use television and public opinion research in a new and constructive way. A random, representative sample is first polled on the targeted issues. After this baseline poll, members of the sample are invited to gather at a single place for a weekend in order to discuss the issues. Carefully balanced briefing materials are sent to the participants and are also made publicly available. The participants engage in dialogue with competing experts and political leaders based on questions they develop in small group discussions with trained moderators. Parts of the weekend events are broadcast on television, either live or in taped and edited form. After the deliberations, the sample is again asked the original questions. The resulting changes in opinion represent the conclusions the public would reach, if people had opportunity to become more informed and more engaged by the issues.

Earle and Fishkin know each other. Earle told NRO that he became aware of Fishkin's work a few years ago and had become "casually acquainted" with Fishkin when Fishkin was a professor at the University of Texas in Austin, before moving to Stanford. Fishkin, who told NRO that "I don't know [Earle] really well, but I know him slightly," says he once sent Earle a tape of a deliberative-polling production done in Britain, and that Earle "has talked to me vaguely about doing some kind of project."

Earle says a program based on deliberative polling would be a good way to "educate" Americans about the threat that he believes corporate political activity poses to the country's political system. Such a program's influence, he says, would extend far beyond Texas, which is one of 18 states that ban corporate giving. To be most effective, the program would be televised nationally; Fishkin has in the past done polls in conjunction with MacNeill-Lehrer Productions, the company that produces >The NewsHour with Jim Lehrer" on PBS.

"My concern has been that there needed to be a conversation about the role of corporations in American democracy," Earle told NRO. "How do you do that? I think it is vitally important to the future of the country that there be a discussion of this concept."

THE $1 MILLION POLITICAL LESSON
That's where the indicted corporations came in. According to the sources with knowledge of the Sears case, Earle told company representatives that he wanted Sears to contribute to the Deliberative Democracy group at Stanford, and that a program devoted to the dangers posed by corporate political money might cost as much as $1 million.

"They asked for an outrageous amount of money," says one Sears source, noting that the maximum penalty the company would have been forced to pay if it had gone to trial and lost would have been $20,000. "All the defendants would pay in similar amounts to a fund that would fund a symposium or seminar or event that would be produced in conjunction with PBS, and it would be televised, and the goal of it would be to explore the evils of corporate money in politics and why that is a bad thing."

Sears representatives balked at the offer. Not only was the dollar figure too high, but they believed that the resulting program would be devoted solely to bashing the political activities of corporations, while leaving untouched those of labor unions and other interest groups like trial lawyers. The two sides agreed to talk again later.

Sears was not dead set against paying some money into some sort of project, but company officials were determined that it not go to Stanford, which, Sears believed, would produce an anti-corporation project. When Sears raised its objections, Earle was adamant that Stanford get the money. In response, Sears suggested an alternative, saying it might be interested in contributing some amount of money to the LBJ School of Public Affairs at the University of Texas. Even though the university was in his own back yard, Earle still wanted Stanford.

The two sides agreed to talk yet again. The impasse was resolved when, a short time later, Earle changed his mind and agreed that the money — the final figure would be $100,000 — could go to the University of Texas. (As it turned out, a top protégé of Fishkin, professor Robert Luskin, does deliberative polling work at the University of Texas.) The final agreement says that, "The defendant, after discussions with the district attorney, has decided to financially support a nonpartisan, balanced and publicly informative program or series of programs relating to the role of corporations in American democracy, which shall include a program conducted through the Lyndon B. Johnson School of Public Affairs at the University of Texas."

The agreement contained a number of other conditions. First, Sears agreed to "modify [its] website to provide for public access to and disclosure of corporate contributions made by the company." Second, Sears agreed to "not make any illegal corporate political contributions," either in Texas or any other state where such contributions are illegal. Third, Sears agreed to "cooperate with the State of Texas in its prosecution and investigation of any other person for any offense related to the corporate contribution made by defendant." And fourth, Sears agreed to a statement defining its political activity as a danger to the country. "The defendant further acknowledges that the historical basis for the Texas prohibition against corporate political contributions is that they constitute a genuine threat to democracy," the agreement said.

In return, Earle stipulated that the alleged offense charged in the indictment "appears to be restricted to a single incident within the State of Texas and does not constitute a continuing course of conduct." Earle also conceded that Sears had no intent to break the law and "has a history of good citizenship and high ethical standards." Earle noted that Sears had hired a compliance officer, and "has already begun a thorough review of the company's contributions policies and practices." Finally, the agreement said Earle believed that dropping the charges "will serve to cause corporations to more closely monitor and evaluate their political contributions in Texas and throughout the United States."

Earle made similar deals with Cracker Barrel, Questerra, and Diversified Collections Systems. (Cracker Barrel agreed to pay $50,000, and the amount paid by the other two could not be determined by press time.) Cracker Barrel included the text of its agreement with Earle in a filing with the Security and Exchange Commission, where it can be viewed on the SEC's "Edgar" database.

FLIPPED?
Earle's deals with the corporations received relatively little press coverage in light of reporters' continuing interest in the DeLay angle of the story. What coverage there was, was not entirely accurate, according to the Sears sources.

On January 12 of this year, the Los Angeles Times reported that the corporations had "flipped," that is, agreed to cooperate with prosecutors. Citing unnamed sources, the paper reported that "information gleaned from the companies could be used as leverage to pressure remaining defendants and, potentially, to target more powerful members of the Republican Party in Texas and Washington."

The "flipped" reference rankled insiders. "That was absolutely not true," says one Sears source. "There was no shred of truth to it." Sears officials, the sources say, had already cooperated fully, telling Earle everything they knew about Sears' lone contribution to TRMPAC. In addition, the sources say, Sears had no knowledge of any illegal activity on the part of anyone else. The implication that Sears had turned state's evidence and might finger other companies involved in similarly illegal acts — which, of course, Sears denied it had committed — was, the sources contend, simply wrong.

In any event, the agreements between Earle and the corporations struck some outside observers as not only unusual but also indicative of the highly political nature of the case. "What does funding think tanks and polling organizations have to do with a violation of the criminal law?" asks former United States Attorney Joseph DiGenova, who has publicly supported DeLay. "This is an extortionate use of the indictment power." One close ally of DeLay calls it a "dollars for dismissals" scheme.

Making the situation worse, say DeLay allies, is what they believe is Earle's political motivation in pursuing DeLay. As an example, they point to Earle's attendance at a Democratic fundraiser in Dallas on May 12, in which Earle publicly discussed DeLay. For his part, Earle, an elected Democrat, has denied have any partisan purpose in the investigation. Whatever the case, Earle's dismissal of the charges against Sears, Cracker Barrel, and the other corporations has at least raised the question of whether his allegations were very strong in the first place.

Sears seeks connection on clothing line
By Becky Yerak - staff reporter - Chicago Tribune
September 28, 2005

Trying to improve results in its struggling apparel division, Sears, Roebuck and Co. is negotiating to add an exclusive line from French Connection United Kingdom.

"We are talking to French Connection, but we have no other information to share at this time," Lee Antonio, spokeswoman for Hoffman Estates-based Sears, confirmed Tuesday.

But while Sears is being tight-lipped, French Connection told WGSN, an online trade bulletin, that a line called Style UK will be sold exclusively in Sears.

"Style UK will initially be launched in approximately 150 Sears [stores] for spring 2006," French Connection PLC USA President Andrea Hyde told WGSN. "Style UK is an easy-to-wear, value-driven label that celebrates comfort and simplicity in a stylish, modern way."

In 2003, French Connection landed first-floor space in Marshall Field's State Street store but was moved last spring to make way for Guess.

French Connection, which also has retail stores, has been known for marketing that incorporates the brand's initials, which nearly resemble a certain four-letter word.

Separately, Homeworld Business reported Monday that Sears would re-enter the ready-to-assemble furniture business, with products set to hit stores in spring 2006.

In June, Sears sister company Kmart Holding Corp., also owned by parent Sears Holdings Corp., announced that it would begin carrying ready-to-assemble furniture made by Martha Stewart Living Omnimedia Inc.

Wal-Mart to Update Its Look?
Retailer Said to Be in Talks to Buy Tommy Hilfiger Corp.

By Ben White - Staff Writer - Washington Post
September 28, 2005

NEW YORK -- It's no secret that Wal-Mart Stores Inc. wants to tap into the cheap-chic retail revolution that turned Target Corp. from a discount house into a hip shopping destination.

Now rumors are circulating that the Bentonville, Ark., retail giant may try to upgrade its dowdy image by buying clothier Tommy Hilfiger Corp., known for its red, white and blue apparel.

Wal-Mart has expressed interest buying Hilfiger, according to a financial industry source. The source, who spoke on condition of anonymity because talks are at an early stage, cautioned that any Wal-Mart deal for Hilfiger remains weeks away and may not happen. Spokeswomen for Wal-Mart and Hilfiger declined to comment on a possible deal, which was reported Monday by Women's Wear Daily.

Hilfiger's sales have been in decline, and the company went on the auction block last month after agreeing to settle a federal tax investigation. Shares in the company spiked Monday after the initial report of a possible Wal-Mart purchase but then retreated. On Tuesday, the shares rose 31 cents, or 1.8 percent, to close at $17.22. Wal-Mart shares dropped 1 cent Tuesday, to $43.10. The financial source said that the formal bidding process for Hilfiger has not yet begun and that Wal-Mart has done none of the exhaustive research required before it could submit an offer.

Nonetheless, retail analysts said going after Hong Kong-based Hilfiger would be in keeping with Wal-Mart's stated mission to attract more affluent consumers and buff its reputation.

"Mass merchandising and discount retailing is moving in a big way toward private labels and exclusive designer brands," said Richard Hastings, a retail analyst at consulting firm Bernard Sands LLC. "That Wal-Mart is rumored to be contemplating something like this is logical, given the trend in the industry."

Wal-Mart became the world's largest retailer by offering discount prices on staples such as shampoo and underwear while opening new stores at rapid clip. But sales have flagged in recent months, and the pace of new store openings has slowed as Wal-Mart runs out of markets to conquer. Wal-Mart reported its smallest quarterly profit growth in four years last month as higher oil and gas prices increased costs and cut into customer wallets.

Meanwhile, Target (widely known among shoppers as "Tar-zhay") has attracted higher-end customers, who are generally less sensitive to gas prices, by introducing product lines from trendy designers, including home furnishings and clothing by Isaac Mizrahi. Target also has focused on slick advertising. The company bought all the ad space in a recent issue of the New Yorker magazine.

Wal-Mart has responded. The company took out an eight-page spread in the September issue of Vogue magazine and has stressed its desire to become a clothes shopping destination. Right now, only 34 percent of Wal-Mart shoppers buy clothes at the company's stores, according to STS Market Research. Wal-Mart remains much better known for its deals on household products.

But while analysts generally agree that Wal-Mart needs to boost its image, several questioned whether Tommy Hilfiger would be the answer. Hilfiger was a hot brand in the 1990s but has cooled considerably since then, analysts said.

The deal may not be a good one for Hilfiger either, according to Kim Picciola, retail analyst at investment research firm Morningstar Inc. She said that Hilfiger has embarked on its own image makeover campaign, highlighted by the company's recent purchase of the Karl Lagerfeld brand, and that signing on with Wal-Mart might not further the company's goals.

"It could be a good thing for Wal-Mart in its competition with Target," Picciola said. "But for Tommy, it seems like it would take away any cachet the company had left. The company really oversaturated itself after the 1990s, and they've been trying to pick up the pieces since then."

Sears' State Street sales falling far below expectations
By Becky Yerak – Inside Retailing - Chicago Tribune
September 27, 2005

Sales at Sears, Roebuck and Co.'s State Street store are 50 percent less than the Hoffman Estates-based retailer forecast for the flagship property when it opened in 2001.

Employment levels at the store, which initially was projected to do $50 million to $60 million in annual sales, also are at their lowest levels since its opening.

The results were made public in a Sept. 22 letter from parent Sears Holding Corp. to the City of Chicago's housing and development department, which helps monitor whether companies are holding up their end of taxpayer-assisted deals.

The store was developed with $13.5 million in city financing.

Initially, as part of the 10-year agreement, Sears said the store would have a minimum of 200 full-time equivalent workers.

"However, if `economic changes' occur, the number of FTEs required to operate the State Street store is permanently reduced to at least 125 FTEs," Sears Senior Counsel John Carreon said in the letter to Jennifer Buxtin, monitoring director for the city's housing department.

Sears has met that lowered requirement since the opening, though employment has steadily fallen, from 156 FTEs in 2001 to 133 FTEs in 2004. Sears didn't furnish a number for the first eight months of 2005.

"Actual sales at the State Street store have been substantially less [by over 50 percent] than the relatively conservative projections made when Sears approved the project," Carreon stated.

Analysts already have considered the possibility of Sears unloading the State Street store.

Citigroup once pegged the value of Sears' real estate at $4 billion to $6 billion but later raised it to $8 billion to $10 billion, with State Street considered one of the jewels of the chain.

"A number of Sears' free-standing stores may provide significant value given the peripheral development that has occurred around the sites over the past few decades," Citigroup said in a December report, citing a 165,000-square-foot Sears store in Santa Monica, Calif., 10 blocks from the beach.

"Equally appealing could be the Sears store at the bottom of a large office building in downtown Chicago," Citigroup said. "The presumably leased store may have substantially below-market rents appealing to a potential buyer."

Sears declined Monday to discuss the financial performance of the State Street store but noted that it has made numerous changes in recent months to differentiate the store and boost sales and profits.

It has added brighter lighting, more colorful displays and new merchandise. It also has increased availability of products in key categories and has moved Lands' End products to the center of the store near the escalators.

Also, Sears has reduced costs at the store by going to self-service in departments such as shoes.

"The improved presentation has drawn positive initial response from customers," spokesman Chris Brathwaite said.

Sears Adds  Hedge Fund Financier to Board
By Gregory Meyer – Crain’s Chicago Business Online
September 25,  2005

A New York hedge-fund manager  with long ties to Sears Holdings Corp.'s chairman has joined the  retailer's board of directors.

Like his old friend Sears Chairman Edward Lampert,  Richard C. Perry worked in Goldman, Sachs & Co. arbitrage unit in the  1980s. And like Mr. Lampert, his Perry Capital LLC is an investor in the  company created from the merger of Sears, Roebuck and Co. and Kmart -  though a much smaller one, with about 2 million shares, or 1.2% of shares  outstanding.
    
"Richard Perry is an accomplished  investor and businessman," Mr. Lampert said in a written statement.  "Importantly, funds he manages are a significant owner of Sears Holdings  shares."

It's immediately not clear how much retail and  merchandising experience Mr. Perry brings to the board. Perry Capital in  1994 merged with flower cooperative Florists' Transworld Delivery Assn.  and created a for-profit company, FTD Inc. The Downer Grove-based florist  was sold in 2004.

Mr. Perry, 50, co-founded Perry Capital in 1988. With  $11 billion under  management it's one of the world's largest hedge funds.  The company considers its investments to be long-term and it "seeks to  develop close working relationships with the key members of a company's  management and operating team," a Sears press release says.

He also serves on the boards of Radio & Records  Inc., of Los Angeles, and Endurance Specialty Insurance Ltd. of Bermuda.  

His appointment brings Sears' board to 11 members:  

Medicare Maneuvers
Uncle Sam's new drug benefits are just around the corner
By Sarah Lueck – Staff Reporter – The Wall Street Journal
September 26, 2005

Here's what you should know to be ready.

Marcella Adler, a volunteer at the Gulfport Senior Center in Gulfport, Fla., has been getting questions for months from fellow seniors about the coming Medicare prescription-drug benefit. " 'What does it mean? What are they going to do?' I just keep saying you'll have to wait until October," she says.

Now October is almost here -- the month when private insurers and the government will disclose to Medicare beneficiaries the specific options for drug insurance in their area. Seniors can expect a barrage of mail, telephone calls and advertising aimed at attracting them to a specific drug plan. They may get in-person sales pitches at drugstores and recreation centers that they frequent.

So how to prepare for what's coming? Medicare experts recommend understanding the basics of how the insurance will work, which are examined below, to make it easier to evaluate specific plans in time for the sign-up period that starts Nov. 15. They also say to keep it simple. Consider your specific circumstances and make a choice based on your needs.

"Everyone doesn't need to know everything," says Mark McClellan, the head of the federal agency that runs the program. "It's not a civics test on how Medicare works."

Should I sign up?
If you don't have good drug coverage now, the answer is probably yes. Most people paying for medications on their own will save hundreds of dollars or more each year with coverage. And it's important to note that the new plans are voluntary, so if you want one you have to enroll.

For people with low or no drug costs, the decision might be tougher. About one-third of Medicare beneficiaries not in institutions will spend $250 or less on medications this year. With such a small tab, it might seem a waste to spend $30 or so per month in premiums for drug insurance that might not be used.

But the idea is the same as with homeowner's insurance: You can't wait for a fire to buy coverage. Some people will pay more in than they get back while they're relatively young and healthy, but serious illness and high costs might hit later.

"The unfortunate truth is as we grow older we get sicker, and illnesses down the road could mean really high drug costs," says Tricia Neuman, a Medicare expert at the Henry J. Kaiser Family Foundation, a research group in Washington, D.C.

In addition, beneficiaries who wait past the initial enrollment period face a penalty: Premiums automatically increase 1% for each month you delay. Thus, if you're eligible to enroll in drug coverage but put off doing so for one year beyond your enrollment period, your monthly premium will be 12% higher permanently. If you wait five or 10 years, the penalties would be even steeper.

The penalty doesn't apply to people who currently have what the government calls "creditable" drug coverage. Coverage is creditable if it's at least as good as the Medicare benefit, and letters you will receive from any current sources of drug coverage, such as a former employer, will explain whether what they are offering fits the bill. If you stick with a creditable policy and end up switching to Medicare in the future, you won't have to pay the premium penalty.

What are the choices for getting coverage?
The drug-benefit plans are being approved and subsidized by the government, but they're being designed and sold by an array of private companies. The number and types of coverage choices will vary based on where a person lives. A menu of options in your area will appear in the "Medicare & You" handbooks that the government plans to mail out next month.

If you decide to participate in a drug-only plan, also called "Part D" or "standalone," you'll continue to receive hospital and doctor coverage from traditional Medicare. Most of the drug plans will have a monthly premium -- the national average is $32.20, though some will be cheaper -- plus a deductible and some cost-sharing for prescriptions.

Most beneficiaries also will have the option of signing up for a Medicare Advantage plan that combines all medical benefits in one policy. Such programs won't be available in all parts of the country. But if they are, they might be a way to trim out-of-pocket costs. The plans are getting big subsidies from the government and have increased their benefits because of it, for drugs and other medical care. The downside is that the plans may not include your doctors and hospitals in their networks. And seeking treatment from health-care professionals and facilities that aren't on the plan list could mean much higher costs.

The sheer number of plan choices is raising concerns that many people will be confused and avoid signing up at all. For example, beneficiaries in California will have roughly 40 drug-only insurance plans to choose from, according to preliminary government data. New Yorkers will have about 34 plans, while beneficiaries in Ohio will have 28. Those figures don't include Medicare Advantage plans.

"The problem is going to be simplifying the choices that are available to patients," says Billy Tauzin, head of the drug-industry group PhRMA.

To narrow the choices, Medicare is setting up a feature on its Web site (www.medicare.gov <http://www.medicare.gov/> 8) that will help beneficiaries compare plans. The program also has a toll-free number, 1-800-Medicare, that beneficiaries can call if they have questions about what is available where they live.

How do I sign up?
The first enrollment period for Medicare drug insurance runs from Nov. 15 until May 15, 2006. Next year and each year after, there will be shorter enrollment periods when people can switch plans or join for the first time. Beneficiaries will be able to sign up through the government's Web site or 1-800-Medicare, or they can contact the plan they've chosen directly. They must sign up by Dec. 30 to guarantee coverage on Jan. 1. From January to May 15, beneficiaries can change their minds and switch plans, but in most cases only once.

What if I can't afford to pay for drug insurance?
People with limited incomes may be eligible for extra financial help with premiums and cost-sharing. A person with an income of less than $1,197 a month, or a married couple with an income of less than $1,604 a month, would qualify for federal subsidies. They also must have limited assets such as savings accounts and investments -- less than $11,500 for individuals or $23,000 for married couples. If you think you might qualify, contact the Social Security Administration at 1-800-772-1213 to get an application, or contact your state Medicaid office. Some states and patient-advocacy groups also are planning to offer extra help.

What drugs will Medicare plans cover?
Generally, the insurance companies providing Medicare drug coverage will have a list of drugs that are cheaper under each of their plans. The lists will be different from plan to plan, and some medications might not be covered at all. These lists are called formularies.

One good first step when picking a plan is to list the prescriptions you take now. That way, you can find out if your medications are on the list. If your list of medications doesn't match up with what the plans cover, you may be able to switch to a generic or to an alternative brand-name drug that is covered by the plan. Talk to your doctor. Also keep in mind that plans can change their formularies as long as they give at least 60 days' notice, so the formulary might not stay the same. Beneficiaries can use the time to request an exception or appeal such changes.

What if I have employer-sponsored drug coverage?
In general, retirees with comprehensive drug coverage should stick with what they have. Employer plans tend to be more generous than the Medicare plans will be, and companies can get funds from the government if that's the case.

One important piece of information to watch for is a letter saying whether the employer's drug coverage is "creditable" or comparable to Medicare's. If it isn't, that means you probably should sign up for a Medicare drug plan. Some employers may help pay retirees' premiums.

If the former employer's drug coverage is creditable, it means the government has decided it's at least as good as the Medicare benefit. But that doesn't necessarily mean it's the best choice for you, says JoAnn Volk, a health-policy expert at the AFL-CIO. The union has been critical of what it says are relatively relaxed requirements for employers in documenting their drug coverage for Medicare.

"You really have to do a comparison given your particular drug spending," Ms. Volk says.

If the employer plan has high out-of-pocket costs, you might want to consider the Medicare drug plans in your area. The same is true if you are eligible for the extra low-income help from the federal government.

Before making any changes to employer-sponsored coverage, it's important to contact the plan administrator to clarify your options. Giving up drug coverage may mean you won't be able to get it back, or that you risk losing other medical benefits.

Should I keep my Medigap policy?
Millions of seniors purchase Medigap plans, also known as supplemental policies, to cover Medicare deductibles and other costs. Several of these plans also provide some prescription-drug coverage. Once the drug benefit starts, companies can't sell new Medigap policies that cover drugs. People who already have such policies can keep them, but they might be better off shifting to a Medicare plan.

For one thing, the government doesn't contribute to Medigap drug coverage, but will be paying about 75% of premiums under the new Medicare drug plans. Also, having Medigap drug coverage doesn't protect people from the penalty if they decide to sign up for the Medicare drug benefit late.

Medigap plans without drug coverage still will be sold.

Ms. Adler, the volunteer in Gulfport, is herself a Medicare beneficiary. The 80-year-old, who used to work in medical-records departments in hospitals and nursing homes, is keenly interested in seeing how the new drug coverage might help her save money. She lives on a Social Security income of just $1,214 per month, and almost one-third of the money goes to pay for three prescriptions she takes for high cholesterol, respiratory problems and low bone density. "It's a big chunk," Ms. Adler says.

Under the standard Medicare drug benefit, Ms. Adler would save about $1,000 a year on her medications. Still, she's living by her own advice and delaying any decisions about what to do until she sees the plan details.

"I'm just going to wait and see what happens," she says.

--Ms. Lueck is a staff reporter in The Wall Street Journal's Washington bureau.

When We're All 64
By Kelly Greene – Staff Reporter – The Wall Street Journal
September 26, 2005

In about 100 days, the first of the baby boomers will turn 60. Already, this generation has given rise to minivans, Botox and two-income families. Here's a look at what might come.

Cellphones that monitor your body temperature and sleep patterns. Cruise ships that take the place of retirement communities. "Brain gyms" where you sharpen your wits with computer games. Video autobiographies and interactive cemeteries.

The baby boom is about to enter its golden years -- and getting older will never be the same.

On Jan. 1, the first of an estimated 77 million baby boomers, those Americans born from 1946 to 1964, will celebrate their 60th birthday. Through its sheer size -- and, some would say, self-indulgence -- the generation has given rise, or given teeth, to a host of fashions and institutions that are now central to popular culture: rock 'n' roll, working moms, Earth Day, sport-utility vehicles, Botox, shacking up, Viagra and Starbucks.

All of which prompts the question: What comes next?

We asked dozens of professionals across the country who track baby boomers as part of their job, from gerontologists and academics to marketers and venture capitalists. Their answers -- or educated guesses -- cover a range of products, services and lifestyles that could make aging in America more comfortable, convenient and rewarding -- not to mention entertaining.

Clearly, puzzling out boomers' wants and whims as they move into their 60s and beyond could prove a lucrative exercise. Baby boomers account for 42% of all U.S. households and control 50% of all consumer spending, or more than $2 trillion a year, according to a 2002 study by American Demographics magazine.

Here's a look at how the boomers' movement into later life might change the economy and society.

LONGEVITY FOR SALE
Boomers are expected to live longer than any previous generation. Men who reach age 60 can expect to live 20 more years on average; women who reach 60 can expect to live an additional 23.5 years. With tremendous spending power at their disposal, boomers may well try to stay healthy by taking medical treatment into their own hands -- trying all sorts of continuing therapies and experimental fixes for long-term health problems.

"Longevity will be for sale," says Ken Dychtwald, a San Francisco gerontologist and consultant for the health-care and financial-services industries. "You or a loved one has a condition for which there's no cure in the U.S. But you hear there's a breakthrough cure in Germany, so you're going to write a big check to cure the disease and live longer."

Boomers tracking chronic problems also may embrace home technology that gives quick updates on fluctuating blood pressure, glucose levels, cholesterol and so forth. These tools, some of which are already in development, would allow boomers to track their conditions more effectively and seek medical attention more quickly when needed.

"Consumer-directed health could merge with entertainment," says Joseph Coughlin, director of the Massachusetts Institute of Technology's AgeLab in Cambridge. "Companies like Philips Electronics and Comcast could enter strategic alliances to offer health services through television."

So, your computer might come with an arm cuff to let you check your blood pressure and view the results on screen. Or your cellphone, which you probably wear anyway, could automatically monitor your body temperature, sleep patterns and typical interaction with other people "to develop a trend line," says Eric Dishman, general manager and director of Intel Corp.'s Health Research and Innovation Group in Hillsboro, Ore.

BOOMERS BY THE NUMBERS

Already, the AgeLab has developed a handheld gadget, called the "personal smart adviser," that scans bar codes in the grocery store and compares product ingredients with guidance provided by your doctor. The prototype has been tested by diabetic boomers and their caregivers. Now a consumer-products company and a grocery chain are considering commercializing it, Dr. Coughlin says.

Also expect an explosion of already-popular nutraceuticals -- natural foods, vitamins or supplements packed with health benefits, such as the arthritis treatment glucosamine, derived from shellfish shells. Then there are cosmeceuticals, or cosmetics that help rejuvenate the body, such as antiwrinkle and baldness treatments that repair the skin or hair follicles.

"The performance of these types of products will continue to improve," says Pamela Prokop, an analyst with Freedonia Group, a Cleveland marketing firm.

Ms. Prokop projects that sales of anti-aging potions and lotions will increase 8.7% annually, reaching $30.7 billion in 2009.

WORK, TAKE TWO
A GI bill for retirement? Marc Freedman, president of Civic Ventures, a San Francisco nonprofit, wants to see a plan of that magnitude to connect older people with opportunities to do good work, either as paid employees or volunteers -- and thereby "help boomers cross a great distance in lifespan and age."

Research shows great interest among baby boomers in staying productive. For example, 75% of boomers intend to keep working in retirement, a recent survey by Merrill Lynch found. But they expect to retire from their current jobs at the average age of 64 -- then launch a new career.

Some want a new job that's more personally rewarding; others want the same type of work, only on a much more flexible schedule. In their new jobs, 42% of boomers want to cycle between periods of work and leisure, according to the Merrill research. (The findings, taken from interviews with 2,300 people ages 40 to 58 last year, have a two-percentage-point margin of error.)

But how are boomers going to find those new jobs, or negotiate those new schedules? Mr. Freedman's group is helping to create a network of later-life career coaches who help boomers ease their way back into the work force.

His group has begun a "Next Chapter" initiative with libraries, community colleges and other local programs across the country, helping them set up programs and gathering spots where people nearing retirement can get "directions and connections" to help figure out their next step. As increasing numbers of boomers join self-help groups and seek counseling about later life, Mr. Freedman thinks the start-up organizations "will [turn] into established institutions that have greater heft," and that the job counselors will develop professional credentials akin to certified financial planners.

But counseling is only the first step. Once they identify what they want to do, boomers are going to demand "simpler, fast-track versions" of traditional educational programs in professions such as teaching and nursing, says Judy Goggin, Civic Ventures' senior vice president, who has been working with local organizers of Next Chapter programs.

"They aren't going to like it if someone in the administrative bureaucracy of a community college says, 'You're going to have to take this pile of coursework that we've determined 18-year-olds need to take,' " Ms. Goggin says. "It's not going to be the same as what they'd need if they were entering the field as a young person."

LIVING TOGETHER
Later life could signal a return to communal living for boomers, particularly as increasing numbers of single, divorced and widowed people seek a lifestyle that's more affordable, social and supportive.

Some groups may settle in neighborhoods where everyone shares a common interest, such as Harley-Davidson enthusiasts "who wear their leathers together and ride their bikes as long as they can," says Brent Green, a Denver marketing consultant who studies boomers. The other extreme could be "people gathering in communities they build together with the common cause of easing the aging process, right into their graves."

Sandra Timmerman, director of the MetLife Mature Market Institute, a resource center on aging in Westport, Conn., says her friends talk a lot about whether to buy a house together. "You might cook together, or have a room for a home-care worker [to stay in] if someone gets sick and needs it. You could have a chauffeur, since so many people can't drive or have trouble at night."

Boomers have already begun to discover "co-housing developments." These neighborhoods, in which residents live in private homes but share a central "common house" with a kitchen and other service facilities, were designed for anybody interested in living communally or conserving resources, such as environmentalists. But they have become increasingly popular with older residents.

In the 82 co-housing neighborhoods that have been built since 1991, one-third of the residents are retirees, says Neshama Abraham, a co-housing consultant in Boulder, Colo. Now, one of the first such developments specifically for people 50 and older is under construction. Silver Sage Cohousing, in Boulder, includes a common building with a kitchen, dining room, library, guest rooms and a treatment room for visiting doctors, physical therapists and other health workers.

A large part of the appeal, Ms. Abraham says, is the "idea of aging in a community. A lot of people talk about aging in place, but it can be very isolating." The hope is that residents can get a lot of their medical needs on site -- and help each other more easily through crises.

On the other hand, some people may give up the idea of a house entirely. Geriatrician Lee Lindquist found through a study last fall that living on a cruise ship would cost about the same as in an assisted-living facility: $33,260 for a year-round cruise versus $28,689 for a year at the average assisted-living facility. (A high-end facility would cost $48,000 or more.) The cruise would provide essentially the same services, including escorts to meals, dining, help with medicine and housekeeping -- plus "look at how much more you're getting on a cruise ship -- the midnight buffet, the pools, and you're treated as a customer, not a patient," Dr. Lindquist says.

She got the idea while on a cruise to the Caribbean with her parents. A few of the other older travelers on the ship said they had been on 20 cruises in the past year -- meaning they were living on a boat about every other week. Boomers she has interviewed say they like the notion. "Part of the appeal is that they wouldn't be with all older people," Dr. Lindquist says. "They'd be mixed in with the frat boys and newlyweds, so they would feel less like it was a nursing home."

PERSONAL TECHNOLOGY
What's likely to be one of hottest areas of research and development? Brain science, says MIT's Dr. Coughlin. "If you look at universities, it's where the huge money is going." One start-up company, Posit Science Corp. of San Francisco, already is trying to capitalize on the trend, rolling out memory-building computer games in Bay area retirement communities. The company claims that the hundreds of older people using its software in preliminary tests have the mental acuity of someone five to 10 years younger. Posit plans to have home versions of the games out by next year. Within a decade, the company hopes to kick-start "brain gyms" as well as online "cognitive-fitness centers," where seniors can play the games in a group environment, says Jeffrey Zimman, chief executive.

It's not as far-fetched as it sounds, some observers say. "Traditional physical-fitness-oriented facilities [that] understand that a significant part of the market is boomers are going to start developing places for people to go to exercise their brain function," says Mr. Green, the marketer in Denver. Although boomers could play computer games at home, "people want social reinforcement," meaning they are likely to either seek out special places to go through the games or join a Web-based service that would connect them online with other brain-exercisers.

Intel's team of social scientists is developing computerized memory aids, too. The gadgets grew out of a study, begun in 1999, "about digital entertainment that wound up being about dementia," says the company's Mr. Dishman. As he spent time in boomer households, trying to show them what they could do with digital TV and broadband access, "they would say, 'I don't need another way to watch TV. I need help taking care of my parents,' or 'I have to figure out how to manage my diabetes.' "

So Intel shifted its focus and developed potential aids for older adults. One gadget, tested in two dozen households in Las Vegas and Portland, Ore., was designed to help people ease their fears of not recognizing a face or voice when answering the door or telephone. Intel used wireless sensor networks to collect data for four months about who visited, called and emailed the participants, and how often. The data were used to create a "solar-system display" on a TV or computer screen. Circles representing friends and family orbit around you; when you move the mouse over those circles, you see photos of the people they represent, along with the last time you spoke to them and what you talked about.

Similarly, Intel developed what designers dubbed "caller ID on steroids." When the phone rings, a nearby digital photo frame displays a picture of the caller and lists what you talked about during your last call. The "presence lamp" was also a big hit among test subjects. One of these lights is placed in the parent's house, one in the child's. When the child returns home after a visit, the light automatically goes on in the parent's house, and vice versa. The gadget lowered depression among the older adults with Alzheimer's disease by showing them their kids had gotten home safely. It also alerted a few boomers when their parents got lost on the drive home after they had dinner together.

"It was in crude prototype, and needed a lot of baby-sitting by our engineers," says Mr. Dishman. But when the trial was over, "the people said, 'No, don't take this away from me.' " Now Intel hopes that the computer makers that buy its chips will bring these products to market.

GETTING AROUND
Whatever boomers drive in future decades will be a big deal: Of the 13 cars that the average American household buys over a lifetime, seven are purchased after the head of the household turns 50, says Art Spinella, president of CNW Marketing Research, a consulting firm in Bandon, Ore.

That number could head even higher, says Rob Tregenza, transportation analyst for Minneapolis-based market researcher Iconoculture Inc., who expects many boomer couples to add a third car. They covet what he calls "aspirational" vehicles that display their personal style. Muscle cars, for instance, are starting to make a comeback. Already, Ford Motor Co. has revived the classic Mustang body, and "there have been rumors that GM is going to start diving into the arsenal of Camaros," he says.

While boomers want to flex their muscles on the road, they also want to be as safe as possible when doing so. Many car makers are starting to tinker with options designed for older customers, but marketable to all ages: vision enhancement, which typically uses ultrasound or infrared technology to make it easier to see at night; collision-warning systems; swivel seats, making it easier to get in and out; and heated seats in cooler climes so drivers and their passengers can use them to help bad backs.

Even with all that, boomers won't be able to drive forever. So what happens when they must quit -- but find themselves living in cul-de-sac suburbs with little public transportation? MIT's Dr. Coughlin predicts the emergence of car clubs. People who no longer drive may pool their resources to buy a car, then share it with a younger driver who serves as a chauffeur. This would be particularly attractive in college towns filled with graduate students who can't afford their own wheels.

"We do a very good job of getting older adults around [via vans and ambulances] for trips they need. We do a terrible job with trips they want," he says. "The boomers are a generation of wants. They are going to make sure transportation is as seamless for them to get ice cream as it is to get a prescription renewed."

Already, local aging agencies are experimenting with driving pools. The Atlanta Regional Commission, for example, has sold discounted vouchers to 20 people who are at least 60 and can't drive, allowing them to hire someone they know to drive them around rather than relying on formal government programs for help. They are finding that the $16.79 average cost "buys a trip to the doctor, plus the grocery store, drugstore and bank, instead of just the doctor. And the driver helps you in and out of the car and waits for you while you're there," says Kathryn Lawler, the project director.

LEISURE QUEST
Despite the fact that some boomers will struggle financially as they age, a sizable number are expected to have enough money to fuel the market for increasingly exotic travel. IExplore Inc., a Chicago-based adventure-travel company, already has received requests from boomers in the past year to sea-kayak the Panama Canal, take champagne flights to the North Pole, live with a Mongolian family in the Gobi Desert, walk the rainforest tree canopies of the Amazon and see the Serengeti in a hot-air balloon.

"Boomers have been in an aggressive period of accumulating assets -- homes, cars, boats," says George Deeb, iExplore's chief executive. "Now they're going to get into a period of accumulating experiences."

To that end, Dr. Dychtwald, the San Francisco gerontologist, expects to see "experience agents," a career counselor-cum-travel agent. "You could go to them and say, 'Look, I'm 57, I'm going to take a year off, and I don't know what to do. Help me with a plan,' " he says. "You might spend three months on an archaeological dig, four months living on an island."

Ironically, the onslaught of boomers could endanger a relatively new retirement institution: the country's 500-plus lifelong-learning institutes, most of them affiliated with local colleges (many are listed at www.elderhostel.org/ein/intro.asp <http://www.elderhostel.org/ein/intro.asp> 5). The programs typically offer college-level courses and are open to anyone over a specific age, usually 55 or 60, regardless of previous academic experience.

But age-segregated programs could have trouble drawing boomers as members, warns Ron Manheimer, director of the North Carolina Center for Creative Retirement, a lifelong-learning institute in Asheville. His center has done extensive focus groups with local boomers, including some already attending its programs, to figure out what they're looking for. His findings: Boomers are "just so diverse in what they want," from the types of classes they'd like to see to the time segments in which they're offered -- making it hard to build a traditional course schedule that will interest a broad range of potential students.

One new approach the center is trying: a full-year program that goes into more depth than the typical semester-length or shorter course, culminating in a certificate of completion. The first experiment, the Blue Ridge Naturalist, is targeted to those wanting to better understand and appreciate the natural environment. The class is meeting Tuesday nights and in the field one Saturday each month, addressing topics as diverse as the heritage of Native Americans, folklore and the night sky.

Likewise, Boston-based Elderhostel Inc., one of the most successful providers of educational-travel programs for older adults, is trying to attract younger clients with its Road Scholar program. Rolled out last year, the program offers a series of trips with smaller groups, more free time and fewer lectures -- features that Elderhostel thinks adults in their 50s and early 60s are looking for. In the first year, 1,700 people signed up. The most popular trips: a spiritual journey through India and a look at criminal forensics.

LEGACY -- THE MOVIE
"Boomers are going to figure out really creative ways of expressing their death," possibly by producing video autobiographies, says Mr. Green, the marketer. For instance, he says he has met with an entrepreneur currently trying to figure out how to set up production studios in shopping malls where boomers can bring in their photos, home-movie footage "of when you were the prom queen" and other memorabilia, then work with a script writer to produce something akin to a Biography Channel segment.

Cemeteries are expected to go digital as well, both with records of gravestones online for genealogical research, as well as for nostalgia's sake. "We should expect to see interactive displays about people, where you can push a button and get a two-minute take on that person's life," Mr. Green says. "And that will also be captured in perpetuity on the Internet."

Boomers have a stronger need than their parents and grandparents "to leave a legacy, and it's going to be a very big business," says David Wolfe, a Reston, Va., marketing consultant who studies the older population. He recently pitched a project to Konica Minolta Holdings Inc. that would help guide boomers on their memoirs, "because a lot of this is about imaging."

What about funerals? Already, boomers are personalizing their parents' memorials, and will probably customize their own memorials in more elaborate ways, says Mark Duffey, chief executive of Everest Funeral Package LLC in Houston, a start-up company that sells independent funeral-planning services. One possibility: creative souvenirs. At a funeral he recently attended, "this guy's dad was a great cook, so he printed off his recipes, bound them up and handed out these books of all the recipes he never gave away."

Cremation has been increasing about one percentage point a year for the past decade, and that's expected to surge with the boomers, Mr. Duffey adds. Instead of having full-fledged funerals, Mr. Duffey's clients are asking, why not "a memorial service at my church, or a party at a restaurant?" he says. "There's a trend of people wanting to have this celebration, a party in honor of their friends. Once people go to a few of these, it's going to accelerate."

--Ms. Greene is a staff reporter in The Wall Street Journal's Atlanta bureau.

Wal-Mart's Need for Speed
By Kris Hudson, staff reporter – The Wall Street Journal
September 26, 2005

To Boost Sales, Retailer Revamps Warehouse, Distribution System

As Wal-Mart Stores Inc. grapples with damped sales growth and rising costs, the world's largest retailer may find some relief by establishing a fast track through its warehouses.

Wal-Mart, Bentonville, Ark., will embark this fall on a program to revamp its massive U.S. distribution system, putting fast-selling items such as home-cleaning goods and bathroom supplies on a quicker path to store shelves.

While drawing far less attention than its massive store network, Wal-Mart's cutting-edge warehouse and distribution system is credited as a prime reason for the company's rise to dominance in the retail industry with sales of $285 billion last year. In the U.S., most of what Wal-Mart sold went through one of its 117 distribution centers before hitting its shelves -- an average of 600,000 cases of products a warehouse a day.

Although it declines to publicly put numbers to its projections, Wal-Mart executives predict a program dubbed "Remix" for revamping its distribution system will boost sales by keeping its sometimes-empty shelves replenished with fast-selling merchandise. The retailer expects to cut costs by freeing receiving clerks in stores to do other work

At a time when Wal-Mart's sales expansion has bogged down as its core customers feel the pinch of high gasoline prices, that would be welcome relief. The retailer is facing rising costs on everything from labor to utility bills, and its stock has sagged about 25% in the past 12 months.

The origins of Wal-Mart's warehouse shake-up came in the mid 1990s, when the discount merchandiser made its initial foray into the grocery business. Unfamiliar with grocery distribution, the retailer relied on distributor McLane Co., a subsidiary since 1990, to help it learn the ropes.

In 2003, Wal-Mart sold McLane to Berkshire Hathaway Inc. and assumed the grocery-distribution work itself. That left Wal-Mart to operate a network of grocery-distribution warehouses and trucking routes that functioned separately from its older system for general-merchandise distribution.

"We could have done nothing and been fine from a logistics standpoint," said Rollin Ford, Wal-Mart's executive vice president of logistics. "But as you continue to increase your sales per square foot, you've got to do things differently to make those stores more productive."

Distribution pressures rose as Wal-Mart expanded into the largest U.S. grocer, with nearly all of its 3,700 U.S. stores now offering groceries on some scale. Delays in restocking store shelves resulted because hot-selling items were mixed in with regular deliveries. At some stores, employees on the receiving docks sort through truckloads of arriving merchandise to find the products most in demand.

Two years ago, Wal-Mart began crafting the Remix overhaul. The core of the plan calls for designating some warehouses for distributing slower-selling general merchandise while others, deemed "high velocity" warehouses, will supply a continual flow to the stores of rapid-turnover goods such as paper towels, toilet paper, toothpaste, some foods and popular seasonal items.

Warehouse crews will pack those items on pallets that can be rolled onto stores' sales floors for quick restocking of shelves, eliminating the previous searching and sorting on the stores' docks. Remix's continual replenishment is supposed to eliminate "stock outs" and to trim dock work.

Wal-Mart gave Remix a trial run last year at a warehouse that serves four stores in Florida. Mr. Ford declined to divulge results from the pilot project, other than to say they justified expansion of the program nationally. The company will begin implementing Remix on a grand scale this fall and complete that installation in 2007.

Wal-Mart isn't the first retailer to experiment with such a program.

Target Corp. of Minneapolis, the No. 2 discount retailer in the U.S., has for two years dedicated an express lane in its warehouses for hot sellers such as Tide detergent, Crest toothpaste and Bounty paper towels. Target's program helped it solve a nagging problem with stock shortages in some stores. However, Target's express-distribution program is less extensive than what Wal-Mart envisions, mostly because Target doesn't handle much of its own grocery distribution.

Why all the focus on distribution? The Remix program "could have a very significant impact" on Wal-Mart's stock price, said Bill Dreher, an analyst with Deutsche Bank AG. Deutsche Bank holds more than 1% of Wal-Mart's stock and counts Wal-Mart as an investment-banking client.

Mr. Dreher predicts the Remix program will help Wal-Mart once again expand its operating profits faster than its sales and maintain that relationship, a measure that a retailer is increasing profitably. Wal-Mart's operating-profit increase has trailed sales growth for the past two quarters -- the first time the company has fallen short in two consecutive quarters since 2001.

New Advice to Retirees:
Spend More at First, Cut Back Later
By Ilana Polyak – New York Times
September 25, 2005

HOW much can you take out of your retirement nest egg each year without running out of money?

Not much, according to the standard, conservative advice of many financial planners. They often say that people who retire at the age of 65 can safely remove only about 4 percent of their portfolios each year, along with adjustments for inflation. On that basis, the initial withdrawal from a portfolio worth $1 million would be just $40,000.

But some experts have been making waves by suggesting that it may make more sense to withdraw bigger amounts in the early years of retirement.

Ty Bernicke, a financial planner in Eau Claire, Wis., for example, says retirees generally spend less as they age, so that it is reasonable for them to spend more when they are in retirement's early stages. Mr. Bernicke's conclusions, which relied on data from the Bureau of Labor Statistics' Consumer Expenditure Survey for 2002, were published in June in The Journal of Financial Planning.

Spending in practically every category, from housing to clothing to entertainment, declines with age, the data showed. The only category in which spending rises with age is health care, he said.

"It's almost a tug of war between inflation pushing costs up and human nature pulling them back down," Mr. Bernicke said.

People over 75 spent 26 percent less, on average, than those in the 65-to-74 age group. And the greater the age difference, the greater the difference in spending: Those over 75 spent 46 percent less than those aged 55 to 64, and 51 percent less than those aged 45 to 54. "Most retirement planning today assumes that a person retains the same lifestyle throughout their life," Mr. Bernicke said. "But as age increases, spending decreases."

George and Kathy Magaw, both 59 and clients of Mr. Bernicke in Eau Claire, expect to spend less as the years advance, Mr. Magaw said. He has decided to take early retirement from his job as a training manager for a manufacturing company in late 2006, when he will be 61; Mrs. Magaw is not employed. He plans to spend time on his fishing boat and to go on waterfowl hunting trips in remote parts of Wisconsin. The couple also expect to visit grandchildren in Wisconsin and Connecticut.

"Am I going to end up spending a little bit more money up front? Yes," Mr. Magaw said, but the period of higher expenditures should be relatively brief. It "won't be more than the first two or three years," he said.

Then he expects to reduce spending gradually on things like travel and entertainment - making up for increases in health care, Mr. Magaw said.

The traditional advice that calls for an initial withdrawal of 4 percent is based on several assumptions. To compensate for inflation, the withdrawal rate would increase 3 percent every year. Someone with a $1 million nest egg could take out $40,000 the first year and $41,200 the next year, for example.

And the nest egg would generally be invested at least 50 percent in stocks - as a further hedge against inflation - with the remainder in fixed-income investments and cash.

The approach is based on risk-assessment studies using all kinds of hypothetical examples of market returns. The withdrawal rates are intended to leave very little chance of running out of money.

"Our whole premise is that if this $40,000 is to have the same purchasing power for the rest of your life, we have to inflate it," said Christine Fahlund, senior financial planner with T. Rowe Price Associates, the asset management firm in Baltimore, which advocates this method. "We're assuming that inflation is part of life."

T. Rowe Price's method assumes a 40-year retirement. Mr. Bernicke assumes one of 30 years.

To Mr. Bernicke, a couple who spend $40,000 in their first year of retirement may not need to spend as much when they are in their 80's. People who are 75 and older spend an average of $674 a year on apparel and services, for example, while those who are 65 to 74 spend twice as much, based on the consumer survey he used. Those 75 and up spend an average of $896 a year for entertainment, compared with $1,371 for those 65 to 74.

According to his calculations, a couple in the first year of retirement at age 55, with expenditures of $60,000, might be able to safely withdraw that much from a portfolio worth $1 million - a 6 percent initial withdrawal rate. They would not run out of money so long as they reduced their spending later on according to the pattern shown in the survey, he said.

"Of course it depends on the mix of stocks and bonds in someone's portfolio," Mr. Bernicke said. "But a 6 percent withdrawal rate becomes very realistic."

He said that this rate could vary because of many factors, including a retiree's spending level and the size of the nest egg.

Others advocate loosening the purse strings in retirement, but for other reasons. In the October 2004 issue of The Journal of Financial Planning, Jonathan Guyton, a planner at Cornerstone Wealth Advisors in Minneapolis, advocated an initial withdrawal rate as high as about 6 percent, drawing his conclusions from a study of market returns from 1973 to 2003. Mr. Guyton found that a person who retired in 1973, in the middle of a punishing bear market with very high inflation, could have supported a 6.2 percent initial withdrawal rate over 40 years with a portfolio that was 80 percent stocks. A portfolio with 65 percent in stocks could have borne a 5.8 percent rate, and one with 50 percent in stocks could have supported a 5.4 percent rate.

"The difference between a 4 percent or a 5 percent withdrawal rate might be the difference between someone taking their grandkids on a vacation or not," Mr. Guyton said. "It's usually the last $10,000 that puts the quality in 'quality of life.' "

In order to take out more than 4 percent that first year, Mr. Guyton said, investors need to follow a few rules. To generate income, they must always sell winning stocks before bonds or losing stocks. They cannot add more than 6 percent a year to their withdrawal even if inflation is higher than that. And no increases are permitted immediately after a year of investment losses.

Mr. Guyton's research can be found at www.fpanet.org/journal/articles/2004_Issues/jfp1004-art6.cfm <http://www.fpanet.org/journal/articles/2004_Issues/jfp1004-art6.cfm> .

TO be sure, Mr. Bernicke's and Mr. Guyton's ideas have been met with skepticism by many planners who worry that medical costs may rise so fast that they will undo a well-constructed financial plan.

The cost of prescription drugs, for example, has been rising more than three times as fast as inflation, according to data from AARP, a lobbying organization for older Americans. Nursing home costs, meanwhile, have been rising 6 percent a year, according to surveys by Metropolitan Life, an insurance company.

To hedge against these expenses, Mr. Bernicke advises retirees to buy insurance policies, but many planners say people need to save more and withdraw less.

"I prefer a more conservative estimate of distribution," said Stephanie Hancock of Hancock Wealth Advisory in Los Angeles. "I can't go back and say: 'Oops. You shouldn't have been taking out as much money the last few years,' if someone doesn't have enough." She is also skeptical about the assumption that people will cut back on expenses as they shift into retirement. "You have all this time on your hands," she said. "You could actually spend more."

And Mr. Bernicke, who is 30 years old, said he is saving furiously for his own retirement. He advises others to save as much as they can in their working years, and not to count now on spending a big part of their nest egg immediately after retirement. Such thinking isn't wise, he said, "for younger people who are just starting to save."

Sears to cut some retirees health care benefits
Reuters – Crain’s Chicago Business Online
September 23, 2005

Company will no longer cover health care costs for retirees under 65

(Reuters) — Sears Holdings Corp. on Thursday said retirees who are under age 65 will soon have to foot the bill for their health care coverage as the retailer struggles to rein in soaring costs.

The company that was formed when Kmart bought Sears, Roebuck and Co. earlier this year said retiree health care costs amounted to some 17 percent of Sears Roebuck's operating income last year and it needed to cut costs to be more competitive.

"Our new plan continues to be more generous than most," spokesman Chris Brathwaite said.

He could not quantify how much Sears hopes to save with the changes.

Some 15 percent of Sears retirees are under 65.

Those who retired before 2000, but are younger than 65, will have to pay the full cost of medical premiums as of Jan. 1, 2006. Subsidies for those retirees will resume once they reach 65 and are eligible for Medicare, Brathwaite said.

Those who retired after 2000 will also have to pay the full cost of medical premiums and will not get subsidized after they turn 65. They will, however, still have access to Sears's benefit plan. The company said that, for most retirees, its plan is cheaper than if they bought coverage on their own.

Dan Quaid, head of the Sears Retiree Club of Chicago-land, said he currently pays $529 a month for himself and his wife under the Sears retiree plan. He expects to pay about $900 a month under the new plan.

"I think it's the best we're going to get," said Quaid, 64, who retired from Sears in 1997 after 35 years. "I don't like the impact it has on me, but it's one of those things you've got to live with."

Quaid, who attended a briefing about the new plan this week, said the benefits were "extremely good" for those who are over 65, but he expects to field some angry phone calls from younger retirees.

"It's not going to be accepted very easily," he said. "They're losing another benefit.” Some 45,000 retirees are enrolled in the company's retiree health care plan, or about one-third of those eligible. The rest get coverage through a spouse, another employer or private plans, Brathwaite said.

"Like most companies, Sears is struggling with the spiraling cost of health care," the retailer said in a letter to retirees dated Thursday.

"Our desire to make Sears a great company again means that we have to make changes in the way we conduct business and run our operations and put our cost structure more in line with competitors," the retailer said.

Sears is one of the only major U.S. retailers that provides retiree health care coverage.

Sears shares, which are down 29 percent from an all-time high of $163.50 set in July, gained 65 cents to $115.80 around midday on the Nasdaq.

Sears Names Executive to Lead Sears Essentials,
Sears Grand Formats
Sears Holdings News Release
September 23, 2005

HOFFMAN ESTATES, Ill., -- Sears Holdings Corporation today announced the promotion of Julie Younglove-Webb, 35, to senior vice president and general manager, Sears Essentials and Sears Grand, effective  immediately.

In her new role, Younglove-Webb oversees all new store development, store operations and merchandising for the two off-mall formats and reports directly to Aylwin B. Lewis, president of Sears Holdings and CEO of Kmart and Sears Retail, who will become Chief Executive Officer and President of Sears Holdings on September 30. Younglove-Webb previously served as VP of space planning for Kmart stores, where she directed store refurbishment, while also supporting the Sears Essentials rollout.

"We want to have a customer-focused and performance-driven company. Julie exemplifies the type of leadership that will help us accomplish this goal," Lewis said. She brings an outstanding track record of results to this job. In her new position she will lead our efforts to refine and expand Sears Essentials, as well as direct the continued refinement of the Sears Grand concept."

Younglove-Webb joined Kmart from IBM in 1999 as a team manager. She has
held positions of increasing responsibility, including divisional vice president of information technology. She is a graduate of the University of Michigan and holds a MS in management and organization from Pennsylvania State University and a MBA from Wayne State University.

Medicare Names Approved Drug-Plan Providers

By Sarah Lueck and Vanessa Fuhrmans – Staff Reporters
The Wall Street Journal
September 24, 2005

Officials Say Many Choices Are Better Than Expected; Marketing Begins Oct. 1

WASHINGTON -- Medicare beneficiaries will have an array of options for getting the new prescription-drug benefit, with some policies costing far less than $20 in monthly premiums or offering more-generous benefits than initially expected, the government said.

The federal Centers for Medicare and Medicaid Services, which oversees the health program for the elderly and disabled, announced that it has approved plans by 10 health insurers and pharmacy-benefit managers, including Aetna Inc. and Medco Health Solutions Inc., to sell Medicare drug plans in all parts of the country. In addition, it said, it gave the nod to several other firms, such as Humana Inc. and the Blue Cross and Blue Shield plans, to sell drug plans in many, but not all, parts of the country.

The drug plans are subsidized by the government but designed and marketed by private companies. Enrollment will begin Nov. 15 and coverage will take effect Jan. 1.

Medicare officials said many of the drug plans will cost less and provide more-generous coverage than had been envisioned by the Medicare law, approved two years ago. In addition, managed-care plans that offer the full range of medical benefits under one policy -- called Medicare Advantage plans -- also are broadening their reach in the program, including through regional preferred-provider organizations. Many Medicare Advantage plans will offer drug coverage at no additional charge to beneficiaries who sign up for them.

Competition between plans is the reason "better choices are available," said CMS Administrator Mark McClellan. "That's why costs are lower and that's why coverage options are coming in better than expected."

CMS and drug-plan sponsors declined to provide full details of the plans, though the contracting process is complete. Companies also said they were restricted because they aren't allowed to start marketing their plans to the public until Oct. 1.

But it was clear that many of Medicare's 41 million beneficiaries will have a vast array of coverage choices when enrollment in the new drug insurance begins. Policies vary widely among regions of the country, and many sponsors are offering more than one option. Some plans are similar to the drug-benefit plan laid out in the Medicare legislation, which has a $250 annual deductible and a gap in coverage of $2,850 per year. Others are eliminating the deductible, providing extra coverage for generic medications and requiring people to make co-payments for prescriptions instead of a percentage of the cost.

Aetna will charge premiums that range from $27 to $68 per month, depending on the plan and where the beneficiary lives. Cigna Corp. and PacifiCare Health Systems Inc. plan to sell three different drug plans in all 50 states. Cigna's plans will cost between $30 and $52 per month, depending on where the beneficiary lives, and its most generous option will cover generic drugs during the coverage gap. PacifiCare's "Saver" plan will cost $19.02 to $34.88 in monthly premiums, depending on the state. A plan with a broader list of covered drugs and fewer authorization requirements will cost $29.64 to $47.61 a month.

MemberHealth Inc., a privately held Cleveland pharmacy-benefit manager, said one of its plans will cover generics at no cost. Tampa-based WellCare Health Plans Inc., which has a co-branding arrangement with Walgreen Co., will have premiums ranging from $17.13 to $35.49 in New Jersey, depending on the plan, and $32.73 to $54.21 in Idaho. Medco said it will charge premiums ranging from $27 to $35 depending on the location and will offer first-dollar coverage of generic drugs in some cases.

UnitedHealth Group Inc., which plans to acquire PacifiCare, will sell its main AARP-branded drug plan for $23 to $31 per month with no deductible. Humana, which plans to provide the drug benefit in 46 states, said at least one of its plans will cost consumers much less than $20 in monthly premiums in many states.

In an effort to prevent widespread confusion about the many options, the government is working on a Web feature to help beneficiaries compare the plans in their area. On Friday, it set up a cost estimator to show how much beneficiaries will save by signing up for a plan. But the tool assumed the lowest published premium in a person's state, which tended to be lower than what a person might actually pay.

Many advocates for the elderly and even the drug-plan sponsors themselves are concerned about the possibility that some beneficiaries will be overwhelmed by the range of choices and not sign up for coverage, which is voluntary.

Medicare drug ad deluge expected to swamp seniors
Details of 16 plans to be released Oct. 1
By Bruce Japsen - staff reporter - Chicago Tribune
September 24, 2005

When information about Medicare's new prescription drug benefit comes out next weekend, Illinois seniors will be bombarded with ads from as many as 16 private insurance companies vying for their business.

The first look at how large, and potentially confusing, the range of choices will be came Friday when the Centers for Medicare & Medicaid Services released a list of health plans approved to administer the drug benefit that becomes part of Medicare on Jan. 1.

More companies than expected lined up to get a piece of the billions in play in the largest expansion of the federal health insurance program for the elderly and disabled since it was created 40 years ago.

Details about specific plans and costs will begin to become available Oct. 1, the day plans are allowed to begin advertising and marketing themselves.

Residents in all states will have at least 11 plans to choose from, while those in bigger states such as Texas and California will have 20 choices or more. And the options become even more numerous if beneficiaries opt to get their drug coverage through Medicare Advantage Plans, which operate like a health maintenance organization and offer more comprehensive coverage than just a drug benefit.

Federal officials praised the abundance of choices and credited it with lowering prices. Others, including the state's largest insurance company, said they expect Illinois seniors will be overwhelmed when marketing begins next weekend.

"In October the gun goes off and everybody can talk about their plans," said Peter Rodes, vice president of consumer markets for Blue Cross and Blue Shield of Illinois. "You are just unleashing a torrent of information at people all at the same time. How can anything but chaos reign?"

Beginning Oct. 1 seniors are expected to be bombarded by a chorus of overlapping messages in TV commercials, radio advertisements and direct mail pieces that will last through the Nov. 15 enrollment period.

The 16 private plans participating in Illinois include household names like Cigna Corp., UnitedHealth Group, Humana Inc. and Blue Cross and Blue Shield of Illinois. Large drug benefit firms Caremark Rx Inc. and Medco Health Solutions Inc. are also participating.

The Bush administration deflected criticism that too many choices was a bad thing, saying the competition has driven down monthly premiums to 14 percent less than original projections. Most seniors will have a choice of one plan with a monthly premium lower than $20.

"The competition between these organizations has resulted in lower costs than expected," said Dr. Mark McClellan, administrator for the Centers for Medicare & Medicaid Services.

In the Medicare drug program the government subsidizes some of the costs for drugs while customers pay the rest through premiums and co-pays. Private insurers will largely administer the benefits--not the federal government, which is expected to spend about $720 billion on its portion of it during the next 10 years.

Companies are spending unprecedented amounts on advertising and marketing to launch their benefits and even they are worried that so many messages coming from so many plans will cause confusion.

Humana said it will spend about $80 million on infrastructure, marketing and advertising to ramp up for the launch of its Medicare drug benefit offerings.

Medicare officials say they will be stepping up their educational efforts at the same time, and have already assisted in deploying 140 networks of community groups, ranging from businesses and pharmacies to non-profit organizations, to help seniors in their neighborhoods.

McClellan said government officials would be making all-out efforts to reach seniors with educational materials "where they live and work and play and pray."

They are also urging seniors to call 1-800-MEDICARE if they have questions.

"We want to make sure people get the support that they need," McClellan said.

Still, the expected bombardment of marketing materials and advertisements is a scary proposition, some seniors say.

"We are going to be inundated with this," said Evelyn Conti, a 78-year-old grandmother from Park Forest.

Already, many seniors have been attending meetings, including some organized by health plans that, until Oct. 1, can only talk about how the program will operate and provide basic education. They cannot officially market plan specifics such as prices and details on what drugs will be covered.

"They are whipping the seniors with letters and information," Conti said. "They have been having all of these meetings locally and the local organizations are trying to explain things, but there are still a lot of seniors that don't understand it."

Some Wall Street observers and politicians are beginning to worry that the large number of plans could backfire if health plans do not get enough participants.

In any health insurance program, firms have to spread payments from the government over a group of people, pay for their benefits and still have enough money left over to turn a profit.

It is unclear whether there will be enough participants in each plan to achieve that goal.

The government's effort in the late 1990s to encourage seniors to enroll in HMOs resulted in scores of plans dropping out of the Medicare program when they found they did not have enough enrollees and that government payments were insufficient.

"The Medicare prescription drug program could be a rerun of Medicare HMOs, with companies pulling out when they can't make enough profits, leaving millions of Americans stranded," said Rep. Jan Schakowsky (D-Ill.). "They may also enroll in plans that drop out of the market after a year or two, leaving beneficiaries with nothing but a glossy brochure."

McClellan said proposals by participating insurers were reviewed by independent actuaries to ensure they had viable business plans.

And, he said, seniors who do not like their health plan can switch to another plan in a year. He expects many will do so because competition will prompt plans "to offer better benefits" over time.

Sears hopes shoppers warm up to `cool' ads
By Becky Yerak - staff reporter - Chicago Tribune
September 24, 2005

Sears, Roebuck and Co. is trading in the good life for a cooler one.

Heading into the fall, the Hoffman Estates-based department store chain's three new television advertisements shelve the "Good Life, Great Price" tagline in favor of the double-meaning "Cooler Every Day."

"The season is changing, and we think and hope that people are thinking that Sears is getting cooler every day," too, said Becky Case, Sears vice president of creative and specialty marketing.

The quality of the new Young & Rubicam Chicago campaign, featuring attention-grabbing music, clever editing and even a budding romance with a 20-something couple, has received praise even from retail observers often critical of Sears, which has been losing sales for years.

"The new ads are very well done, and they try to get a message across of `We're young, we're contemporary, we're on target,'" said Howard Davidowitz, chairman of Davidowitz & Associates Inc. in New York.

Shot in July and early August and launched after Labor Day, one of the ads features rapid-fire editing, split screens and percussion music that mostly zeroes in on appliances, digital cameras and other Sears strengths. A second ad, featuring time-lapsed photography, focuses on appliances as well as such soft goods as towels and dog beds.

But the ad most incongruous to what Sears traditionally represents in retail is a clothing ad that features young love blossoming over several months.

The spot, featuring a pop song by the Pernice Brothers and set in the early fall as it unfolds, shows a brunette woman walking down the street in her layered sleeveless tops. Through the magic of technology the woman appears in different outfits as the season gets colder and the leaves fall.

Meanwhile, a man who starts out as a passerby early in the spot ends up as her significant other by the time she's bundled up in her new coat.

The ad features clothing by such exclusive Sears brands as A/Line, Apostrophe, Parallel and Latina Life--but not Lands' End, a major 2002 acquisition.

"We wanted to make sure that people know, without saying `fall,' that it's getting cooler, and that's a reason to change your wardrobe," Case said. "And they think of Sears as a cool place."

The model was chosen for her "hint of ethnicity," Case noted.

Hispanics, Asians and blacks account for more than 25 percent of Sears' sales.

While acknowledging that its sweet spot is consumers ages 35 to 54, Sears is hoping that the ads might encourage younger consumers to give it a look-see.

But engaging new ads might not seal that deal.

"The problem is that every time there's an obituary, Sears loses a customer," Davidowitz said of Sears' traditional reliance on older consumers.

He doubts that Sears can win younger, fashion-oriented customers regardless of the skills of its advertising agency.

"Who is going to believe it?" asked Davidowitz, who thinks Sears should turn 75 percent of its store into hard goods such as appliances and tools. "Sears is saying `We're cool,' so now we'll get other customers from cool places. I don't think they're coming to Sears."

Sears has no illusions that shoppers regard it as a fashion leader, Case said.

"No one would believe us," she said. Instead, Sears wants to position itself as a place to buy quality clothes that are "fashion right."

It's estimated that soft goods, namely apparel, take up 60 percent of Sears' floor but generate only 20 percent of sales.

Sears won't comment on results of its clothing department, traditionally its weakest unit, but one former executive said apparel sales are down as much as 20 percent.

Davidowitz wonders whether the new Sears campaign might end up like the "Softer Side of Sears"--much praised as a campaign but petering out as a way to generate sales.

But Case, a five-year Sears veteran who previously worked for May Department Stores Co. and Federated Department Stores Inc., said poor execution in the stores hurt the softer side effort.

"We did not do a good job in delivering on expectations when people came into the stores," she said.

The "Cooler Every Day" tagline will be retired in early November.

That's when Sears, which has slashed ad spending since its March merger with cost-conscious Kmart Holding Corp., starts airing its holiday ads, which are being done now.

Case said she didn't know whether Sears, which recently consolidated its branding efforts with Y&R, will revive "Good life, great price" after the holidays.

"I'm not saying we won't because we really haven't made a decision," she said.

Separately on Friday, Sears Holdings Corp., formed from the March merger of Sears Roebuck and Kmart, on Friday promoted Julie Younglove-Webb, 35, to senior vice president and general manager of two off-mall formats, Sears Essentials and Sears Grand, effective immediately.

Younglove-Webb previously served as vice president of space planning for Kmart stores.

Beaten-Down Sears Looks Good to Insider
By Naureen S. Malik - Barron’s Online
September 23, 2005

SHARES OF DEPARTMENT-STORE CHAIN Sears Holding have been beaten down as of late. But one board member's $30 million purchase is forcing critics of the stock to look again.

This week, Steven T. Mnuchin, a hedge fund manager and Sears director, purchased 266,000 shares valued at roughly $31.7 million. The shares were initial investments made for three separate accounts -- a hedge fund, a family trust and a personal account.

Jonas Ferris, editor of the insider trading newsletter Insider Moves, says he was recommending that investors "short" the stock in his newsletter because of earlier insider selling combined with a higher-priced stock.

The stock is down 25% since hitting its high of $163.50 in July.

Ferris says he now has had a change of heart "because of this buying" combined with a better valuation for Sears' shares.

This week, Mnuchin purchased 250,000 of those shares on behalf of investors at his private investment fund, Dune Capital Management, where he serves as chairman and co-chief executive officer.

Mnuchin then bought 8,000 shares each for himself and for a family trust, for a total of $1.9 million.

These transactions reverse an overwhelming selling trend by Julian Day, another Sears director. Day pocketed $124.6 million after selling nearly 900,000 shares this year, the majority of which were sold after options were exercised, notes Jaseem Hasib, a research analyst at Thomson Financial.

"It's dueling directors in terms of insider data," says Jonathan Moreland, director of research at InsiderInsights.com. Day sold his shares at higher prices of at least $133, so "let's see whether he continues to sell at $120 or below."

Sears declined to comment on the transactions.

Investors and analysts had been watching Sears with much anticipation following the merger of Sears, Roebuck & Co. and K-Mart in March. However, the stock plummeted in August as the retail picture began to sour on higher energy prices and softer consumer confidence, which impact discretionary spending by Sears' "bread and butter" customers, says Ferris.

In its first full quarter after the merger, Sears reported earnings of 98 cents a shares (including a 41-cent restructuring charge). Analysts were expecting earnings of $1.36 according to Thomson Financial consensus estimates.

Shares continued to fall after the company said earlier this month it would continue to cut medical benefits to retirees in the face of riser health care costs.

Meanwhile, Edward S. Lambert, a hedge fund manager and Sears chairman, is currently heading up marketing and merchandising initiatives at Sears.

The company's previous chief executive was demoted and a new one was appointed in a management shakeup widely seen as "inevitable," says Ivan Feinseth, managing director of Matrix USA. He has a Strong Buy on Sears and places the stock's intrinsic value at about $150, though Matrix does not issue price targets.

Lampert has been instrumental in extracting value from Sears, Feinseth says, repositioning its stores so they tailor more to the tastes of local demographics and away from their "one-size fits all" mold.

Feinseth sees Lampert's managerial role with Sears as a temporary one until an experienced retailer is found to take over the marketing function.

The most compelling story at Sears, however, is the "positive momentum" in the company's economic profits (return on capital minus cost of capital), Feinseth says. The number is still negative, but it is sloping upward.

Hurricane rebuilding efforts could help boost traffic at stores in the area as they seek out construction equipment and home furnishings. Also, Sears is repurchasing up to $500 million common stock, or about 2%, to use up extra cash flow to optimize shareholder value.

In the meantime, Mnuchin's purchase of $30 million shows real commitment, especially when compared to usual insider activities when chief executives will pick up a few thousand shares here and there, says Feinseth. "If you picture a plate of ham and eggs, the chicken made an effort and the pig made a commitment."

HHS Formally Unveils Medicare Drug Plan
By Peter Loftus – Wall Street Journal Online
Dow Jones newswires – September 23, 2005

The government's Medicare program Friday formally approved new drug-benefit plans that will be administered by health insurers and other organizations across the country beginning in January.

The U.S. Department of Health and Human Services said there will be drug plans in every state, and between 11 and 20 organizations offering the plans in each region of the country. In every state except Alaska, at least one prescription plan will have a premium of less than $20 a month, HHS announced. Medicare previously said monthly premiums would average about $32.20.

"The competition between these organizations has resulted in lower costs than expected," said Mark McClellan, administrator the HHS's Centers for Medicare and Medicaid Services "Forty-nine states will have a drug plan with a premium below $20."

Nine organizations will offer drug coverage nationwide, HHS said. The drug coverage is being offered as stand-alone benefit or as part of the so-called Medicare Advantage plan, which is a privately administered, HMO version of Medicare. Medicare Advantage plans will be offered in 44 states with prescription drug coverage for no additional cost.

The new drug benefit was part of the Medicare reform legislation passed in 2003. Medicare, which has more than 40 million beneficiaries, previously hasn't offered substantial drug coverage.

Under the voluntary drug plans, the elderly and other Medicare beneficiaries will be able to get discounts on prescription drugs. They will pay premiums to the plan administrators, which will also receive per-member subsidies from the government.

All plans are required to provide coverage at least as good as Medicare's standard coverage, which pays on average 75% of drug costs after a $250 deductible, up to $2,250 in total drug spending, HHS said. The coverage also pays about 95% after $3,600 in out-of-pocket costs to protect against very high drug expenses.

Administrators of the plans may begin marketing Oct. 1, with enrollment beginning in November. The nine companies approved to offer stand-alone drug coverage nationwide are: Aetna Life Insurance Co., Connecticut General Life Insurance Co., Memberhealth Inc., Pacificare Life and Health Insurance Co., Silverscript Insurance Co., Unicare, United Health Care Insurance Co. and Wellcare Health Plans.

Corrections & Amplications:
Nine organizations will be offering drug coverage nationwide. HHS initially stated the number was eight, as was reported in an earlier version of this story.

Fierce Bidding for Drug Benefit
Insurers' Low Offers to Medicare Suggest Future Market Shakeout
By Vanessa Fuhrmans – Staff Reporter – The Wall Street Journal
September 23, 2005

Competition among health insurers and other companies to provide the new Medicare prescription-drug benefit is shaping up to be fiercer than expected. That's raising questions about the new market's prospects -- as well as the specter of a disruptive shakeout among participating companies down the road.

The drug benefit's impact should emerge more clearly today, when Medicare officials are expected to disclose which companies have won contracts and what plans will be available in various regions.

In a week, health insurers and pharmacy-benefit managers will begin marketing hundreds of prescription-drug plans for the elderly, either as a standalone benefit or as part of a comprehensive, privately managed Medicare plan. The new coverage takes effect on Jan. 1 and aims to close the biggest hole in the 40-year-old government health program: no assistance in paying for most prescription drugs.

After the bill passed in 2003, some industry observers fretted that not enough companies would participate, but the reverse has happened. Medicare beneficiaries in most areas have 11 to 23 plan sponsors vying for their business. And the premiums that health insurers have proposed are 14% lower on average than what Medicare officials predicted.

That insurers are going after the business with cut-rate prices is good news for the millions of seniors they hope to lure as customers. But it also means that, in itself, the benefit isn't likely to be a very profitable business. Health Net Inc., one of the bigger Medicare players, cooled investors' expectations this week when it said at an investors conference that it expected margins between 2% and 3% on some of the drug-benefit business, less than what some analysts and companies had predicted.

Instead, some are betting on making money from sheer volume, as well as selling customers on products with higher profit potential, such as Medicare HMOs, known as Medicare Advantage.

"There's always a trade-off between profitability and membership," says Scott Latimer, president of Humana Inc.'s senior segment for central and north Florida. "But there's a lot of optimism on the number of seniors expected to take the benefit."

There are definite signs that beneficiaries are showing interest. The Social Security Administration said yesterday that three million people had applied for extra federal help with premiums and cost-sharing available to those with low incomes -- a sign, government officials said, that efforts to publicize the assistance are working. In May, the government began mailing 19 million applications to people they thought might be eligible. It's unclear how many of the three million will actually qualify; Social Security still is processing the forms.

A handful of companies have the scale in the Medicare business to lure customers into more profitable plans and services. Humana and PacifiCare Health Systems Inc. -- and by extension, its soon-to-be parent, UnitedHealth Group Inc. -- already have large Medicare plans and the hospital-and-doctor networks to support them. "They can expand that business at very little cost," says Joe France, an analyst at Banc of America Securities. The challenge of building their own Medicare networks will make it hard for new rivals to jump in.

By better managing patients' comprehensive care in these plans, and not just their prescription-drug use, these companies have more room to squeeze profit from their government reimbursement.

UnitedHealth, for instance, says it sees a lot of opportunity in a more tailored plan for Medicare beneficiaries with severe or disabling chronic conditions that Congress legislated alongside the drug benefit. Called "special-needs" plans, they call for a higher level of reimbursement from the government, so that health plans can more rigorously coordinate these people's care. UnitedHealth already provides a similar elderly-care service.

"These people have the highest needs and make up most of the [Medicare] budget," says Lois Quam, head of Ovations, UnitedHealth's division for its Medicare and other elderly-care services. "Therein lies the opportunity to improve their health and, as a byproduct, keep them out of the hospital and save money."

It's likely that dozens of others vying to provide the drug benefit on a standalone basis will discover there isn't enough money to be made. That could lead to a shakeout.

Executives and analysts are waiting for Medicare officials to disclose which companies have been awarded contracts. The officials may also say which companies bid on the lower end of the premium spectrum, a hint about which companies will be offering the more attractively priced plans. That information will also indicate who gets a piece of instant market share: the roughly six million Medicare beneficiaries who are so low-income that they qualify for Medicaid as well. To ensure they still get drug coverage, the government is providing them a fully subsidized benefit and automatically allocating them among health plans that have bid for that business below the average, or benchmark, premium submitted to Medicare.

"The thinking is that this is the one-time chance to get that chunk of enrollment," says Matthew Borsch, analyst at Goldman Sachs.

Health Net, for instance, has already said that it knows it bid below the benchmark in all 10 states, or six Medicare regions, where it plans to participate. It's one of seven below-average bidders in California, where one million of these low-income beneficiaries are. Humana has disclosed that it successfully bid below each regional benchmark for all of its prescription-drug-plan bids submitted to Medicare authorities.

 

Sears retirees to see health costs jump
The Associated Press
September 23, 2005

HOFFMAN ESTATES, Ill. (AP) - Thousands of retired Sears Holding Corp. workers under the age of 65 will soon have to cover the full costs of their medical insurance as the company bids to reduce costs after being acquired by Kmart.

Spending on health coverage for workers and retirees last year accounted for about half of Sears' operating income.

Sears on Thursday would not disclose changes made to programs for current workers, though it did say that new benefits would include a credit for nonsmokers and discounts for workers who get prescriptions filled at company pharmacies.

In April, Kmart Holding Corp. acquired Sears, Roebuck & Co., and the newly formed Sears Holding began to put a greater emphasis on cost-saving measures.

Retirees under 65 must begin paying the full cost of health insurance coverage on Jan. 1. Retirees say that will increase the amount they must pay by about 40 percent.

Those who aren't yet 65 and who retired before Jan. 1, 2000, will be eligible for a subsidy after they reach 65. Those who retired after Jan. 1, 2000, will have to pay the full costs of medical insurance premiums, but they will have access to Sears coverage that the company says will cost them less than buying individual coverage.

Some retirees who warned last year that Sears might try to drop insurance coverage completely said they were relieved the cost-saving measures were not more severe.

"They thought Sears would do the worst, and they really didn't," said Ron Olbrysh, chairman of the National Association of Retired Sears Employees.

There are about 45,000 retirees now enrolled in the company's medical program.

 

New campaign breathes life into Sears
By Lewis Lazare – Sun-Times Columnist
September 23, 2005

From an advertising perspective, things are looking somewhat brighter at Sears Holdings Corp.

Chairman Edward S. Lampert announced his new hands-on marketing responsibilities only a few days ago, so we can't credit him for the pleasing improvement in at least three of four new spots Sears is introducing for the fall season.

One thing is readily apparent: Sears now has a sense of rhythm that was painfully lacking during the Janine Bousquette era at the retailing behemoth. This new work doesn't suggest Lampert has yet determined what the overarching brand image for Sears should be, but at least several of these new commercials from Young & Rubicam/Chicago are stylish enough to make Sears feel like a contender again.

We especially enjoyed the 30-second "Layering," which takes an appealing piece of pop music and some fairly routine footage of male and female models sashaying down an urban sidewalk and makes something pretty magical out of it, thanks to wizards in the edit booth. If anyone doubts how much a confident, knowing editor can affect a spot's impact, check out "Layering."

You'll also note Y & R has dropped the eminently forgettable "Good Life. Great Price" tag in this new work in favor of a nifty seasonal line, "Cooler Every Day."

"Doors" is another well-above-average piece that makes good use of a delightfully percussive soundtrack and, again, some exceedingly fine editing to show off various Sears hard goods -- and some apparel, too. We all know what a drag it can be to market hard goods, but "Doors" proves it is possible to make a classy-feeling commercial featuring such wares.

"Dream House" may be one of the last Sears spots we'll see from dropped roster shop Ogilvy & Mather/Chicago. Would that it were a more memorable commercial. But Ogilvy had to work with goofy home makeover expert Ty Pennington, and we can't heap all the blame for that on the agency.

Whatever Pennington's charms as a television show star, they aren't nearly so apparent in "Dream House," where he displays the unfortunate habit of leaning backward every time he utters one of his decorating suggestions or witty retorts. Pennington's persona may seem sweetly accessible to some, but to us he comes off way too dorky.

Many Sears retirees' health costs to jump
By Becky Yerak - staff reporter – Chicago Tribune
September 23, 2005

If under age 65, they will pay full premium

Beginning Jan. 1, thousands of Sears Holdings Corp. retirees under the age of 65 will be responsible for the full cost of their medical insurance coverage, as the retailer moves to reduce its own costs.

The Hoffman Estates-based retailer also made changes to benefit plans for current workers that in some cases will be less generous.

Spending on worker and retiree health coverage in 2004 represented about half of the operating income for Sears, one of only a handful of major U.S. retailers offering retiree medical benefits.

In April, after Sears, Roebuck and Co. merged with cost-conscious Kmart Holding Corp., the newly formed Sears Holdings announced several pay and benefits changes for workers, including ending new contributions to pension funds in 2006 and cutting 401(k) contributions.

At the time, Sears Holdings said no changes would be made this year to health benefits and paid time off.

Sears on Thursday wouldn't disclose changes made to programs for current workers, other than to say new benefits include a $30 tobacco-free credit, discounts for workers getting prescriptions filled at company pharmacies, and a medical savings account that can be carried over from year to year.

Sears was more forthcoming about its plans for retirees.

Those under age 65 will begin paying the full cost of health insurance coverage on Jan. 1. That will increase what retirees have to pay by roughly 40 percent, according to retirees.

However, those pre-65 who retired before Jan. 1, 2000, will be eligible for a subsidy toward their coverage once they turn 65.

Those who retired on or after Jan. 1, 2000, must pay the full cost of medical insurance premiums but will have access to Sears coverage, which likely will cost less than if they bought it on their own, the company said.

About 45,000 retirees are enrolled in Sears' medical program.

Of those, about 15 percent, or 6,750, have not turned 65. About half will be eligible for a subsidy when they turn 65.

The National Association of Retired Sears Employees was "cautiously optimistic" about the changes, though new premiums haven't been announced. Early this year the group worried that Sears might eliminate the subsidy for all retirees or drop insurance coverage.

"They thought Sears would do the worst, and they really didn't," said Ron Olbrysh, chairman of the retirees group.

Dan Quaid, 64, president of the Chicagoland Sears Retiree Club, retired in 1997 and pays $529 a month for coverage, after receiving a subsidy of $220 a month from the company.

That means his monthly cost will rise to at least $749 a month next year.

"I'll have to eat that along with normal cost increases," he said.

Separately, at a Goldman Sachs media conference in New York, Martha Stewart Living Omnimedia Inc. said it continues to talk about expanding its contract with Kmart, Bloomberg News reported.

Sears stock closed at $121.91, up $6.76, or 5.9 percent.

Sears Plans More Cuts To Retirees' Medical Benefits
By Amy Merrick – Staff Reporter – The Wall Street Journal
September 23, 2005

Sears Holdings Corp. has begun to notify its retirees that it will make further cuts to their medical benefits, citing rising health-care costs and competition from retailers that provide little or no medical coverage to retired employees.

The moves are the latest in a series of cuts in retiree benefits in recent years. In the past, such cuts helped Sears generate income, thanks to accounting practices that transform reductions in retiree benefits to accounting gains.

As a result, Sears's postretirement benefits, which include both medical and life-insurance benefits, added $50 million to the company's operating income last year, according to its annual report filed with the Securities and Exchange Commission. Its total operating income for the year was $487 million. The benefits program contributed $65 million to income in 2003 and $60 million in 2002.

Sears, Roebuck & Co. was acquired this year by Kmart Holding Corp. to form Sears Holdings, based in Hoffman Estates, Ill. Sears said that because of accounting rules related to that deal, it no longer expects to record gains from postretirement benefits in future years.

The most noticeable change to benefits will be for retirees younger than 65 years old. They will still have access to medical coverage, but Sears will no longer pay anything toward the coverage. About 15% of the 45,000 Sears retirees enrolled in a company medical plan fall into this group, the retailer said. More than half of those employees will become eligible for subsidized coverage once they turn 65, Sears said.

Retirees who are older than 65, and who retired before Jan. 1, 2000, will continue to receive payments from Sears for medical benefits, but the payments will be smaller than in the past, the company said. The changes take effect next year.

"The key to being a great company is lowering our overall cost structure so we can be competitive," said Aylwin B. Lewis, who is president of Sears and will become chief executive Sept. 30. "A lot of our very excellent competitors don't have these legacy issues."

Sears said the plans will give retirees access to medical coverage "at competitive rates." However, it declined to say what the monthly premiums are likely to be. Because this group is older and presumably less healthy, the costs would likely be higher for them than for another group involving both active and retired employees.

"The pre-65 people are going to struggle," said Ronald Olbrysh, chairman of the National Association of Retired Sears Employees. The group isn't affiliated with Sears, and it has been highly critical of benefit cuts in the past. But Mr. Olbrysh said he was pleased with some of the new coverage options for retirees over 65. "The worst scenario would be if Sears said they're not covering anything, but they're not taking that approach."

Sears to cut some retiree health benefits
By Sandra Guy – Business Reporter – Chicago Sun-Times
September 22, 2005

Sears will stop subsidizing retiree health care coverage for a new batch of employees and retirees, further cutting its benefit costs so it can better compete with rival discounters.

Hedge fund guru Edward S. Lampert, who became Sears' chairman after he engineered Kmart's takeover of Sears in March, has emphasized boosting profits and slashing costs. Sears' medical costs for retirees last year equaled 17 percent of the retailer's operating income.

Employees age 40 and older will no longer get Sears' medical-coverage subsidy when they retire, effective immediately, Sears told workers Thursday.

Earlier this year, Sears cut the subsidy for employees younger than 40, and eliminated employee stock-option grants and guaranteed pensions.

Sears employees who lose the retiree health-insurance subsidy will still have access to Sears' benefit plan, which is cheaper than coverage that most individuals can buy on their own, a Sears spokesman said Thursday.
Sears also will offer employees a health savings account that carries over from one year to the next, a discount on prescriptions filled at Kmart and Sears Essentials pharmacies, and a company-paid life-insurance benefit up to $50,000.

Retirees younger than 65 also will lose the Sears subsidy for retiree health care coverage. About 15 percent of Sears' retirees are younger than 65.

One group of the retirees will get the subsidy back when they turn 65, but another group has lost it altogether.

Retirees younger than 65 who retired between 1978 and 2000 will have their subsidy eliminated on Jan. 1, 2006, but will become eligible to get it back when they turn 65.

Retirees younger than 65 who left after Jan. 1, 2000 will lose their subsidy altogether.

Another group ineligible for the subsidy comprises retirees who left Sears after Jan. 1, 2000, and who are older than 65. Their subsidy was eliminated five years ago.

Dan Quaid, president of Sears' Retiree Club of Chicagoland, said the change will raise his out-of-pocket expense about $220 a month, but he knows Sears must make itself more competitive.

"It could have been a lot worse," said Quaid, 64, who noted that Kmart dropped its retiree medical coverage altogether when it went into bankruptcy protection in 2002.

Quaid, who retired at 55 as director of systems, said he will regain the health care subsidy when he turns 65. His wife must stay under Sears' unsubsidized plan for three more years until she turns 65.

The Hoffman Estates-based retailer delighted many of its retirees by unveiling a program to expand the range of health care coverage for those age 65 and older.

Ken Posey, president of Sears Atlanta Retiree Club, said Sears listened to retirees' concerns that they be able to choose among a greater variety of health care plans. New to retirees are a supplement to the new Medicare prescription-drug program and elimination of a cap on lifetime payouts, according to sources.

Retirees also were delighted that they still have access to medical coverage, regardless of their age or health, Posey said.

The expansion of health care options has turned some skeptics of the "new" Sears, post-Kmart, into believers, Posey said.

"We now feel like our company didn't go away," he said. "The new company is as concerned about us as the old."

Sears met this week with members of the retiree advisory board that CEO Alan Lacy appointed five years ago to tell them about the new plans. The company is setting up meetings with 37 retiree clubs nationwide to give out further details, and will brief club presidents today.

AFTER KATRINA: CRISIS MANAGEMENT:
'The Only Lifeline Was the Wal-Mart'
By Devin Leonard – Fortune Magazine
October 3, 2005 issue

The world's biggest company flexed its massive distribution muscle to deliver vital supplies to victims of Katrina. Inside an operation that could teach FEMA a thing or two.

Jessica Lewis couldn't believe her eyes. Her entire community ˜Waveland, Miss., a Gulf Coast resort town of 7,000˜had been laid waste by the storm, and Lewis, co-manager of the local Wal-Mart, was assessing the damage to her store. The fortresslike big box on Highway 90 still stood. But Katrina's floodwaters had surged through the entrance, knocking over refrigerators full of frozen pizza, shelves of back-to-school items, racks of lingerie. Trudging through nearly two feet of water in the fading light, Lewis thought, How are we ever going to clean up this mess?

That quickly became the least of Lewis's worries. As the sun set on Waveland, a nightmarish scene unfolded on Highway 90. She saw neighbors wandering around with bloody feet because they had fled their homes with no shoes. Some wore only underwear. "It broke my heart to see them like this," Lewis recalls. "These were my kid's teachers. Some of them were my teachers. They were the parents of the kids on my kids' sports teams. They were my neighbors. They were my customers."

Lewis felt there was only one thing to do. She had her stepbrother clear a path through the mess in the store with a bulldozer. Then she salvaged everything she could and handed it out in the parking lot. She gave socks and underwear to shivering Waveland police officers who had climbed into trees to escape the rising water. She handed out shoes to her barefoot neighbors and diapers for their babies. She gave people bottled water to drink and sausages, stored high in the warehouse, that hadn't been touched by the flood. She even broke into the pharmacy and got insulin and drugs for AIDS patients. "This is the right thing to do," she recalls thinking. "I hope my bosses aren't going to have a problem with that."

Wal-Mart, America's biggest company, is many things to many people-discounter extraordinaire, union buster, guardian of small-town virtues, wrecker of small-town shops-but about one thing there is no question: It is the repository of the nation's stuff. And for the people whose lives were stripped bare by Katrina, it was mundane stuff that meant the difference between life and death. Lewis was one of thousands of Wal-Mart employees who delivered, and no, her bosses don't have a problem with what she did.

The hurricane was a pivotal moment for Wal-Mart, one that it nearly fumbled. The company dispatched armored cars to the region before the storm hit to remove cash from stores. But it left behind guns that ended up in the hands of looters. Katrina shut down 126 Wal-Mart facilities in the Gulf Coast area, yet the company was criticized for offering some jobless employees only three days' pay. Wal-Mart argues that it usually has its stores open within a day after a natural disaster. To be fair, it also offered these workers small amounts of cash.

As the extent of the devastation became clear, however, Wal-Mart did a remarkable about-face. At the urging of CEO Lee Scott, its truckers hauled $3 million of supplies to the ravaged zone, arriving days before the Federal Emergency Management Agency in many cases. The company also contributed $17 million in cash to relief efforts. Wal-Mart also demonstrated how efficient it can be. As of Sept. 16, all but 13 of the facilities that Katrina had shut down were up and running again. The company had located 97% of the employees displaced by the storm and offered them jobs at any Wal-Mart operation in the country.

The result was a public relations coup˜not a common occurrence for this company ˜but also something more. Wal-Mart likes to say it has three guiding principles enunciated by its late founder, Sam Walton: Respect the individual, serve the customer, and strive for excellence. In this case, the company honored Mr. Sam's memory and saved lives. As Scott told a group of Wal-Mart officials recently: "I got a phone call from someone who said, 'Do you think this will change the minds of our critics?'" No, he told the caller. But it sure quieted them down.

Wal-Mart began its response to Katrina on Aug. 23˜six days before the storm rampaged through New Orleans. That was the day Jason Jackson, Wal-Mart's director of business continuity, noticed that a storm off the coast of Florida had become a tropical depression and was headed for the state's southern tip.

Jackson's drab title belies his importance. He oversees Wal-Mart's Emergency Operations Center down the road from the home office in Bentonville. You'd expect the Emergency Operations Center at the nation's largest company to be a high-tech war room. In reality, it is just another chamber of blue cubicles at a company whose executives proudly disdain spending time or money on anything so frivolous as design. But what takes place in the EOC is truly artful.

Every day, it seems, Jackson and his crew get a call from a Wal-Mart store with a crisis. In August a crazy person shot two workers in the parking lot of the Wal-Mart in Glendale, Ariz. The EOC immediately alerted surrounding stores, in case the shooter showed up on their doorsteps to inflict more harm. (He was apprehended at his house near the crime scene.) The same day, a terrified employee phoned from a store in Melbourne, Fla., where somebody had just tossed a Molotov cocktail. Jackson's team kept employees calm as a manager wrestled the suspect to the ground.

Hurricanes, for the folks at the EOC, are practically run-of-the-mill˜last year Jackson and his staff responded to four hurricanes in five weeks in Florida. With Katrina looming, Jackson, a fast-talking 33-year-old who was once an assistant fire chief in Sylvan Hills, Ark., followed his normal procedure. Using data culled from the National Weather Service and private meteorologists, he plotted the storm's likely path across southern Florida. He alerted company officials to begin shipping crucial items to Wal-Mart distribution centers near stores in the area before Katrina could pay them a visit. "It's like a giant game of chess," Jackson says.

There was little guesswork involved. Wal-Mart has studied customer buying patterns in hurricane-prone areas. Some of the company's findings are obvious: When a storm is on the way, customers stock up on bottled water, flashlights, generators, and tarps. Afterward, they buy chain saws and mops. But there have been surprises too. Customers also load up on Strawberry Pop-Tarts. Why is that? "They are preserved until you open them, the whole family can eat them, and they taste good," says Dan Phillips, Wal-Mart's vice president, information systems division.

The EOC also made sure the needs of Wal-Mart store managers in the area were addressed. Jackson alerted the company's trucking division to ship backup generators and fuel to Florida stores so they would be prepared for power losses. Trucks also delivered dry ice, so if the generators failed, frozen food could be kept from thawing for 72 hours.

Katrina swept through the southern tip of Florida on Aug. 25 without inflicting too much damage. The National Weather Service predicted that she was on her way up to the Panhandle. But the following morning, Jackson was warned by Wal-Mart's meteorologists that Katrina had changed her mind and was headed just east of New Orleans˜more than 12 hours before the National Weather Service issued a similar advisory.

So Wal-Mart reloaded trucks and hauled hundreds of thousands of cases of bottled water, Pop-Tarts, and generators to distribution centers outside the Crescent City. It was a big job, but still fairly routine for a company with 117 distribution centers around the country. "That's what we do," shrugs Rollin Ford, Wal-Mart's executive vice president of logistics and supply chain. "We move mass volume very efficiently."

When the hurricane reached land on Aug. 29, Jackson and his staff watched in grim silence as their computerized monitoring system showed store after store in the region losing power. "You could hear a pin drop," Jackson says.

Before the winds died down, Wal-Mart had dispatched members of its "loss prevention" team˜people deployed to protect stores against everything from shoplifting to vandalism. The team was amazed at what it discovered. Looters had cleaned out the Tchoupitoulas Street store in New Orleans. Elsewhere, though, local Wal-Mart employees fended off looters and gave away items to the truly needy. In Kenner, La., a Jefferson Parish town outside New Orleans, a local loss-prevention specialist named Trent Ward used a forklift to pop open the warehouse door at his store in order to deliver water to nearly 100 elderly people stranded at a retirement home (they were evacuated later). In nearby Marrero, La., Wal-Mart employees transformed their store into a makeshift headquarters for police officers who had lost their homes and had no place to sleep. As ill-equipped National Guardsmen began to trickle into the area, Wal-Mart gave them bullets and holsters. One day a New Orleans police officer arrived in a panic. "I'm down to one bullet," he told store employees. "I don't know what he was doing," says Neal Guidry, a district loss-prevention supervisor from Kaplan, La., "but we gave him some."

As the scope of the tragedy became clear, Wal-Mart CEO Lee Scott asked for volunteers from the company's army of truck drivers to haul food to shelters in the flood zone. One of the first to step up was Robert Svoboda, a 42-year-old driver from Sealy, Texas, who delivered peanut butter, Pop-Tarts, and canned goods to three shelters in Marrero. "When I arrived, it sounded like someone scored a touchdown in a football game," he recalls. "I could have sat there and shook hands all day, they were so happy to see me."

Merrick Bordel, a 56-year-old driver from Cottonport, La., spent a week in Jefferson Parish transporting loads of food to shelters. There were times when he had to step behind his truck to hide his tears from the displaced children to whom he was giving handouts. One day he took a load of dog food to a hospital. "I said, 'Do you all need this? Shouldn't I bring it somewhere else?'" Bordel recalls. "They said, 'No, we have a bunch of pets here. This will help us.'"

Wal-Mart employees arrived so early in the disaster area that they often wound up running their own relief efforts. "If the federal government would have responded as quickly as Wal-Mart, we could have saved more lives," says Jefferson Parish Sheriff Harry Lee. "FEMA executives were there, but they didn't do anything. They weren't up and running for four or five days." In one case, he says, FEMA actually made things more difficult for the retailer. Wal-Mart sent three trailer trucks with water to a FEMA compound. "Much to my dismay, FEMA turned them away," Lee says. "They said they didn't need it.... [Wal-Mart] ended up giving the water directly to us." A FEMA spokeswoman disputes Lee's account.

But other local officials recall things similarly. Philip Capitano, mayor of Kenner, says Wal-Mart's trucks rolled into his city with supplies several days before the Red Cross and FEMA. "The only lifeline in Kenner was the Wal-Mart stores. We didn't have looting on a mass scale because Wal-Mart showed up with food and water so our people could survive," Capitano says. "The Red Cross and FEMA need to take a master class in logistics and mobilization from Wal-Mart."

Many evacuees decided that they were better off dealing with Wal-Mart than with the government. The company set up a phone bank in Bentonville to take calls from displaced employees who needed assistance. It wasn't long before Wal-Mart volunteers began receiving calls from nonemployees seeking help. They even helped a New Orleans couple find their newborn child, who had been moved from a city hospital to a Houston neonatal center in the chaotic evacuation.

On Sept. 10, Wal-Mart's top executives congregated in Bentonville for the company's famous Saturday morning meeting. "This was one of the few times at Wal-Mart when we did the right thing and actually got credit for it," Scott told the crowd. "Everywhere I go, everybody wants to talk about what you did."

Clearly, this could be a turning point for Wal-Mart. It is a chance to regain ground with a skeptical public. It is an opportunity to boost employee morale at a time when Wal-Mart is the target of what Scott describes as "the largest, best-funded union campaign in history" and is also bracing for the November opening of The High Cost of Low Price, muckraking director Robert Greenwald's movie about the company. Scott told his assembled executives that he wanted to harness the energy that Wal-Mart employees showed in the storm and do something with it: "We have an opportunity to take this and move to the next level."

But what will Wal-Mart do with the good will it has earned? Will its critics be silenced for more than a few days? "Wal-Mart can do the right thing when they choose to," says Chris Kofinis, spokesman for WakeUpWal-Mart.com, a campaign funded by the United Food and Commercial Workers union, which has tried in the past to enlist company workers. "If you do the right thing today, you can do the right thing every day. For Wal-Mart, it's never been a question of can't. It's always been a question of will."

A company is bound to be changed by an experience like the one Wal-Mart has just come through. Executives can't talk enough about new ideas for helping disaster victims. It is posting digital pictures of missing people on its website. More than 1,300 victims have created "wish lists" of items they need to rebuild their lives on the computerized wedding registries at Wal-Mart stores. Sam's Club members can order relief supplies online and pick them up on their next visit.

But maybe all that misses the point. For years, Wal-Mart has defended its behavior by insisting that it does do the right thing every day, simply by delivering to people the things they need, cheaply and efficiently.

For once, it's hard to argue with that.

 

Sears Announces 2006 Retiree Medical Benefits
FROM SEARS RETIREE WEBSITE
September 22, 2005

Since the completion of the Sears and Kmart merger earlier this year, Sears has begun taking actions to position the company for long-term success. Making Sears Holdings a great company means making changes in the way we conduct business and run our operations, and putting our cost structure more in line with our competitors.

Rising Healthcare Costs
Like most companies, Sears is grappling with the spiraling cost of healthcare. The challenge in an increasingly expensive healthcare environment is to strike a balance between ensuring access to healthcare coverage for retirees and active associates, and managing costs so that Sears remains competitive.

New Medical Program Highlights - Guaranteed Access for all Retirees
In response to these challenges, Sears is making changes to its retiree medical program for 2006. Under the new program, all Sears retiree medical participants will have guaranteed access to medical coverage at competitive rates, regardless of age or health status.

Medicare-Eligible Retirees
Medicare-eligible retirees will have more choice in coverage options ˆ something retirees have often requested.

Sears will continue to provide a level of subsidy to retirees who are eligible for Medicare and retired prior to January 1, 2000. Retirees in this group are also eligible for a subsidy for any covered dependents who are eligible for Medicare. Those who retired on or after January 1, 2000, will continue to pay the full cost of medical premiums.

For Retirees not eligible for Medicare
Retirees who are not yet eligible for Medicare will be responsible for paying the full cost of medical premiums beginning January 1, 2006. However, those who retired prior to January 1, 2000, will be eligible for a company subsidy once they become eligible for Medicare.

Active Associates
Going forward, active associates who retire will pay the full cost of retiree medical premiums. Active associates meeting eligibility requirements will continue to have guaranteed access to both pre-65 and post-65 medical coverage.

Retiree Health Access (RHA)
Sears has worked closely with several other leading companies, through an organization called the Affordable Health Care Solutions Coalition, to consider options for retiree medical insurance. Out of those discussions, several national employers developed a new platform for providing retiree healthcare benefits called Retiree Health Access (RHA). Sears will be transitioning retiree medical coverage to RHA effective January 1, 2006.

Through RHA, retirees who are not yet eligible for Medicare will continue to have access to most of the same plans as active associates. Medicare-eligible retirees will have access to a variety of options, including:

Working Through the Transition
While having more healthcare options is positive, it can also make the decision-making process more difficult. To help retirees with the transition, Sears will conduct meetings in conjunction with local retiree clubs in many locations across the country. (See the list all of the meeting locations <http://www.retireessears.com/benefits/docs/RetireeMeetings.doc> posted on the site). A video will be sent to all retiree clubs. Retirees will also receive a detailed pre-enrollment guide and will be able to receive personal assistance through dedicated call centers. The Sears Retiree Service Center will have general information about the new program. In mid-October, RHA will open its call center. The RHA Service Center can help retirees evaluate their various plan options.

Retirees will have plenty of time to consider their options: the enrollment period for the new retiree medical program will extend from November 7 to December 2, 2005.

In a Shift, Marketers Beef Up Ad Spending Inside Stores
By Emily Nelson and Sarah Ellison – Staff Reporters
The Wall Street Journal
September 21, 2005

Shelf Promotion
Funky Displays and Lighting, TV Spots in Wal-Mart;
Unsettling Madison Avenue
Fake Doorknobs Pitch Diapers

Procter & Gamble Co. believes shoppers make up their mind about a product in about the time it takes to read this paragraph.

This "first moment of truth," as P&G calls it, is the three to seven seconds when someone notices an item on a store shelf. Despite spending billions on traditional advertising, the consumer-products giant thinks this instant is one of its most important marketing opportunities. It created a position 18 months ago, Director of First Moment of Truth, or Director of FMOT, (pronounced "EFF-mott") to produce sharper, flashier in-store displays. There's a 15-person FMOT department at P&G headquarters in Cincinnati as well as 50 FMOT leaders stationed around the world.

P&G's insight is helping to power a shift in the advertising business: the growth and increasing sophistication of in-store marketing. Almost a century ago, P&G popularized the concept of mass-market advertising. Now, in response to the fragmentation of television and print ads, it wants to tout its brands directly to consumers where they're most likely to be influenced: the store.

In part for this reason, the decades-old hierarchy that ruled the ad industry is under assault. Previously, ad executives who designed TV commercials looked down on those who worked on in-store promotions. Now, executives with retail expertise are gaining clout as the world's biggest advertising firms build up departments to handle an area in which they have little expertise. One marketing firm has even hired an expert on the durability of corrugated cardboard

To fill a store's giant canvas with advertising messages, ad agencies are now charged with designing everything from in-store TV commercials to special shelf displays and packaging. The work is more elaborate than traditional in-store marketing, typically signs posted at the end of supermarket aisles. For all the excitement, agencies face huge challenges coordinating so many pieces. Some are stumbling over new problems, such as how to measure and charge for these services.

When Gillette Co. introduced a new women's razor last spring, the Venus Vibrance, its first TV ad ran on just one network -- the one inside Wal-Mart stores, which has become a powerful advertising medium. To market Pampers diapers in the United Kingdom, P&G persuaded retailers earlier this year to put fake doorknobs high up on restroom doors, to remind parents how much babies need to stretch. Grey Synchronized Partners, owned by WPP Group PLC, created last year a display for Absolut vodka that lit bottles with colored spotlights corresponding to their flavor. The display's look matched the label's traditional print advertising.

Joe Celia, Grey Synchronized's chief executive, first started working on in-store displays six years ago. Earlier in his career, "marketers would create the product and the brand image and then throw it over to us to see what we could do inside the store," he says. "Now, we all start together from the beginning."

Veronis Suhler Stevenson Partners LLC, an investment bank that produces forecasts for the communications industry, says companies in the U.S. are expected to spend about $18.6 billion on in-store marketing and in-store ads this year, up from $17.6 billion last year. Overall, companies are slated to spend almost $200 billion on standard types of advertising this year, including TV, print and the Internet, up from $188 billion in 2004.

P&G, the maker of Tide, Crest and Pampers, won't say how much it spends on in-store marketing. But it has cut its commitments to advertise on cable channels for the current season by 25% and its broadcast-TV allotment is down about 5%. At the same time, overall ad spending rose slightly.

One vehicle that's helping change this traditionally mundane advertising medium is Wal-Mart Stores Inc.'s in-store TV network. It is seen by 130 million shoppers a month, according to ratings data produced by Nielsen Media Research for San Francisco-based PRN Corp., which runs the network. Through it, Wal-Mart has, in effect, recreated the mass audience that marketers used to easily reach on network TV.

Wal-Mart even sells advertising like TV networks. Today, Wal-Mart is hosting manufacturers in its hometown of Bentonville, Ark., to sell blocks of advertising time for the coming year, a direct imitation of the annual ad-sales extravaganza, known as the upfronts, put on by the networks. PRN, which is owned by Thomson Corp., says its rates are comparable to those of cable TV.

Last year, 122 new products were launched on Wal-Mart TV, says Charlie Nooney, chief executive of PRN, including goods from P&G, Unilever and Gillette, which agreed to be acquired by P&G earlier this year. The TV sets, which have sound, are located in parts of the store where people tend to gather, such as the deli, and will soon be installed in checkout aisles.

Pilot Program
Stewart Stockdale, chief marketing officer of mall operator Simon Property Group cites research it commissioned from Arbitron Inc., a media-research firm, showing that shoppers are more likely to recall an ad seen in a mall than one seen at home. The company has a pilot program at the Roosevelt Field mall in Long Island, N.Y., which airs TV commercials on giant digital screens. Advertisers include restaurant chain Wendy's International Inc. and Coca-Cola Co.

Even as TV viewers scatter among a multitude of channels, the broadcast networks remain unique in their ability to deliver a big audience, in a single shot, to advertisers. The Super Bowl, TV's most-watched event, drew 86 million viewers last year and its 30-second commercials sold for $2.4 million, Nielsen says.

In addition, some TV executives say, in-store advertising isn't necessarily competitive. Viewers are relaxed at home, notes Chris Carlisle, executive vice president of marketing for News Corp.'s Fox network. In the store, they're rushed, "with people pushing their shopping carts, going down their lists," which makes for a different selling environment. Indeed, Fox itself buys ads on in-store networks to pitch DVDs.

At Procter & Gamble, Dina Howell, the director of FMOT, says she wants to take in-store marketing, "from an art to a science." P&G has developed a series of tests to measure the success of its packaging and in-store marketing efforts. P&G won't divulge specific details. But broadly speaking, Ms. Howell says packaging should "interrupt" shoppers on their shopping trip. P&G has developed a set of questions that a package must answer: "Who am I? What am I? Why am I right for you?"

When ad agencies submit ideas, P&G invites them to two facilities it built several years ago in Cincinnati and Geneva. These mock stores double as research centers where P&G can rearrange shelves and see how its products look alongside those of the competition. The company also brings in focus-group participants to study how they shop.

For the launch of Kandoo wipes -- flushable baby wipes for toilet-training toddlers -- in the U.S., P&G convinced retailers to place the packages low on shelves, so they would be at a toddler's eye-level. It also created display shelves in the shape of the product's frog mascot to attract children's attention.

One of P&G's most prominent in-store promotions has been for a new line of Pampers. In the U.S., P&G came up with what it calls "a shopper concept" -- a single promotional theme that allows it to pitch products in a novel way. The theme for Pampers was: "Babies First." In stores, the company handed out information on childhood immunizations, car-seat safety and healthy diets while promoting its diapers and wipes in other parts of the store. It was sponsored by P&G, Wal-Mart and the American Academy of Pediatrics.

To market Pampers in England, P&G hired Publicis Groupe SA's Arc Worldwide, an agency that specializes in store marketing. Late last year, Arc managers designed and pitched P&G several approaches. They all dovetailed with the distinctive green color of Pampers' packaging as well as the company's TV ads, which show the world from the perspective of a baby.

For diapers, called nappies in Britain, Arc designed a clammy-feeling green gel cover to wrap over the handle of a shopping cart. It read, "This is how it feels when your nappy needs changing." It suggested putting mirrors in shopping baskets to show babies looking at the world around them.

P&G rejected the handle, however, after focus groups said it reminded them of something they didn't want to think about. The mirrors were also nixed after retailers said the idea was impractical.

P&G did go for some of Arc's pitch. On the doors to restrooms with baby-changing facilities, Arc added big fake doorknobs, unreachably high up, and the message: "Babies have to stretch for things. That's why they like the extra stretchiness of Pampers Active fit."

The consumer-products company printed huge footprints on the floor of the diaper aisle. On shelves, it added pull-out cards with information about Pampers that read: "do not pull," a play on the fact that babies like to do the opposite of what they're told. Elements of the marketing plan appeared in several major chains, including Asda, which is owned by Wal-Mart, and Tesco PLC.

The new emphasis on in-store marketing is forcing advertising agencies to add unfamiliar services, such as shelf-design consulting. They're also hiring and promoting managers with expertise in those areas. At Leo Burnett, which is owned by Publicis, executives trained in direct marketing now sit with creative designers when they meet clients and have an equal say. Clients are telling ad agencies, "if you can't provide it, we'll shop elsewhere," says Richard Pinder, president of Leo Burnett's operations in Europe, the Middle East and Africa.

Nearly every client pitch done by rival Grey Global Group, a unit of WPP, now includes retail strategy. The company last year appointed executive vice president Jonathan Dodd to head its "First Moment of Truth Initiative" which works with P&G and other companies.

Unusual Expertise
Andy Murray's marketing firm helps clients advertise inside Wal-Mart and other stores. The agency even buys samples of Wal-Mart shelves to see exactly how products would look in a store. A former P&G executive, he started his new firm nine years ago with less than a dozen staff members. Since then, Mr. Murray's agency has grown to about 300 people and was recently acquired by Publicis' Saatchi & Saatchi.

Now named Saatchi & Saatchi X, it has some unusual expertise for an advertising agency. Mr. Murray hired a structural engineer to assess how long a corrugated cardboard display will last. The agency uses pink shrink-wrap to prevent products from getting lost in vast storage warehouses. It also developed software that can track a consumer's eye movements.

The growth of in-store marketing has made ad agencies' lives more complicated. For starters, ad agencies now have more than one master to please: the client and the retailer. Even after a retailer agrees to a newfangled in-store display, it often falls to individual store managers to install them or, in some chains, make sure the television is on at the right time; they aren't always good at complying.

Some stores charge marketers a fee for in-store displays -- as if they were selling space on a roadside billboard. Others don't have the clout or think they will be compensated through the overall boost to sales. Those that charge face another wrinkle: there's no standard system for measuring the audience for in-store ads and therefore no easy way to charge for the space. The fees for each project are negotiated on a case-by-case basis, a time-consuming task.

There's also the matter of how ad agencies get paid. For years, agencies were paid a percentage of the overall ad budget. P&G changed that model several years ago because it worried agencies would naturally gravitate toward costly TV ads. It now ties agency compensation to product-sales increases. Ad-agency executives say another factor will soon be thrown into the mix: the cost of new services they're being asked to provide, such as installing and monitoring in-store displays.

Field's name dropped
By Sandra Guy - Business Reporter – Chicago Sun-Times
September 21, 2005

Marshall Field's survived the Chicago Fire, the Great Depression and even the bizarre Loop flood, but it won't survive cut-throat consolidation in the retail industry.

Field's, the 140-year-old icon synonymous with Chicago, will become Macy's by Sept. 1, 2006.

Terry Lundgren, the CEO and president of Field's new owner, Cincinnati-based Federated Department Stores, said Tuesday's announcement was "difficult, challenging and emotional," but it was the right one for business reasons.

Federated, which owns Macy's and Bloomingdale's, doubled its size Aug. 30 with its $11.9 billion takeover of Field's owner, May Department Stores.

All 62 Field's stores will be renamed Macy's.

"We knew it would be an emotional day in Chicago. That's why I'm here," said Lundgren, who broke the news to Mayor Daley in a breakfast meeting Tuesday morning.

"It's a hard thing for anyone to accept a big change, but it's an opportunity for us to move the business forward," Lundgren said.

Lundgren tossed Field's loyalists several bones:

*No job losses in the Chicago market and the possibility of job growth, a far better outcome than the 6,200 jobs Federated will cut in other divisions of Field's previous owner, St. Louis-based May Department Stores;

*A promise to "explore" whether Frango mint-making can return to Chicago from Pennsylvania;

*No changes to the grand traditions of the Great Clock, the Christmas windows, Glamorama, the flower show, charitable giving, and the Marshall Field's nameplates on the State Street store;

*The State Street store's future role as a third flagship -- "the third jewel in Macy's crown" -- after New York City's Herald Square and San Francisco's Union Square stores, and an expansion of the State Street store's Marshall Field's museum;

*Keeping Field's merchandise buying team intact in Minneapolis.

Macy's stores in the Northwestern United States sell Frango mints, but Frangos haven't been made in Chicago since Field's former CEO Dan Skoda closed the State Street store's 13th-floor candy kitchen and fired 157 employees with no notice 61/2 years ago.

Lundgren sought to assure Chicagoans that Field's store merchandise, surroundings and customer service will improve.

"We have complete and total respect for the traditions of Marshall Field's," he said. "We'll protect those traditions. ... But we also have a commitment to improve the business."

But the future remains uncertain for the upscale boutiques that have drawn many shoppers back to Field's in the past two years.

At first, Lundgren said, "I don't know," when asked about the boutiques, but then added, "If they're doing well, we'll grow them, and if not, we'll wonder why they are there."

Makes national ads easier

The boutiques, a key part of a multimillion-dollar makeover of Field's State Street store, include Baccarat crystal, Bose electronics, menswear shops Thomas Pink and Alexandre Savile Row, and the Levenger reading and writing store.

Macy's has no stores in Illinois, but its expansion has already begun. Federated announced July 28 that it will rename as Macy's seven former Famous-Barr stores Downstate and an L.S. Ayres in northwest Indiana by next fall.

Macy's expansion will make it easier and more efficient for Federated to advertise, manage inventory, buy merchandise from vendors and plan product assortments -- all important ingredients in staying profitable in a retail world filled with rivals ranging from Nordstrom to J.C. Penney to specialty boutiques.

"We could have said, 'Available at Macy's except in Chicago.' That doesn't make any sense," Lundgren said. "You need to be part of this national idea, this national opportunity."

The Marshall Field's renaming was part of a bigger reorganization in which Federated will sell the Philadelphia-based bridal group division it acquired from May. It also is deciding whether to make its Lord & Taylor division into a separate chain.

Field's no more...
Chicago retail icon to become Macy's in '06
By Becky Yerak, Tribune staff reporter - Chicago Tribune -
Staff reporters Gary Washburn, Susan Chandler and Lorene Yue
contributed to this story
September 21, 2005

The Marshall Field's name, as identified with Chicago as its lakefront and its skyline, is being erased in favor of a Manhattan moniker--Macy's.

This move kills off a 153-year-old brand that survived the Chicago Fire but now succumbs to bottom-line concerns of its new owner, Cincinnati-based Federated Department Stores Inc.

Rapid consolidation and competition from both high-end stores such as Nordstrom and discounters such as Target and Wal-Mart have conspired for years against regional chains like Marshall Field's, leaving them with neither the buying clout nor the advertising power to compete.

With the 62 Marshall Field's stores becoming Macy's, Federated will complete the national footprint it has long sought to make the chain, known as the backdrop in the holiday film "Miracle on 34th Street," a powerhouse.

That reasoning was little comfort for Chicago shoppers.

The announcement aroused widespread anger across Chicago, where people often tell each other to "meet under the Field's clock" on State Street.

"Macy's should stay in New York and Field's should stay in Chicago," said 87-year-old Helena Beadal of Chicago, who has fond memories of shopping on State Street and still meets a friend there every Tuesday. "I'm thinking of closing my [charge] account."

Macy's doesn't belong on State Street, added 21-year-old Olugbemisola Oke, a sales associate at the store. "People really come here for the name," she said. "It's a Chicago icon."

By the 2006 holiday shopping season, Chicagoans who flock to the ornate displays at the flagship store on State Street will be looking into the windows of a Macy's.

Federated Chief Executive Terry Lundgren defended the decision. Citing internal market research, he said "two-thirds of those surveyed in the Chicago market felt neutral to positive--largely neutral--about the name change from Marshall Field's to Macy's."

The reaction was anything but neutral after the name change was announced. An unscientific online Chicago Tribune poll was indicative of the emotional response: More than 96 percent said they would be less like to shop at Field's if the name is changed to Macy's. More than 14,000 people had voted as of 7 p.m. Tuesday.

Chicago Mayor Richard Daley took a philosophical view of the loss of the Field's name, announced as the State Street store plays host to numerous Fashion Week events.

"Retailing has changed and lifestyles have changed and business has changed, but we should never be afraid of change," he said.

Indeed, the fate of Field's name is a familiar story in this time of retail industry consolidation. Since March, longtime regional names have fallen in markets from Miami to Seattle as Federated fashions Macy's into a national nameplate that can be advertised coast to coast. Macy's brand-building got a boost last month when Federated completed its acquisition of Field's parent, May Department Stores Co., in a deal to create a $30 billion department store chain.

`Very challenging business'

In explaining the decision to shelve the Field's name, Lundgren said that regional department stores are "in a very challenging business," getting nibbled at by bigger national players for apparel basics and by upscale chains for luxury goods.

"That's why you don't see them anymore," he said of regional chains. "Marshall Field's is a great name and a fabulous business in many ways. But it's not doing very well, and it hasn't been for years."

Lundgren declined to comment on a statement by a Field's executive earlier this year that the $2.5 billion chain had a sales upswing in 2004, its first since 1999. Figures published earlier this year by May Department Stores also showed that Field's sales rose in 2004.

If there was a silver lining in the announcement, it came during a meeting Lundgren had with Daley in his City Hall office Tuesday morning.

There Lundgren said Federated would consider returning the production of Frango mints to Chicago. And although Federated announced plans to cut more than 6,000 jobs in such markets as Los Angeles, St. Louis and Boston, no layoffs are planned for Chicago.

That pleased Daley, who early on "was not very thrilled" about the possibility of losing Field's identity, a spokeswoman for the mayor said.

But the promise of no layoffs and the possibility of returning Frango manufacturing to Chicago were "a huge part of [becoming] amenable" to the change in nameplates, she said.

Several retail consultants think Federated is being short-sighted by changing the name.

"Chicagoans and folks in the central United States tend to be more brand loyal," said Burt Flickinger, managing director for Strategic Resource Group in New York. "While Field's was a broken business, it was not unfixable. Federated has taken a broken business and made it a much more broken business."

Another retail consultant said Field's could be fashioned into an upscale brand.

"Retailing has been skewed to the low end and the high end. Marshall Field's would be a powerful high-end brand. Why would you bring it down to the mushy middle?" asked Al Ries, author of the "The 22 Immutable Laws of Branding."

"This is particularly bad," he said. "I'd rather have a name that no one has heard of with potential rather than a name like Macy's that everyone has heard of but has no potential. People know about it, but it will never be perceived as a high-end brand."

Craig Johnson, president of Connecticut consulting firm Customer Growth Partners, called it "the biggest consumer marketing mistake since the geniuses in Atlanta came up with New Coke in the 1980s."

"In fact, when Terry Lundgren said they had `carefully researched consumer preferences,' that's what Coke management said at the time," Johnson said.

Big corporate savings

Former Field's President Dan Skoda regrets that the name of his old stomping ground will cease to exist, but he understands the rationale.

"They'll save a lot of money by putting Macy's on everything from TV and newspaper ads to even paychecks," Skoda said. "That's one reason Target and Wal-Mart are so economical."

Indeed, there can be a disconnect between how shoppers say they'll mourn the loss of their hometown chains and whether their shopping habits change as a result of a new moniker.

Last March, Federated converted five of its regional nameplates--Rich's, Lazarus, Goldsmith's, Burdines and Bon Marche--to Macy's amid an outcry in some of the markets.

But since then, Federated's monthly same-store sales--sales at stores open at least a year--have increased in all but one month.

While Lundgren said Federated is still studying the performance of Field's business, from its designer shop to its store-within-a-store concept on State Street, Field's shoppers most certainly will see changes above and beyond the Macy's name.

"The merchandise assortment is definitely going to be tweaked," he said. "It has to be, because that's what customers respond to. They've got to respond better than they've been responding for the last several years."

Lundgren said it was too late to restore Field's to its former glory under its long-standing name because it's hard to change the opinions of those who no longer shop there.

Of the coming changes to the historic State Street flagship, Lundgren said, "I just know it needs to do better."

 

Marshall Field's Becomes Macy's as Era Ends
By Ellen Byron – Staff Reporter – The Wall Street Hournal
September 21, 2005

In 1896, as legend has it, the wife of U.S. President-elect William McKinley called on Marshall Field's Chicago department store to create her inaugural gown.

"Give the lady what she wants," store founder Marshall Field responded, a command that became the retailer's motto for more than 100 years.

Beginning next year, the iconic script nameplate will cease to exist. Federated Department Stores Inc., which acquired Fields' parent, May Department Stores Co., earlier this year, announced yesterday that it would convert all of the 62 Field's stores to the Macy's name.

Federated also plans to cut as many as 6,200 jobs, or about 5% of May's work force, next year as it embarks on a massive integration effort to combine the two companies. The $11.9 billion deal, completed in August, creates a department-store behemoth of about 950 stores nationwide and more than $30 billion in sales.

The decision provoked a storm of outcry in Chicago, where generations of shoppers grew up having afternoon tea in Marshall Field's famous Walnut Room, admiring its annual Christmas tree and buying its own-brand Frangos mints. More than just a retailer, Marshall Field's has long been synonymous with Chicago, where Mr. Field, the founder, and his heirs were among the city's most prominent philanthropists, helping fund some of the city's landmarks including the Field Museum, the University of Chicago and the Merchandise Mart.

"I think it's a crime," said Ashley Corotis, a 28-year-old Chicago lawyer, echoing a widespread sentiment. "I bought my wedding dress there. It's a shopping institution. They are losing that history."

The end of Marshall Field's is just the latest in a long string of moves by Federated to create a national department store brand. Faced with competition from retail giants like Wal-Mart Stores Inc. on the low end and specialty stores owned by Neiman Marcus Group Inc. on the high end, Federated has said that a unified national chain under a single umbrella brand is the only way it can compete.

"Certainly in the Chicago market there is emotion with the name of Marshall Field's, and we have a lot of respect for that -- these are hard decisions," Federated Chief Executive Officer Terry Lundgren said in an interview yesterday. "But where can you take that business, how do you expand it, how do you grow it? It didn't have national potential."

Federated worked with marketing and consumer-research experts before making its decision, Mr. Lundgren said. It conducted mall surveys, a phone campaign and focus groups to determine that folding the storied chain into the larger Macy's business made sense. A key consideration: The Macy's shingle permits the 62 Field's locations to participate in Federated's plans to significantly increase Macy's national advertising presence. "It would have been a missed opportunity for Chicago to not be a part of this," Mr. Lundgren said.

With the exception of its upscale Bloomingdale's division, Federated earlier this year converted all of its chains -- including Rich's, Burdine's and Goldsmith's -- to the Macy's nameplate. Yesterday, Federated reiterated its intention to convert the rest of May's long-time nameplates to Macy's, including the Filene's, Hecht's and Robinson-May chains. Lord & Taylor could also disappear: Federated said it intends to study the division and determine its future by the end of its fiscal year in January.

For seasoned retail experts, yesterday's announcement underscored that the era of the local department store is over. "We are witnessing a shakeout of historically anchored department stores," said Kurt Barnard, a 45-year retail veteran and president of Barnard's Retail Consulting Group. "While history has moved forward, while people and lifestyles have gone through dramatic changes, while competition has turned itself on its heels, department stores insisted on standing still -- as a result, they are disappearing."

"I think this is one of the largest marketing mistakes since the geniuses in Atlanta came out with New Coke in the mid-1980s," said Craig Johnson, CEO of Customer Growth Partners, a retail consulting firm in New Canaan, Conn.

"It's great to save three or four cents a share because of some advertising efficiencies, but not at the expense of a century-and-a-half-old franchise. It's a shame."

While Federated's consumer surveys indicate that consumers will continue shopping at Field's after it changes its name to Macy's, many local shoppers mourned the passing of an era.

"I don't like that idea," Chicago resident Dee Greer said while shopping for gray dress shoes at Field's State Street location in downtown Chicago yesterday. Ms. Greer, 43, remembers buying patent leather shoes for Easter there when she was a little girl. "Marshall Field's has always been Chicago. To change it to Macy's, you've taken one of the things that's been Chicago."

Linda Howe, a 57-year-old artist from Hanover Park, Ill., said she's worried the quality of the store will deteriorate once it takes on the Macy's name. "I'll continue to shop here unless my expectations aren't met," Ms. Hanover said while buying foundation at the State Street store yesterday. "To me, Macy's is low down on the totem pole."

Marshall Field's landmark location on State Street has been its home since 1907. With its Tiffany glass ceiling, 10 floors and 800,000 square feet, it is the world's second-largest department store after Macy's Herald Square site in New York.

The first State Street store -- then called Field, Leiter & Co. -- opened in 1868, dazzling Chicago with an array of the finest goods available. In 1881, Marshall Field, at age 47, bought out his partner and renamed the store Marshall Field & Co.

Mr. Field quickly zeroed in on fashion-conscious ladies, hiring a "style expert" to travel to Europe to bring back the latest looks to America's heartland. From there, his store became a pioneer in retailing practices widely copied and still in use today. In an effort to encourage women to spend the day shopping, Field's opened a tea salon and restaurant. An "Evening Room" allowed women to see how their gowns looked under artificial light.

In addition to an array of apparel, furniture and housewares, the store offered 11 restaurants, workshops to repair antiques, a dry cleaner, even charm school classes for children in past decades. Chicago gangster Al Capone bought $35 silk shirts by the dozen at the Field's Men's Store annex, which specialized in hunting goods and shotguns.

The job cuts announced yesterday include 1,700 positions at May's St. Louis headquarters and 4,500 jobs at May's divisional operations in Boston, Houston, Arlington, Va. and Los Angeles, which Federated plans to close. Some employees in the eliminated positions may be rehired in other company positions, Mr. Lundgren said.

While Chicago Mayor Richard Daley wasn't thrilled to hear about the name change in a meeting yesterday morning with Mr. Lundgren, the promise of no layoffs at the chain and the possibility of bringing Frangos mint production back to Chicago from Pennsylvania made the news more palatable. "Things change in life," Mr. Daley said through a spokeswoman. "If you are not willing to accept change, you stay in the past."

Field's isn't first landmark name to disappear
By Leslie Baldacci – Staff Reporter – Chicago Sun-Times
September 21, 2005

The name Marshall Field & Co. is one of many Chicago brand names that are the icons, destinations, landmarks and lore that combine to create the city's commercial identity.

Some -- like Field's, Wrigley and Sears -- are still around, at least for the moment. Others -- like Montgomery Ward -- are history.

In about a year, the Marshall Field's signs will come down, replaced by Macy's signs. Marshall Field put his name on the store in 1881, and while the Field family hasn't owned the business since 1990, the name remained.

The Wrigley Building, the Michigan Avenue landmark celebrated in the Sammy Cahn song "My Kind of Town (Chicago Is)," is still corporate headquarters for Wrigley chewing gum.

William Wrigley Jr. started off selling soap, then baking powder, then gum. This past June, Wrigley added Altoids, Life Savers, Creme Savers and Sugus brands to its expanding portfolio of confectionery products.

Sears, of catalog, then tower fame, remains as well. Sears, Roebuck and Co., incorporated in 1893, offering mail order products to folks in the hinterlands. The first catalog was issued in 1896. It was discontinued in 1993 but the company continues to grow and morph through acquisitions.

The Union Stock Yard was completed in 1865, peaked in 1924, and went out of business in 1971. It's now an industrial park.

Montgomery Ward, who learned his trade at the knee of Marshall Field, as a clerk and a traveling salesman, started the first mail-order business in 1872.

His first department store was at Michigan and Madison. The chain went out of business at the end of 2000.

Marshall Field's to change to Macy's
Chicago Tribune
September 20, 2005

Daley promised a possible return of Frango production to Chicago

Marshall Field & Co., a name long venerated in the history of Chicago retailing, will disappear in the fall of 2006, to be replaced by Macy's.

All 62 Field's in Illinois and seven other states will be converted to Macy's, according to today's announcement by Federated Department Stores Inc., Field's new owner.

While Federated had "great respect for the legacy and traditions of Marshall Field's," the decision to drop the Field's name was made after Federated "carefully researched customer preferences and studied alternatives," Terry J. Lundgren, Federated's chairman, president and chief executive, said in a news release.

"While the store's name will change, much of what customers love will stay the same, including Marshall Field's traditions and its outstanding record of community and charitable giving," Lundgren said.

"From a shopping standpoint, customers will have the best of both worlds in major markets like Chicago, Minneapolis and Detroit," Lundgren said.

"They will continue to benefit from regional buying that remains attuned to local preferences and lifestyles plus enjoy the distinctive merchandise and shopping experience that's part of the Macy's brand," Lundgren said.

"As part of this name change process, we will do everything we can to honor the Marshall Field's heritage, particularly in its Chicago birthplace."

The stores will be operated under a Minneapolis-based division, Macy's North, the Cincinnati-based Federated said.

Among the first people in Chicago to learn of the name change was Mayor Richard Daley. The mayor had had several conversations with Lundgren recently before being personally informed by the Federated chairman of the decision this morning, said Daley spokeswoman Jacquelyn Heard.

Daley "was not very thrilled" to hear the news, Heard said. But the promise of no layoffs and the possibility of bringing Frango mint production back to Chicago from Pennsylvania, where it was outsourced in 1999, were "a huge part of (becoming) amenable" to the change in nameplates, she said.

Speaking to reporters later in the morning, Daley took a philosophical view of the loss of the Field's name.

"Things change in life," he said. "If you are not willing to accept change, you stay in the past."

The mayor called Federated a "very good corporate citizen." Regarding the State Street store, Federated plans to "reinforce that store," making it even more a "destination" than Field's has been.

Federated, parent of Macy's and Bloomingdale's, doubled its size Aug. 30 by completing its $11 billion acquisition of Field's owner, May Department Stores Co.

The acquisition gave rise to immediate misgivings among Chicagoans familiar with Federated's history of changing the names of regional department store chains it acquired to Macy's.

Most other May chains, including Famous-Barr, with seven Illinois stores, are to be renamed Macy's by fall 2006. One exception is Lord & Taylor, which Federated has ruled out changing.

The deal between Federated and May marked the second time in less than two years that Field's has changed hands. In July 2004, May bought Field's from Minneapolis-based Target Corp., which dumped its department store holdings to focus on its more vigorous discount chain.

The Federated-May deal created a $28 billion retailer with about 950 department stores.

Despite changing the name to Macy's, Field's may remain a fixture on State Street for some time to come. Two days after Federated closed its acquisition of May, the Commission on Chicago Landmarks formally recommended that the City Council bestow landmark status to the retailer's flagship store at State and Washington Streets.

If approved by the City Council, the landmark designation would give the city legal power to restrict building changes, including tinkering with the large nameplates on its exterior.

Preservationists and politicians have said changing the State Street store from Field's to Macy's would strip away a piece of the city's identity. Many also hoped a landmark designation would preserve the name of the State Street shopping icon.

"It's like changing the name of the Eiffel Tower, honestly," Preservation Chicago president Jonathan Fine said earlier this month. "I don't think Chicagoans will ever accept it as a Macy's. To us, that's somebody who sponsors a parade in New York."

Sears Chairman on Unfamiliar Turf
By Lauren Coleman-Lochner and Rachel Katz
Bloomberg News – Denver Post
September 19, 2005

The financial whiz takes on a role for which others say he'll need merchandise experience to succeed

Edward Lampert became a billionaire hedge fund manager betting on distressed companies. Now he'll have to make the right calls on which jeans will lure teenagers next spring as he directs merchandising at Sears Holdings Corp.

Lampert, who in March became chairman of the largest U.S. department-store chain, on Sept. 8 also took over the company's marketing and its Lands' End business. Lampert has spent two decades at Goldman Sachs Group Inc. and ESL Investments Inc.

"If you're in the merchandising business, you have to have people expert in merchandising," Allen Questrom, former chief executive of J.C. Penney Co., said. "You need to motivate people to get the job done. Not everybody can do that."

Questrom, retired after a 30-year career at retailers including Federated Department Stores Inc., declined to comment specifically on Sears or Lampert.

Lampert will oversee the fashion choices for almost 3,900 stores at Sears and Kmart, whose same-store sales have each declined for at least three years. Sears is adding exclusive apparel such as women's clothing by Max Azria and Liz Claiborne to catch up with Target Corp. and J.C. Penney, leaders in selling affordable designer apparel.

"I don't think he can be a merchandiser," said Tim Ghriskey, who helps manage about $800 million at Solaris Asset Management, including Sears shares, in Bedford Hills, N.Y. "That's not his training. It's a real specialty."

"It's very hard to develop the merchandising skills," said Jane Hali, a former Macy's executive who helped select fashions for the department store. "To come up with the compelling merchandise, you have to have a merchant's eye in terms of color, silhouette and sellability," said Hali, who runs retail and merchandise consulting at New York-based Coleman Research Corp.

Lampert, who says he is a student of billionaire Warren Buffett's investment style, created the dominant U.S. department- store chain when Kmart Holding Corp. bought Sears, Roebuck & Co. for $12.3 billion and took on the Sears name. He earned $1 billion in 2004 at ESL, the most of any hedge fund manager, according to Institutional Investor's Alpha magazine. His earnings more than doubled from 2003.

The shares of the company that became Sears Holdings have risen more than fourfold in the past two years as Lampert sold Kmart real estate to raise cash.

The transaction combined two ailing retailers that have lost shoppers to Target, J.C. Penney and Kohl's Corp., which have been faster in introducing exclusive apparel. Comparable sales at Kmart have fallen for 14 consecutive quarters and for 16 of the past 18 quarters at Sears.

Target's monthly same-store sales have risen an average of 6.7 percent since January.

Sears has yet to recover from several missteps, said George Whalin, president of Retail Management Consultants in San Marcos, Calif.

Lampert will need to demonstrate he can go beyond his expertise in finance, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting firm and investment bank in New York.

"He's a brilliant financial engineer," Davidowitz said. "His record is always the same: cut costs, sell assets. That's terrific, only that's no way to run a retail business."

The Long Road to Wal-Mart
By Gwendlyn Bounds – staff Reporter – The Wall Street Journal
September 19, 2005

What does it take for entrepreneurs to break into the nation's largest retailer? More than you can imagine.

It was 7:50 a.m. last November on one of the most important Wednesdays of Colin Roche's career, and the rain was coming down hard in Bentonville, Ark. As he and his business partner, Bobby Ronsse, navigated the slick two-lane road leading to the headquarters of Wal-Mart Stores Inc., Mr. Roche began to sweat as their rental car inched along in traffic.

The pair had finally scored a coveted 8 a.m. appointment with a Wal-Mart buyer -- giving them a chance to get their ergonomic pen, the PenAgain, in front of the world's largest retailer. But with only 10 minutes to spare, that chance was slipping away as the entrepreneurs sat, panicked, still a mile and a half away.

Desperate to make headway, Mr. Ronsse gripped the steering wheel tightly and pulled illegally into a side lane. Despite a 1 a.m. test drive to Wal-Mart from the Best Western that morning, the Bentonville first-timers had vastly underestimated weekday traffic -- and, as it turned out, the number of daily visitors to Wal-Mart. By the time headquarters loomed into view, the parking lot was already filled.

"I'm getting out," Mr. Roche hollered to Mr. Ronsse as they pulled up to the entrance. "Find a place to park -- anywhere." Gripping their presentation materials, the contents of which he'd been working on since high school, the 33-year-old Mr. Roche dashed umbrella-less in the rain toward the low-slung red-brick building where inventors' dreams can be made, or broken.

The time was now 7:57 a.m.

* * *

Getting into Wal-Mart is an entrepreneur's equivalent of making it to Broadway. Even a short run on the shelves there can help transform an invention from niche product to household name. And while Wal-Mart certainly isn't the only retail path to commercial success, nor the right outlet for every product, for mass-market merchandise at a certain price point no other bricks-and-mortar retailer reaches so many shoppers. Today the company has 5,300 outlets world-wide, and gets more than 138 million customers a week.

But as with Broadway, there's more than enough talent to fill the stage. Last year about 10,000 new suppliers applied to become Wal-Mart vendors. Of those, only about 200, or 2%, were ultimately accepted. "We just don't have very many empty shelf spaces," says Excell La Fayette Jr., Wal-Mart's director of supplier development.

On a supplier's journey into Wal-Mart, Mr. La Fayette's office is often a first point of contact. In addition to taking solicitations by telephone and email, his staff of four sifts through hundreds of new online supplier queries submitted each week through the company's Web site (www.walmartstores.com <http://www.walmartstores.com/> 5), as well as those made through stores at a local level, before passing viable candidates on to one of Wal-Mart's hundreds of buyers.

"People come out of nowhere with all kinds of ideas that are not practical for our business," says Mr. La Fayette, noting that the company still receives "grandma's elixirs" in mason jars through the mail. "They see Wal-Mart and see dollar signs and think they can sell us anything."

Making matters trickier, in most established categories -- like the $4.8 billion writing-instrument market -- there already is so much duplication that it's tough persuading a retailer to give shelf space to an unknown. "Unless there is something really unique that has a special advantage to help customers, a lot of 'me too' items just don't make it," Mr. La Fayette says.

But as the story of PenAgain and its founders shows, there are steps a small business can take to maximize the chance of getting its wares in front of a Wal-Mart buyer. These include everything from establishing solid relationships with other retailers to developing a broad product mix, having a flexible production capacity and illustrating why a new product deserves to replace an old one.

* * *

Mr. Roche's path to Bentonville, Ark., began in 1987 during a Saturday detention at his Palo Alto, Calif., high school. On lunch break, Mr. Roche wandered into a flea market where he purchased a toy robot that, when twisted a certain way, doubled as a pen. While fiddling with the robot and a lighter, he burned the writing tip off one leg and then reattached it to the robot's head. Writing in that position, with one index finger between the robot's legs, he found he didn't need to grip so tightly because the design supported the natural weight of his hand. "I'd always had horrible writer's cramp, and this helped," he says.

Not long afterward, Mr. Roche began fiddling in his garage with other pens, melting them down and shaping them into V's. He recalls telling his father: "I have this idea to reinvent the pen."

Through college, he continued thinking about his invention, choosing its name after a friend jarred him from a daydream -- "I was just thinking about that pen again," Mr. Roche told his pal. In June 2001, he teamed up with Mr. Ronsse, a former fraternity brother turned engineer, and the two began plotting development of the PenAgain, which they envisioned as a futuristic wishbone design modeled after the robot. Putting in $5,000 each, they launched Pacific Writing Instruments in December 2001, filed for patent approval, launched a Web site (www.penagain.com <http://www.penagain.com/> 6) and set up production in the Bay area.

Had they first set their sights on selling to Wal-Mart, the results undoubtedly would have been disappointing. "We like companies to have a sales history and to be sold somewhere else first, even if it's just a downtown boutique," says Wal-Mart's Mr. La Fayette.

Plus, PenAgain's design was radical -- something of a Catch-22 for the entrepreneurs. On the one hand, it distinguished their product from the "me too's," but was it too different to catch on? And while ergonomic pens were hot thanks to an aging population of baby boomers facing carpal-tunnel syndrome and arthritis, most traditional pen players addressed this need by tweaking a pen's length or width or the texture of the grip -- not by varying its basic stick design.

"We've seen submissions with the wishbone design and tested similar designs," says Charlie McCaffrey, vice president and general manager of Newell Rubbermaid Inc.'s Paper Mate brand, which is sold in most major retail outlets, Wal-Mart included. "We think it lacks mass appeal at this time." Two of his company's most recent ergonomic introductions, the X-Tend and PhD, have cushioned grips at the tip, but are still a stick design.

Even PenAgain supporters acknowledge the uphill battle it faces. Mickey Miladinov worked for 28 years at Kmart Corp., her last stint as merchandise manager in the stationery category, including pens. While she sees opportunities for PenAgain, she says something "new, new, new doesn't always play to the masses. Will there be other people in this universe that need that product? Yes. But when I looked at an item at Kmart, I had to say, 'Does this hit the largest percentage of my shoppers?' And if not, I'd have to pass on that product."

* * *

Such thinking meant Mr. Roche had his work cut out proving buyers existed. First, he wooed smaller sellers, such as Edwards Luggage Inc. in San Francisco. "It was gimmicky, but it looked good," says the store's owner, Fred Ebert. The risk paid off: Today, he sells about 700 PenAgains annually at $12.95 apiece, making it his top seller of a single style pen. "This is different, yet it actually works," he says.

Meantime, Messrs. Roche and Ronsse pushed hard to get their product viewed alongside more entrenched players at major trade shows, once staying up all night gluing together more than 300 pen samples in their hotel because the manufacturer hadn't heat-welded the pieces in time. These shows got them hooked up with more buyers and distributors. Further, they worked less-obvious channels on a grass-roots level, including doctors who treated patients with hand troubles. That helped them rack up testimonials from customers with Parkinson's, autism and other ailments that can make it hard to wield a traditional pen.

The business grew. Last year, PenAgain had $2 million in revenue across a wide swath of retailers, including 5,000 independent stationery and office-supply stores, 200 Staples in Canada and other chain outlets including Fred Meyer and Hobby Lobby. Mr. Roche's company also does a strong business in the promotional-products industry, has sold 1.2 million units in Europe alone, and sees about $5,000 in Internet business every month. From time to time, PenAgain has been the No. 1, 2, and 3 seller on Amazon among all office products.

The breadth also helps, because Wal-Mart doesn't like to account for more than 30% of a supplier's total business; if it did, and suddenly had to change an order based on shifting trends, it could sink the supplier.

Still, to play with the big boys, the company needed to lower its prices and have high-volume manufacturing capacity -- which meant moving production overseas. With financial backing from four outside investors, including a former chief information officer of Microsoft Corp., the PenAgain founders located manufacturers in China in late 2003 and have continued investing to have multiple molds for PenAgain produced; these cost about $10,000 a piece, roughly half what they paid in the U.S. Having more molds ready to go means that if a big order comes in, they can ramp up quickly. "It allows us to push hard on expanding the distribution channels without fear of being unable to deliver," Mr. Roche says.

It also helped them reduce PenAgain's retail price to as low as $3.99 on one model, something crucial on the Wal-Mart front. Simultaneously, Mr. Roche pushed to expand the line. By this November, the company will have 10 pieces in the PenAgain mix, including a pencil, highlighter, hobby knife, white-board marker and children's writing instrument, in a wide swath of colors and textures. "That would have been one of the biggest obstacles, if he only had a single item," says Ms. Miladinov, the former Kmart buyer, who is now an independent consultant. "Retailers want to know, so what can you do for me now? Sell me a program so that you become an important vendor to me."

Even with these pieces in place, Mr. Roche says the pair still wondered, "How the heck do you get into Wal-Mart?" They talked to some local California store managers first, something Mr. La Fayette of Wal-Mart recommends because Wal-Mart maintains a national and local supplier program. "Local managers have a lot more buying autonomy now," he says. "It's sometimes a smarter route to go for an upstart business." Still, Mr. Roche was determined to get face time with a national Wal-Mart buyer.

So last September, he and Mr. Ronsse forked over a hefty $10,000 to attend an "arranged meeting" portion of a trade show hosted by the School, Home, & Office Products Association where vendors were promised individual meetings with major retailers, including Wal-Mart.

But the day of the show, the Wal-Mart buyer had to cancel because of an impending hurricane. Instead, the buyer sent an email to the event's coordinator, offering to devote a day in Bentonville to see the jilted suppliers. The coordinator gave Mr. Roche the Wal-Mart number. He tapped it into his cellphone and went running back to the room where Mr. Ronsse sat waiting.

"Hey Bobby," he said, phone to his ear. "You're never going to believe this.

* * *

A month and a half later, Mr. Roche stood inside the Wal-Mart lobby shaking water off his jacket and surveying all the other vendors clutching merchandise displays, video projectors and cardboard boxes with their inventions tucked inside. "Everyone had their game face on and looked really tense," he says. Just then, Mr. Ronsse came running in the door, also soaking wet, having found a makeshift parking spot. The two were escorted into a small conference room where, at 8:01 a.m., the buyer walked in.

Immediately, she delivered bad news upon seeing the PenAgain. "I've seen this design before and passed," she said, mentioning a competitor's product manufactured in Korea with a similar shape.

Mr. Roche kept his own game face on, heart racing. "The difference," he said, "is that we are building a brand. Rather than going to you first, we've got a base of independent retailers and distributors world-wide who have already picked us up." He kept talking, showing her the testimonials, media write-ups, product extensions and everything else he and Mr. Ronsse had assembled over the previous few years. "She kept taking notes and looking really serious and professional," he recalls.

Finally, with their time allotment nearly up, the buyer closed her notebook. "OK, we will give you a trial period for a certain amount of time," Mr. Roche recalls she said. The parameters of the deal were this: Some 500 stores would carry the product for six weeks, with the expectation that PenAgain would sell at least 85% of the product displayed in that time to warrant more permanent shelf space. (Mr. La Fayette of Wal-Mart confirms that these are fairly standard terms.)

Over the past 10 months, PenAgain's founders completed the intensive paperwork required to become an official Wal-Mart vendor. Finally, last week, Mr. Ronsse opened his email box to find a note saying their supplier agreement had been approved. Wal-Mart says on average it takes six months to a year for a supplier to get a first purchase order because buyers must review categories and give suppliers time to gear up. "We've taken the path that a company like ours can take," Mr. Roche says. "No Wal-Mart buyer will call you out of the blue."

Says Ms. Miladinov, formerly of Kmart: "It's a big deal that Colin's gotten this far." Should a Wal-Mart order not ultimately happen, she says, "it's not the end of the world," but then adds, "Now let me flip it around -- if it does, it might be the beginning of the world."

Department Stores Dead?
Don't Tell Federated
By Jennifer Alban – Barron’s
September 19, 2005

TERRY LUNDGREN HAS ONE of the toughest jobs in American retailing. For starters, the chief executive of Federated Department Stores oversees not one but two iconic department-store chains, Bloomingdale's and Macy's, which together account for 460 stores nationwide. Three weeks ago, with the blessing of the Federal Trade Commission, Lundgren, 53, expanded his to-do list to include the integration of May Department Stores, which Federated agreed to purchase last spring for

$17 billion in cash and stock, and the assumption of debt. The merger will create the nation's second-largest department-store chain behind Sears Holdings, with 950 units and annual revenue of more than $30 billion.

Much is riding on the success of this union, and not merely Lundgren's reputation. From Seventh Avenue to Wall Street, the deal has come under scrutiny, as it may well determine if there remains a place in the nation's retail landscape for full-price department stores, whose demise has been long prophesied. In recent years consumers at every income level have gravitated to big-box chains such as Wal-Mart ( Target and Home Depot which now reign as the three kings of U.S. retailing. For many, their convenience and low prices have trumped the experience of shopping at classier, full-service stores.

Federated has had plenty of experience integrating unwieldy purchases. After all, it bought Macy's out of bankruptcy in 1994. Today, more than a third of Macy's goods are private label, and they account for almost 20% of Federated's total sales.

Federated shareholders also have a lot at stake in the integration of May, which has been floundering for several years. Federated's stock has more than doubled to 65.50 since the first quarter of 2003, though the shares have rolled over since mid-summer, along with many other retail stocks, amid concerns that higher gasoline prices would curb consumer spending. For the stock to rally anew, as many analysts and investors expect, Cincinnati-based Federated will have to prove it can integrate May's stores successfully into its own sprawling empire, and reverse their subpar performance.

Those who have taken the bet expect to be rewarded with a stock price of $85 by year end, and at least $100 within 12 months. "This is a value play with a catalyst," says Thomas Vaiana of American Century, which owns 1.5 million of Federated's 172 million shares.

CITIGROUP ANALYST DEBORAH WEINSWIG, known for her prescient call on the turnaround at J.C. Penney (JCP), thinks Federated could trade for 15 times her earnings estimate for fiscal 2007 (ending Jan. 31) of $7 per share, implying a stock price of $105 by this time next year. Her estimate, unlike most Wall Street figures, assumes that Federated will sell May's bridal division shortly, and use the after-tax proceeds to repurchase shares. She too values Federated as a "turnaround story" that will draw on management's "on the mark" merchandising, store enhancements and the national re-branding of May units with the Macy's moniker.

Through a spokesman, Lundgren declined repeated requests for an interview. But, like many analysts, his one-time mentor, retail veteran Allen Questrom, anticipates a successful outcome. Questrom earned his stripes most recently by revitalizing Penney and Barneys New York, and in the 1990s turned Federated around after it came out of bankruptcy.

Questrom calls the six-foot, three-inch Lundgren, a Long Beach, Calif., native who now calls Manhattan home, "skilled and groomed" to make the merger work by removing redundancies, transitioning May's regional stores to Macy's units, integrating May personnel into the Federated fold and creating a cohesive culture for the combined corporation. What's more, he predicts the creation of a new colossus will "reinvigorate" the department-store market, especially since it has been consolidating into stronger hands.

As for the rumored death of the industry, Questrom tells Barron's: "I've heard that for so long. There's room for any store that can execute a strategy that appeals to customers."

FEDERATED, WHICH TRACES its roots back to 1830, has its work cut out when it comes to 128-year-old May. While Federated's same-store sales, a key retail measure, dipped in two of the past three years, May's have shown a sharper decline. Likewise, May's earnings have dropped as it has relied on higher markdowns to move merchandise. In the latest reported quarter, ended July 30, for instance, Federated's per-share earnings from operations jumped 33%, to 84 cents a share, while May's declined 36%, to 21 cents, before accounting for special items.

But mending broken businesses is nothing new to Federated, which bought Macy's out of bankruptcy in 1994. Indeed, Lundgren, on his way to the top, oversaw the integration of Macy's merchandising and product-development functions into those of its new parent.

"Federated takes the operational fat out of whatever it acquires," says American Century's Vaiana. In the 10 years since it purchased Macy's, Federated's gross margins expanded to 40.5% from 38.1%. Margins on earnings before interest, taxes, depreciation and amortization, or Ebitda, widened to 13.5% from 10.9%, notes Christine K. Augustine, an analyst at Bear Stearns who has an Outperform rating on the stock and a 2005 price target of $85.

Macy's extensive private-label program played a big role in growing those margins. More than a third of the division's goods are exclusive, and they account for more than 17% of Federated's total sales.

Analysts -- and shoppers -- might look to Macy's as a as model for the May stores' future. Augustine expects Federated to have "a major impact on May merchandising in both private labels and national brands" by the third quarter of 2006. She thinks Federated's same-store sales will rise 2.5% in 2005, atop a gain of 2.6% in 2004.

Earlier this year Federated converted all of its co-branded regional department stores to the Macy's name. Not surprisingly, Lundgren plans to do the same to about 330 of May's regional units. Federated is planning to close 75 stores in markets there the two companies overlap, but the ax will fall mostly on May brands such as the fabled Filene's, Kaufmann's and Hecht's.

The company still is weighing the fate of May's Marshall Field's and Lord & Taylor divisions, which some analysts have speculated will be sold. Citigroup's Weinswig has even gone so far as to put a price tag of $384 million on Lord & Taylor's fabled Fifth Avenue flagship.

The elimination of weaker stores can only strengthen the retail sector, which is plagued by excessive competition and rampant discounting. Moreover, a bulked-up Federated is likely to have considerably more clout with vendors in demanding "markdown money" and "charge-backs," the mechanisms by which manufacturers reimburse retailers for apparel sold at less than full retail price or that arrives damaged.

THE LATEST SHIFT in the industry's balance of power hasn't been lost on suppliers, some of whom say they feel "powerless" in the face of the new gorilla. But, in a sign that industry competition is strong, regulators did not seek to block the Federated-May marriage as they might have a decade ago, analysts note. Instead, five state attorneys general, including New York's Eliot Spitzer, struck an antitrust pact with Federated to sell just 26 stores as part of the merger.

Experience isn't the only thing working in Federated's favor. The company's balance sheet is strong, with debt accounting for less than 40% of total capital. Its operations throw off more than $750 million in free cash per year, a figure that could climb to $1 billion in 2006 and $1.5 billion in 2007.

The probable sale of May's Bridal Group, and possibly the renowned Lord & Taylor chain, could put more money in Federated's pocket. And the sale of the two companies' credit portfolios could generate nearly $4.5 billion of after-tax proceeds, Prudential Equity Group analysts Wayne Hood and Phillip Juhan calculate.

Federated has used its cash, in part, to pay a modest dividend -- most recently, of 54 cents a share, for a yield of 0.8%, though that payout will rise to $1 on an annualized basis (for a yield of 1.5%) as of Oct. 3. The company could use additional funds to make small acquisitions and repurchase shares, another potential spur to its stock.

WHILE BLOOMINGDALE'S NEW YORK STORE is a temple of style, Federated in general doesn't vie for the same customer as luxury merchants Neiman-Marcus, Saks Fifth Avenue (SKS) and to a lesser degree, Nordstrom (JWN). The stores carry a lot more Juicy Couture and BCBG Max Azria, exemplars of affordable chic, than Dolce & Gabbana and Prada. Macy's devotes extensive floor space to handbag makers Coach and Dooney & Burke -- far from inexpensive, but also far from Gucci and Tod's. In footwear, too, the stores are a step -- or two or three -- behind the high-end competition. Bloomingdale's fall collection features Pajar Furry Boots for $298; Neiman's Bergdorf Goodman unit features shearling Jimmy Choos for $730.

"[Federated] is going to have fewer problems with the competition for that particular price point," says Questrom.

Like its peers in the discount arena, however, Federated is vulnerable to circumstances beyond its making -- in particular, the recent spike in gasoline prices, and deleterious trends in interest rates or employment that could curb consumer spending.

Barring an economic slowdown or weather-related event -- good or bad, weather tends to get the blame for a lot that goes wrong in retail -- it would be unwise at this point to bet against Lundgren.

Federated's merchant-in-chief, who was named CEO in 2003, entered the retailing business more than three decades ago, working first for the company's Bullock's division, now part of Macy's West. He later became chairman and CEO of Neiman, before returning to Federated in 1994 as head of its merchandising operations.

In the coming year, Lundgren's resume could grow longer still: If he can deftly integrate May into the Federated empire, and ratchet up the combined company's sales and earnings, he will be the new king of American department stores -- and the toast of Wall Street.

Looking Upscale, Wal-Mart Begins A Big Makeover
By Ann Zimmerman and Kris Hudson – Staff Reporters
The Wall Street Journal
September 17, 2005

As American Economy Shifts,
Retailer Redesigns Stores And Tries to Be Trendier

Doubling the Space for Wine

Wal-Mart Stores Inc. has begun a fundamental rethinking of the formula that made it the world's largest retailer.

Wal-Mart grew enormous by cramming its shelves with merchandise at the lowest prices possible. Now, responding to big shifts it sees in the American economy, it is changing the way it does business to reach out to more upscale shoppers.

This month, Wal-Mart unveiled an eight-page advertising spread in Vogue that uncharacteristically emphasized fashion, such as a leopard-print tank top with pink lace, instead of price. On Monday night, the huge public screen in Times Square will display video from Wal-Mart's first New York fashion show. The Bentonville, Ark., company even has a trend-spotting outpost now in the U.S. fashion capital.

Wal-Mart has created a store prototype with wider aisles, lower shelves and more elegant displays of pricey products. The retailer once prided itself on selling the first DVD player under $100. Now it also offers 42-inch flat-panel plasma TVs for $1,648 to $1,998.

It's a significant gamble, because lower-income rural shoppers have always been the core customers of this nearly $300 billion-a-year company -- bigger than any other nonoil company, measured by sales. In 2004, Wal-Mart sales represented 7.58% of all nonauto U.S. retail sales. William Cody, managing director of the Baker Retailing Initiative at the University of Pennsylvania's Wharton School, says Wal-Mart is the most dominant retailer in U.S. history in terms of sales as a percentage of gross domestic product.

But Wal-Mart needs to shake things up. Its sales at stores open at least a year, a key measure of retailing performance, have been lagging. Over the past year, such sales at more fashionable Target Corp. have been rising twice as fast as those at Wal-Mart. Wal-Mart's share price, which hit a 52-week low yesterday, is down 17% in the past year, while Target's has risen 18%.

The sense of crisis sank in last holiday season. During December, Wal-Mart stores were instructed to display items under $2 in the prominent places at the end of aisles, in an appeal to financially squeezed shoppers. But sales were disappointing. "We went the wrong direction," Wal-Mart Chief Executive Lee Scott told analysts this June, reflecting on the failure. "You can't just spend all your time chasing a customer who is going through that economic cycle."

Across its 3,100-store empire, Wal-Mart is deploying a 340-person squad to enforce new "rack rules." In a Wal-Mart supercenter in Cullman, Ala., Joel Ewing recently snatched a group of peach-colored, beaded tunics from a circular rack and put them on a rack with four outspread arms.

The four-way racks hold fewer items but allow shoppers to glimpse a garment's style and detail. "Putting out less merchandise can translate into more sales, because customers can really see what you have," explained Mr. Ewing as he surveyed departments with the store manager in tow. "But here, that is not an easy lesson to teach."

Wal-Mart's predicament reflects broader changes in the U.S. The country's uneven economic recovery over the past couple of years has benefited high-income Americans more than the traditional Wal-Mart customer, who values price over image. Even before Hurricane Katrina pushed gasoline over $3 a gallon, rising pump prices were having a disproportionate effect on working-class Americans because fuel represents a much bigger slice of their budgets.

Executives now say Wal-Mart needs to appeal to the shopper who loves a great deal on socks but also can splurge on merchandise with fatter profit margins, such as 400-thread-count sheets or a stereo.

Where Wal-Mart's mantra was once "stack it high, watch it fly," its fashion police have a new set of rules. There's the "one-hand rule": Racks shouldn't be stuffed so full that shoppers have to tug at a hanger with both hands. All racks should be 4-feet, 6-inches tall, so shoppers can see over them to apparel hanging on the walls. Thirty-six inches should separate one rack from another.

After surveying its customers and concluding they were "starved for fashion," Wal-Mart has started to bring in more stylish merchandise. The company still does all its apparel buying out of Bentonville. But two years ago, it opened the New York office, located on Fifth Avenue near the Empire State Building, to spot hot styles. Last year, the office persuaded headquarters to take a chance on long, patterned skirts embellished with sequins. They sold out in all stores within weeks.

"Fashion and creativity are not centered in Bentonville," says Celia Clancy, a Wellesley College graduate and former employee of Filene's Department Store, who runs strategic planning for the New York office. "To excel and be credible in apparel and home furnishings, this had to happen."

In the current Vogue ads -- part of a two-year, $12 million deal -- real-life customers pair fashionable Wal-Mart clothes with their own accessories.

Still, the company must be careful not to alienate its traditional base. Other retailers have flopped in pursuing growth outside their areas of expertise. A decade ago, J.C. Penney, the midmarket department-store chain, failed to woo new customers and alienated old ones when it tried to go upscale. Wal-Mart may also face a challenge squeezing suppliers for the last dollar of savings as it sells a plusher image.

Wal-Mart has been trying to improve the quality and style of its apparel and home furnishings for years, but its efforts seem to come in fits and starts. Three years ago, it introduced the George line of apparel from its unit in Britain, where it had sold briskly for a decade. But the company never promoted George here and buried the stylish office and weekend wear in disorderly apparel sections.

"We did focus groups with thousands of women and their biggest dislike was the mess on the floor," says Claire Watts, executive vice president of product development in apparel and home furnishings.

Many shoppers simply don't associate Wal-Mart with fashionable clothes. Caroline Geppert, a 36-year-old stay-at-home mom from McKinney, Texas, regularly shops at Wal-Mart for clothing for her daughters, but not for herself or her husband. "I've been surprised going to Target and seeing some things that I would buy and wear, whereas in Wal-Mart I usually wouldn't buy anything other than socks or underwear or a basic T-shirt," says Ms. Geppert, who formerly worked as a lawyer.

Wal-Mart has been slow to get all the pieces of fashion merchandising in place. Most apparel retailers have fashion planners whose job is to quickly halt production of styles that aren't selling well and rush to get more of popular items. Wal-Mart didn't have such planners until it recently hired 33 of them. It long treated all apparel in the same way as underwear or polyester pants with elastic waistbands, where demand is fairly steady. As it began hawking clothes in more trend-sensitive categories, the absence of planning led to a buildup of inventory and a rash of markdowns that hurt 2004 sales and profits.

This summer Lisa Waltuch, the New York office's top design guru, spotted young women in long, knit gaucho pants on 34th Street in Manhattan. Ms. Waltuch checked local stores in New York and found the garments were sold out. She put out a bulletin to Wal-Mart's Late Developing Items team in Bentonville. The gauchos will hit Wal-Mart stores this fall, faster than the typical six-month lead time.

Surveying shoppers, the trend office identified a customer Wal-Mart isn't reaching. They call her Gracie. She's at least 25 and spends a high percentage of her disposable income on fashion apparel. This month, a new private label brand of high fashion targeting Gracie will arrive in 500 urban Wal-Mart stores.

For years, Wal-Mart advertised relatively little, believing that low prices spoke louder than any commercial. What advertising it did emphasized "everyday low prices" and "rollbacks," or permanent price cuts. Television ads featured a yellow smiley-face character bouncing around the store and slashing prices. That approach seemed to work as Wal-Mart devastated retailers such as Sears and Kmart that had higher costs and less-efficient distribution.

But the constant emphasis on bargains turned off many affluent shoppers. And the frenzied advertising seemed to echo the long lines and busy aisles that can make shopping at Wal-Mart an ordeal.

One spot last holiday season featured the Gingerbread Man character from the movie Shrek 2 careening around a store. The ad hit all the themes Wal-Mart told its ad agencies to reflect -- low prices, happy employees, a wide selection -- but it made Julie Lyle, a vice president of marketing at Wal-Mart, feel exhausted. She feared weary holiday shoppers would feel the same.

Under Ms. Lyle, who is now on leave, and a new chief marketing officer, John Fleming, Wal-Mart crafted calmer ads. One spot shows small girls walking down their bedroom hallway wrapped in oversize towels. Another features Trish, a customer in her home, describing how she found low-priced yet contemporary decorating materials at Wal-Mart.

With the ads now running nationally, the challenge is to make the stores match the image. If higher-income shoppers are lured to the stores only to find the familiar drabness, they're not likely to give Wal-Mart a second chance.

In early June, Wal-Mart opened a prototype supercenter in Rogers, Ark., that targets the new demographic. Among the changes: wider aisles, mock hardwood floors and skylights. Stereo systems are on display rather than left in boxes.

Then there are the shelves. In older stores, all are 7-feet high, sometimes with merchandise stacked above that. The new prototype in Rogers strategically places 4-foot, 6-inch shelves among higher displays. One shelf of small kitchen appliances is kept low so shoppers can see over it to the aisle of pans and kitchen utensils.

"The aisles are wider and it's not as crowded," said Amy Cooper, a Rogers homemaker, loading her 8-year-old son and 6-year-old daughter into a minivan. "It seems cleaner."

Wal-Mart says the new store stocks just as many items as older ones. To make up for the extra space on the sales floor, it slashed backroom space by tweaking its delivery schedule so the store only needed one receiving dock instead of the usual two.

The new sales strategy is showing early results, Wal-Mart says. In McKinney, Texas, a suburb of Dallas, Wal-Mart manager Brent Allen says his two-month-old supercenter has seen a "high-double-digit percentage increase" in its sales of big-screen and flat-screen television sets, compared with a smaller store that used to be across the street. The sets are easy to see on a wall with less merchandise packed around them. Mr. Allen has noticed healthy sales of artichoke hearts and filet mignon. He doubled the floor space in his wine department after customers kept emptying the shelves.

"I think we have a more well-rounded income level that is visiting the store now," Mr. Allen said.

Wal-Mart's immense size, however, means it will be a long time before the prototype store is the norm. Wal-Mart plans to open roughly 100 supercenters modeled on the prototype this year, just 3% of the total.

That's why the retailer is trying to shake up old stores too. In the Cullman, Ala., store, Mr. Ewing, the fashion merchandiser, noticed a violation of the "rack rule" that says clothing bottoms should be placed directly under tops. He spotted a wall where $22.82 jewel-toned blouses were displayed above matching $17.57 plaid skirts, but the skirts were facing sideways. He straightened them out.

The SEC: Cracking Down On Spin
Business Week – Finance
September 26, 2005 (issue)

It's going after executives for skimpy or misleading disclosures in annual reports

The Securities & Exchange Commission threw the book at two former top executives of Kmart Corp. on Aug. 23. The agency requested unspecified penalties and a bar on the pair ever again serving as officers or directors of a public company. The executives -- former CEO Charles C. Conaway and former CFO John T. McDonald Jr. -- weren't accused of fudging Kmart's numbers. What incurred the SEC's wrath was their allegedly misleading explanation of the Troy (Mich.) retailer's finances in its 2001 quarterly reports. Lawyers for Conaway and McDonald say their clients contest the allegations and expect to be exonerated.

The civil suit is the latest sign that the SEC intends to turn the "management's discussion and analysis" (MD&A) section of quarterly and annual reports into a no-spin zone. Already, hundreds of companies have received letters exhorting them to tell the unvarnished truth. The reports are supposed to discuss the story behind the numbers, highlighting factors that could have a significant impact on company financials. But the SEC believes too many managers may be giving investors a skimpy or distorted picture of their business.

In Kmart's case, executives blamed a big spike in inventories on "seasonal fluctuations." In fact, the SEC alleges, they were hiding massive unauthorized purchases by one top official. The SEC also alleged that the executives lied about why Kmart was slowing payments to vendors and the impact the company's liquidity crisis had on its relations with vendors. Kmart filed for bankruptcy in 2002. After reorganizing, it acquired Sears, Roebuck & Co., now Sears Holdings Corp., in March.

BUSY PIPELINE

Misleading MD&A reports also were at the heart of cases the SEC brought in April against Coca-Cola Co. and Global Crossing Ltd. Without admitting or denying wrongdoing, Coke settled charges that it failed to disclose shipments of excess beverage concentrate to bottlers in Japan from 1997 through 1999 to meet earnings expectations. Such "gallon-pushing" isn't illegal, but the SEC says Coke left investors in the dark about the impact on company finances. The SEC faulted Global Crossing and three former executives for inadequate disclosure of fiber-optic capacity swaps with other telecom carriers in 2001. Global Crossing and the executives -- who each paid penalties of $100,000 -- settled the charges without admitting or denying guilt.

Defense lawyers and compliance experts suspect more such cases are in the pipeline. Now that most companies have adjusted to the major reporting requirements in the Sarbanes-Oxley Act, there's a renewed focus on risk assessment and disclosure, says Scott S. Cohen, editor and publisher of newsletter Compliance Week. "Everyone, from regulators to institutional investors, has been calling on companies to provide more clear, forward-looking, transparent, 'plain English' MD&A," Cohen says.

CEOs, who must sign the reports, can't blame shoddy MD&A discussions on auditors or other gatekeepers. The MD&A "is specifically designed to let investors view the company's financial condition through the eyes of management," says Peter H. Bresnan, an associate director at the SEC's Enforcement Div.

Managers had ample warning about what the SEC expects. Agency staffers have issued repeated guidance on what MD&A should cover. "What we are looking for in MD&A is the fresh story," says SEC chief accountant Donald T. Nicolaisen. "Often management repeats the same old boilerplate again and again. There is high resistance to change."

BEEFED-UP REPORTS
Databases of SEC documents compiled by Global Securities Information Inc., a publisher of the SEC's electronic document filing service, reveal a constant stream of staff requests to companies to amend and expand their MD&A filings. On Aug. 9, Johnson Controls Inc. added 14 pages of information to its 2004 annual report in response to SEC requests. "We've gotten mixed messages from investors about it, though some say 'the more information, the better,"' says R. Bruce McDonald, Johnson Controls' CFO. In March, Dress Barn Inc. beefed up its management discussion for its 2004 annual report after the SEC asked for an overview that would "identify the most important matters on which you focus in evaluating financial condition and operating performance."

Still, corporate arrogance remains an obstacle to candid, easy-to-read reports. "Many executives think they can get away with spoon-feeding investors whatever information they want them to have, not what they're entitled to," says former SEC chief accountant Lynn E. Turner, a managing director at investment researcher Glass, Lewis & Co.

Corporate lawyers argue that managers have valid reasons to parse their words. Saying too much could give rivals an edge; saying too little could invite shareholder suits. And there are tough calls. If a company's biggest customer is threatening to walk, must management disclose that? Lawyers say it depends on whether management believes it will lose the customer. "There are a lot of gray areas," says Brian Lane, a partner at Gibson, Dunn & Crutcher and a former director of the SEC's Corporation Finance Div.

So far, the agency has been vigilant about flushing out executives who try to hide bad news in those gray areas. If the Kmart case goes to trial, it will show just how much power the SEC has to deal harshly with those it thinks have given investors a whitewashed version of company finances.

Ex-FEMA Chief Witt Lobbies for Allstate
By Sharon Theimer – The Associated Press – Washington Post.com
September 15, 2005

WASHINGTON -- The former federal disaster chief hired by Louisiana to help lead its Hurricane Katrina recovery has registered to lobby for an insurance company that wants Congress to create a natural disaster "catastrophe fund."

Former Federal Emergency Management Agency director James Lee Witt and his firm, James Lee Witt Associates, registered Tuesday to lobby for Allstate Insurance Co. Their mission: "to draft and introduce model legislation creating a natural disaster catastrophe fund," says the registration, posted Thursday by the lobbying tracking service Political Money Line.

Witt's lobbying for the fund comes while he's on the payroll of the state of Louisiana. Gov. Kathleen Blanco hired him earlier this month as a consultant to advise her on the state's hurricane relief work.

Mindful of the potential appearance of a conflict of interest, Witt is turning away prospective clients who want him or his firm to lobby in Louisiana, and is refusing to do such work for existing clients, said Barry Scanlon, a firm partner and lobbyist.

"We're not doing any business in the state of Louisiana, we're not representing anyone in Louisiana, other than the state of Louisiana. That's where our loyalty lies," Scanlon said.

Though the registration was filed this week, the firm's work for Allstate began Aug. 1, nearly a month before the hurricane struck, Scanlon said.

Witt headed FEMA in the Clinton administration. His Washington firm lobbies on disaster issues for several clients and also serves as a consultant on disaster preparedness planning, training and assessments. Less than 5 percent of the firm's revenue comes from lobbying, said Scanlon, a special assistant to Witt while they were at FEMA.

Witt's experience at FEMA was among the reasons Allstate hired him, company spokesman Michael Trevino said.

"He's an expert," Trevino said.

Under the catastrophe fund proposal, insurers would cover homeowners' natural disaster-related claims up to a certain amount. The state affected by the disaster would cover claims over that amount up to a certain level, and the federal government would cover them beyond that.

Sears stays on buyback path, keeps debate going
By Becky Yerak - staff reporter - Chicago Tribune
September 15, 2005

Sears Holdings Corp. may have shaken up its top management last week, but some things remain the same at the Hoffman Estates-based retailer: a preference for buying back stock and a debate whether the money would be better spent investing in its struggling stores.

The nation's third-biggest retailer, formed by the March merger of Kmart Holding Corp. and Sears, Roebuck and Co., announced Wednesday plans to buy back up to $500 million of its shares.

The show of self-confidence came less than a week after the retailer reported disappointing second-quarter results, demoted its chief executive and drastically lowered capital improvement spending.

Separately, Catherine David, senior vice president and general manager of Sears Essentials, Sears Grand and the Great Indoors, left the company earlier this month after giving notice in August.

David's duties have been divvied up between Aylwin Lewis, the Sears Holdings president who last week was elevated to CEO , and William Crowley, the chief financial officer who last week was given the additional title of chief administrative officer. Sears said it expects to name David's replacement soon.

Sears Holdings' $500 million stock buyback program is one of the first initiatives announced since Chairman Edward Lampert said he would take a higher profile at the $55 billion retailer, directing its merchandising, marketing, design, online businesses and its Lands' End unit.

Predecessor Sears Roebuck--in which Lampert had been a 15 percent investor--also heavily bought back shares after it sold its credit business in 2003.

Some retail observers speculated that former Sears Roebuck CEO Alan Lacy kept his job as long as he did because his active stock buyback program kept shareholders like Lampert happy and per-share earnings propped up.

Sears declined to comment Wednesday on the stock buyback, but at least one retail analyst questioned the wisdom of plowing money into share repurchases as Sears tries to turn around its retail business.

"A better use of cash could have been to concentrate on store fixtures, display, lighting and remodeling more stores," said Richard Hastings, senior retail analyst for Bernard Sands LLC. "At the same time, Lampert's strategy is to reward shareholders, so I'm not surprised by it." During the 26-week period ended July 30, Sears Holdings spent $180 million on capital expenditures. That compares with $124 million and $306 million spent by Kmart and Sears, respectively, during the same period last year.

The buyback announcement did little to halt the slide in Sears Holdings' stock.

Based on Wednesday's closing price of $128.87 a share, down 1 percent, Sears Holdings could buy back almost 3.9 million shares. Sears Holdings had about 165 million common shares outstanding as of Aug. 31.

The stock reached $163 in July as investors bet Lampert, who last year earned an estimated $1.02 billion managing his hedge fund and who controls about 40 percent of Sears Holdings' stock, would sell off everything not nailed down, but asset sales have been fewer than expected. The company's West Coast hardware chain has been put on the block so far.

When it released second-quarter financial results last week, Sears noted it had more than $2 billion in cash and cash equivalents, up from $1.6 billion at the end of the first quarter.

Sears Holdings said last week that it still plans to open 400 Sears Essentials, an off-mall format selling items from appliances to soft drinks, over the next two or three years, most converted from former Kmart sites.

The performance of the early Sears Essentials sites has been mixed since the May opening, with the performance of the store in Palatine "all right," said a former Sears executive. Hitches included not having plus-size or junior's clothing upon opening at some locations.

Separately, Sears Canada Inc., which is 54 percent owned by Sears Holdings, will pay $2 billion in special dividends from the sale of its credit business.

Sears to Buy Back Stock
By Nat Worden
TheStreet.com Staff Reporter
September 14, 2005

Ed Lampert signaled more faith in shares of retail turnaround play Sears Holdings (SHLD:Nasdaq) amid creeping Wall Street doubts.

Sears said Wednesday its board approved the repurchase of up to $500 million of the company's common shares.

Sears' board is led by Lampert, the hedge fund guru of ESL Investments who orchestrated the merger between Sears and Kmart. Its stock has been one of the hottest on Wall Street for two years, but the shares have fallen 20% since mid-July and took a hit last week on what some perceived as lackluster second-quarter earnings.

The company had about 165 million shares outstanding at Aug. 31. It said the repurchased shares will be bought in the open market or in privately negotiated transactions, depending on market conditions and other factors.

The shares were trading up $1.56, or 1.2%, to $131.81 Wednesday morning.

Sears Canada Plans C$2 Bln Payout After JPMorgan Deal
Bloomberg
September 14, 2005

Sept. 14 (Bloomberg) -- Sears Canada Inc., a unit of Edward Lampert's Sears Holdings Corp., plans to pay a special dividend of C$2 billion ($1.69 billion) after completing the sale of its credit-card business to JPMorgan Chase & Co.

The exact amount and timing of the payout, equal to C$18.75 a share, will be determined after the JPMorgan transaction closes, the Toronto-based retailer said today in a Canada NewsWire release.

Sears Canada last month agreed to sell the card business for C$3.4 billion, resulting in proceeds of C$2.2 billion. Sears Holdings, which owns 54 percent of the Canadian retailer, has been trying to boost the value of the company since Lampert, its chairman, engineered Kmart Holding Corp.'s $12.3 billion acquisition of Sears Canada's parent in March.

Sears Canada also plans to cut about C$100 million in annual costs, most of which will be achieved next year, the company said. It expects to record pretax costs of C$70 million in the fourth quarter related to the cost cutting.

The cuts will come from steps including job reductions and office closings, Sears Canada said.

Sears Canada stock climbed C$2.45, or 8 percent, to C$33.25 in 12:59 p.m. trading on the Toronto Stock Exchange after earlier rising as high as C$33.01. They've almost doubled this year.

Sears Holdings stock rose 45 cents to $130.70 in U.S. trading.

Sears Canada had 106.7 million shares outstanding on Aug. 31.

Medicare's Drug Plan:What to Do Now
By Sarah Lueck – Staff Reporter – The Wall Street Journal
September 14, 2005

As Key Sign-Up Dates for Benefit Approach,
Seniors Face Series of Decisions; Choosing a Policy

KEY DATES

Here are some important dates related to the Medicare prescription-drug benefit:

* Oct. 1 -- Insurers and others can start marketing drug policies to seniors.

* Nov. 15 -- Enrollment period for the drug benefit begins.

* Jan. 1 -- Drug coverage starts for those signed up.

* May 15 -- Last day to sign up without a penalty.

Source: Centers for Medicare and Medicaid Services

As the new Medicare prescription-drug benefit nears its launch, a host of private insurers are preparing to sign on, offering seniors a broad -- and some say bewildering -- array of policies to choose from.

The drug benefit, which takes effect Jan. 1, is designed to plug a glaring gap in the four-decade-old federal health program for the elderly: Medicare doesn't pay for most prescription drugs used by its more than 40 million beneficiaries. Now, seniors will be able to buy private policies, subsidized and regulated by Medicare, to help cover those costs.

When Congress passed the benefit two years ago, some predicted that few insurers would be interested in offering the coverage. In fact, the opposite is happening. While final contracts haven't been signed, the latest government information shows that seniors will be offered stand-alone drug policies from 11 to 23 different companies, depending on where they live.

Providers range from national health insurers such as United Healthcare, Humana and Aetna, to smaller regional providers. Many companies will offer several options that will vary considerably in their cost (some monthly premiums are expected to be as low as $20, with others well above $30), pharmacy networks and medicines they cover.

Insurers have been moved to participate by the opportunity to sell insurance to a new group of customers -- and perhaps eventually lure them to the lucrative Medicare Advantage plans, a managed-choice alternative to traditional Medicare. Companies are already laying plans for extensive marketing; starting Oct. 1, seniors will start seeing numerous pitches on TV, radio, in print and in their mailboxes. Enrollment for the benefit is set to start Nov. 15.

To help people choose a plan, the government will unveil a Web site in mid-October that will allow seniors to enter the drugs they take and the pharmacies they prefer. The site will then recommend the plans that match their needs.

Despite such tools, many health-policy experts are voicing concern that beneficiaries will be overwhelmed by the sheer number of choices, and other complexities. "The question is: Will seniors be so overwhelmed by all these choices that they throw up their hands and say, 'Forget about it'?" says Tricia Neuman, a Medicare expert at the Kaiser Family Foundation, a Washington nonprofit.

Selecting a plan requires seniors not just to evaluate the options in their area, but also to weigh them against other coverage they may have, such as retiree benefits or Medigap policies.

Here are some things to consider:

Sign up on time

Though the benefit is voluntary, anyone who delays signing on faces steep financial penalties -- in the form of higher premiums -- if they decide they want it later on. The initial enrollment period for the drug plans will run from Nov. 15 until next May 15. The penalties affect people who are eligible for Medicare because they are age 65 or above or have certain disabilities, and who don't already have drug coverage that has been determined by the government to be at least as good as the basic Medicare benefit.

For each month such a person is late signing up, he or she will automatically pay 1% more in monthly premiums forever. For example, people who are eligible for Medicare and lack good drug coverage would pay monthly premiums that are 24% higher if they join two years late.

The penalties, which are similar to penalties in Medicare's coverage of physician services, are designed to get everyone to sign up, not just the sick. They encourage people to start paying premiums even when they're relatively healthy instead of waiting until later when they become ill.

Weigh costs carefully

The bulk of the tab will be picked up by the government, but seniors will face significant costs in the form of monthly premiums, deductibles and co-payments. Those costs are likely to vary sharply depending on the plan, but insurers must follow some broad requirements set by the government. For example, annual deductibles -- the amount people must pay out of pocket before the plan starts to pay -- can't be higher than $250.

Insurers are offering few specifics ahead of the October marketing launch. But some premiums may be as low as $20 a month, according to preliminary information, while others will be well above $30; the nationwide average premium is estimated by Medicare at $32.20.

Some plans may be structured to charge no deductible, or to eliminate or lessen a coverage gap often referred to as "the doughnut hole," which Congress built into the plan to curb costs. The gap works like this: Once beneficiaries' total drug bill, not including premiums, reaches $2,250 in a year, they must foot their own costs until they spend a total of $3,600 out of pocket, not including premiums. After that, benefits kick in again, with policies required to pay at least 5% of drug costs for the rest of the year.

Beneficiaries and their families will be able to get help sorting out the benefits and costs on the government Web site, which will be accessible through www.medicare.gov. Those who don't use online services can call the 1-800-MEDICARE hotline. And various state and local agencies on aging and other groups will be holding informational seminars for in-person help.

Contact your former employer

Millions of beneficiaries will continue to get drug coverage in their retiree benefits. By Nov. 15, anyone with such coverage is supposed to get a letter from their former employer or benefits administrator informing them whether the benefit is "creditable," meaning the government has decided it's at least as good as the basic Medicare drug benefit. If that coverage is creditable -- and most corporate benefits are expected to be -- then retirees probably shouldn't sign up for the Medicare benefit.

Anyone who hasn't heard from their former company should contact it before making any change. Dropping an employer-sponsored plan could have serious consequences, such as losing access to other medical benefits.

Another note: Many employers are dropping retiree benefits as a cost-cutting move, and those who lose their corporate coverage may want to sign up for the Medicare drug benefit down the road. As long as that coverage was "creditable," they won't face penalties for signing up late.

Consider alternatives

Medicare Advantage plans, which are mostly offered by managed-care companies, provide seniors an opportunity to save on premiums and co-pays for medical care, including hospital and doctor fees, compared with traditional Medicare. The plans, previously provided under a program called Medicare + Choice, are part of the federal government's efforts to reduce costs by shifting seniors to managed care. Policies provide some drug benefits, but they aren't available everywhere.

Because of extra government subsidies that were part of the Medicare drug-benefit legislation, Advantage plans have started to offer more-generous drug coverage and in more parts of the country. The trade-off: These policies often have limited lists of in-network doctors and hospitals, and require participants to pay more to use out-of-network providers.

Revisit Medigap

Roughly 10 million seniors have so-called Medigap plans -- also known as Medicare supplemental policies -- to cover deductibles and other out-of-pocket costs that Medicare doesn't cover. The plans, which offer benefits at several government-set levels designated by letters from A to J, provide prescription-drug coverage in the H, I and J plans. But once the drug benefit starts, companies can't sell new Medigap policies that cover drugs.

Beneficiaries who already hold H, I and J plans can keep them if they choose. But the government doesn't subsidize Medigap policies, and the drug coverage isn't "creditable" compared with the new Medicare drug benefit. So people who keep them for a while and sign up for the Medicare drug benefit late would pay a penalty.

Seniors might be better off signing up for a stand-alone Medicare drug benefit or Medicare Advantage plan, or shifting to a Medigap policy without drug coverage.

In all, there are a lot of aspects to the Medicare drug benefit for seniors to consider. Bill Mayer, a 70-year-old in Monroe Township, N.J., who has a radio show focusing on senior issues, says discussions about Medicare always prompt a lot of calls. "I'm all for it," he says of the drug benefit. But he cautions that many beneficiaries may not view it as optimistically. "Seniors will have to read. Seniors will have to go on the Internet. Seniors will have to make choices," Mr. Mayer says. " 'We've had enough of schooling,' is what I hear. The biggest problem Medicare is going to face is that.”

Third Avenue's Whitman slashes stake in Sears
Reuters
September 14, 2005

NEW YORK (Reuters) - Distressed debt investor Marty Whitman has greatly cut his stake in Sears Holdings Corp. saying the company must really excel to justify its share price.

Whitman said in a letter to shareholders of his flagship Third Avenue Value Fund that, while Sears Holding seems to be exceedingly well managed with very good prospects to succeed as a large U.S. retailer, success is far from assured.

"At the prices at which (the common stock of) Sears is now selling, the company has to succeed in a big way in order to justify these prices," he said in the letter released Tuesday.

"Against this background, it seemed prudent to lighten up the fund's position in Sears."

Sears was trading up 13 cents at $130.38 at midday on the Nasdaq stock market. The company said on Wednesday it would buy back up to $500 million of its own stock.

The fund sold 2.25 million shares of Sears during its third quarter ended July 31, when the stock traded as low as $133.24 a share on June 13 and as high as $163.11 on July 20. The fund's cost basis for its Sears holdings was close to the $10 per share it paid for Kmart in May 2003.

The fund had sold 654,897 shares in the previous quarter, when Sears accounted for 6.5 percent of the fund's total assets. It no longer is a top 10 fund holding. The stock is also held in the Third Avenue Small-Cap Value Fund, and Third Avenue also hold Sears' escrow notes and trade claims.

Whitman, whose connection to the Sears name began decades ago when he worked for the Rosenwald family that was closely associated with the company's early beginnings, had previously said success for the new Sears was hardly a "slam-dunk." The jury was still out on whether Sears could compete with Wal-Mart and Target.

Whitman also added more property holdings to his flagship portfolio in the latest quarter. Whitman added Hong Kong property companies Hang Lung Properties Ltd., making his fund the largest mutual fund holder of Cheung Kong shares.

The Third Avenue Value Fund is also now the largest unsecured creditor of U.S. auto supplier Collins & Aikman Corp. which is "a considerably more troubled debtor than we had assumed," Whitman said in the shareholder letter.

The fund, with about $5.9 billion in assets, is up 13 percent so far this year as of Tuesday and has returned an annual 25.5 percent over the past three years, according to Lipper Inc., a unit of Reuters Group Plc.

Lampert Faces a Long Shot In Reviving Sears
Long & Short – By Jesse Eisinger – Wall Street Journal
September 14, 2005

It is tempting to root for the Eddie Lampert experiment.

Mr. Lampert, the hedge-fund manager who controls Sears Holdings and engineered Kmart's acquisition of Sears, wants Wall Street to rid itself of its addiction to management earnings forecasts, so Sears doesn't give any. He wants to run a retailer that is more interested in profits and cash flow than sales growth for growth's sake. Sears doesn't give investor presentations; there are no earnings conference calls. The executives run the business for the long term, figuring the stock should take care of itself.

Finally, the dog is wagging the tail

Alas, what a dog it is.

The problem is that Mr. Lampert, who successfully steered Kmart out of bankruptcy, isn't simply experimenting with investor relations. He has embarked on a plan to make what is arguably the toughest turnaround in retailing history. Sears and Kmart outlets are getting shellacked by the likes of Wal-Mart Stores and its ilk. As compelling as it is to profess the long-term management vision thing, the latter endeavor is in a race against time.

The bulls on Sears, which include several major hedge funds, have much going in their favor. For one, they have been right. After a huge pre-acquisition year for both stocks in 2004, Sears Holdings is up nearly 32% this year. (In the interest of accountability, I should note here that I have periodically written bearish items on Kmart since May 2004 and on Sears since March 2003 and have been consistently wrong.)

The bulls hail that Sears is producing free cash flow, a good measure of real profitability. In the first 26 weeks of the fiscal year, Sears generated $491 million in such cash (after capital expenditures) and more than $1 billion in earnings before interest, taxes, depreciation and amortization. There is plenty more where that came from, as Mr. Lampert takes a scythe to bureaucratic waste, advertising and marketing costs and capital expenditures. He is proceeding with his plan to streamline the businesses by having sold off the Sears Canada credit-card portfolio and by putting the Orchard Supply hardware business up for sale. The Lampert cheerleaders point out that Sears's profit margins were up in the latest quarter while Kmart's heretofore plummeting sales have stabilized, with same-store sales down a mere 0.3% and apparel sales up, even as Wal-Mart struggles with duds.

"It was a surprisingly good quarter," says Deutsche Bank's Bill Dreher, who rates the stock a buy. "We began to see some of the fundamental improvements from the post-bankruptcy Kmart stores."

The acquisition only closed in late March and the bulls are taking Mr. Lampert's long view. Their insurance policy is that he will be able to sell off assets judiciously, including some of its valuable real estate, if sales don't pickup.

Sears declined to make Mr. Lampert available.

For every bullish point, there is a nagging counter. Kmart's sales stabilized, but the gross profit margins were down a full percentage point. If Mr. Lampert had gotten Kmart to focus mainly on profitable sales, margins should go up, not down. The result suggest that "the strategy has played itself out and Kmart is back to the time-tested and true strategy of sacrificing margin to boost sales," says Morgan Stanley analyst Greg Melich, a skeptic.

Free cash flow might have been strong, but capital expenditures on maintaining and improving existing outlets are low. The problem with relying solely on the cash flow figures, rather than looking at the whole financial picture, is that a management can milk a company for cash by cutting costs and underinvesting in the business. Sure, it makes theoretical sense that both Sears and Kmart were wildly inefficient, advertising too much, stocking too many unprofitable items and ordering poorly. In cutting costs, Mr. Lampert may be starving the business. Investors may wake up one day to find that the cash flow wasn't sustainable.

By Morgan Stanley's reckoning, Target spends just less than $8 a square foot merely to maintain its stores. Sears Holdings would have to spend $2.2 billion to match that -- more than four times what it is spending now, Mr. Melich figures. The cuts come even though Sears historically has "clearly underinvested" relative to the discounters and the home-improvement warehouses and has barely kept pace with the other mall department stores, he argues.

What about the real-estate fall-back plan, which Mr. Dreher calls the "cherry on top of the sundae?" The problem is everybody is spooning that dessert. Federated Department Stores and May Department Stores plan to sell off mall space. Mervyn's is unloading stores, as is Toys "R" Us. Supermarket chain Albertson's, which just put itself up for sale, will probably follow suit. The retail real-estate bulls should take note that Office Depot took a hit Monday on some stores it bought from Toys "R" Us only last year, writing down their value.

Sears's stock price implies that over the next five years, if sales stay flat, its operating profit margins must average more than 9%, up from less than 3% now and compared with Wal-Mart's 7% or so, according to an analysis by Applied Finance Group.

It may be early in the company's life after the acquisition and investors might be inclined to be patient. But the economy won't wait too many quarters for Mr. Lampert to get Sears right.

Suit Says Wal-Mart Is Lax on Labor Abuses Overseas
By Steven Greenhouse – New York Times
September 14, 2005

A labor rights group filed a class-action lawsuit yesterday against Wal-Mart Stores in which apparel workers in Bangladesh, China and other countries assert that Wal-Mart violated its contractual obligations by not enforcing its code of conduct for overseas contractors.

The lawsuit, filed in state court in Los Angeles, makes the novel argument that Wal-Mart's code of conduct created contractual obligations between it and thousands of workers employed by contractors who were supposed to comply with the code.

In the lawsuit brought by the International Labor Rights Fund, workers from Bangladesh, China, Indonesia, Nicaragua and Swaziland assert that the codes of conduct were violated in dozens of ways. They said they were often paid less than the minimum wage and did not receive time-and-a-half for overtime, and some said they were beaten by managers and were locked in their factories.

"Based on its vast economic power, Wal-Mart, based on its code of conduct, can and does control the working conditions of its supplier factories," the lawsuit states. "It could use its power and position to prevent its producers from profiting from the inhumane treatment of plaintiffs."

Beth Keck, a Wal-Mart spokeswoman, said the company was studying the lawsuit. "It's really too early for us to go into any kind of detail about this complaint," Ms. Keck said. "It involves a number of countries, suppliers and factories. We will be looking into this and taking it very seriously."

Wal-Mart executives say that they have the world's largest overseas monitoring program, with more than 5,000 factories inspected by 200 full-time inspectors who visit 30 factories a day. The executives say that when inspectors find violations, they give factories several months to fix any problems before another inspection.

Last year, according to the company's ethical standards report, Wal-Mart cut off 1,200 factories for at least 90 days because serious violations were found in the second visit. Another 108 factories were permanently banned, primarily because of child-labor violations.

In the lawsuit, two male workers for Wal-Mart contractors in Shenzhen, China, asserted that they were not paid the minimum wage, not permitted to take holidays off and were forced to work overtime. They said the contractors withheld the first three months of all workers' pay, almost making them indentured servants because the company refused to pay the money if they quit.

An apparel worker in Dhaka, Bangladesh, said that she was locked into the factory and did not have a day off in her first six months. She said that she was told if she refused to work the required overtime, she would be fired. Another worker said her supervisor attacked her "by slapping her face so hard that her nose began bleeding simply because she was unable to meet" her "high quota."

The complaint tells the stories of 16 plaintiffs, but lists them as John and Jane Does, saying they need to be protected against reprisal. Several said they were fired or suspended for backing unions.

The lawsuit accuses Wal-Mart of breach of contract for wage violations, forced labor and denying workers the right to associate freely. It also accuses the company of negligence, unjust enrichment and fraudulent and deceptive practices in violating California's business code.

Terry Collingsworth, executive director of the International Labor Rights Fund, a Washington-based advocacy group, asserted that filing the lawsuit in California was appropriate because Wal-Mart had violated that state's laws. He said that if the plaintiffs had filed the lawsuit in their home countries, they would have faced arrest, physical attacks and hostile judicial systems that favored corporations.

He faulted Wal-Mart's monitoring system, contending that fewer than 10 percent of its inspections were unannounced. He said company managers often coach workers on what to tell the inspectors.

Wal-Mart executives say that they are working to improve the monitoring and that more inspections will be unannounced.

"With our growth, the challenge of ethical sourcing has become increasingly complex," H. Lee Scott Jr., Wal-Mart's chief executive, wrote in the company's 2004 Report on Standards for Suppliers. "But we have a qualified ethical standards team dedicated to verifying that factories are in compliance with local labor laws and/or Wal-Mart standards, whichever are more stringent."

An Indonesian plaintiff who said she made jackets for Wal-Mart's private-label George line complained of unpaid work hours and unpaid overtime, saying that she often worked from 7 a.m. until 8 or 10 p.m. Mondays through Fridays. She said she also had to work on Saturdays from 7:30 a.m. until 3 or 4 p.m.

Another Indonesian worker said, "Wal-Mart production quotas were far higher than quotas from previous buyers, and her supervisor regularly yelled at her and her colleagues if the work was not performed quickly enough."

An apparel worker in Matsapha, Swaziland, said he sometimes had to work from 7 a.m. to 11 p.m. and once worked all night. "He was threatened with immediate dismissal if he did not work overtime, and the factory doors were locked to ensure he did not leave," the lawsuit asserted.

Mr. Scott wrote in the ethical standards report, "It is important to recognize the reality that however strong the programs we develop, violations of our standards will occur." He added that it was a point of pride with Wal-Mart when violations were discovered, action was taken.

The plaintiffs include four unionized California supermarket workers who say that they suffered cuts in pay and benefits because of competition from Wal-Mart's low prices. They argue that those prices are attributable in part to violations of the chain's suppliers' code of conduct.

Mitch Merin, Division Head at Morgan, Is Departing
By Landon Thomas, jr. - New York Times
September 14, 2005

Mitchell M. Merin, the head of Morgan Stanley's asset management division, said yesterday that he would leave the firm, the latest sign of the intent of the new chief executive, John J. Mack, to reshape the executive ranks.

Mr. Merin was a longtime ally of Philip J. Purcell, the former chief executive, and the move, which was expected, now allows Mr. Mack to start a search for a successor to run the firm's investment management business. With $416 billion in assets under management and its mix of retail and institutional funds, the division has always been considered a crucial strategic component of Morgan Stanley.

But, in recent years, fund outflows, a period of weak performance and regulatory hiccups have cast a shadow over the unit. Despite a revival of sorts in recent quarters, the division drew harsh reviews from Mr. Purcell's critics during the battle over his leadership that led to his retirement.

Mr. Mack was a forceful advocate for the business and the steadying fees it produced during his time as president of the firm before he left in 2001. He has spoken openly about the division's importance, despite a developing industry trend of financial conglomerates looking to spin off these divisions, which contribute little to the firm's bottom line.

"Investment management is a key business for Morgan Stanley," Mr. Mack said in a statement. "As head of the business, Mitch Merin provided strong leadership and established an excellent foundation on which to build."

Morgan Stanley has hired the executive search firm of Spencer Stuart to head the search process. In the interim, Mr. Mack appointed Owen D. Thomas, a top executive in the firm's real estate group, to succeed Mr. Merin. The position could be a difficult one to fill. Top executives at independent fund companies are unlikely to leave their jobs for a business that wields so little financial clout within the firm. And finding an executive capable of executing business strategy as well as improving investment performance will be no easy task.

Mr. Merin, who first joined Sears in 1981, was in many ways Mr. Purcell's closest confidante. Not an investment banker or broker by trade, Mr. Merin, 52, became a financial jack-of-all-trades for Mr. Purcell, pitching in on the start of the Discover card business, the Dean Witter public offering in 1993 and most crucially, the decision to merge Dean Witter with Morgan Stanley in 1997.

Mr. Merin, together with his counterpart at Morgan Stanley, Robert G. Scott, went on to head the integration efforts from the Dean Witter side. But like many of Mr. Purcell's top executives, Mr. Merin never spent enough time running any one business to develop a significant power base that would make him a viable candidate to become chief executive.

In 1998, he was given the asset management business to run, in a management shuffle precipitated by Mr. Purcell. By elevating a Dean Witter executive to lead a business that had close ties to Mr. Mack and the old guard at Morgan Stanley, Mr. Purcell was able to solidify his management grip on the firm.

The initial years were difficult for Mr. Merin as executives departed and a combination of regulatory pressures and weak returns stanched the division's growth. But in recent years, Mr. Merin took steps to move away from the old Dean Witter model of pushing proprietary funds through its brokerage network in favor of a third-party offerings - namely through the firm's Van Kampen family of funds.

Despite such headway, Mr. Merin had informed Mr. Purcell last year of his desire to move on to something new and at the beginning of this year, a preliminary search began. Morgan Stanley did not make Mr. Merin available for comment.

Morgan Stanley Sees Salvation At Higher End
Heard on the Street
By Ann Davis – Staff Reporter - The Wall Street Journal
September 14, 2005

CEO Mack Aims to Reinvigorate Its Stock-Brokerage Business By Capturing Wealthier Clients

NEW YORK -- Morgan Stanley has long succeeded in the investment-banking arena. But the Wall Street firm's individual-investor business has struggled to keep pace with its white-shoe cousins in the past several years.

The fate of the individual-investor business loomed as one of the biggest issues facing John Mack when he arrived at Morgan Stanley as the firm's new chief executive this summer. Dissident alumni had successfully pushed for the ouster of Mr. Mack's predecessor, Philip Purcell. Many critics also called loudly for Morgan to sell the lagging individual-investor business.

But Mr. Mack has tacked against the alumni and other critics. Instead of scuttling the business, he has hired James Gorman, formerly Merrill Lynch & Co.'s brokerage chief, in a bid to reinvigorate the individual-investor unit. Mr. Mack believes the unit can transform itself into a much more profitable business by focusing more intensely on attracting richer clients. The bet on the individual-investor brokerage business will play a big role in how Morgan Stanley and its stock fare under the Mack regime.

Mr. Gorman can't start until February due to competition restrictions, but Mr. Mack isn't biding his time: He has dismissed 1,000 underperforming brokers and says the unit will shift its focus to more high-net-worth clients. He says Morgan will draw on its "superior products, powerful franchise and leading intellectual capital."

The challenge facing Messrs. Mack and Gorman is daunting. Morgan's profit margin from advising individual investors was 8% in 2004, compared with Merrill Lynch's 19% and 22% for Citigroup Inc.'s Smith Barney unit. And while other firms have diversified aggressively into mortgages and other financial products, Morgan has been slower to move away from stocks, bonds and mutual funds. "There is a great deal that we can and must do to improve its performance," Mr. Mack says of the business.

Mr. Gorman, a former McKinsey & Co. management consultant, brings with him a track record of success. He helped transform Merrill's once-clubby brokerage operations into a more sophisticated platform. But at Merrill he began with a more affluent client base. Morgan, in contrast, has traditionally focused on less wealthy clients than its peers, a legacy of its Dean Witter years. Dean Witter, Discover & Co. and Morgan Stanley merged in 1997 to create a global securities giant.

A believer in scale, Mr. Gorman isn't inclined to shrink the 10,000-strong adviser force, people who know him say. In addition to recruiting new advisers, he is expected to train former Dean Witter "stock jocks" to sell mortgages, insurance and even hedge funds. (Merrill employs more than 14,000 advisers; Smith Barney more than 12,000.)

Mr. Gorman's strategy will look familiar to Morgan's Wall Street foes. Along with Merrill, Smith Barney and UBS AG have in recent years morphed many of their brokers into "wealth advisers" who collect fees based on account size rather than on transactions. They collaborate with outside money managers and trust-and-estate experts, among others, to give clients more choices.

These rivals also developed nontraditional offerings, such as mortgages and small-business loans much sooner, and assembled teams of advisers with multiple specialties to cross-sell. This helped compensate for lost income as commission rates dropped.

Morgan has relied for much longer on sales of in-house stocks and mutual funds instead of advice -- and has struggled to attract assets. And while it has offered mortgages for 11 years and small-business loans for five, the firm acknowledges it hasn't marketed the diversity of its offerings until recently.

Morgan says it will expand banking services this fall and emphasizes that 800, or about 8%, of its brokers have gone through its Wealth Advisors training program. U.S. client assets representing $1 million-plus households have grown to 59% from 54% a year ago, while assets in sub-$100,000 households is dropping.

For years, Dean Witter bet on small clients and sold them a lot of home-cooking. Its mutual-fund arm, the InterCapital funds, drew fire for weak performance, but Dean Witter pocketed maximum fees by selling through internal channels.

By the 1997 Morgan merger, 75% of all mutual funds that Dean Witter sold were house funds, far higher than competitors. Mr. Purcell kept costs low by spending less than rivals on technology and training, former firm executives say. Mr. Purcell declined to comment for this article.

Until 2003, Morgan gave brokers a big incentive -- 1% to 3% higher payouts -- and sponsored lavish sales contests to sell in-house funds, according to regulators. It didn't disclose this to customers and faced penalties for the practice.

Today, less than 25% of the funds Morgan sells are proprietary, though that is still 5% to 10% higher than competitors.

During the 1990s stock-market mania, Merrill was the first to acknowledge another pitfall of the old ways: The little guys drained broker time and ran up expenses. So Merrill began transferring client accounts with under $100,000 into a call center, suffering some bad publicity but ultimately keeping most clients, it says. Merrill also reduced what it paid brokers to service small accounts.

Morgan rolled out a call center late last year, mainly for households with less than $35,000 but for some with as much as $100,000. Given Morgan's average account size of about $100,000, according to Bank of America Corp. research, the move could pose risks.

Recently, Merrill, UBS and others have emphasized "open architecture," offering investments outside the company. Smith Barney, for example, part of Citigroup's Global Wealth Management division, has been creating "separately managed accounts," or SMAs, in which outside portfolio managers customize asset allocations for wealthy clients.

Morgan, many of whose best brokers still focus on stocks and bonds, only recently caught up to the SMA trend and says it has attracted several billion dollars into such funds in the past year.

Even as Morgan's individual business has fallen behind, it has had a business focused on the super-rich. As part of the merger, Morgan Stanley contributed a Private Wealth Management business for clients with $10 million or more in investable assets. But the number of advisers has declined to 200 today from about 250 in 1997.

People familiar with Mr. Purcell's thinking say he viewed Private Wealth's higher-service model as too costly. But John Straus, former manager of the group, says Purcell executives also overpaid for high-end advisers.

Private Wealth brokers also protested when other Morgan brokers sought to call on their clients, and Morgan fed tensions between the two sides by keeping them on separate broker-dealer registrations and computer platforms. This spring, tensions resurfaced when the firm sought to force Private Wealth advisers onto an aging computer platform from the old Dean Witter. The system couldn't display certain foreign currencies and exotic investments that the elite brokers said their clients demanded.

In May, the firm canceled the computer overhaul, and Mr. Mack now says the firm is rethinking a more workable integration and addressing underinvestment in technology.

Double Duty for Sears' Lewis
Newsmaker Q&A – Business Week Online
September 14, 2005

The retailer's African-American CEO talks about the challenges of being a role model and rebuilding an iconic brand

Aylwin Lewis stepped before an audience of about 80 people Sept. 8 and received an enthusiastic ovation. And consider who these fans were: H. Carl McCall, former New York State comptroller and gubernatorial candidate; Hugh Price, former president of the National Urban League; John Rogers, president of Ariel Capital Management; Charles Tribbett, principal at Russell Reynolds Assoc.; and more of the most powerful African Americans in Corporate America.

They were gathered for the fourth annual Black Directors Conference, an invitation-only event in Chicago, and these luminaries were applauding Lewis's just-announced appointment as CEO of Sears Holdings. Maybe Sears -- which merged in March, 2005, with Kmart -- isn't the household name it once was. But Lewis' colleagues know this: It's still a $55 billion conglomerate with more than 2,000 stores, including its Kmart locations and other brands. And so they expressed their pride in their newly decorated peer.

Of course, Lewis is no stranger to power posts. He has held key positions at KFC and Kmart, and he sits on the Walt Disney board of directors. But now, he has become part of an elite group: the handful of African Americans who run some of the world's biggest companies.

What does that mean to Lewis? And what are his plans?
He paused for few moments to share his thoughts with BusinessWeek Deputy Chicago Bureau Chief Roger O. Crockett mailto: Roger_Crockett@businessweek.com. Here are edited excerpts of their conversation:

How do you feel now that you're CEO of a major U.S. corporation?
It's an honor and a pleasure, and I'm humbled by it. Sincerely. I recognize the importance. There's a lot of people counting on me to do well. I feel that responsibility.

How will you define success?
I believe success in my immediate job is directly tied to my effort, the people I surround myself with, and making this thing work. I don't take it lightly. It's rolling up your sleeves and getting to work, and bringing great effort every day.

How much are you conscious of the fact that you're an African-American CEO, given that there are so few in Corporate America.
I'm 51-years-old, and 51 years ago I didn't even have the right to think that I could have a job like this. I had great parents and I have a great wife. Growing up, we lived in the projects. I had big dreams.

But I could have lived a great American dream running a hundred restaurants for KFC. That would have been a nice career that would have been very good success, particularly for a black person. So it means a lot, keeping this door open. The history of this thing, the importance of this thing, yeah, you betcha it's important. And it's not a burden. It's a wind in my sail.

I hate to use the cliche, but is it important to you to be a role model for aspiring black executives?
I don't mind being a role model, and I don't mind being the only one. This is about, how do I extend this so that it's easier for the next generation? So they don't have to think that they're an exception. They should expect to reach jobs like this.

What's the key to your success in climbing the ladder?
You're here to serve, you're here to help others. These roles and the trappings of these roles, you can't get caught up in them. You win by helping other people win.

I'm a learner. You've got to always go and be a student and continue to learn. I would have been dead meat leaving the restaurant industry coming to the retail industry if I didn't have the aptitude to say, "I'm a student of life and I have to learn every day."

You must have had mentors along the way that have helped you, right?
I've had tremendous people helping me. I haven't done this by myself. Some of it is my disposition, but a lot of it is that people took the time. For example, David Novak [CEO of Yum Brands] was a big mentor. Part of my ascension at Yum was because he took an interest in me.

What are the biggest challenges that face you as CEO of Sears?
One is building the culture. We've brought two retailers together [Sears and Kmart]. We have to have one culture. We have to be able to attract and retain very highly skilled people. There's no substitute for talent.

And we have to put the business together where we can be competitive. We believe we have a lot of assets, a lot of brands. We have great real estate. How do you put that all together where you can compete and win? This merger gives us the time to do that. This merger gives us the financial wherewithal to do that.

Having a majority owner as a chairman [Sears Chairman and investment guru Edward Lampert] is very beneficial because it cuts through all the B.S. You clearly understand what the motives are of the enterprise and how we're going to invest. There are no qualms about that stuff.

And we look at the business differently. At the end of the day, we look at cash-flow targets. We look at other measures, but that's the main measure we look at. One of the things that attracted me to the position when I first met Eddie was we want to have time to do this thing well. Chasing the daily sales numbers, chasing the monthly numbers, may not be the right long term thing. So running this in the public domain as a private company, that really is what I wanted to do.

Will you share some insight into the strategic direction you have planned for Sears?
First, just getting back to basics. There are some things we need to fix: customer experience, supply chain, IT, replenishment. Those are real big issues we're facing. The inherent strength around what we will attempt to do is built on customer relationships and the trust that's inherent in Sears.

Will it take a lot of good marketing to reach people?
Oh yeah. We have an agency picked. We want to show people that we do end-to-end. You buy something from us and we repair it. We have that in our arsenal. But we don't communicate that well. I don't think the public knows that. We can fix things for you, and we offer great protection agreements.

We're working on all that. People still trust the Sears name. Almost everybody in America at one point had a good experience with that brand, that company. And that's a great place to start. The brand can be resurrected, and that's what we plan to do.

Lampert Takeover Shouldn't Come as a Surprise
Excerpt from Lewis Lazare Advertising Column
Chicago Sun-Times
September 12, 2005

Why all the angst? Late last week, in the immediate wake of the announcement Eddie Lampert was taking charge of merchandising and marketing at Sears Roebuck and Co., more than a few retail consultants and analysts -- clearly in agony -- were wringing their hands and wondering "why?"

None of them could understand why Sears Holdings Corp. Chairman Eddie Lampert would want to stick his hand into matters where the hedge-fund manager had accumulated little or no expertise. But even raising such questions demonstrates how clueless most analysts and consultants truly are. If they had done even a minimal amount of their homework on Lampert, those experts could have seen this coming.

Lampert is taking charge because he's Eddie Lampert, a take-charge kind of guy. And as such, he had obviously lost patience waiting for the nice, slow-to-get-going Midwest folks at the helm of Sears to make the necessary changes at one of the nation's largest retailers, where sales are in a slump.

It's true Lampert has no experience as a marketer. But that might not be a big drawback. As McDonald's former Global Chief Marketing Officer Larry Light once told us, smart marketing is really nothing more than the application of good common sense. We couldn't agree more, though we wonder why it seems not to be applied more often. If his huge ego hasn't altogether obliterated Lampert's own common sense -- a big "if" indeed -- he just might surprise us as he goes about orchestrating Sears' marketing.

What's been mostly overlooked during the handwringing is what fate awaits former Target executive Luis Padilla, who until Lampert took over last week, had been perceived to be in charge of Sears' advertising. Padilla arrived at Sears a year ago with what looked to be a mandate to revamp Sears' advertising profile. Make it classier. Give the work more impact. But if Padilla, who we've been told isn't giving interviews these days, indeed had the power to carry on with that mandate after Lampert swooped in and bought Sears earlier this year, it's highly doubtful Padilla has it now.

What's more certain, however, is that Padilla -- given his sterling Target pedigree -- won't settle for being Lampert's toady for very long.

A Sears source said Lampert and Padilla have "a good rapport," but who knows how much longer that will be the case now that Lampert has forcefully invaded Padilla's turf.

All we know for sure, as of late last week, is that Padilla had not yet left the Sears headquarters building for good.

Holiday edge to other retailers?
By Becky Yerak - staff reporter – Chicago Tribune
September 10, 2005

Criticized during the 2004 holiday season for being tight with bargains, Wal-Mart Stores Inc. vowed this week not to make the same mistake this year.

"We are going to be very aggressive," Chief Executive Lee Scott said.

Such fighting words from the world's biggest retailer could spell trouble for rival merchants, including the new management team at Sears Holdings Corp.

Sears Chairman Edward Lampert--a hedge fund manager--said Thursday he would raise his profile at the Hoffman Estates-based company just months before the critical holiday season begins. Lampert will direct the marketing, merchandising, design and online businesses of Sears Holdings and its Lands' End clothing unit.

The management shuffle, which coincided with disappointing second-quarter financial results, also included the promotion of Sears Holdings President Aylwin Lewis--until a year ago a fast-food industry executive--to the CEO's post, replacing Alan Lacy, a former Sears finance whiz who'll remain vice chairman.

Retailers' holiday plans should be set by now. Federated Department Stores Inc., for example, completed its acquisition of May Department Stores Co. last month, but analysts don't expect Federated's merchandising touches to show up in May stores until at least spring 2006.

Likewise, Lampert's "impact isn't going to be felt until next year," Morningstar Inc. equity analyst Kimberly Picciola said. "They're already done merchandising for the holiday season."

But another retail industry observer makes a case that Sears Holdings, through a more visible Lampert, is likely to push for changes in the game plan for this holiday season.

"They wouldn't know a sweater from a tank top," New York retail consultant Howard Davidowitz said of Sears' top executives. "But what they could influence strongly is how much inventory to buy and how aggressive promotions should be, and those are things Lampert will be up to his eyeballs in."

Lampert, who earned more than $1 billion last year as a hedge fund manager, brought Kmart Holding Corp. out of bankruptcy court, nursed it back to financial health and last March masterminded the acquisition of Sears, Roebuck and Co., merging the two to form Sears Holdings. As chairman of Kmart, Lampert made money for the company and a reputation for himself by cutting costs, including the discount chain's level of promotions, as well as reducing its inventories.

Now heading the $55 billion Sears Holdings, Lampert is likely to throw his weight around with vendors for the nation's third-biggest retailer.

"Can you imagine a $50 billion guy at your doorstep saying, `I've got an $11-billion order but I'd like to make it $9 billion?'" Davidowitz said. "The vendor will salute."

Indeed, in a letter to shareholders Thursday, Lampert addressed Sears' relationships with its suppliers.

"Many of our vendors will see increased sales as a result of working with us to lower our costs and to improve our customer experience," Lampert wrote. "There'll be others who do not see their long-term interest aligned with ours, and they may see their business with us reduced or eliminated."

After dropping 5.2 percent Thursday after the earnings announcement, Sears' stock rebounded Friday, closing up 3.9 percent to $132.74.

Richard Hastings, senior retail sector analyst for Bernard Sands LLC, saidhe liked what he saw in the second-quarter numbers. Operating income jumped 26 percent to $658 million, he noted.

"That's what matters most: whether Sears-Kmart can generate more cash from operations," Hastings said.

But while the company's gross profit margins rose to 27.2 percent from 26 percent , margins at Kmart were pressured by higher markdowns, a trend that could continue into the holiday season.

"It's likely that retailing will generally be more promotional and price competitive this season, and that will put more pressure on Sears and Kmart," Hastings said.

Davidowitz said Wal-Mart's decision not to pull its punches this year on holiday pricing--plans outlined by Scott during a Prudential Equity conference in Boston on Wednesday--doesn't bode well for Sears, which competes with Wal-Mart for buyers of such products as sporting goods and electronics.

"Lampert's strategy is reducing promotions and being profit-oriented," Davidowitz said. "If he continues on this strategy, he'll be in a terrible spot because customers have choices."

Setup for a flameout?
By David Greising - chief business correspondent – Chicago Tribune
September 10, 2005

If history is a guide, Sears Holdings Corp. Chairman Edward Lampert's decision to be involved in almost all aspects of the company puts him in a tough spot

When hedge fund investor Edward Lampert decided to take over operating control of Sears Holdings Corp. on Thursday, he sent a clear signal that he feels he can do a better job than professional managers.

It is a decision fraught with risk: a financial investor who has never served as a corporate executive before taking control of one of the nation's biggest and most troubled department store chains.

This sort of coup by bankroll happens rarely in business, and for good reason: It usually doesn't work.

Cable titan Ted Turner became so frustrated with the play of his Atlanta Braves that he donned a baseball uniform and managed from the dugout until Major League Baseball forced him to stop. The league didn't like seeing an owner sink to the low level of managing games.

When investor Laurence Tisch stepped in as CEO of CBS, he damaged the "Tiffany network" by meddling with content and direction.

Perhaps the best-known investor flameout was Carl Icahn's failed effort to run TWA in the late 1980s and early '90s. Icahn arrived as a hero at the company in 1985, saving it from a hostile takeover effort by Texas Air Corp. Chief Executive Frank Lorenzo.

But after seizing both financial and operating control in 1988, Icahn had nothing but trouble on his hands. In 1992 TWA was forced into bankruptcy and Icahn was forced out. Icahn called TWA "the worst investment I made in the last decade."

That is the history management experts have in mind when they appraise Lampert's decision to take charge at Sears.

"If he doesn't have management experience, then he's in deep trouble," said Robert Duncan, an expert on management-led strategic change and dean of the Eli Broad College of Business at Michigan State University.

"What he'd better do is get people who understand their business and know the marketplace, because there are going to be pitfalls," Duncan said. "He doesn't have the skills, so he'd better find top management who do."

Lampert has built a remarkable career as a hedge fund investor. His ESL Investments has averaged annual returns in the 30 percent range since its founding in 1988. Even before he bought into Kmart and Sears, Lampert directed one corporate turnaround, at AutoZone Inc., closely guiding his hand-selected CEO.

But the Sears job is on a different scale than AutoZone.

After all, Sears is not just one big retailer. Since it just merged with Kmart Holding Corp. earlier this year, Lampert is really managing a merger. And since Kmart itself was less than two years out of bankruptcy, he is managing that company's strategic repositioning. And Sears is developing a new strategy of its own, so he is managing two repositionings.

Howard Davidowitz, a New York retail consultant, is skeptical. "The first question you ask with this change is, `What talent was added to fix the problems at Sears?'" Davidowitz said. "The answer is none."

John Edwardson, chief executive of computer retailer CDW Corp., notes that Lampert will be challenged just to decide how to manage his personal workload. Lampert's ESL Investments is based in Greenwich, Conn., Edwardson observes.

"Will he move here? Run the company from out there? By telephone? It's going to be tough," Edwardson said.

According to sources at Sears, Lampert in the first few months since Sears and Kmart merged has managed small issues affecting cost control, everything from the expense of lighting certain parts of stores to the cost of Sears' sales fliers. He has rigorously reviewed the performance of key managers and executives, and made it clear that every person is expendable--a point forced home by the departure of Sears' former chief marketing officer, chief financial officer and other high-profile executives.

In meetings with employees, and in interviews with the press, Lampert has talked about leveraging Kmart's good real estate with Sears' stronger name. He has focused on making sure Kmart focuses on profit, not market share, as it builds its merchandise selection.

Lampert is a fan of Warren Buffett. When he started out, he used to scour Buffett's famed annual report letters for Berkshire Hathaway for tips on Buffett's investment thinking.

Although Buffett is famous for a mostly hands-off attitude toward his investments, he has been known to step in aggressively when necessary.

Buffett came in at Salomon Bros. brokerage firm in 1991 after an ethics crisis, spent several years getting the company in shape, then turned the job over to professional managers.

In making his move on Sears, Lampert appears not to be pulling a Buffett. His announcement Thursday implied a certain permanence to the move by taking charge of merchandising, marketing, the Lands' End catalog retailer, and Sears' strategic positioning.

Lampert won't take the title of chief executive, which was given to former Yum Brands executive Aylwin Lewis. But Lampert will act as CEO in virtually every aspect of the company.

"My decision to become more deeply involved in certain aspects of Sears Holdings business reflects the board's and my desire to make the company more responsive to our customers and to involve me more directly in the renewal of the company," Lampert said in a statement. He has not been available for interviews.

Many analysts doubt it will work. "I don't think a hedge fund manager taking over the creative efforts of a situation as serious as Sears is going to work," said Davidowitz, the consultant. "There's a real question of how this will turn out."

Shake-Up at the Top at Sears
By Jeff Bailey – New York Times
September 9, 2005

CHICAGO, Sept. 8 - Edward S. Lampert, the billionaire who bought Kmart when it was in bankruptcy and then used it to buy Sears, Roebuck, put himself in charge of creative decision making on Thursday, taking a measure of personal responsibility for lifting two retailers out of a long sales slump.

Mr. Lampert, a 43-year-old hedge fund manager and a financier his entire career, said that he would oversee marketing, merchandising, design and online operations at the merged companies, now called the Sears Holdings Corporation.

The move came as Sears reported a 2 percent dip in overall sales for the second quarter, ended July 30, and as sales in stores open at least a year declined 0.3 percent at Kmart stores and 7.4 percent at Sears stores.

Shares in Sears Holdings slid $7.04, or about 5 percent, to close at $127.81 in Nasdaq trading.

The company also demoted Alan J. Lacy, a longtime Sears, Roebuck executive, stripping him of the chief executive's title. That title was handed to a former Kmart executive more closely associated with Mr. Lampert, Aylwin B. Lewis.

Mr. Lampert, the chairman of Sears Holdings whose investment firm controls 39 percent of Sears stock, and Mr. Lewis declined comment through a company spokeswoman. Mr. Lacy, 51, who also declined comment, could be preparing to leave Sears. A restricted grant to him of 75,000 shares, valued Thursday at about $9.5 million, vests in full on June 30, 2006, according to a company filing with the Securities and Exchange Commission. And beginning that same day, Mr. Lacy has a 30-day window during which he can quit and pocket an additional $7.5 million. He already received more than $20 million for Sears, Roebuck options around the time of the takeover by Kmart.

As a further incentive for Mr. Lacy to quit during that 30 days, his noncompete agreement forbids him from working for any retailer with sales of more than $1 billion for a full year after leaving Sears. But if he leaves in the month after June 30, 2006, there are only eight big retailers he cannot immediately join, including.

Mr. Lacy will continue as a vice chairman and board member and will work on merger integration and strategic issues, Sears said in a filing with the Securities and Exchange Commission, with a $1 million-a-year salary that could run through March 2010, should he choose to stay. "I would like to thank Alan for his leadership and partnership through the initial phase of the merger integration process," Mr. Lampert said in a quarterly letter to shareholders made public on Thursday.

"It's not surprising that Lacy is retiring," said Walter Loeb, a New York retailing consultant. "In the merger, he certainly appears to be a transitional figure."

Mr. Lewis, 51 and a former executive at the fast food company YUM! Brands, had been chief executive of Kmart before the Sears acquisition and is one of the nation's highest-ranking African American executives. From the beginning, he was in charge of both store chains - 3,900 outlets in all. Also reporting to him as chief executive are home repair and installation services, finance, legal staff, supply chain, information technology and human resources.

Kmart and Sears were weakened in recent years due to uninspired merchandising, squeezed between the fierce discounting of Wal-Mart and Target and more fashionable offerings at department stores and specialty retailers.

A person familiar with Mr. Lampert's thinking, who declined to be named because Sears keeps tight control of all disclosures about its business, said the financier believes there is a shortage of talented merchants in the industry. "This is a work in progress," the person said. "It's going to be a bumpy ride." But he noted that Kmart's sales have pulled out of a nosedive under Mr. Lampert and that both chains are also forsaking mere sales growth through discounting.

Mr. Lampert personally received compensation of more than $1 billion last year, according to an estimate by Institutional Investor magazine, in large part due to the big run-up in the value of Kmart shares held by his ESL Investments fund. But the prospect of the financier now overseeing merchants who make decisions on fabrics, colors and other fashion elements disturbs Mr. Loeb, the retailing consultant.

"That's scary," he said. "He's a terrific financial person. But he doesn't necessarily know the details of merchandising. Every company needs a strong merchant at the top."

Mr. Lampert, in his letter to shareholders, said, "My decision to become more deeply involved in certain aspects of Sears Holdings' business reflects the board's and my desire to make the company more responsive to our customers and to involve me more directly in the renewal of the company." He will work without salary or stock options, he noted.

For the second quarter, net income was $161 million, or 98 cents a diluted share, versus $154 million, or $1.54 a share a year earlier, when Kmart had many fewer shares outstanding. So-called pro forma results, which combine the year-earlier operations as if Kmart and Sears had been a single company, showed second-quarter profit up 46 percent on stronger profit margins from sales.

New Sears Strategy Targets Kmart Locations,
but What About the Sears Stores?
AMR Research - Alert Highlight
Alexi Sarnevitz, Scott Langdoc
September 9, 2005

Sears Holding Corporation, the parent company of Sears and Kmart, reacted to its recent quarter’s sluggish financial performance (which included a 7.4% same-store sales decline at Sears) by making some organizational changes, most notably naming new CEO Aylwin Lewis to replace Alan Lacy and moving Chairman Edward Lambert into an operational management role overseeing all of marketing and merchandising. These moves were directed at turning around Sears’ core business while ensuring that the current strategy of converting hundreds of Kmart stores to the new Sears Essentials name and format delivers improved results. This banner-shifting strategy adds top Sears’ brands, such as Craftsman and Kenmore, to Kmart’s discount-store merchandise. Lambert sees himself as the best short-term solution to arresting the sales declines.

The Bottom Line: Deploying the Sears-oriented banner across Kmart assets is simply not enough to make this merger work—operationally or financially. Sears must maintain momentum with its premerger process and technology improvements if it expects to see long-term success.

What It Means: Offering Sears’ branded merchandise in reformatted Kmart stores is a brilliant (though anticipated) approach for extracting significant assortment synergy from the merger (see the AMR Research Alert article “A New Retail Force: Sears and Kmart Set To Merge”). But this strategy alone won’t adequately improve the top line because Kmart locations produced only a little more than one-third of the combined Sears Holding’s sales based in premerger results, and many of these sites will not be converted to Sears Essentials. As important as this banner shift is, Sears must also improve sales in its traditional Sears stores. In crafting these strategies, Lambert and Lewis should consider the following.

Superficial marketing and merchandising programs won’t cut it

By taking the chief merchant role, Lambert sends a message that he understands that more effective marketing and merchandising strategies are imperative to turning around the core Sears business. Quick fixes, such as aggressive discounting or major increases in ad spend, won’t be enough. He won’t have to look far for evidence of this. Former Kmart CEO Joseph Antonini tried to compete with Wal-Mart using this approach in the early 1990s and failed big-time.

The softlines-oriented retail segment is even more difficult today, with aggressive competition from Target, Kohl’s, a newly-combined Federated/May, and a resurgent J.C. Penney. At the same time, Home Depot and Lowes are quickly taking a bite out of Sears’ bread and butter—appliances. These retailers that now surround Sears and Kmart have emerged as formidable competitors because they have aggressively developed superior business processes and successfully capitalized upon some of the latest technologies to gain superior demand intelligence that has allowed them to greatly improve merchandising and store execution.

The Takeaway: Marketing dollars, reactive promotions, or quick merchandising shifts alone will not translate into sustainable success. Major changes like new banner introductions or broad merchandise transformations require coordinated process and technology investments, not to mention better demand insights, in each major functional area such as advanced supply chain, merchandising, and store operations.

Reduced capital expenditures indicate that critical premerger initiatives may have stalled

Sears Holding slashed second-quarter capital expenditures 60% from the prior year, totaling $114M for the period. A reduction of this magnitude raises concerns that any critical IT initiatives Sears initiated prior to the merger, particularly store systems, multichannel order management, merchandise planning, multitier replenishment, and markdown optimization, have slowed or stalled. This is even more worrisome when you look at the lack of any significant updates (from Sears or its IT vendors) regarding these initiatives.

The Takeaway: While it does take a methodical approach to successfully rationalize various technology systems after a merger, future announcements, and hopefully early positive returns regarding new or revitalized initiatives will demonstrate how serious Sears Holding is about implementing sustainable improvement within its core operations.

Conclusion: Sustainable merchandising and marketing changes will require much deeper insight into what consumers are looking for, complemented by effective processes that turn those signals into actual improvements throughout the supply chain into every single store. This applies to all formats including traditional Sears stores. Nothing short of this thinking will improve margins and lift the top line. Edward Lambert has been heralded as a financial genius for the deal he struck at Kmart and with the Sears merger deal. Now is his chance to show he has that same natural skill when it comes to leading a merchandising revolution.

Sears Shuffles Its Management Team
By Amy Merrick - Staff Reporter - The Wall Street Journal
September 9, 2005

Shaking up its management team, Sears Holdings Corp. demoted its chief executive officer and put its chairman, Edward S. Lampert, in charge of merchandise and marketing. The company said its fiscal second-quarter profit rose 4.5%.

The moves indicate that the Hoffman Estates, Ill., retailer -- created when Kmart Holding Corp. purchased Sears, Roebuck & Co. in March -- needs to step up its efforts to send a coherent message to shoppers. Sears promoted Aylwin B. Lewis, who had been president of the company and chief executive of Kmart and Sears Retail, to CEO and president of the corporation, effective Sept. 30.

He succeeds Alan J. Lacy, who had been chief executive of Sears since 2000. Sears said Mr. Lacy, 51 years old, will stay on as vice chairman, a member of the board of directors and chairman of Sears Canada. He remains a member of the three-person office of the chairman, which includes Messrs. Lampert and Lewis.

Sears is betting that it will win back more shoppers with a leader who is an expert in promoting brands, rather than a finance veteran like Mr. Lacy. Mr. Lewis, 51, spent much of his career in the restaurant industry, serving as president and chief multibranding and operating officer of Yum Brands Inc. before he joined Kmart last year. Mr. Lewis's job required him to master changing customer tastes.

Mr. Lacy, by contrast, is a longtime Sears finance professional who worked his way to chief financial officer and head of the company's credit-card division before becoming CEO. Though Mr. Lacy made big moves such as buying the Lands' End clothing brand and selling the credit business to Citigroup Inc., Sears perpetually lost market share to rivals such as Kohl's Corp. and Target Corp. during his tenure.

In a statement, Mr. Lacy said the management changes are "the next logical step in the transformation of the company into a more customer-focused organization." He signed an employment contract, extending to March 23, 2010, that grants him an annual salary of no less than $1 million and a performance bonus for 2005 that could be valued at as much as $2.25 million.

Mr. Lampert, the 43-year-old hedge-fund manager who engineered Kmart's purchase of Sears, said he will assume responsibility for the marketing, merchandising, design and online businesses, as well as Lands'[cq] End. In a letter to shareholders filed with the Securities and Exchange Commission, Mr. Lampert wrote that his decision "reflects the board's and my desire to make the company more responsive to our customers and to involve me more directly in the renewal of the company."

Others agree that Sears needs to give shoppers more reasons to choose its stores. "These days, brands have to be famous; they have to have more personality," said Faith Popcorn, CEO of Faith Popcorn's BrainReserve, a New York consulting firm.

Sears shares fell $7.04, or 5.2%, to $127.81 in 4 p.m. Nasdaq Stock Market composite trading.

For the fiscal quarter ended July 30, Sears said net income was $161 million, or 98 cents a share. The results don't provide a meaningful comparison with the prior-year fiscal second quarter, because the 2004 results were only for Kmart. In the fiscal second quarter of 2004, Kmart posted net income of $154 million, or $1.54 a share. When the results are presented as if Kmart and Sears had been combined at the beginning of 2004, operating income would have increased 33% to $324 million. With the inclusion of both chains this year, revenue nearly tripled to $13.19 billion.

Showy moves lose luster;
Lampert left to compete
By David Greising - chief business correspondent - Chicago Tribune
September 9, 2005

Sears Holdings Corp. made official what was plainly obvious a long time ago. Sears is Eddie Lampert's show now, and his reputation will rise or, more likely, fall based on what happens at the retailer.

Officially, Sears named Aylwin Lewis chief executive officer. But this was one of those principal-for-a-day promotions: Big title, no power.

Consider the description of Lampert's new duties, according to the company's statement. He will "direct the marketing, merchandising, design, and on-line businesses of Sears Holdings, as well as Lands' End."

In short, anything worth doing will fall under Eddie's very watchful eye. The Warren Buffett admirer is trying something the superinvestor from Omaha never has: running one of his investments day-to-day.

Lampert's announcement marks the formal conclusion of the Alan Lacy era at Sears. It means yet another Sears chief executive exits the stage, pursued by bearish investors. The stock has fallen nearly 20 percent since July, closing Thursday at $127.81.

In the 1980s, Edward Brennan could not fix Sears' stores, so he sold Allstate Insurance Co. instead.

In the 1990s, Arthur Martinez introduced slick new ads but could not update Sears' dowdy merchandise to match.

Then came Lacy. A former chief financial officer, with woefully thin experience in merchandising and marketing, Lacy failed on a number of fronts. And with his failure, another Chicago business icon became takeover bait--though, fortunately, this one kept its headquarters in the area, on Sears' Hoffman Estates campus.

Lacy could not make sales grow and missed predictions by such wide numbers that investors fled the stock. He placed ill-prepared people in key positions, then failed to hold them accountable. And he rolled the dice on bold, bad deals.

Lacy will be remembered for three major deals: his purchase of Lands' End, the sale of Sears' credit card operation, and his ultimate move, the sale of the Big Store to lowly Big K. None turned out quite right.

Lacy's purchase of the Lands' End catalog retailer for $2 billion in cash was a bad gamble. The idea was that Lands' End would class up Sears' stores, and Sears would bring customers to Lands' End. But neither really happened. The Lands' End name has been damaged, and Sears has gained little.

Lacy's decision to sell Sears' profitable credit card business turned a quick $6 billion. But that deal was marred by Lacy's ill-considered decision to pour virtually all of Sears' cash proceeds from the sale into a huge stock buyback, not operations.

The deal forced Sears to compete on even ground with the likes of Target, Wal-Mart and even J.C. Penney, none of which proved to be a winning battle.

"The credit card sale forced Sears to perform on the merchandising end of the business, which was a debacle," said Howard Davidowitz, of the Davidowitz & Associates consulting and investment banking firm. "Sears operated better as a bank than it did as a retail company."

Then there was the sale of Sears to Kmart Holdings. When Lacy agreed to sell Sears last November, he got a premium from Lampert of less than 10 percent of the stock's pre-merger price.

This was a giveaway. Lampert needed to buy Sears. The razzle-dazzle was running out at Kmart, where Lampert had created the impression of success by selling the company's real estate. Lampert needed the Sears deal to avoid turning in numbers that would have stampeded investors into a blue light special on Kmart stock.

But Lacy did not press his advantage. He took Lampert's thrifty offer, even though Lampert's position was fraught with apparent conflicts of interest, thanks to his role as both Kmart's chief executive and Sears' biggest shareholder.

Investors are not optimistic that Lampert can turn around Kmart, which has had declining sales for three years, and Sears, where sales have declined for most of the last four years.

"The show is over," says Ivan Feinseth, director of research at Matrix Investment Research. "Now you're back to the reality of competing with Wal-Mart."

Lampert so far has focused on cost cutting and real estate plays. His idea of marketing has amounted mainly to printing up sales fliers. He has spurned the sort of big image campaigns that pushed Target and Wal-Mart to top-of-mind.

None of Lampert's moves so far seems capable of creating the strategic change that Sears and Kmart need. And by taking on all his new duties, he might get more bogged down in detail when it's a strategic vision that's so desperately missing.

Eddie Lampert is a supremely confident executive. The challenge at Sears will put his confidence, and competence, to the test.

Lampert dumps Lacy
Inability to halt long sales decline at Sears seals fate
By Becky Yerak - staff reporter - Chicago Tribune
September 9, 2005

Billionaire hedge fund manager Edward Lampert thinks he can succeed at what a host of others have failed to do: sell more merchandise at Sears.

Lampert, who last year orchestrated the takeover of Sears, Roebuck and Co. by Kmart Holding Corp., which he brought out of bankruptcy, said Thursday that he will oversee marketing, merchandising, design and online businesses at the combined company.

Thursday's management shake-up at the nation's third-largest retailer, now known as Sears Holdings Corp., included the demotion of Chief Executive Alan Lacy. His four-year tenure as Sears' top executive was marked by falling sales and capped by the takeover of the venerable retailer.

Replacing Lacy as CEO is Aylwin Lewis, president of Sears Holdings and chief of the retail division overseeing Sears and Kmart stores.

The management shake-up was announced in tandem with disappointing second-quarter results for Sears Holdings.

The news did not please Wall Street Thursday. Sears' stock closed down 5.2 percent, to $127.81, as results fell short of expectations.

Sears' stock reached $163 in July as investors bet that Lampert, who earned an estimated $1.02 billion last year managing his hedge fund, would sell off real estate and brands. But only the company's West Coast hardware chain has been put on the block so far.

Further changes appear to be in store as well. Lampert hinted Thursday that Sears Holdings, which has cut about 1,400 jobs, will further reduce costs.

"Many of our retail competitors have much lower cost structures that allow them to run different business models that are valued by both employees and customers alike," Lampert said in a letter to shareholders.

Gary Balter, a Credit Suisse First Boston analyst who in June predicted that Sears stock could reach $180, said the company's results came in as expected.

"The lack of asset sales will keep some wondering whether these assets have the values we believe," he wrote in a note to clients. "Even the greater involvement of Eddie Lampert can raise some concerns that the story is not playing out for him, although he has been micromanaging this company from Day 1."

Investors looking for positives in the numbers released Thursday point to higher profit at Sears and better sales at Kmart. However, that is offset by Kmart's earnings drop and Sears' 7.4 percent drop in sales at stores open at least a year.

Sears' second-quarter net income was $161 million, or 98 cents a share, up from $154 million, or $1.54 a share, a year ago.

"While maybe not as exciting as some had hoped, the upside is still significantly greater than the downside risk, and we stay in the bull camp," Balter said.

But to another retail industry observer, a management shuffle that elevates executives lacking strong retail experience reinforces the perception that the merger of Kmart and Sears is more of a financial play than a serious attempt at competing in today's retail arena.

"It doesn't surprise me that Alan Lacy was squeezed down due to the questionable performance of Sears over the years," said Robin Lewis, publisher of Robin Reports and a former executive editor of Women's Wear Daily.

"It also doesn't surprise me that Eddie Lampert is taking a more direct role in merchandising and marketing. But I think the more he micromanages that business, given the fact that he doesn't have a retail cell in his DNA, the faster the business is going to go down," Lewis said.

"He should give more responsibility to people who know what they're doing in that area. What this guy's doing is maniacal."

Burt Flickinger, managing director for Strategic Resource Group, said Lampert still might be shaken by the departure this year of Steve Odland from another Lampert investment, AutoZone Inc.

Odland, handpicked by Lampert for the AutoZone job, left the auto-products retailer to take the top job at Office Depot Inc.

"Odland, after giving Lampert a 500 percent return at AutoZone, left Lampert's fold," Flickinger said. "If such a successful co-captain left, Lampert may feel he has the biggest bet of his career at Sears, and he really wants to control the company himself rather than delegate to any of his disciples."

Also as part of the management changes at Sears Holdings, Chief Financial Officer William Crowley will assume the additional role of chief administrative officer. He had been Kmart's senior vice president of finance.

The changes take effect Sept. 30, which means that after Oct. 1 former Kmart officials will hold the top day-to-day leadership posts at Sears Holdings

Lacy stays on as vice chairman of Sears Holdings' board. Yet his influence at Sears Holdings had been waning.

Although Lacy got the title of CEO, direct responsibility for Sears and Kmart stores fell to Lewis, who had left the fast-food industry in fall 2004 to accept Lampert's offer to take the helm of Kmart.

"We believe Lewis is the better person to lead a customer-centric business," said Richard Hastings of Bernard Sands LLC.

Lacy had been unable to fix intractable problems since being named Sears Roebuck's chief in October 2000. Sales had fallen for four straight years despite numerous initiatives, including spending as much as $900 million a year to spruce up the stores.

In 2002, Lacy made a high-stakes gamble by buying Lands' End for $1.9 billion, but apparel sales continued to decline.

Lacy also was slow to move away from shopping malls as Wal-Mart Stores Inc., Target Corp., Lowe's Cos. and Home Depot Inc. expanded aggressively.

In 2003, Lacy launched Sears Grand, an off-mall format that combined such Sears strengths as appliances and hardware with convenience items such as food. At one point, Lacy called Sears Grand the company's main growth vehicle.

Now, after the Kmart and Sears merger, Sears launched Sears Essentials, a smaller off-mall format that Sears said would be its primary growth vehicle.

In a filing Thursday with the Securities and Exchange Commission, Sears said it still plans to convert about 400 Kmart stores to the Sears Essentials format over the next two to three years.

Lacy will get a pay cut in an amended contract that ends March 23, 2010. He'll receive an annual base salary of $1 million. In his previous role, his base salary was $1.5 million.

CEO quits before she starts at Whitehall
Beryl Raff parts with jewelry retailer
By James P. Miller  -  Tribune staff reporter - Chicago Tribune
September 9, 2005

Whitehall Jewelers Inc. said Thursday that industry veteran Beryl Raff--who agreed only weeks ago to join the jewelry chain as chief executive--resigned this week before ever starting work.

The Chicago retail chain did not offer any explanation for Raff's surprising defection. But the company did disclose that it is running short of cash and is having trouble paying its bills.

Investors didn't react well to the news. In New York Stock Exchange trading Thursday, Whitehall's shares tumbled $2.71-- losing 68 percent of their value--to close at $1.26.

While Thursday's announcement brought an abrupt end to Raff's remarkably brief connection to Whitehall it also promises to prolong the disarray that has characterized the company's executive suite for some time.

Whitehall's difficulties began in 2003, when the company first disclosed it was under investigation by federal authorities for its possible role in a large-scale fraud. In late September 2004 the company agreed to pay more than $13 million to resolve the government case and to settle an associated civil lawsuit.

In addition, Jon Browne, its former chief financial officer, pleaded guilty to felony bank and wire fraud conspiracy charges in New York in connection with the case. Browne helped executives at a Manhattan jewelry supplier defraud a lender out of $20 million by overstating the value of certain accounts receivable.

While Whitehall was not prosecuted in the case, under the settlement it did agree to accept responsibility for the improper conduct of its former executive. As part of last year's settlement Whitehall adopted a number of corporate-governance changes and agreed to bring in a new president and chief operating officer.

A few months after the settlement former Sears, Roebuck and Co. senior vice president Lucinda M. Baier joined Whitehall as president and chief operating officer.

When Whitehall's 54-year-old chairman and chief executive, Hugh Patinkin, died suddenly of a heart attack in March of this year, directors named Baier interim chief executive.

Three weeks ago, however, the company announced that it had named Beryl Raff to join Baier in the executive suite as CEO. Raff had been serving as J.C. Penney Co.'s senior vice president and general manager of fine jewelry. Her earlier jobs included a stint as the head of Whitehall rival Zale Corp. and a stretch as an upper-level executive at Macy's Department Stores' jewelry business.

Raff went on Whitehall's payroll effective Aug. 10, according to documents the company filed with federal regulators.

The respected industry executive did not come cheap. Her employment agreement called for her to receive an annual base salary of $500,000 and to also receive $1.95 million in "transition compensation," payable in four installments of $487,500 each, with the first installment payable on Aug. 12.

Raff had not been scheduled to actually assume her CEO duties until mid-September. But things became complicated.

Whitehall had been expected to report earnings for the quarter ended July 31 on Sept. 1, but on Aug. 26 the company disclosed that it was pushing back the release date to an undisclosed later time.

On Tuesday the number of Whitehall shares being traded suddenly surged and the price began to weaken, but the company declined to comment. Then Wednesday afternoon the company asked the NYSE to halt trading in Whitehall shares pending a news announcement.

Typically, such halts are soon followed by a company announcement. But Whitehall kept investors waiting until Thursday morning before announcing that officials had received Raff's letter of resignation on Wednesday.

Trading finally reopened about 11 a.m. CDT Thursday.

The jewelry retailer's statement did not say why she was leaving. Raff will repay the compensation the company has paid her to date, Whitehall said, adding that the company is "currently assessing its legal and other alternatives in light of Ms. Raff's letter."

Neither Raff nor company officials could be reached for comment Thursday.

Whitehall also said Thursday that it needs additional capital, and is weighing a number of alternatives, including the possible sale of additional debt or equity, to address the problem. To "manage liquidity" in the near term, Whitehall said, it has asked certain key suppliers to extend payment dates.

If it cannot get access to additional cash, Whitehall said, the company may be obliged to pursue "other alternatives, such as a restructuring of its obligations."

Whitehall operates 388 stores in 38 states. Based on the battered price at which the company's shares closed Thursday, Whitehall's market capitalization is a minuscule $17.6 million.

Changing Roles at Sears
By Mike Comerford - Business Writer
Daily Herald - Suburban Chicago
September 9, 2005

Sears’ chairman, president and CEO clasped hands like the Three Musketeers during the Kmart-Sears merger announcement last year.

On Thursday, Sears said their roles will change, but Wall Street didn’t like the plot twist.

CEO Alan Lacy will turn over his job to Kmart CEO Aylwin Lewis in October and Sears Chairman Edward Lampert said he will take on some traditional CEO tasks — retail marketing and merchandising.

Shares in Hoffman Estates-based Sears Holdings Corp. fell in response by 5 percent, or $7.02, to close at $127.81.

After five years at the helm, Lacy will stay on as a vice chairman and chair Sears Canada. He will help manage the merger and the sale of Sears Canada’s credit card unit.

Sears Chariman Edward Lampert says he'll take more day-to-day control after CEO Alan Lacy steps down Sept. 30.Lampert’s lack of experience as a retailer concerned investors. The Connecticut billionaire hedge fund expert is widely seen as a brilliant investor.

And Lewis is a 26-year-veteran of fast food chains such as Pizza Hut and KFC.

Precipitating the change was the lack of change in Sears’ fortunes. Second-quarter sales fell 3 percent at Sears and 3.2 percent at Kmart amid competition from discounters including Target Corp.

Some analysts saw Lampert’s move as a signal that his plan to remodel stores and introduce exclusive apparel brands may be faltering.

“Even the greater involvement of Eddie Lampert can raise some concerns that the story is not playing out for him,” wrote New York-based Credit Suisse First Boston analyst Gary Balter, who placed his current earnings estimates under review.

Still, moving Lewis into the CEO chair makes him part of an elite corps of black corporate executives in America, along with E. Stanley O’Neal at Merrill Lynch and Dick Parsons at Time Warner Inc. Lewis already was on Fortune magazine’s Diversity 2005 Most Influential People of Color List.

“We look forward to other Aylwin Lewis’ of this world coming up through the ranks,” said Dennis Dowdell Jr., executive director of the Institute for Leadership Development and Research, at the Washington D.C.-based the Executive Leadership Council.

Some retail analysts see the management shift as a move away from the policies of Lacy, whose leadership in various roles during his 11 years at Sears failed to stem the loss of market share to rivals Target and Wal-Mart Stores Inc.

Nevertheless, Sears said Thursday Lacy will be paid $1 million in salary and a target bonus of $2.25 million under an employment agreement that runs through March 2010.

“Hopefully, the new CEO will chart a course that is more sales productive,” said John Melaniphy III, executive vice president of Chicago-based retail consulting firm Melaniphy & Associates.

Lampert engineered Kmart Holding Corp.’s $12.3 billion acquisition of Sears, Roebuck and Co. in March. Kmart shares have soared more than fourfold in the past two years.

Lampert said Thursday in a letter to shareholders that he’s taking a role in day-to-day operations to participate “more directly in the renewal of the company” and to make Sears “more responsive to customers.”

Lampert is converting some Kmart locations to new Sears Essentials stores that combine food, apparel and general merchandise much like Target. He is also adding fashionable exclusive apparel brands.

Total second-quarter revenue fell 2 percent to $13.2 billion from a year ago after the company closed some Kmart stores and offered discounts. Kmart profit rose 46 percent, lifted by a decline in selling, interest and other costs. The results are not in accordance with generally accepted accounting principles and assume the companies combined a year ago.

Sears said net income rose 4.5 percent to $161 million, or 98 cents a share, from a year earlier. Sales rose to $13.2 billion.

Same-store sales in the quarter fell 0.3 percent at Kmart and 7.4 percent at Sears. Comparable sales have declined for 14 straight quarters at Kmart and 16 of the last 18 quarters at Sears.

However, some analysts think Lampert’s bold strokes won’t save the day at Sears.

“Lampert is going to go through all sorts of concoctions of reorganizing, but at the end of the day, Sears won’t be able to compete,” said Howard Davidowitz, chairman of Davidowitz & Associates Inc. in New York.

Leadership Changes at Sears Holdings
Excerpt from Sears Holdings News Release
September 8, 2005

Sears Holdings also announced several organizational and executive changes effective September 30, 2005.

Aylwin B. Lewis will assume the position of Chief Executive Officer and President of Sears Holdings, with responsibility for the Company's 3,900 stores, as well as home services, finance, legal, supply chain, information technology, and human resources.

Edward S. Lampert, Sears Holdings' Chairman, will lead Sears Holdings' initiatives to become more responsive to its customers. Mr. Lampert will direct the marketing, merchandising, design, and on-line businesses of Sears Holdings, as well as Lands' End, to ensure that these initiatives are clearly focused on responding to customer needs.

William C. Crowley, Sears Holdings' Chief Financial Officer, will assume additional responsibilities associated with the newly created role of Chief Administrative Officer.

Alan J. Lacy will continue to serve as Vice Chairman and a Director and as a member of the Office of the Chairman. Mr. Lacy will also continue to serve as the Chairman of the Board of Directors of Sears Canada and, together with Mr. Lampert, will focus on merger integration and strategic issues.

Mr. Lampert said, "Alan, Aylwin and I believe these changes will achieve greater clarity in our operating management and align this corporate structure with our vision of Sears Holdings. Our goal is to build one company with multiple ways of connecting with our customers, including our various store formats, on-line offerings, service relationships, and credit products. Alan will continue to make substantial contributions to Sears Holdings and to provide his leadership and judgment on our merger integration opportunities and strategic issues."

Mr. Lacy said, "As a result of the hard work and commitment of the Sears Holdings executives and associates, we have made rapid progress in integrating the two companies. This is the next logical step in the transformation of the Company into a more customer-focused organization." Mr. Lewis said, "Sears Holdings has the potential to be a great retailer, and we are striving to create a great retail experience for consumers wherever and however they choose to shop. Our focus will be the customer."

Sears Vice Chairman In New Employment Pact
thru March 2010
Wall Street Journal Online – Dow Jones Newswires
September 8, 2005

WASHINGTON (Dow Jones)--Sears Holdings Corp. (SHLD) said Thursday that it amended its employment agreement with Vice Chairman and current Chief Executive Alan J. Lacy Wednesday.

Earlier Thursday, the Hoffman Estates, Ill., holding company for Sears Roebuck & Co. and Kmart Holding Corp. reported in a press release several organizational and executive changes effective Sept. 30. Among the changes, the company said Aylwin B. Lewis will become chief executive and president of Sears Holdings. Lacy will continue to serve as vice chairman, director and a member of the office of the chairman.

Sears Holdings said in a Form 8-K filed with the Securities and Exchange Commission that Lacy will receive an annual salary of at least $1 million and a target 2005 bonus of $2.25 million.

The company said its board's compensation committee will reduce the 2005 bonus to a pro-rata amount to reflect the period of time during the fiscal year that Lacy served as Sears Holdings chief executive.

According to a previous SEC filing, Lacy's previous annual base salary was at least $1.5 million and his target bonus was set at 150% of his annual base salary. In the year ended Jan. 1, Lacy received a salary of $1.02 million and a bonus of $768,731 from Sears Roebuck.

Sears Holdings was formed in late March through the merger of Kmart Holding and Sears Roebuck.

Sears Holdings said Thursday that under Lacy's previous employment agreement, he received a grant of 75,000 restricted shares and a grant of stock options to purchase 200,000 shares.

The company said the grants will continue to be governed by the provisions of their respective grant documents. Lacy didn't receive any additional grants of restricted stock or options in connection with the amended employment agreement.

Sears Holding said Lacy's amended employment agreement ends March 23, 2010.

Shares of Sears Holding stock recently traded at $128.23 each, down $6.62 from Wednesday's close.

Sears' Lacy to take 33% salary cut
By Sandy Jones - Crain’s Chicago Business Online
September 08, 2005

CEO relinquishes CEO spot at end of September

Sears Holdings Corp. Vice Chairman Alan Lacy will have his salary cut by 33% when he relinquishes the post of CEO at the end of the month.

But the remainder of his pay will remain unchanged. Mr. Lacy will continue to receive an annual bonus of $2.25 million. And his restricted stock options, worth $10 million, remain in tact.

Edward Lampert, chairman of the Hoffman Estates-based retailer, removed Mr. Lacy from the No. 2 job less then six months after engineering Kmart Holding Corp.’s $12.3 billion acquisition of Sears, Roebuck and Co.

In his diminished role, Mr. Lacy will receive $1 million in annual salary, down from the $1.5 million agreed upon in November 2004 when the Kmart-Sears agreement was reached.

Mr. Lacy, who continues as vice chairman and a member of the board, must remain employed at Sears through June 30, 2006, to receive the $10 million worth of restricted shares he was granted in March. Mr. Lacy, who had been chairman and CEO of Sears, Roebuck and Co. for more than four years, already received an estimated $28 million from cashing in stock options when the merger closed in March.

Compensation experts say the pay cut signals Mr. Lampert is slowly easing Mr. Lacy out of a job.

“It sounds like they’re padding his ultimate departure,” says Don Delves, a Chicago-based compensation expert. “To take away the CEO title is a very dramatic move. I’m surprised they didn’t lower the pay further, given the magnitude of that change.”

Mr. Lampert tapped Sears Holdings President Aylwin Lewis to replace Mr. Lacy as CEO and president, responsible for Sears’ and Kmart’s combined 3,900 stores. Mr. Lampert hired Mr. Lewis as Kmart’s CEO shortly before reaching the agreement to buy Sears. Sears has yet to disclose Mr. Lewis’ new employment agreement.

Lampert Looms Larger at Sears
By Nat Worden – Staff Reporter – The Street.com
September 8, 2005

Both Ed Lampert and shareholders of his newly merged retailing behemoth, Sears Holdings, were unhappy with the second quarter the company reported Thursday.

Lampert, the chairman and largest shareholder at Sears, gave himself a greater role in several key operational areas at the retailer, further cementing his grip on the company's direction. Having masterminded the merger of Kmart and Sears, the head of ESL Investments will now "direct the marketing, merchandising, design, and on-line businesses of Sears Holdings, as well as Lands' End, to ensure that these initiatives are clearly focused on responding to customer needs."

In another sign that he wants change, Lampert replaced Sears' chief executive, Alan Lacy, with Aylwin Lewis, the former chief executive at Kmart who was handpicked by Lampert. As CEO and president of Sears, Lewis will assume "responsibility for the company's 3,900 stores, as well as home services, finance, legal, supply chain, information technology, and human resources," the company said.

Richard Hastings, a retail analyst with Bernard Sands, said the move was not a surprise.

"Lacy didn't have a very good performance at Sears before the merger, and I think it's kind of typical in a situation like this that the person who is the head of one of the businesses will be kept on for a while and then gets moved aside," Hastings said. "I was hoping Lewis would be put in charge. He's a better fit. This signals that Lacy's role in day-to-day operations at Sears is over."

Lampert primarily has been been viewed as an allocator of capital, a role that is formally under his control at Sears. His skills as an investor, which have been compared to those of Warren Buffett of Berkshire Hathaway (BRK.A:NYSE) , are the main bulwark for the bull case on the stock.

That bull case took a hit after Thursday's announcement, with the stock recently down $8, or 5.9%, to $126.85. The company posted a 4.5% gain on second-quarter earnings, meeting expectations, but investors are mainly concerned by a continued loss of market share.

The company, whose revenue rose 175% over the same periods due to the November merger of Kmart and Sears, cited a restructuring charge and a new accounting standards for its single-digit profit growth. It said same-store sales fell by 0.3% at Kmart during the quarter due to lower traffic.

At domestic Sears stores, the company said, same-store sales fell 7.4% from a year ago, reflecting less discounting and lower inventories, two initiatives that are supposed to goose gross margin.

"This is a continuation of contracting top-line results with controlled spending by management, and we expect to see more of this for the rest of the year," Morningstar analyst Kim Picciola said. "In the long run, you can only do so much cost-cutting. If this is truly going to be a retail story, investment has to be made in the business to bring back customers going to Wal-Mart (WMT:NYSE) and Target (TGT:NYSE) .

"If this is not a retail story and there's something more here to Lampert's strategy, we just haven't seen any sign of it yet," she added.

Many Sears bulls, like Credit Suisse Boston analyst Gary Balter, have said there is more to Sears than just retailing. Balter, with a price target on the shares of $180, has predicted that asset sales will provide a windfall of cash for the company that Lampert can use to make lucrative investments elsewhere. Balter's firm has an investment banking relationship with Sears.

Both Kmart and Sears surged last year as speculation grew that they were sitting on a gold mine of undervalued real estate assets. Kmart sold off several stores that turned out to be considerably undervalued on its balance sheet following its bankruptcy reorganization. Vornado Realty Trust (VNO:NYSE) bought a stake in Sears.

Now, the reincarnated Sears has yet to sell off any stores, and with all the talk of a real estate bubble on Wall Street, investors may be getting nervous.

"The lack of asset sales will keep some wondering whether these assets have the values we believe," Balter said in a research note. "Even the greater involvement of Eddie Lampert can raise some concerns that the story is not playing out for him, although he has been micromanaging the company since day one."

Sears Holdings replaces CEO, posts $161 million profit
By Dave Carpenter – Associated Press – Detroit Free Press
September 8, 2005

CHICAGO -- Sears Holdings Corp., the No. 3 U.S. retailer, named Aylwin Lewis to replace Alan Lacy as chief executive on Thursday and reported a $161 million profit from its first full quarter following Kmart Holding Corp.'s acquisition of Sears, Roebuck & Co.

The second-quarter results reflected continuing sales declines at both chains and fell well short of Wall Street's expectations. The company's stock dropped in pre-market trading after the news.

Chairman Edward Lampert named Lewis, the former head of Kmart and of Sears' retail business, to take over as CEO and president of the Hoffman Estates, Ill.-based company effective Sept. 30. He will have responsibility for the company's 3,900 stores as well as home services, finance, legal, supply chain, information technology and human resources.

Lacy headed Sears, Roebuck & Co. from 2000 until its March acquisition by Kmart and was CEO under Lampert for the past six months. He will continue to serve as vice chairman and a director, and as a member of the office of the chairman.

"Alan, Aylwin and I believe these changes will achieve greater clarity in our operating management and align this corporate structure with our vision of Sears Holdings," Lampert said in a statement. "Our goal is to build one company with multiple ways of connecting with our customers, including our various store formats, online offerings, service relationships, and credit products."

During his tenure, Lacy overhauled the layout and inventory of Sears' full-line stores, bought the Lands' End specialty catalog and sold the credit division to Citigroup. But he was unable to stem Sears' long-term sales slump.

Sears' second-quarter net income grew to $161 million, or 98 cents per share, from $154 million, or $1.54 per share, a year ago. The latest period includes $42 million of restructuring costs related to the merger.

Analysts polled by Thomson Financial were expecting earnings of $1.36 per share.

Total revenue rose to $13.19 billion from $4.8 billion last year, due primarily to the addition of Sears Roebuck revenue of $8.6 billion. Kmart revenue decreased due to a reduction in the number of stores and a decline of 0.3 percent at stores open at least a year, also known as same-store sales.

Sears Roebuck domestic sales declined 3 percent for the quarter, with same-store sales down 7.4 percent despite strong home appliance sales. The company attributed the drop to efforts to improve gross margin by reducing reliance on promotional events and reducing inventory levels to lower costs.

Despite the drop in Kmart's same-store sales, the company said the decline has lessened and several businesses, including apparel, had positive same-store sales during the quarter.

Sears Holdings said about 20 Sears and Kmart stores and facilities located in Louisiana and Mississippi were damaged by Hurricane Katrina. The company expects the majority of any losses to be covered by insurance.

Sears shares fell $9.78, or more than 7 percent, to $125.07 in pre-market trading. The stock closed Wednesday at $134.85, up slightly since the shares began trading March 28 on the Nasdaq Stock Market at $131.05 but well off their July peak of $163.50.

Sears Names Lewis As CEO, President
Retailer Posts 4.5% Earnings Rise
WALL STREET JOURNAL ONLINE
September 8, 2005

Sears Holdings Corp. named Aylwin Lewis as its chief executive, replacing Alan Lacy, effective Sept. 30.

Sears, the third-largest U.S. retailer, said Mr. Lacy will continue to serve as vice chairman and a director. Mr. Lacy will also continue as chairman of Sears Canada, the company said.

Also Thursday, Sears reported that its second-quarter earnings rose 4.5%, and the company noted that all losses from Hurricane Katrina are expected to be covered by insurance.

Second-quarter net income increased to $161 million, or 98 cents a share, from $154 million, or $1.54 a share, for the year-earlier period. The latest period includes $42 million of restructuring costs related to the merger of Kmart Holding and Sears, Roebuck & Co. On a pro forma basis, Sears Holdings would have earned $110 million, or 67 cents a share, in the year-earlier period.

Revenue rose to $13.19 billion from $4.8 billion last year, due primarily to the addition of Sears revenue of $8.6 billion. Kmart revenue decreased due to a reduction in the number of total Kmart stores and a decline of 0.3% at stores open at least a year, also known as same-store sales.

While Kmart's same-store sales declined as a result of lower transaction volumes, the company said the decline has lessened and several businesses, including apparel, had positive same-store sales during the quarter.

Gross margin improved to 26.7% from 24.1% last year, due primarily to the inclusion of Sears, which had a higher overall gross margin rate than Kmart in the current-year quarter. Kmart's gross margin rate was helped in the latest quarter by lower vendor costs and an increase in sales within the more profitable apparel product lines, but was hurt by increased promotional markdowns.

Sears Holdings said about 20 Sears and Kmart stores and facilities located in Louisiana and Mississippi were damaged by Hurricane Katrina. The company expects the majority of any losses to be covered by insurance.

Sears Reports Profit up; Replacing CEO
REUTERS.COM
September 8, 2005

CHICAGO, Sept 8 - Sears Holdings Corp. (SHLD.O: Quote, the retailer formed when Kmart bought Sears, Roebuck and Co., on Thursday reported a 4.5 percent rise in quarterly profit as it cut back on clearance sales, and said it would replace its chief executive at the end of the month.

The No. 3 U.S. retailer said Aylwin Lewis, who had been CEO of Kmart before the merger, would replace Alan Lacy as CEO as of September 30.

Lacy, who will stay on as vice chairman, had faced Wall Street criticism for failing to revive sales at Sears despite years of turnaround efforts.

Sears Holdings said second-quarter net income rose to $161 million from $154 million a year earlier. Earnings per share, however, slid to 98 cents from $1.72 because of a large increase in shares outstanding associated with the merger, which was completed in May.

On a basis that assumes Sears and Kmart had been combined last year instead of in March 2005, earnings rose to $161 million, or 98 cents a share, from $110 million, or 67 cents a share.

The retailer, headed by hedge fund manager Edward Lampert, has focused on cutting costs by reducing profit-eroding clearance sales. The company has also closed or sold underperforming stores and cut thousands of jobs.

The efforts have hurt revenues but left Sears Holdings with a hefty cash pile. Thursday's report showed that cash and cash equivalents fell to $2.04 billion from $2.62 billion a year earlier, however.

Revenues fell 2.1 percent for the quarter on a basis that assumes the merger was completed a year earlier. Sales at Sears stores open for at least a year dropped a sharp 7.4 percent, which the company blamed on eliminating some clearance sales.

At Kmart stores, comparable sales were down just 0.3 percent, and the retailer said key categories including apparel actually reported a comparable-store sales increase.

The company said it was sticking to its strategy of converting some 400 Kmart stores in the next two or three years to a new format called Sears Essentials, which sells everything from toilet paper to Kenmore appliances.

Sears said it had opened 32 Sears Essentials stores as of July 30, and plans to have about 50 open by year end.

The retailer said about 20 of its stores and facilities were damaged by Hurricane Katrina, but it expected insurance to cover the majority of the losses.

CEO Says Allstate Adjusts Storm Plan
Personnel Can't Reach Heart Of Disaster,
So They Start Claims Work at the Fringes
By Theo Francis - Staff Reporter - The Wall Street Journal
September 6, 2005

Damage estimates for Hurricane Katrina have continued to mount, rising to more than $100 billion overall, with between $14 billion and $35 billion on the insurance industry's tab.

For insurance executives like Edward M. Liddy, chairman and chief executive of Allstate Corp., the extent of the devastation -- and the still imperfect information about just how much it will cost -- has meant rethinking their response to the storm.

Allstate, the second-biggest home-and-car insurer in the U.S., behind State Farm Insurance Cos., insures about 350,000 homes in Louisiana, Mississippi and Alabama. Extensive flooding, particularly in New Orleans, has complicated disaster planning for Allstate and others. Home insurers rarely cover flood damage, yet the high water has essentially halted efforts to assess the damage in some areas. Looting and fires in New Orleans raise the specter of the costs rising even further.

In an interview with The Wall Street Journal on Friday, Mr. Liddy explained how he and Allstate have handled Katrina's aftermath.

Excerpts:

WSJ: This had to be one of the most extraordinary weeks ever. How did you spend it?

Mr. Liddy: I cleared everything I had on my calendar ... and I have attempted to stay as flexible as possible. You spend some time thinking ahead: Do we have enough mobile-response units on the way? Do we have enough telecommunications backups in place? Do we have enough claims adjusters heading down there? Is the claims department going to have a place for those adjusters to stay? We have people who deal well with those [matters]. What you're trying to do is keep asking questions, keep getting information so that you can find out if the response is well thought out and appropriate. And it is.

How are you keeping on top of information?

We have very good technology people. We are in communication with our people [in the field]. ... We're in constant contact with our agencies in the area who, to the extent they can, keep us abreast of what's going on. The claims people report into our national catastrophe center on a regular basis. And, of course, we have eight or 10 or 12 TV screens on.

Have you accounted for everybody from Allstate?

That was one of the first things we did. We had about 300 employees and about 100 agencies in the greater New Orleans area. The last report I got is that we think we had all of them accounted for. There are a couple of injuries -- nothing life-threatening -- so we are relieved by that.

What has been happening in the field?

Normally, we would take our most-experienced claims representatives and send them into the areas that are worst hit, [that is,] we start on the inside and work to the outside. In this case, we changed our process because we can't get to the inside, so we started at the outside and we're working in.

We now have 1,100 adjusters on the ground in Alabama, Mississippi and Louisiana who are working in toward New Orleans. We have another 500 who are ready to go as soon as we can get into some of those most-devastated areas. [The] national catastrophe center, staffed with about 300 people, [is working to] assess the situation and flex our resources.

This is very tragic, and it's very massive. There's a temptation when one of these happens to get in an airplane, to get on a helicopter, and get down and see what's happening. [Top management has] resisted that thus far because we would simply be in the way.

Even as a CEO, you're just in the way?

Yes, because people then spend time and energy on you, not on rebuilding customers' lives. That's a much more important priority.

How much of your time has been taken up by the hurricane?

It's 60% to 70% of a day that got expanded. My normal work hours, to be there at 6 o'clock and leave around 6 or 7 p.m., I've extended that by a couple of hours, and it's just been more intense. There's not much free time in any one hour.

How much is Katrina likely to cost Allstate?

I wouldn't even hazard a guess. ... It will be many weeks, probably months, before there are anything approaching reliable estimates.

What's different about the way Allstate is handling this storm, beyond starting on the outside moving in?

We haven't generally had a problem [before] with the safety of our claims employees ... being threatened with the kind of anarchy that appears to be happening in some of those locations. In New Orleans, we're having a hard time even reaching our customers, because they aren't at home and they won't be [for a while].

How does Hurricane Katrina fit into the worst-case scenarios that Allstate has planned for over the years?

It looks larger and perhaps worse than Hurricane Andrew [which in 1992 caused $21.6 billion of insured losses in today's dollars, mostly in Florida]. My sense is, this is a tragedy for homeowners and for insurance companies, but it's a national tragedy because it seems like we're just having a hard time with our national preparations to help people. I think the planning has been good. I just think because of the massiveness of it and some of the difficulty with lawlessness, the federal response is having some difficulty getting traction.

Do you have any advice for the federal government?

The country has this very thin patchwork that's frayed at the edges of how we protect ourselves against natural disasters and acts of terrorism. It's time for the federal government and state government ... to rethink what we have and to do it in a much more whole-cloth way.

There are too many people living in exposed areas, and the traditional insurance companies are scaling back at the time risk is increasing. That's not a good situation. I think [a process] needs to be led by the federal government, but the states need to participate. We need to rethink the whole system of responses, including insurance, to these kinds of natural catastrophes.

The insurance industry is designed for those things that happen with great frequency and don't cost that much money when they do. It's the infrequent thing that costs a large amount of money to the country when it occurs -- I think that's the role of the federal government.

Current estimates put the cost of insured damage at less than 10% of the property-casualty industry's capital of $400 billion. Doesn't this suggest the industry can handle hurricanes just fine?

But you can't have all of the capital in the insurance industry dedicated to one event, a hurricane in New Orleans. What if a hurricane now hits in Miami? Or an earthquake in San Francisco? The federal government's role in terrorism insurance is an appropriate role, and that thinking is quite logically extended to natural disasters. ... The [federal] flood-insurance model works reasonably well.

After last year's four hurricanes, Allstate stopped writing new policies in Florida and transferred thousands of policyholders to another company. How might Allstate change the way it does business along the Gulf?

We first need to ascertain what the damage is and see what the responses of the various states and the various state insurance commissioners are. Obviously, the risks to a place like New Orleans were underestimated, and the cost of insurance in those exposed areas will go up. Sometimes regulators want to reduce rate increases, and then you don't have enough capital in the area, and you have to cut back.

Old Sears Headquarters to Be Redeveloped
By Jeanette Almada – Chicago Tribune
September 4, 2005

NORTH LAWNDALE REDEVELOPMENT
A new catalog
Investments, redevelopment bring buyers to North Lawndale

Through decades of declining population and disinvestment, North Lawndale has had location among its assets.

And now that's paying off in the form of a 1,200-unit residential development called Sterling Park, to be built over the next five years on part of the old Sears Roebuck property.

It is next to the 300-unit Homan Square residential development, which dates from 1994 and occupies part of the land that at one time held Sears' headquarters.

"This neighborhood is next to everything -- two expressways [the Eisenhower and Stevenson], 10 minutes to downtown," said Mordecai Tessler, president of Royal Imperial Group, the Chicago-based development company that will build the project. "It's near the Medical District, where there are jobs. It has Douglas Park and Garfield Park, where the city has made significant improvements in the last few years."

"When I take people to North Lawndale, if they haven't been there in years, at some point in the tour they always say `wow,'" Tessler said.

It's a far cry from the neighborhood that has struggled for redevelopment since the riots of the 1960s ravaged its Roosevelt Road commercial district and set the stage for an exodus of its residents.

"Evidence of investment is everywhere. The city has invested substantially in its parks, in the infrastructure -- roads and sidewalks," Tessler said. "Homan Square has renewed several blocks in the neighborhood; other small and large non-profit developers have built projects throughout the neighborhood, and there is obviously investment in a lot of the area's good building stock."

"Especially in the last few years, we have had more construction projects started in our ward than any other ward in the city," said Ald. Michael Chandler (24th).

With the opening of the North Lawndale Plaza shopping center with theater, Chandler says the focus has shifted to redevelopment of Ogden Avenue. Also, he says construction is set to begin within a year of a film center on Roosevelt Road, between Kostner and Kildare Avenues. "It is a $47 million project that will bring traffic through our area, good for the ma-and-pa businesses, but also it will be huge for the city," Chandler said.

Sterling Park is going up on portions of four blocks between Kedzie and Homan Avenues and Fillmore and Polk Streets -- the eastern 12.6 acres of the former 55-acre Sears, Roebuck and Co. complex.

In its heyday, a little less than a century ago, the catalog business drew more than 10,000 employees to the neighborhood.

Sears began phasing out its use of the complex in the 1970's when it transferred employees to the tower that bears its name. By 1993, Sears had closed the complex entirely.

A growing inventory of vacant buildings and lots in the neighborhood painted a bleak picture.

Then, in 1994, the Shaw Co. began building Homan Square on the western end of the Sears complex.

"We are building on successes of large and small projects that have gone up throughout the neighborhood in recent years, particularly on Homan Square's success in bringing in new home buyers and renters to the neighborhood," Tessler said. He added that his company likes to build in under-invested neighborhoods just before they turn to hot spots and cited the company's conversion of the Mergenthaler Linotype Building into condos 20 years ago. It was the first condo conversion in Printers Row, Tessler said.

Sterling Park will convert several old office buildings at the eastern end of the Sears complex into residential. The complex is on the National Register of Historic Places.

Those buildings had been earmarked for commercial development, as part of the Homan Square project, in hopes that they would create jobs for North Lawndale residents. But they proved to be too old and too expensive to maintain, according to Kristin Dean, of the Homan Arthington Foundation, created by Sears to oversee development and sale of the complex. The foundation last year sold three of the buildings on the complex and vacant land around them to Royal Imperial.

The developer will convert the city-landmarked, five-story Administration Building at 3333 W. Arthington St. into 200 apartments; the six-story Merchandise & Development Laboratory at 3301 W. Arthington into 199 apartments and the 10-story Allstate Building into 238 condominiums, according to Tessler.

"Those buildings have . . . beautiful, grand lobbies with 20-foot ceilings, and the units will have big windows, tall ceilings and beautiful architectural features," Tessler said.

Four new buildings will go up on vacant land. Planned along Kedzie Avenue, just east of the Allstate Building, are a 75-unit seniors building and two 173-unit condo buildings. The developer will build 21 townhouses just south of the Allstate Building, Tessler said.

Eventually, the western portion of a parking garage across Arthington from the Allstate Building will be demolished and a 121-unit condo building erected there, according to Tessler.

"We are still in early planning stages and haven't finalized prices, but we think we will sell our mix of studio, one-, two- and three-bedroom condos for prices from around $135,000 and they will go to about $260,000," Tessler said. The units will range from 650 to 1,350 square feet.

He expects the similar-sized apartments to rent for $600 to about $1,000. "We think our project can draw the critical mass of home buyers that will advance economic revitalization" under way in the neighborhood, Tessler said.

While some residents and most neighborhood leaders champion the project for its innovative use of old office space, some residents have expressed concern about the project's density.

"The bottom line is, in North Lawndale, we have a lot of vacant land," Chandler said in response to that criticism. "Twelve hundred units might seem dense, but each unit will have its own off-street parking, and those buildings that have sat there vacant for decades will be used again and it will be great to get them back on the tax rolls.

"We are striving to keep affordable housing on the front burner. Of all of the development under way in the neighborhood about 75 percent of it is affordable and 25 percent of it is market rate," Chandler said. "[Sterling Park] is market rate but we worked closely with the developer to be sure that the units are priced affordably for working families in the area."

Chandler and Tessler are confident that Sterling Park prices will draw new renters and buyers.

New West Realty is building and marketing West Village, with condos priced from $245,000 to $399,800 near the Sterling Park site, along Kedzie between Taylor and Flournoy Streets. "We are having no problem drawing people into this area. We started selling our first-phase units in May and have already sold 70 percent of them," said Cindy Molitor, New West sales manager. There's a waiting list for a second round of units to be marketed this fall, she said.

Eighty apartments in the Liberty Square development, on Independence Boulevard just west of Homan Square, are renting for $750 to $800 a month, according to Cleve Glover, a project manager for H.I.C.A., the non-profit group that built the project in partnership with private developer Fred Bonner. Financing was subsidized by the city.

For non-profit groups such as H.I.C.A. (Homan, Independence, Central Park and Arthington), the area's resurgence is a mixed blessing. "In North Lawndale, vacant lots are at a premium. We used to get them for practically nothing; now they are going for market rate," Glover said. H.I.C.A. worked for years to get subsidies and other financing for a project of 65 single-family homes, about to break ground on Spaulding Avenue near Douglas Boulevard.

"We were going to build 110 houses and had city-owned lots set aside for that project," Glover said. "But by the time we got financing together, about half of the lots that had been allotted for us were taken by other developers. We are looking to get more [city-owned] lots through the alderman."

- - -

- Royal Imperial Group proposes 1,200 housing units for Sterling Park in North Lawndale

- The 5-story Administration Building at 3333 W. Arthington St. -- to be converted to 200 apartments.

- Six-story Merchandise & Development Laboratory, 3301 W. Arthington -- to be converted to 199 apartments.

- 10-story Allstate Building -- to be converted to up to 238 condos.

- An indoor parking garage across Arthington from the Allstate Building -- western portion will be demolished to make way for a 121-unit condo building; eastern part will be rehabbed.

- Vacant land just west of the Allstate Building along Kedzie Avenue -- 3 buildings will be built: a 75-unit seniors building and two condo buildings each with 173 units.

- Vacant land just south of the Allstate Building -- construction of 21 townhouses.

Attention Sears Associates
From Sears Retiree Website
September 2, 2005

We are attempting to make contact with all Sears and Kmart associates who have been impacted by Hurricane Katrina. All Sears Holdings businesses are participating in both the SHC Disaster Relief Program and the Catastrophic Pay Program. Associates in any Sears Holdings business that have been impacted by Katrina are asked to call 1-888-88SEARS.

Gulf Coast Crisis: The Storm's Impact Retailing: Stores close; Sears offers relief to workers, customers
Becky Yerak, staff reporter – Chicago Tribune
September 2, 2005

What's happening: Six Sears, Roebuck and Co. stores and 11 Kmart stores, employing a total of 1,800 people, were closed as of late Thursday afternoon in New Orleans and Mississippi. Also, about 6