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 January 2003 - March  2003

Why Sears Is in the Basement
By Gene G. Marcial - Business Week
February 24, 2003
Inside Wall Street

Sears Roebuck (S) may be in more trouble than the No. 1 department-store chain has acknowledged. "Sears' financial woes with its ailing credit-card business could be just the tip of the iceberg," says a hedge-fund manager, who refuses to be named and is short Sears' stock. Shares have fallen to 21 a share from 59.90 in June. On Feb. 6, Sears said first-quarter profit will be far less than the 87 cents-a-share consensus forecast, partly because of crimped income from its credit-card business, hurt by rising delinquencies. The unit accounts for more than 50% of total profits.

Rumors are the credit-card problems may have influenced General Counsel Anastasia Kelly to resign on Jan. 27--three months after Kevin Keleghan, who ran the credit division, was dismissed. Sears CEO Alan Lacy says Keleghan "wasn't forthcoming" with information on the card business. Keleghan has sued for breach of contract and defamation. Kelly's departure, says Lacy, was part of a corporate reshuffle. Kelly couldn't be reached for comment.

Edward Jones analyst Asma Usami suggests avoiding the stock until Sears addresses its credit-card woes and slumping sales. She worries its "aggressive and high-risk" card business worsens earnings uncertainty.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

Retailer Home Depot to Unveil National Ad Campaign
By Karen Jacobs - Reuters
February 21, 2003

Home Depot Inc. (nyse: HD - news - people), seeking to gain a marketing edge amid growing competition, is rolling out an advertising campaign in the United States that plays down price promotions and focuses more on services the home improvement retailer offers.

The campaign, featuring the theme -- "The Home Depot is more than a store. You can do it. We can help" -- will debut in the United States during the Grammy Awards telecast on Sunday.

Home Depot marketing chief John Costello said the ads, which show consumers attending the retailer's how-to clinics and children's workshops, highlight ways the retailer can assist customers and play up an emotional connection with consumers.

Home Depot declined to say how much it was spending on the campaign.

"The new advertising is built on a foundation of great merchandise selection, everyday low prices and the know-how to get the job done right," Costello said in an interview on Friday.

"Our goal is to continue to evolve a very strong brand, and to remind customers of all of the ways we can help make their homes better," he added.

The ads, which will debut on television and eventually expand to radio, print and the Internet, feature Home Depot workers and consumers of various ages and cultural backgrounds, said Costello, who is credited with developing the "Softer Side of Sears" campaign that boosted the image of retailer Sears, Roebuck and Co. (nyse: S - news - people) in the 1990s.

CRITICAL TIME

The marketing campaign, developed by the Richards Group of Dallas, Texas, comes at a critical juncture for Atlanta-based Home Depot, which is revamping its business to improve sales and profitability amid a competitive threat from smaller but faster-growing rival Lowe's Cos. (nyse: LOW - news - people)

Michael Baker, a Deutsche Bank analyst, said the campaign is in line with Home Depot's move away from price-promotion ads in favor of an emphasis on its everyday low pricing.

"It's a good use of some of their cash to try to drive traffic," Baker said. "Once the customer gets there, Home Depot has to deliver on initiatives of better customer service, better shopping environment, better in-stock levels," he added.

Home Depot has raised its capital spending this year to devote more money to remodeling its older stores, many of which now compete with newer Lowe's warehouses. Home Depot is also bringing in new merchandise and boosting worker training to improve service levels.

Lowe's, of Wilkesboro, North Carolina, has gotten a boost from its own national marketing campaign as it expands to major U.S. metropolitan areas such as Boston. Lowe's has "been more visible with their advertising on a national basis," Baker said.

Home Depot and Lowe's will report fourth-quarter earnings next week. Analysts on average expect Lowe's, which reports on Monday, to earn 33 cents a share, compared with 28 cents a year earlier, according to research firm Thomson First Call.

Home Depot, which reports on Tuesday, is expected to earn 27 cents a share, compared with 30 cents a year earlier. In New York Stock Exchange trading, Home Depot shares gained 76 cents, or 3.5 percent, to close at $22.41, while Lowe's was up $1.07, or 3 percent, at $36.02.

Copyright 2003, Reuters News Service

Pleasure and Perils In Instant Service
By Kathy Chu - A Dow Jones Newswires Column
February 21, 2003

Instant customer service may be just a mouse click away. But so is the instant salesman.

Traditionally, if you have a problem while surfing online - say, if you're shopping and you can't find an item on a company's Web site - the standard remedy is to shoot the company an e-mail or to call them. And then you would wait, hoping to get a quick answer.

But now, financial companies, led by Wells Fargo & Co. (WFC), are following the lead of retailers like Sears Roebuck & Co.'s (S) Lands' End subsidiary and Coldwater Creek Inc. (CWTR), which are using what's referred to as "Web collaboration" software to provide customers with answers to questions in minutes, and sometimes, even seconds instead of hours. This is done through text chatting or via shared screens between the agent and the client.

Yet while customers can expect to benefit from this convenience, they should also be aware that companies are trying to attract new online users with the technology, partly because it gives them an opportunity to sell additional products. It's similar to the experience you may get on the phone when you call your credit-card company with a question about your account. Chances are that the customer-service agent will also try to pitch account protection or some other product.

"It's customer service with a profit motive behind it," said Robert Spector, a customer-service consultant and the author of "Anytime, Anywhere: How the Best Bricks-and-Clicks Businesses Deliver Seamless Service to their Customers." "It becomes a cost-efficient way to sell merchandise to people."

Basically, Web-collaboration technology allows retailers and financial institutions, among others, to chat online with consumers, to "co-browse" or view the same screen as the client, and also, to trigger a call from the agent, hopefully, within seconds after the client clicks a button.

The technology is still relatively new, and only a handful of tech-savvy companies have incorporated it into their Web sites. But because of the software's increasing popularity, there's reason to believe that its growth will ramp up in the near future, providing a boon to some of the companies that offer the technology, including privately held Hipbone in San Carlos, Calif., Kana Software Inc. (KANA) in Menlo Park, Calif., and Egain Communications Corp. (EGAN), in Sunnyvale, Calif.

Financial-Services Industry May Catch Up To Retailers Earlier this week, Wells Fargo became the first financial-services company to offer Web-collaboration services, joining a high-tech cadre of companies with this technology. Most of them are retailers, possibly because Lands' End took the lead in 1999 when it began offering the service online.

At Wells Fargo, consumers can now get instant assistance from a customer- service agent by clicking on a "Live Help" button and interacting with the agent via text chat or by phone. The agent can view the same screen that the user is seeing, and then, with a click of the agent's mouse, bring up additional screens for the potential customer to view. Users can be guided through transactions from setting up accounts and bill payment on the Web to transferring money.

"This really facilitates a much richer communication," said Jim Smith, senior vice president of consumer Internet products for Wells Fargo in San Francisco. "Our hope is really to get the next wave of customers online and to get them comfortable with using the site."

If history is an indication of the future, more financial institutions will soon follow Wells Fargo's lead in offering text-chatting and co-browsing capabilities. The bank, in 1995, was a pioneer of online banking, but now, a majority of financial institutions have followed suit.

"This technology really had to mature in order for banks to be able to use it," said Anne McVey, vice president of marketing at Hipbone, which provides Web- collaboration software to Wells Fargo and Veritas Software Corp. (VRTS), among others. "If you're buying a book online, it's a relatively low-value transaction, but with banking transactions, they could be very high value and the need for security is great."

Currently, many major financial institutions are giving "serious consideration" to incorporating this technology into their Web sites, according to McVey.

Aligning Company Interests With Consumers For companies, the drivers behind the use of Web collaboration technology are really threefold: increasing product sales, cutting costs and improving customer service capabilities.

At times, what's good for the company can also be good for the customer.

"One of the things that we found at Lands' End is that if you provide great customer service, people will continue to shop with you," said Bill Bass, the company's senior vice president of e-commerce.

The value of the average order increases by about 5.7% when a consumer uses the Lands' End online Web-chat or phone-connection service and there's a 70% increase in the number of shoppers converted to buyers, according to the clothing retailer, headquartered in Dodgeville, Wis. This may be because customers are more confident in what they're buying, Bass said.

Other benefits for companies including saving money by directing customers to the Web site for basic questions and being able to cross sell products. Yet cross selling doesn't necessarily mean that companies will randomly push products.

"Certainly sales are a component," said Smith of Wells Fargo. "We will certainly work with you to identify any financial needs and product needs that you may have. But by no means are sales the only component."

Yet the main appeal of this technology - the ability to provide instantaneous responses - can also be a pitfall in the future if the software doesn't function properly or if more users seek to use these services than the company has resources for. The amount of time that an online user has to wait depends on the speed of an individual's Internet connection and the number of other customer-service requests that have come in.

Bass, of Lands' End, said long wait times are unlikely because companies can anticipate periods of higher activity based on when they take out advertisements and send out catalogs.

For GM's Retirees, It Feels Less Like 'Generous Motors'
By Jeffrey Zaslow and Gregory L. White - Staff Reporters
The Wall Street Journal
February 21, 2003

Pensioners Still Have It Good, but Rise In Benefit Costs Sparks Fears of Cutbacks

 A dozen General Motors Corp. retirees gathered for lunch at a Chili's restaurant here recently. They all drove up in GM cars bought at discount prices. And like several generations of GM retirees, they all enjoy one of the nation's best private pension plans.

But the camaraderie in this GM retiree club was spoiled when talk turned to an old bone of contention: GM doesn't treat all retirees equally. Beneath that tension lay a growing fear that the auto maker may soon be unable to treat any retirees as well as it does now.

The former white-collar, salaried workers groused that GM makes them pay more for their benefits while catering to the demands of the powerful United Auto Workers union. "When they worked overtime, they got time-and-a-half," said Ralph Gumbinger, 66 years old, a former salaried employee in what is now GM's truck division. "We'd work until midnight and not get an extra penny. Now their benefits are far superior to ours."

The blue-collar retirees shot back that they didn't feel sorry for their white-collar counterparts. "When we were making $500 a week, they were making $1,500," said Normand Allard, 61 years old, an hourly retiree who used to load cars on freight trains at a plant in Framingham, Mass.

GM's half a million retirees are in good shape compared with those from companies in other industries who are struggling with slashed pensions or plummeting 401(k)s. Former GM workers live comfortably and help prop up the economy in their communities. But rising pension and health-care costs and intense competition in the car business are forcing the auto maker to look for ways to chip away at these benefits. Retirees fear that generous benefit plans are destined for extinction, and they wonder how their children, many of whom now work at GM, will fare when they retire.

Indeed, GM salaried workers who started after 1993 aren't eligible for company health insurance when they retire, although they receive larger 401(k) contributions than workers hired earlier. And just this week, No. 2 auto maker Ford Motor Co. told salaried workers and retirees that they will have to pay substantially more for health care.

The ballooning costs of pension and health-care benefits are draining GM, contributing to cuts in its credit rating and to a steep decline in its stock, which now stands near seven-year lows. The auto maker pumped $4.8 billion into the pension fund last year and a further $1 billion into a fund to cover retiree health-care costs. Taken together, that's close to the $6.4 billion GM put into capital spending last year, which includes most of what it laid out for new car and truck models. Pension and health-care costs add almost $1,400 to the cost of every car it builds, according to analysts' estimates. Owing to the company's steady decline during the past three decades, GM's 460,000 retirees and surviving spouses now outnumber active employees in the U.S. nearly 3 to 1.

"We've got a hole on the pension side," says Chief Executive Rick Wagoner.

The pension problems reverberate far beyond GM's balance sheet. Driven largely by the need to generate cash to fill the pension fund, GM has flooded the U.S. auto market with unprecedented discounts to keep sales going, even as the economy has sputtered. Competitors have followed, helping auto sales to near- record levels during the past several years and shoring up the economy -- though at a high cost to auto companies' profits.

Days of Wooden Wheels
GM set up a pension plan for U.S. salaried workers in 1940, and then started one for U.S. hourly workers in 1950. That was a time of record financial returns and great expansion for the world's largest auto maker, which saw itself setting an example for the rest of the nation's big companies. Costs for pension benefits steadily grew, from $17 million in 1960 to $6.3 billion in 2001, as the union won regular increases and the number of pensioners grew.

Today's pension rolls include retirees such as 96-year-old Guy Irvin of Atlanta, Ga. He began working for GM in 1928, when the company was still putting wooden wheels on cars. He earned 45 cents an hour unloading parts off boxcars. When he retired at age 60 in 1966, his pay had risen to $3.03 an hour. He now receives $800 a month from his GM pension and $900 from Social Security. He also has virtually full medical coverage.

Mr. Irvin participated in the legendary sit-down strike of 1936 and 1937, which led GM to recognize the UAW. He talks of the sacrifices made by his generation to win today's benefits. "I've earned a lot more in my pension than I ever got working," he says. "But younger people are wrong to think GM is good-hearted and just decided to hand out these benefits. We had to fight for all of them."

GM pensions for all retirees average about $14,000 a year, more than double the median income from private pension plans in the U.S. GM won't disclose exact figures, but officials note that many retirees get substantially more than the average, which is depressed by the reduced payments made to surviving spouses. GM's medical plan for retirees also is unusual. According to government data, nearly two out of three Americans over 65 get no medical coverage from their past or current employer.

Retirees' health-care benefits now cost GM about $3 billion on top of the pension checks, and the auto maker has become the largest private purchaser of health care in the U.S. Prescription drugs cost GM about $1,500 a year for each retiree. The company spends $55 million a year just on the heartburn drug Prilosec. Health costs have become its fastest-growing expense.

So far, the UAW has defeated every effort to cut back on those benefits. Indeed, the powerful union has won hundreds of millions of dollars in increases with each new contract. By contrast, GM's 116,500 salaried retirees, who once saw their benefits rise as much as the hourly workers', have lost ground in recent years as GM has tried to control costs.

"I wouldn't call it 'Generous Motors' anymore," says Mr. Gumbinger, the former salaried employee.

At the Detroit Auto Show last month, a dozen salaried retirees from Lansing, Mich., staged a protest march, with signs reading: "Salaried Retirees, Broken Trust."

"The union is an 800-pound gorilla that backs the corporation into a corner on health-care issues," says John Bond, vice president of the 1,200-member GM Lansing Salaried Retiree Club. "That leaves the salaried retirees swinging in the wind, with no organization and no clout."

Marked Differences
There are marked differences between the benefits packages of hourly and salaried retirees. Hourly retirees pay only a relatively small amount for broad health-care coverage, often without any deductible or co-pay. Salaried retirees pay steadily increasing premiums or are often on plans that give them just 80% coverage for medical expenses outside the hospital. (However, the salaried plan does cover some office visits and preventive care that the hourly plan doesn't.) Hourly retirees can purchase brand-name drugs on their health plans, and pay a $5 co-pay per prescription. Salaried employees must get generic drugs unless a doctor says a brand name is necessary. Under the current contract, which expires in September, the hourly retirees receive a yearly UAW-negotiated lump-sum cost-of-living bonus worth about $850 that the salaried retirees don't get.

As a salaried employee, Mr. Bond says his health-insurance premiums have doubled since last year, to $157 a month from $79.19. GM says it raised premiums this year an average of $25 a month for the most popular retiree plan, although the company still offers plans that don't require retirees to contribute.

GM officials note that as health-care costs have skyrocketed over the last decade or so, it has asked retirees to contribute more. But the company insists that it has passed on some of the benefits of its cost-saving measures to retirees, who would otherwise have faced even-steeper increases in their out-of- pocket expenses, as retirees from many other companies have.

The company also tries hard to wean its retirees from some benefits they've long enjoyed -- even sending them a word puzzle to help them "brush up on your generic-drug knowledge." A shift of one percentage point in generic-drug use is worth about $14 million in savings a year. But despite GM's campaign to fight health-care costs, they rose 6% last year.

These hourly-vs.-salaried issues are always a topic of discussion among the 675 members of the Treasure Coast GM Retiree Club here in Port St. Lucie. Membership in many other GM retiree clubs is exclusively either former hourly workers or former salaried workers. Treasure Coast membership is split 50-50. During the lunch at Chili's, there was good-natured teasing between the salaried and hourly retirees, but they admitted to tensions, too.

Mr. Allard said that many salaried employees, especially lower-level office workers, had the option to join the UAW and didn't. "Now they're kicking their butts because our benefits are better."

The hourly folks aren't sympathetic to the Johnny-come-latelies who are just now discovering the union cause. "If they could, a lot of them would join the union in the morning," said hourly retiree Norbert Turek, 70. Added James Mate, 65: "When we were all working, the salaried people got to park close to the plant. They had all these perks. Now in retirement, it's switched around."

Some of the hourly retirees admit that things turned out far better for them than they'd expected. Alan Church, president of the Treasure Coast club, left GM in 1994 as an hourly employee earning about $75,000 a year after 30 years. Now 60, he receives a pension of $25,000 a year.

James Sculley, 60, was an hourly worker in the Framingham plant's "finesse booth," removing imperfections in the paint jobs on Buick Century sedans. In 1989, when GM closed the plant, the future looked uncertain for many of the 3,300 affected employees. "We were very bitter. We were scared," says Mr. Sculley. "But there was one guy who kept saying, 'Don't worry. We have the pension, the union, health benefits. We're golden!' I didn't believe it. But as it turned out, he was right. We are golden."

Mr. Sculley had been earning about $40,000 a year. As part of its agreement with the UAW, GM gave him 90% pay for two years. He now receives about $13,000 a year as a pension.

By contrast, some salaried GM retirees found that their plans weren't as golden as they were led to believe. Gerald McKouen of Lansing retired as a general foreman in the tool division in 1980. At the time, he was given a memo promising that "full basic health-care coverages for retiree and eligible dependents are continued for life at no cost to the retiree."

He was 60 at the time. "That was an incentive for a lot of us to retire," he says. "If they had told us we'd have to pay for our health care, we'd have worked longer."

Seven years later, in 1987, GM added an annual deductible and co-payment provisions. Since then, Mr. McKouen's health-care costs have risen from almost nothing in 1980 to about $1,500 last year. Depending on his medical needs, his health care could cost him as much as $2,600 in 2003, he says.

In 1989, 114 white-collar retirees sued GM, saying the company had reneged on its health-care promises to 50,000 GM retirees who had been induced to leave the company early. Though the retirees won in lower courts, they lost on appeal in 1998.

Where the benefits hold up, GM retirees can give a welcome boost to their communities. "When doctors find out you're a GM employee, they love it," says Mr. Turek. "They know they'll get paid." At Steve Barnett Automotive Superstore in Port St. Lucie, GM retirees account for 15% to 20% of its Cadillac sales each month. They get discounts of about $2,000 per Caddy.

Many retirees have children who now work for GM, and the younger generation doesn't always have sympathy for them. In Lansing, John Fox, 68 years old, has a son who is a salaried employee for GM in Detroit. When the elder Mr. Fox talks about how GM hasn't kept its promises to him, he says his son tells him how his benefits are being cut back. "Quit your complaining," his son says.

So far, benefits for the hourly retirees continue unabated. Mr. Allard has had two heart bypass operations. He figures GM has spent more than $750,000 on his medical costs.

Over lunch with his fellow Florida retirees, he smiled when talking about the 96-year-old Mr. Irvin, who is his father-in-law. "GM must have a check mark next to his name," he says, as company officials await the day they can take him off the pension rolls. Along with Medicare, "they have to pay for his medicine, his hearing aids, his eyeglasses, his powered wheelchair, his Viagra..."

The others laugh. "I'm kidding about the Viagra," he says. Then he gets serious, talking about the next generation of retirees -- the baby boomers coming up behind him. "No one will have what we have," he says. "Those days are gone."

 

The J.C. Penney 'Turnaround'
Barron's Online
By Jesse Eisinger - February 20, 2003

Ahead of the Tape

For Hollywood screenwriters, if your script is "in turn-around," it's stalled out. But for investors, it's when a company's stock takes off.

Turnaround is that magical period when fresh faces revive hopes and investors decide the future will unfold to the accompaniment of warbling birds. Retailer J.C. Penney shares caught investors' fancy at the start of 2001 as just such a turnaround, but have since stalled out. J.C. Penney reports fourth-quarter earnings Thursday that should be strong. But hitting analysts' expectations for the current year -- $1.63 a share, according to Multex -- could be a stretch.

As it happens, turnaround is a verboten word around company headquarters. Penney offers more-modest expectations, considering this a five-year process that began in 2000.

The project is challenging: Department stores are under siege by discounters, and malls are hurting.

But J.C. Penney has underinvested in its business for years. Its capital expenditure as a percentage of sales lags behind most competitors. Penney is making an effort to catch up; that is going to be a continuing and sizable cash drain.

Also, though store sales have stabilized, catalog sales are in collapse. Investors haven't focused on the catalog since it's only a small part of the business. But the decline means that total sales at Penney, excluding its Eckerd drugstore chain, will likely show a drop of 2% in the just-completed year, J.P. Morgan estimates.

Eckerd, which represents just under half of sales and a bit less of profits, continues to be the question mark. Sales in stores open a year or more lag behind most drugstore competitors, including even Rite Aid. Yet the division has shown a surprisingly strong margin increase. Investors are skeptical that can last, given the competitive pressures.

Though the valuation is no longer as out-of-whack as it was in early December, J.C. Penney trades at a significant premium to Federated Department Stores and May Department Stores. The shares are much more expensive if, as J.P. Morgan expects, the company only earns $1.50 a share this year.

Bethlehem Steel Retirement Benefits Vanishing
Commentary.
Doron Levin is a columnist for Bloomberg News.
The opinions expressed are his own.

February 20, 2003

The worst nightmare of Bethlehem Steel Corp. workers and retirees has come true. Promised retirement benefits are vanishing as the bankrupt steelmaker struggles to stay in business.

Bethlehem's financial troubles, affecting present and future retirees, sound a cautionary note for hundreds of thousands, maybe millions of American autoworkers, pilots, and others who presume - - mistakenly -- that money set aside by their companies to cover pension and health-care benefits will be there no matter what.

Robert S. Miller Jr., Bethlehem's chairman and chief executive, who worked as a financial executive in the auto industry for most of his career, is receiving a stream of bitter e- mail from workers angry about losing their benefits.

"I hope other companies are ready for this, because many of them, including some automakers, aren't going to be able to outrun their pension liabilities,'' he said. ``At some point the great sucking sound of pension and health-care liabilities just overwhelms your ability to raise capital or invest in new plants and equipment.''

Balance Sheets Threatened
U.S. automakers and airlines in particular are fighting low- cost, highly productive competitors, and, like Bethlehem, they have promised employees retirement benefits that threaten to overwhelm their balance sheets.

Improving productivity by encouraging workers to retire early has had an unintended consequence: workers began drawing pension benefits early, straining pension funds' finances.

Indeed, the immense sums corporations pay into pension funds, as well as for prescription drugs and other health benefits, have shaken the finances of Bethlehem and other high-cost producers such as General Motors Corp., Ford Motor Co. and UAL Corp. UAL is operating under Chapter 11 bankruptcy proceedings.

General Motors Corp. is no bankruptcy candidate. At the end of 2002, however, the automaker posted a $19 billion shortfall in its U.S. pension funds and perhaps as much as a $29 billion deficit worldwide. Hence, GM estimates it must contribute $16 billion to $18 billion cash over the next five years to keep its pension fund solvent.

The Huge Pension Shortfall
At the automaker's current share price, the pension shortfall in the U.S. alone represents a sum exceeding General Motors's entire market capitalization. Still, the automaker insists that payments to keep its pension fund solvent won't compromise its competitiveness.

``I don't think our capital is being diverted from product programs,'' said Jerry Dubrowski, a General Motors spokesman. ``It does mean we'll have less cash available for shareholders. We're certainly not going to borrow to pay dividends.''

Ford Motor Co. in January disclosed that its pension funds worldwide were underfunded by about $15.6 billion. To redress some of the shortfall, Ford said it was contributing $500 million to its fund immediately and another $500 million by June.

A sustained stock market rally could bail General Motors, Ford and others out of their pension fix, though no one is counting on that happening.

Meanwhile, Ford and others are lowering their assumptions about how much their pension funds are expected to increase annually, meaning they must contribute more in cash.

The `Double Whammy'
Three years of falling equity prices and record low interest rates have created an unexpected ``double whammy'' for pension funds. Equity prices are depressed, while fixed-income securities held in funds need more time at current rates to cover future obligations.

Credit Suisse First Boston estimates that pensions for S&P 500 companies were underfunded by an aggregate $243 billion at the end of 2002.

On Dec. 18, the federal Pension Benefit Guaranty Corp. announced it was taking over Bethlehem's pension fund. Consequently, tens of thousands of workers will receive pensions limited by law to $44,000 annually. For many, not all, that amount will cover their promised benefits.

Bethlehem, once the nation's third-largest steelmaker, on Feb. 9 agreed to sell itself to International Steel Corp. for $1.5 billion.

Generous pension and health-care benefits became common in U.S. corporations during 1950s and 1960s, often as a result of negotiations with labor unions. Similar benefits later were extended to salaried workforces, in part to keep them from unionizing.

Today's younger workers don't expect to spend their entire lives employed by one company. That's why 401k plans and other defined contribution plans make sense -- despite being beaten down over the past three years by falling equity prices.

When negotiations for a new labor contract at the Big Three automakers begin this summer and the discussion turns to pensions, it's a good bet agonies of Bethlehem workers won't be far from anyone's mind.

J.C. Penney's Profit Doubles;
Target Gains on Credit Unit

By Amy Merrick and Ann Zimmerman - Staff Reporters - The Wall Street Journal
February 20, 2003

A difficult holiday season didn't stop Target Corp., J.C. Penney Co. and Nordstrom Inc. from boosting their fourth-quarter profits, but the retailers warned that business will continue to be challenging this year.

While falling retail prices and a sluggish economy depressed Target's sales, the company increased net income by 4.6% for its fiscal fourth quarter, as it drove harder bargains with manufacturers to reduce costs and improved profits from its burgeoning credit-card business.

For the quarter ended Feb. 1, the Minneapolis-based retailer earned $688 million, or 75 cents a share, matching a consensus estimate of analysts surveyed by Thomson First Call. The company earned $658 million, or 72 cents a share, in the year-ago quarter.

Target's revenue increased 6.4%, to $14.06 billion from $13.22 billion. Sales rose only 5.6%, but revenue from credit operations leaped 49%. Sales at stores open at least a year, or same-store sales, decreased 2.2% for the quarter, with stronger results at the discount Target stores than at the Mervyn's and Marshall Field's department-store chains.

Because Target has a greater proportion of trendy, discretionary merchandise and has been rapidly growing its credit-card business, analysts consider it more sensitive to economic swings than its chief rival, Wal-Mart Stores Inc. "Of any company we follow, [Target] is probably the most cyclical,'' said Deborah Weinswig, a retail analyst with Salomon Smith Barney.

MORE ON EARNINGS
Listen to a conference call 1 on J.C. Penney's quarterly results.

Earnings Cheat Sheet: 2
See previews of corporate earnings, including forecasts and key items to watch.

For the full fiscal year, Target's net income increased nearly 21%, to $1.65 billion, or $1.81 a share, from $1.37 billion, or $1.50 a share. Revenue increased 10% to $43.92 billion from $39.83 billion.

The retailer said it is comfortable with the First Call estimate of $2.05 per share for its current fiscal year. The company said it expects write-offs of bad credit-card debt, which have been rising, to stabilize this year.

J.C. Penney's fiscal fourth-quarter net income doubled on the strength of department store holiday sales and improved margins, and despite disappointing sales gains at its Eckerd drug stores chain.

After praising the company's progress in offering a better assortment of merchandise at lower prices in easier-to-shop stores, Penney Chief Executive Allen Questrom cautioned in a statement, "As we begin the third year of a very complex turnaround, we face internal challenges and many uncertain external factors."

Despite a sluggish economy, higher pension expenses for the department stores, and catalog restructuring charges, Mr. Questrom said the Plano, Texas, company expects to achieve 2003 net profit of $1.50 to $1.70 a share, in line with analyst's expectations, according to First Call. In the current quarter, Penney expects to earn in the low 30-cents-a-share range.

"They've established the fundamentals for a solid turnaround, the first on such a large scale in retailing," said Robert Buchanan, retail analyst at A.G. Edwards. "But next year they face a lot of obstacles that will dramatically decelerate their earnings growth."

MORE ON EARNINGS
Listen to a conference call 3 on Target's quarterly results.

Earnings Cheat Sheet: 4
See previews of corporate earnings, including forecasts and key items to watch.

For the period ended Jan. 25, Penney posted net income of $202 million, or 68 cents a share, compared with $95 million, or 32 cents a share, in the year-ago period. Total revenue was essentially flat at $9.55 billion compared with $9.54 billion a year ago.

Department store and catalog sales declined 2%. Sales at department stores open at least a year rose 1.9%, boosted by large sales gains in apparel and fine jewelry. Catalog sales slid 21% on lower circulation and page counts. Eckerd's sales increased 3.3% and same-store sales rose 2.5%, below the 6% the company had originally expected.

Nordstrom, aided by a 7.3% sales gain, said its fourth-quarter net income jumped 18% to $60.0 million, or 44 cents a share, two cents ahead of a First Call consensus estimate. For the quarter ended Jan. 31, same-store sales increased 1.9%. The Seattle-based retailer earned $50.7 million, or 38 cents a share, in the year-earlier period.

Net income for the full fiscal year dropped 28%, to $90.2 million, or 66 cents a share, from $124.7 million, or 93 cents a share. The current year included $71 million in after-tax charges related to the effect of an accounting change, the purchase of a minority interest in Nordstrom.com5 and the write-down of a technology investment, the company said. Excluding those charges, Nordstrom said it would have earned $161.3 million, or $1.19 a share.

Nordstrom released its earnings after the close of regular trading Thursday. In 4 p.m. composite trading on the New York Stock Exchange, its shares slipped eight cents to $17.17. Target shares fell $1.10, or nearly 4%, to $26.77 and Penney shares rose $1.34, or 7%, to $19.77, also in 4 p.m. Big Board trading.

In Pursuit of Perks,
Buyers are Returning to Store Credit Cards
By Jennifer Bayot - New York Times
February 18, 2003

Store credit cards, considered the poor cousins of major credit cards, are staging a revival, thanks to some aggressive promotions and perks offered by retailers.

In September, Bloomingdale's began giving shoppers who charge five pairs of shoes on store cards an additional 25 percent, or $25, off a sixth pair. Pier 1 Imports cardholders who spend at least $1,000 a year receive free local deliveries. Neiman Marcus members who collect 100,000 points can upgrade their Hertz car rentals. Target card customers can donate 1 percent of what they spend to whichever nonprofit school — public or private — they select.

In the past, most stores gave discounts only on first purchases. Now they are adopting more creative and expansive rewards programs to compete with offerings like airline miles and hotel stays.

As a result, many consumers have ended up with wallets full of sometimes forgotten store cards.

"I pulled my credit report from the Internet, and I saw every one of my store accounts still open — even though they've been paid down to zero," said John Hanig, 48, a registered nurse from Charlotte, N.C. "The end result is 15 cards with God knows how much available credit."

Though consumer debt on major credit cards is seven times that on store cards, the retailers' efforts are starting to pay off. In 2001, spending on store cards rose 4 percent, to $125 billion, after an 18 percent surge in 2000, according to the Nilson Report, a publication based in Oxnard, Calif., that tracks payment systems. And those figures are not counting the store-branded MasterCard and Visa cards that many retailers now offer.

"Folks have been writing the obituary for store cards for quite some time, and they've been wrong," said John Grund, a partner at First Annapolis Consulting in Annapolis, Md. "Store cards are still very important to America's middle class. They do offer very unique benefits."

The cards also carry risks, however, for both the consumer and the retailer. Store cards charge interest rates that typically top 20 percent and at times are double the rates of general-purpose cards.

As the efforts by retailers to attract cardholders increase, so, too, do the chances for delinquent accounts. In October of last year, Sears, Roebuck stunned investors by announcing that it would have to allot an additional $222 million to cover unpaid credit card debts in the third quarter. A year earlier, the Spiegel Group blamed credit card delinquencies for a $12.3 million quarterly loss.

"We're essentially allowing riskier customers to hold these accounts," said David Kratoville, vice president for client services at Alliance Data Systems, which administers credit card programs for the Limited stores, Abercrombie & Fitch and about 50 other large retailers. As a consequence, Mr. Kratoville said, "Over the years, we have actually seen loss rates trend upwards."

Store credit departments are not the large internal operations they once were. Only about two dozen store chains, including Sears, Roebuck, and Federated Department Stores, still run their own programs. Over the last decade, many others have either moved their credit card operations to financial companies like GE Capital, a unit of General Electric, or have begun issuing co-branded cards with Visa or Mastercard.

Analysts described the last year as a breakthrough for co-branded cards in particular, as several large retailers, including T. J. Maxx, the Walt Disney Company and Amazon.com, began issuing their own MasterCard and Visa cards, and others like Target and Circuit City Stores strengthened existing card programs.

Store chains with internal card operations own the balances due on their cards — and any fees and interest paid on them — but the stores also bear the full cost if customers default. Retailers that outsource their credit divisions negotiate terms with their contractor; sometimes they collect a small percentage of each transaction and sometimes they actually pay a fee.

No matter how they are managed, store cards allow retailers to track the buying habits of their customers and in most cases to save the cost of transaction fees imposed by outside credit cards — compelling incentives to recapture market share from the bank cards.

The decline in store cards began decades ago but accelerated in the 1980's and 1990's, as more and more retailers accepted outside credit cards and shoppers abandoned store cards. Stores compensated by giving credit to younger consumers. General-purpose cards soon copied that tactic and also offered lower interest rates and better rewards programs. Although the number of store credit cards grew during the 1990's, their share of credit card balances shrank — to 13 percent in 2002 from 22 percent a decade earlier, according to the Nilson Report.

In fact, little more than a third of those cards were considered active, and outstanding balances on the accounts were less than a seventh of those on all- purpose credit cards. Bargain hunters had opened accounts to take advantage of one-time promotions, retailers complained, then forgot about the cards.

So over the last year and a half, many more retailers have worked to entice existing cardholders to use their credit lines more consistently. In 2002 alone, about a dozen large store chains, including Linens 'n Things and BJ's Wholesale Club, introduced credit card loyalty programs. Cardholders receive points for every dollar or so they spend and periodically accumulate enough points to receive a gift card or certificate.

Sears allows its card customers to make returns without receipts, and Brooks Brothers, a unit of Retail Brand Alliance, pays for shipping if cardholders want to return items they bought online. Card members of Belk department stores pay nothing for basic alterations.

At high-end retailers, special events for cardholders are coming into vogue. In October, Bloomingdale's, a unit of Federated Department Stores, treated 5,000 of its cardholders to a night of Broadway actors performing in its Manhattan store. Lane Bryant, a unit of Charming Shoppes Inc., invites its members to apply to be "test models" and occasionally pays off a card account drawn in its PayOff Sweepstakes.

Hunter Blankenberger, a 30-year-old New Yorker who described himself as "not a big fan of credit cards," said he nonetheless used a Banana Republic card because he liked receiving $15 gift certificates for every $350 he spent.

He said that he even persuaded his fiancée and her relatives to apply for their own retail cards, both at Banana Republic and its sister store, the Gap.

"We went to her family's Hanukkah party, and I think every box there was from Banana Republic or Gap," he said. "I seriously got everyone signed up on these cards."

Store card debts have caught the attention of consumer advocates, especially because of the high interest rates on the cards. Consumers, they said, are spending store credit without knowing their cards' terms.

"When you buy a blender, you look at the directions and see how it works; with credit cards, it's the same thing — they come with instructions," said Steve Rhode, president of Myvesta, a nonprofit financial management group based in Rockville, Md. "People need to pay attention."

United States Representative Anthony D. Weiner, a Democrat whose district includes Brooklyn and Queens, said, "Right now the stores are benefiting from a presumption in the marketplace that their rates are coming down." Mr. Weiner plans to introduce legislation requiring stores to display their cards' terms at cash registers.

Senator Charles E. Schumer, Democrat of New York, is asking the Federal Trade Commission for a similar measure.

Despite all the store-card perks and promotions, some shoppers remain unimpressed. Mary Jean Wyatt, a New York public relations consultant, said she had credit lines at Bloomingdale's, Saks Fifth Avenue and Lord & Taylor, but never used those cards, even when pushed by cashiers.

"I always say, `No, I'll use my Visa for the miles,' " she said, referring to one of the most popular loyalty programs of the bank cards. "I don't know why a department store can't offer the miles."

Copyright 2003 The New York Times Company

Corporate Reputation Survey

Dow Jones Newswire - February 12, 2003

Harris Interactive 2002 Corporate Reputation Survey

Other High-Profile Corporate Reputations | Reputational Rivals | Leaders in Corporate Communications Sincerity | Highest Top 3 Box Ratings on the 6 Corporate Communications Sincerity Attributes

Reputation Ranking
This ranking is based on an online survey of people's perception of corporate reputations. Respondents rated one or two companies on 20 different attributes. Companies could receive a maximum possible score of 100. (See Full Methodology)

See an interactive graphic with the reputation survey results and information on the leaders in categories from financial performance to workplace issues.

NA = Not available because company wasn't included in 2001 survey.
Source: Harris Interactive Inc.

Other High-Profile Corporate Reputations
Companies that had been among the most nominated in 2001 but not among the most nominated in 2002 were measured in a separate study paralleling the measurement of the 60 most nominated. Added to that list of 12 "temporarily less visible" companies were four reputational rivals, two "prominent subsidiaries" (of companies already measured), one reputationally-linked company (to another company already measured), and one other high profile reputation.

Arranged in alphabetical order. Highest possible score is 100.

Source: Harris Interactive Inc.

Reputational Rivals
How did industry rivals fare in the survey? Did Coke can Pepsi? Did Southwest soar above American Airlines?

Harris compared the reputations of pairs of rivals on eight attributes -- one each from the six Reputation Quotientism dimensions, along with two non-RQ attributes:

RQ Attributes
• Trust the company a great deal (Emotional Appeal)
• High quality products and services (Products & Services)
• Looks like a good place to work (Workplace Environment)
• Behaves responsibly toward the people in the communities where it operates (Social Responsibility)
• Looks like a company with strong prospects for future growth (Financial
Performance)
• Excellent leadership (Vision & Leadership)

Non-RQ Attributes
• Looks like a company that maintains high ethical standards
• Provides excellent customer service

Each company was rated by people indicating they were "very" or "somewhat" familiar with that company. Attribute scales ranged from 1 to 7, with 7 representing the most positive rating. The figures shown below represent the percentage of "top 3 box" ratings, which are ratings of 5, 6, or 7 on the 7- point scale. These are also referred to as positive ratings. The "gap" refers to the gap between the two companies in terms of their positive ratings.

The chart on the left shows a company's overall reputation quotient. An asterisk (*) denotes a company that wasn't included the 2002 reputation survey but that was measured in a separate study paralleling the measurement of the 60 most nominated.

Southwest Airlines vs. AMR
Southwest is perceived more positively than American Airlines on all eight attributes -- with the largest gap on "strong prospects for future growth."

Home Depot vs. Lowe's
Home Depot is perceived more positively than Lowe's on all eight attributes
though all gaps are less than 10 points.

McDonald's vs. Wendy's
The biggest gap between McDonald's and Wendy's is on the attribute "high quality products and services" with positive perceptions significantly more in favor of Wendy's. Wendy's also leads on "trust," "good place to work," "high ethical standards," and to a lesser extent "excellent leadership." Interestingly, the companies are much more similar (at least as perceived by the public) when it comes to "community responsibility" and "prospects for future growth." Wendy's leads McDonald's on customer service by 20 points.

Coca-Cola vs. PepsiCo
Coca-Cola is perceived more positively than PepsiCo when it comes to trust, quality of products and services, as a place to work, and excellent leadership. The gaps in favor of Coke fall to less than 10 points for strong prospects for future growth and high ethical standards. The two companies (like the McDonald's and Wendy's comparison) are perceived equally positively when it comes to community responsibility.

Wal-Mart vs. Target
According to the public, Target has a slight lead over Wal-Mart on trust and quality of products and services, but Wal-Mart is perceived more positively in terms of its prospects for future growth. Wal-Mart also receives more positive ratings than Target on the other four attributes -- though the gaps are all five points or less.

Source for comparison tables: Harris Interactive Inc.

Leaders in Corporate Communications Sincerity (Overall)
For the first time this year, Harris constructed a separate "corporate sincerity" ranking, composed of six characteristics -- sincere, honest, informative, deceptive, secretive and self-serving.

Question: In your opinion, how well does each item describe the corporate communications of [company]?

A company's corporate communications include communications that are within a company's control such as its advertising, press releases, publications, scheduled interviews, and information posted on its corporate website. "Does Not Describe Well" = 1, "Describes Very Well" = 7, Not Sure [Deceptive, Honest, Informative, Secretive, Self-serving, Sincere]

Calculation of Corporate Sincerity Score: Sum of mean ratings on "honest," "sincere," and "informative" and reversed-coded sum of mean ratings on "deceptive," "secretive," and "self-serving" divided by total possible score multiplied by 100.

GE, Coca-Cola Will Scale Back
Executives' Retirement Benefits

By Theo Francis and Kathryn Kranhold
Staff Reporters - The Wall Street Journal
February 13, 2003

General Electric Co. and Coca-Cola Co., under pressure from shareholders and the AFL-CIO, are reducing their executive retirement benefits.

GE, Fairfield, Conn., said it will end a deferred-compensation plan paying top executives 12% in annual interest or more on money they set aside from their paychecks. Coca-Cola, Atlanta, said it will phase out an executive pension plan that is more generous than the one available to most workers.

The AFL-CIO had submitted a shareholder proposal to each company criticizing the plans as overly generous, and asking holders to cut back benefits to newly enrolled executives in the plans. The labor federation also filed similar proposals with five other companies.

"The size of these benefits are galling to shareholders and to frontline employees," said William Patterson, the labor group's director of corporate investment. "The fact that it's surreptitious compensation only makes the size ... more egregious."

Both GE and Coca-Cola said shareholder comments contributed to the decisions to amend their plans. Kari Bjorhus, a Coca-Cola spokeswoman, added that "the dialogue we're having with organizations like the AFL-CIO is important to us, and it's certainly a factor in the decisions that we make." The Coca-Cola and GE moves were reported by the Financial Times.

Coca-Cola said only three officers participate in its special retirement plan, and no additional executives will join. The AFL-CIO had objected to terms that guaranteed executives more of their pensions sooner than other employee plans, increased the benefit they would receive and credited them with more years of service than they actually worked.

GE said it will end one deferred-compensation plan, but top executives can still set aside as much as half their pay every three years under a larger plan open to about 4,000 senior managers. Those deferrals earn 9.5% a year. "It's meant to help retain our top executives," spokesman Gary Sheffer said.

The AFL-CIO said it is negotiating with both companies about whether it will withdraw its shareholder measures.

The AFL-CIO said it hasn't received responses from other companies with which it has submitted similar resolutions. Those companies are Exelon Corp., U.S. Bancorp, Sears, Roebuck & Co., and Wal-Mart Stores Inc. The labor group also submitted a resolution to Bank One Corp. but withdrew it after learning that the company had already adopted plan changes.

Dinged-up Allstate Recovering
Premium hikes increase income, customer gripes
By Janet Kidd Stewart, Chicago Tribune staff reporter - February 12, 2003

Few companies are throwing victory parties these days, but the good times were rolling inside Allstate Corp.'s lush corporate campus in Northbrook last week.

Chairman, Chief Executive and party ringleader Edward Liddy was everywhere. He and the company declared a dividend increase one day, and reported the first rise in annual operating income since he took the helm the next.

From there he held court over a companywide meeting, starring in a professionally produced skit that unveiled this year's 401(k) plan contribution: a rich, $1.50 company match for every dollar of employee contributions. Last year, the match was 50 cents.

"Whenever our results are good, and they are," Liddy said with dramatic pause to employees as he introduced the skit, "we like to have a little fun in announcing the profit-sharing contribution."

The romp ended with Liddy winning the $1.50 contribution as an oversized, Publishers Clearinghouse-style winner's check, and employees cheering the increase.

But not everyone touched by the good-hands people is feeling so warm and fuzzy.

Liddy's wrenching first bold move as chairman--changing Allstate's agent workforce to independent contractor status about three years ago--still is consuming huge amounts of corporate attention as the company tries to repair relationships with the agents.

Also in the last year, soaring auto and home insurance premiums have rankled customers and consumer advocates and received attention from rate regulators.

And despite the company's profit growth in 2002, analysts were looking for higher numbers and have begun to lower their expectations for continued rate hikes in the future. Allstate shares have fallen more than 8 percent since the company announced fourth-quarter earnings last week.

"It's a tough balance" keeping all those constituencies happy, notes David Schiff, author of the popular industry newsletter Schiff's Insurance Observer.

Liddy acknowledges the difficulty of trying to please the diverse audiences of an insurance concern.

Rancor among the agents reached such a din, in fact, that a small group fought to form a labor union, a move that was rejected in December by the National Labor Relations Board. That followed a handful of other lawsuits filed by agents across the country who were unhappy with the new independent contractor status.

"It was not an easy year, especially for our agents," Liddy said in a rare serious note during last week's festivities. "Putting through rate increases and not writing business in some states--that can be a difficult message."

LaVonne Hayes-Strickland is living proof.

The longtime agent in Calumet City said her business costs have soared, and her two office employees no longer have company-provided health insurance because she can't afford to pay it since the switch. Meanwhile, the company keeps raising performance bars, and she's virtually on her own to deal with customer wrath over the rate increases, she said.

But relations between the company and agents have improved since October, when Allstate drastically lowered the number of warning letters it sends to agents, said Hayes-Strickland, a 15-year veteran.

Rather than flagging all agents who fall below top performance benchmarks, only the weakest performers get the "expected results" letter from corporate headquarters, said Tom Wilson, president of Allstate's insurance division.

"All the changes [taken together] haven't been enough to make me leave," said Hayes-Strickland, citing what she perceives as an equally difficult operating environment for independent agents.

Ray LaMantia, a 34-year-old former bond futures trader who started as an Allstate agent after the independent contractor change was made, couldn't be happier. He just won a company trip to Paris, in fact, an incentive given to the company's 500 most profitable offices.

"This has been incredible for me," said the Skokie-based agent, who craves the unlimited earnings potential that comes with the independent status.

In another gesture, Allstate stopped requiring agents to keep offices open on the Friday after Thanksgiving, instead staffing call centers to handle higher claims calls that day, Wilson said.

"There's no longer a downward trend in relations with the agencies," Wilson said, though getting an objective measure is difficult. After years of bad publicity over its battles with agents, company contracts continue to force agents to funnel all media requests through the corporate office.

Assuming the worst of the agent issues are behind the company, the biggest challenge appears to be future growth.

As president of the company in the mid-1990s, Liddy consistently stressed a need to stick to Allstate's knitting in property and casualty insurance. Now, there is a clear push to find new sources of earnings growth that don't rise and fall with the next hurricane or earthquake.

Enter Allstate Financial, the unit run by a former Northwestern Mutual executive that sells life insurance and other investment products and accounts for 30 percent of total operating income.

Casey Sylla, chairman of the financial unit, said half of Allstate's agents are licensed to sell the financial products. His aim is to boost that to 75 percent this year.

The overarching strategy, within the financial group and the traditional insurance divisions, is to get bigger and broader to smooth out the earnings bumps that come from the cyclical nature of the property and casualty insurance business.

"Simply put, we want to grow faster than the industry, and, doing that, we'll take market share over time," Liddy said.

Analysts aren't convinced about growth rates far surpassing the rest of the industry and were disappointed with premium growth in the fourth quarter. In the latest rankings, more analysts rated the stock a "hold" than a "strong buy."

"It's basically just a good, cyclical company," said Schiff. "It's a good, strong franchise that over time should do reasonably well."

But to put too many resources into charging up growth rates is folly, Schiff warns.

"Even the greatest [insurance] companies don't have 40 years of steady, straight-up growth," he said.

Copyright © 2003, Chicago Tribune

Are Department Stores Dinosaurs?

Traditional retail outlets losing out to specialty stores, mass merchants

The face of the fashion industry is changing. CNBC's Garrett Glaser reports from New York's Fashion Week.
By Garrett Glaser - CNBC - New York - February 10, 2003

As Fashion Week kicks off today in New York city, there's a changing dynamic in the way apparel is sold. Twenty years ago, some 70 percent of all apparel in the U.S. was sold in department stores. Today, it's 40 percent. That has owners of these traditional retail outlets scrambling to re-invent the way they reach consumers.

AMERICAN CONSUMERS have loved "and lost" retail royalty before, including once-prosperous chains like Bonwit Teller, Wanamaker’s, B. Altman, Gimbels, and Best and Co.

Tastes change. When stores don't, they go away. It's about survival of the fittest. At least that's the traditional wisdom.

But today, competition among retailers has a new element. Traditional department stores like Macy's and Bloomindale’s are losing out to smaller specialty stores like Ann Taylor or Bed, Bath and Beyond that offer better service, price and convenience.

As president of Federated Department Stores the largest and, some say, most innovative department store company in the nation Terry Lundgren has a lot to think about these days.

Federated is a group of stores. Abercrombie is a brand, and it has the coolness of a brand. That concept is central to the company’s strategy.

"We are a store that has multiple brands, said Lundgren." One of the single best success stories inside of our company is a brand called I.N.C. We created that brand ourselves. It is a very successful business.

Go shopping with Wells Fargo retail industry analyst Jennifer Black and you’ll see things a whole new way. Black’s earnings estimates for retailers are rated the most accurate in the industry.

She says that Federated and its largest direct competitor, May Department Stores, continue to lead the way in operating margins. But she’s convinced consumers — especially younger ones — will continue the exodus from traditional department stores.

"That’s what’s been happening and we believe that will continue to happen, she said. "Both to the specialty and mass channels of distribution.”

They're going to higher-end stores like Saks Fifth Avenue and Neiman Marcus, as well as apparel specialists like Gap, J. Crew and Abercrombie. And they're moving to mass distributors like Wal-Mart, Target and even troubled Kmart.

One of the biggest negatives she sees for traditional department stores is their sales help.

“If you’re in a typical department store today, chances are that person could be a floater,” said Black. “They may not know the merchandise. So you have that problem. Or you could have the problem that you find an item — if you’re lucky enough to find the department — and then you can’ find someone to ring it up.”

Enter Re-invent. It’s Federated’s name for a long list of innovations.

Start with scanners that customers can use to check an item’s regular price and the sale price, showing how much they’ll save.

Then there’s music and video for energy; refreshment areas; central check-out; better signage, and spacious try-on areas. The changes are already in dozens of stores with many more to come.

But veteran industry consultant Merrill Lehrer doesn’t think all of it is enough. He’s visited all kinds of stores, including a Rich’s in Atlanta.

“I was very hopeful to come out and see this store and say, ‘Wow, they got the message: they have revolutionized their format,’” he said. “And I just didn’t see that happening.”

David Hone runs the Scudder Large Company Value Fund, with $1.5 billion under management. And not a penny in department stores.

“We think that the outlook for the department stores is quite challenging both near term and longer term,” he said. “And for those reasons we avoid the group.”

Federated’s Lundgren could not disagree more. He says the department store’s core customer, the American female consumer, is still well served.

“Ultimately, she’s going to want quality, fashion and great value,” he said. “And there’s no better place to find that than at stores like Macy’s and Bloomindale’s.”

Other department store operators report progress in reversing sales declines. J.C. Penney, which is in the middle of a much-publicized merchandising turnaround, posted sales gains for December, which few others did.

Sears COO Alan Lacy told CNBC a few weeks ago the company is well on its way to recovery after acquiring mail order clothing retailer Lands End.

May Department Stores said in a written statement: “Anyone who thinks department stores won’t be around is making a serious mistake. We will always have a special niche serving consumers.”

Credit Cards to Swipe Profits At Sears During Turnaround
By Joe Hallinan and Amy Merrick - Staff Reporters
The Wall Street Journal
February 11, 2003

In the midst of an ambitious turnaround plan, Sears, Roebuck & Co. is optimistic about improving its profits this year. But it will take a lot of washing machines, power tools and Lands' End turtlenecks to overcome the plastic problem.

Sears says it has taken action to fix its credit-card business, after stunning investors last fall with a series of revelations about credit woes. But a closer look shows that credit problems could continue to jeopardize the overall turnaround plan -- and hold down the price of a stock that lost nearly half its value last year, some investors and analysts say.

Sears is the third-largest MasterCard issuer in the world, trailing behind only Citigroup Inc. and MBNA Corp., according to Nilson Report, an industry periodical in Oxnard, Calif. Sears launched the card just over two years ago, part of an attempt to counter a loss of market share by its proprietary "blue" card, which is good for use only in Sears stores. Thanks to the two cards, Sears' credit and financial-products segment provided $1.5 billion, or 60%, of the company's operating income in the fiscal year that ended Dec. 28. Its retail segment, by comparison, provided just $1.16 billion.

So when the company says, as it did last month, that it expects the earnings benchmark that it uses with Wall Street to increase 5% this year, Sears will need its ailing retail division to post better than 5% earnings growth, to make up for the sliding results in the huge credit-card business. (The earnings benchmark excludes what Sears calls "noncomparable items," though the accounting rules generally classify those items as ordinary gains and expenses.)

Yet Sears, still tweaking its store formats and product assortments in the wake of its acquisition of Lands' End, suffered a 4.6% drop in comparable store sales in December from the year-earlier period, and such same-store sales dropped 8% in January. That prompted the company on Thursday to issue a gloomy first-quarter earnings forecast that was well below what analysts were predicting. Shares of its stock fell nearly 9% that day and have since continued to slide. In 4 p.m. New York Stock Exchange composite trading Monday, Sears shares fell 36 cents to $22.88.

"Obviously, Sears was hit by the same bug as the rest of the retailing industry this holiday season," says analyst Carol Levenson of Gimme Credit, an independent credit-research firm.

For its part, Sears, based in Hoffman Estates, Ill., says it generally isn't counting on rising store sales to lift profits in either its retail or its credit businesses. Instead, it expects to benefit from major cost cuts made last year. The company predicts that the better retail profits will more than offset the decline in credit-card income. Among other steps it has taken to improve its credit-card operations, the company in October abruptly dismissed the president of its credit division.

But by Sears' own admission, losses on its credit-card portfolio seem certain to get worse. Charge-offs typically increase as young portfolios, such as the MasterCard one held by Sears, mature. In fact, Sears says it expects its MasterCard charge-off rate, 3.63% of account balances as of Sept. 30, to nearly double, peaking late this year between 6.5% and 7%.

Sears maintains it is adequately reserved against the increase, with $1.78 billion set aside. But some analysts and investors say they would prefer to see Sears slow down its earnings growth and instead bolster its reserve. In the fourth quarter, Sears sharply increased its provision for uncollectible accounts by 40%, but the provision was down slightly relative to the prior quarter.

"We found the increasingly high delinquency statistics disturbing, and question whether it's prudent to cut back on the provisioning just yet," noted Gimme Credit's Ms. Levenson, in a report after the company's Jan. 16 announcement of 2002 and fourth-quarter results. She added: "Sears desperately needs its credit operations to offset its rocky retailing results, but right now it appears Lands' End might be the only profitability savior." Her conclusion for bond investors: It is "premature to recommend" Sears's commercial-paper debt, or short-term IOUs.

Among other reasons why some analysts and investors fret: Sears's credit clientele seems more troubled than the average American. "It's one we would expect to experience more credit challenges," says James E. Moss, an analyst with Fitch Ratings. Bankruptcies among the retailer's credit-card holders soared 20% in the third quarter from year-earlier levels, and vaulted 26% more in the fourth quarter. That is far higher than the 7.8% increase recorded nationwide for personal bankruptcies in the year ended Sept. 30. Sears contends its increase is represented in dollars, not individual filers, and isn't out of line with the national statistics. (The national statistics, from administrators of the U.S. court system, come only in the number of filings, not dollar amounts.)

Sears says its customers are no less creditworthy than average Americans. The company says its active MasterCard customers have an average credit score compiled by credit specialists Fair, Isaac & Co. of 720, which roughly places them in the middle of the pack of American consumers. But Sears declines to release the scores for its inactive MasterCard accounts or for its proprietary blue card. Sears has some 60 million credit accounts, of which 25 million are active, meaning they have been used in the past year. Of those 25 million, roughly 16 million are Sears blue cards; the rest are gold MasterCards.

It is difficult to compare Sears's credit-card operations with those of rivals. Most credit-card issuers begin to write off customer accounts once they are delinquent for 180 days, but Sears doesn't take action until 240 days have passed. And at Sears, a customer who is 240 days behind can become current by making two payments, each of as little as 1/45th of the outstanding balance. Sears declines to say what percent of its accounts has undergone this so-called re-aging process. But Sears Chairman and Chief Executive Officer Alan J. Lacy says the number is small. "Pick one of the smallest numbers you can think of," he says. "And it's about that."

Another potential concern for Sears is the impact of rising interest rates on the company's own debt load. At the end of the third quarter, some 86% of Sears's domestic debt was at a variable rate, versus just 60% the year before. Based on the $24.2 billion size of its variable-rate funding portfolio, Sears estimates a one-percentage point increase in interest rates could cost it $242 million per year before taxes.

Sears's ability to pass such increased costs onto its customers may be limited. The chief draw of its MasterCard is its relatively moderate annual interest rate, which generally ranges between 13.9% and 21.9%. Bump that rate up too much, and cardholders could simply defect to a cheaper card -- or to one that offers perks like frequent-flier miles.

But Sears says it can keep its customers happy by offering in-store discounts, as well as adding out-of-store benefits like coupons good for discounted meals at Chili's Grill & Bar, a division of Dallas-based Brinker International Inc.

Moody's Investors Service adds that Sears' asset-backed debt has grown to 47% of the company's capital structure from 37% in 2001. If the level of asset- backed debt stays that high, Moody's says, it could modestly cut Sears' unsecured debt rating.

Sears says it has a diverse funding base and back-up lines for its unsecured borrowings. But Moody's notes, "The lack of any multiyear component to its proposed new bank facility materially weakens, in our view, the overall quality of Sears' alternate liquidity arrangements."

Weak Retail Sales Push Out More and More Executives
By Tracie Rozhon - New York Times
February 11, 2003

The revolving door for retail executives has really started to spin.

Within the last month, at least 14 top executives at retail companies have thrown in the towel or the sweater, or the Barbie doll and people in the industry say a majority of those were fired. Most of the executives left without a successor in place; many of the vacancies remain unfilled.

Last week, Kathy Bronstein was ousted from Wet Seal, after 10 years as chief executive and a whopping 25 percent sales decrease in January (although Ms. Bronstein will remain on the board). Kim Roy, the president of Ann Taylor Stores, was out two weeks ago. Rob Gruen left the Parisian stores, owned by Saks Inc., on Feb. 3.

And that's not all. Major retail executives at Linens 'n Things, American Eagle Outfitters, Toys "R" Us, Kmart, Coach, Bath & Body Works, Talbots, Marc Jacobs, Tommy Hilfiger and Donna Karan have all left their positions. Ken Pilot was chief executive at J. Crew for only about five months when the board got the chance to hire Mickey Drexler, the Gap's former wunderkind. Mr. Pilot was out, and is looking for a job.

For those who did not leave voluntarily, the reasons are basically twofold: weak retail sales at the end of the companies' fiscal year — and increasingly impatient corporate boards.

"The number is unprecedented," said Kirk Palmer, founder of Kirk Palmer & Associates, a national retail executive search firm. "Although some always leave at the end of the fiscal year, what is unusual this year is both the number and the high profile of these departures."

Hal Reiter, president of Herbert Mines, another national search firm, said that while harsh year-end retail economics usually result in some axes falling, this year's departures are 25 percent higher than normal.

"More and more, these boards are like baseball and basketball — at the end of the season, your report card gets read. If you don't have A's or B's, you're outta there."

Tracy Mullin, president and chief executive at the National Retail Federation, blamed the tough economic times, and said that the retail bloodbath might not be over: she said she knew of several more "major" retail shakeouts in the works, which may be announced in the next six months.

Mr. Palmer has already met with eight of the executives who left recently. He said he expected to meet with almost everyone within the next few months, as they return from spending time with their families — or whatever they said they would be doing in the news releases.

If the pace of this year's departures is exceptional, so is the politeness. On Feb. 4, Steven Silverstein resigned as president of Linens 'n Things after less than two years. Mr. Silverstein, the company announced, stepped down to pursue other interests. "The decision was amicable," was the way Norman Axelrod, the chief executive, put it.

Companies may have promised to call a forced departure a resignation, in return for the ousted going quietly. Or, the board and the former employee may agree on the need not to kick up the dust. Or maybe, they just left.

Yesterday, Rebecca Caruso, a spokeswoman for Toys "R" Us, said that Gregory R. Staley, the former chief executive officer, was not ousted.

"It was a mutual decision that he and John Eyler reached together," she said, referring to the toy company's chairman. "With our physical store renovation completed, they felt it was time to move forward with a fresh vision."

Mr. Staley, who announced his resignation on Jan. 20, left 10 days later, Ms. Caruso said. "He wanted to spend some time with his family — and consider his options."

Gilbert W. Harrison, the chairman of Financo, an investment banking firm, is also meeting — discreetly — with some of these high-level unemployed, exploring their options, options which might include offering the former chief executives new leadership roles in companies Financo is considering buying.

Mr. Harrison cited the current pressure on the country's chief executives.

"With so many store comps down, with inflation and lower unit profits, it's harder than ever to perform — there's tremendous pressure — and the boards are less and less patient," said Mr. Harrison, who sits on several boards, including that of American Eagle Outfitters.

At American Eagle, the new co-chief executive, Roger S. Markfield, said that Jay L. Schottenstein, the company's majority shareholder, resigned in December as chief executive but would remain chairman. Why? "It was cleaner," replied Mr. Markfield, "with all the increased scrutiny of corporations."

`'There is no real change of leadership," he said, adding that he and the other co-chief executive, James V. O'Donnell, had already been running the $1.4 billion clothing company "on a day-to-day basis."

The increased emphasis on corporate responsibility is one reason for the high level of turnover, according to Rakesh Khurana, an assistant professor of organizational behavior at the Harvard Business School, and author of "Searching for a Corporate Savior: The Irrational Quest for Charismatic C.E.O's" (Princeton University Press, 2002).

In a study of 850 chief executives who were fired in the last 17 years, Mr. Khurana said today's chief executive is three times as likely to be fired than a similarly performing chief executive in 1980.

Although Mr. Khurana's book is about chief executives in all industries, he cited Mr. Drexler's arrival at J. Crew, announced two weeks ago, as an example of today's revolving-door chief executives.

Mr. Harrison of Financo decried the near extinction of the true "merchant c.e.o.," naming Gordon Segal at Crate & Barrel, Rose Marie Bravo at Burberry and Lew Frankfort at Coach as "stars of that dying breed." Nowadays, he said, boards want less brilliant merchandising creativity and more bottom-line expertise. Mr. Drexler, at the Gap, was replaced by Paul Pressler, who had led theme parks at the Walt Disney Company.

Neil Fiske, who was appointed chief executive of Bath & Body Works yesterday, does have retail experience from the consulting side: he spent the last 13 years with the Boston Consulting Group.

But industry sources caution bleeding hearts not to feel too sorry for those ousted. A spokesman for J. Crew hinted that Mr. Pilot's severance was healthy; people close to the decision said the package ran into the millions of dollars. (Although Ms. Bronstein's severance package at Wet Seal has not been disclosed, her compensation while chief executive was $2.6 million, people in the industry said.) Not only that, Mr. Palmer predicts most, if not all, will find jobs.

"No one wants to hang up their retail clothes and play golf," he said. "I don't know if you can say they'll end up at better companies or not.

"But just a few years ago, most of these men and women were knocking it out of the park," Mr. Palmer said. "When we return to another business cycle, why couldn't they hit another home run?"

Why, indeed? Tim Lyon, a spokesman for the J. C. Penney Company, said that Beryl Rath, now Penney's senior vice president and general merchandise manager, was formerly the chief executive of Zale's, a national jewelry chain.

She joined Penney in May 2001, and since then, "deserves much of the credit for getting our jewelry business back on track," Mr. Lyon said, adding that jewelry has the highest gain of any merchandise division in the company. "She brought in better merchandise, she cleaned up the displays, and she solved our distribution problems."

Who said there are no second acts in America's retail business?

Copyright 2003 The New York Times Company

Cheap Stocks Can Get Cheaper
By Jesse Eisinger - Barron's Online
February 7, 2003

The market is starting to give value investors regular shocks.

Home Depot lowered earnings forecasts recently, Toys "R" Us shares keep sliding, McDonald's is struggling and Circuit City Stores short-circuited this week. On Thursday, grocer Safeway Inc. came in with weak earnings and Sears Roebuck delivered a blow about the current quarter.

"Value" investors, like short-sellers, own up to poor timing. They admit they're often too early, buying good companies that might not have delivered all the bad news. But it looks early for all these names.

Sears is the latest to disappoint. It said January's same-store sales were down 8%, worse than expected. The company blamed weak sales of home electronics.

Worse, Sears forecast earnings for the current quarter that are much lower than expected thanks in part to its worsening credit-card business. It sees first- quarter earnings of 50 cents to 65 cents a share, compared with the First Call average of 87 cents. The stock fell 9%.

Sears is caught on the wrong side of many retailers, including Wal-Mart Stores and the home-improvement stores like Lowe's and Home Depot. Cheap now, the stock is likely to head even lower.

Meanwhile, investors were less disenchanted with Safeway's earnings, though there were signs of continued stress there, too. The defenders of Safeway used to say it was geographically insulated from Wal-Mart's incursion into the food business. But the price war initiated by Wal-Mart has spread across the country. Gross margins at Safeway slipped in the quarter and the company expects them to keep falling, while administrative costs should keep rising. Sales at "identical" stores, same stores excluding replacement stores, were down 1.9% in the fourth quarter.

Responding to Wal-Mart, Kroger is adopting a low-price strategy. Others, such as Safeway, are depending on having good locations, better offerings and more easily navigated stores. The U.K. supermarkets that adopted the latter strategy amid a similar price war several years back didn't thrive. Safeway's pretax profits could fall from here, skeptics warn.

Some, or even all, of the value favorites might turn out to be great stock calls. For now, many of them look to have more room to fall.

Sales Slide Continues at Sears...
Retailer Expects Soft 1st quarter
By Robert Manor - Staff Reporter - Chicago Tribune
February 7, 2003

Sears, Roebuck and Co. said Thursday that its sales slump is continuing, and the retailer warned that first-quarter earnings will be worse than previously thought.

Sears said same-store sales fell 8 percent for the four weeks ending Feb. 1, the 17th consecutive monthly sales decline at stores open at least a year. Total sales for the period fell 6.3 percent, to $1.6 billion.

The Hoffman Estates-based company said it also expects first-quarter earnings to be less than analysts expected. Sears said it expects earnings of 50 to 65 cents a share, while analysts surveyed by Thomson Financial/First Call had an average forecast of 87 cents.

Sears' poor performance is coming at a time when some of its big competitors are doing well.

Wal-Mart Stores Inc., the world's largest retailer, said its sales rose 2.3 percent last month, and Gap Inc., the country's largest clothing store chain, reported a 16 percent increase.

"Comparatively speaking, the discounters have much better earnings," said Derek Leckow, a retail analyst for Barrington Research. Leckow said consumers are looking for value in their purchases.

"Sears does represent good value, but maybe that message isn't getting out there," Leckow said.

Sears stock plunged on the news. Shares fell $2.23, about 8.7 percent, to $23.31, far below its 52-week high of $59.90.

Sears management said the decline was no surprise. "January comparable-sales results were within our first-quarter plan of a mid-single-digit percentage decline," said Chairman Alan Lacy. "We continue to tightly manage expenses."

The company said sales of electronics goods suffered in January. Fitness equipment sold well, however. Sears' credit card operations, ordinarily a large contributor to company performance, also have suffered, as an increasing number of people are unable to pay their debts.

Sears forecast a mid-single-digit drop in February sales. Roz Bryant, a retail analyst for Morningstar, said Sears is trying to attract a better-educated, more affluent customer. She said those consumers will buy Sears appliances and tools but not its apparel.

Bryant said that is why Sears acquired Lands' End, which has a reputation for value, durability and a measure of style. "We tend to believe this strategy is not going to be successful," Bryant said. "Winning over a more well-heeled consumer is a tough proposition," she said, noting that many retailers target that economic group.

Copyright © 2003, Chicago Tribune

Sears' Stock Falls on Bad Sales News
Daily Herald - Suburban Chicago  - February 7, 2003

Sears, Roebuck and Co. Thursday reported its 17th straight monthly decline in sales at stores open at least a year and said its first-quarter profit would be far below Wall Street estimates.

Stock in the Hoffman Estates-based retailer fell $2.23, or 8.7 percent, to $23.31 for its biggest one-day loss since mid-October, when the company reported a 28 percent drop in third-quarter profits and warned of growing losses on credit card debt.

Sears' news was in contrast with Wal-Mart Stores Inc., which raised its outlook for earnings for the recently ended fiscal year and said same-store sales rose 2.3 percent.

Sears said its same-store sales fell 8 percent in the four weeks ended Feb. 1, in part because of weak demand for home electronics. The company had said it had expected a percentage decline in the mid-single digits.

Sears' retail unit has struggled as lower-priced stores such as Kohl's Corp. expand, while its credit-card business, which generates about two-thirds of the company's profit, has seen results hurt as it sets aside more money for people unable to pay their bills in a soft economy.

Sears said it expects first-quarter earnings of 50 cents to 65 cents a share, excluding extraordinary charges or gains. The estimate includes an expected decrease in credit income and the effect of a later Easter holiday.

While a spokeswoman said the outlook was unchanged from the company's previous earnings guidance, it is well below the forecast range of 84 cents to 89 cents from analysts surveyed by Thomson First Call.

For the full year, Sears said it sees a low- to mid-single-digit percentage increase over 2002 earnings per share of $4.92 before any extraordinary charges or gains. The analysts' average estimate compiled by First Call is $5.09.

Sears also confirmed Thursday that it has discontinued its Wish Book catalog. The Christmas catalog, which has existed in one form or another since 1933, had a circulation of 10 million, according to published reports. A Sears spokeswoman said an alternative publication is expected to be ready by the next holiday season.

Among other retailers, results at stores open at least a year were mixed in January. Target Corp. had a 0.4 percent decrease. Kohl's Corp. reported a 5.5 percent increase. Gap reported a 16 percent gain, continuing its revival following months of poor results. J.C. Penney Co. Inc. said sales for department stores were down 3.8 percent. Saks Inc. sales were down 2.1 percent. TJX Cos. said sales were down 2 percent.

Sales at Downers Grove-based Spiegel Group were down 16 percent, although same-store sales at its Eddie Bauer unit fell only 1 percent.

Double Tax on Social Security and Medicare
By  Gordon H. Muschett, NARSE Communications
February 7, 2003

The Bush Tax Plan fails to eliminate the "double tax" on Social Security and Medicare for Workers and Seniors.

As you are reading this message, thousands of corporations, associations, public interest groups, various agencies, and lobbyists are planning strategies and tactics to convince legislators to enact laws, make changes, or appropriations that will benefit them, their organizations, or clients.

The U.S. process of law making is, by design, a competition among special interest. As in most competitions, the legislative process has its winners and losers. President Bush has taken great pains in laying out his priorities which is especially difficult in today's economy, while making his case for war with Iraq, and keeping a watchful eye on other trouble spots, and laying out an economic plan. A part of his economic plan is the proposal for the elimination of tax on dividends. We are suggesting that the best plan for most Americans may rather be the elimination of the double taxation on Social Security and Medicare rather than the elimination of taxation on dividends.

The February 3, 2003 article TIME magazine article (as noted below), "THE REALLY UNFAIR TAX" details the impact of the "double tax" on Social Security and Medicare which penalizes millions of workers and seniors.

According to TIME, "income tax is layered upon the portion of a worker's paycheck that is withheld to pay Social Security and Medicare taxes."

Later, "when retirees begin to collect Social Security benefits, the income tax is again imposed on up to 85% of their benefits for those whose income exceeds a fixed level. For a husband and wife, it's $32,000 a year. For a single person, it's $25,000."

TIME says, "for 2000, 7.7 million individuals and families with incomes below $75,000 were taxed on their Social Security checks."

TIME estimates that 100 million wage earners would profit from the elimination of the double tax on Social Security and Medicare. And some 90% of these people take home less than $100,000 a year." "Middle income and lower income taxpayers are the hardest hit by Social Security's double tax for yet another reason. The amount of income tax subject to tax rises annually with inflation, making it the most regressive of all levies."
The TIMES article is a MUST READ for working Americans, Seniors, and Retirees to thoroughly understand how this "UNFAIR TAX" on Social Security benefits affect them and their families.

What should concerned workers, seniors, and retirees do about it?

PHONE, FAX, E-MAIL, AND WRITE PRESIDENT BUSH, YOUR SENATORS AND CONGRESSPERSONS. TELL THEM TO REPEAL THE DOUBLE TAX ON SOCIAL SECURITY AND MEDICARE!!!!

All elements of the President's Tax Plan are NOW ON THE TABLE AND NEGOTIABLE!
Your calls, fax, e-mail, and letters today can help shape the final "Tax Relief Plan", and provide long over-due relief for American workers, Seniors, Retirees, and workers nearing retirement.

Below are listing of how to easily contact your Legislators:
Again, NARSE urges you to today write an e-mail, fax, or snail mail a letter to President Bush, your Congressional Senators and Legislators. Due to the events following Sept. 11, snail mail may be delayed for screening before delivery.

You may contact President Bush at:
President George W. Bush
The White House
1600 Pennsylvania Ave. NW
Washington, DC 20500

or phone comments:
202-456-1111
Fax: 202-456-2461

or e-mail: http://www.president@whitehouse.gov

The fastest way to reach your Congressional Legislators is by e-mail. To locate your Senator type: (place your cursor on the blue highlighted addresses then left "click" on your mouse for direct access to the site) http://www.senate.gov <http://senate.gov>

Select the applicable boxes. On the right side of the Senate block, you may directly click on the U.S. House of Representatives web site, and/or: http://www.house.gov
And, or contact: http://firstgov.com. In addition, they have a feedback form which makes it easy to send a message at: http://firstgov.comfeedback/FeedbackForm.jsp

It is critically important that you contact President Bush, your Senators and Congresspersons NOW! TAKE ACTION TODAY! TIME IS OF THE ESSENCE. DO IT! PLEASE FORWARD THIS NOTE TO ALL YOUR ACQUAINTANCES ASKING THEM FOR ACTION. In addition, write letters to the editor of your local news media expressing your concerns.

Sales Slip for Sears, Other Retailers
Chicago Tribune - February 6, 2003

The nation's retailers contended once more with a difficult sales climate during January, although they were able to clear out holiday leftovers thanks to deep discounts and frigid temperatures.

Sears, Roebuck & Co., the largest U.S. department-store chain, said first- quarter profit will be less than analysts expect because of smaller profit from its credit-card business and falling sales. Federated Department Stores Inc., and Saks Inc. also posted same-store sales declines.

Sales at Sears stores open at least year, known as same-store sales, decreased 8%, and total sales were down 6.3 percent to about $1.6 billion. The first quarter will be affected by a later Easter holiday, the company said.

Comparable earnings per share will be 50 cents to 65 cents a share, the company said in a statement. Analysts expected 87 cents, according to a survey by Thomson First Call. Sears said it will meet its annual profit forecast.

Wal-Mart Stores Inc., usually the industry leader, reported that its same-store sales came in below Wall Street forecasts.

But Gap Inc. continued its turnaround with a double-digit gain in same-store sales, far better than the mid-single increase that Wall Street expected. Same-store sales are considered the best gauge of a retailer's strength "January was marginally better than the prior month. But we are still locked in the same perspective," said Michael P. Niemira, vice president of Bank of Tokyo- Mitsubishi Ltd. "War is a near-term potential, and it makes for an iffy environment."

The company's same-store sales tally of 78 stores was up 1.8 percent for the month, compared to a 1.0 percent increase in December. The January performance was slightly higher than Niemira's forecast for a 1.5 percent gain.

Kurt Barnard, president of Barnard's Retail Trend Report, based in Montclair, N.J., said the upside was that "stores were effective in getting rid of the overhang of merchandise to the benefit of consumers who saw very low prices."

"Consumers are still willing to buy so long is the product is a real bargain," Barnard continued. "The economy continues to be sluggish, with productivity down and failure of hiring to take place. Unemployment remains a serious problem, particularly for retailers."

A report from the Labor Department underscored the weak environment, reporting that productivity of U.S. companies dipped at an annual rate of 0.2 percent in the final quarter of 2002, the worst performance in more than a year.

The Labor Department also announced Thursday that new claims for unemployment benefits fell last week by a seasonally adjusted 11,000 to 391,000. But while the pace of layoffs may be stabilizing, the job market continues to be sluggish.

January is one of the least important months of the year,as stores seek to clear out holiday inventory. Niemira and others looking at February as a better barometer of consumer spending.

Still, a sluggish retail trend is expected to continue. In fact, while discount retailers continue to outperform apparel and department stores, their monthly sales increases have waned.

Wal-Mart posted a 2.3 percent same-store sales increase in January, below analysts' forecast for a 3 percent gain. Total sales were up 12.9 percent.

Target Corp. had a 0.4 percent decrease in same-store sales, below analysts' forecasts for a 0.01 percent increase. Total sales were up 7.7 percent.

Kohl's Corp. reported a 5.5 percent increase, beating Wall Street estimates of a 4.4 percent increase, but still modest from earlier double-digit gains. Total sales were up 22.1 percent.

Here are selected same-store sales for January for other leading retailers:

Copyright © 2003, Chicago Tribune

Spiegel CFO Resigns, Retailer's Future Uncertain
By Kelly Quigley, Crain's Chicago Business
February 5, 2003

Spiegel Inc. Chief Financial Officer James R. Cannataro has resigned, just one day after the struggling retailer's auditor revealed that it has substantial doubts about Spiegel's ability to stay in business.

Mr. Cannataro, 50, will leave next week to become executive vice-president of Nintendo Co. Ltd.'s U.S. unit. An 18-year Spiegel veteran, he insisted his resignation is "totally unrelated" to Spiegel's financial woes.

"This was just the right opportunity at the right time," he said.

Mr. Cannataro recently signed off on Spiegel's annual report, filed Tuesday with the Securities and Exchange Commission, in which a letter from the company's auditor KPMG LLP paints an uncertain picture of the Downers Grove-based retailer's future.

KPMG said Spiegel has not complied with its debt covenants and is past due on "substantially all" of its $1.2 billion in debt covered by those agreements. The company has not been successful in negotiating new agreements with its lenders, the letter said.

"These matters raise substantial doubt about the company's ability to continue as a going concern," KPMG said.

Credit card woes
 In the annual report, Spiegel said it will no longer seek a buyer for its troubled credit card business, which has been on the market for a year. The company said it will keep its private-label credit cards but discontinue its First Consumer National Bank subsidiary.

To stay afloat, Spiegel said it is trying to lower its cost structure but beef up on marketing and new merchandising initiatives. In addition, the company said it would seek more money from its majority shareholder Michael Otto, a multibillionaire who controls the world's largest catalog retailer, Germany's Otto Versand.

The Otto family, which owns 90% of Spiegel shares and holds a majority stake in Northbrook-based Crate & Barrel, funneled more than $360 million into Spiegel last year (Crain's, Oct. 7, 2002).

There's little to show for the hefty investment, as Spiegel has posted declining monthly sales for more than a year at its Eddie Bauer, Spiegel catalog and Newport News Catalog units.

Spiegel said it has started looking for a replacement for Mr. Cannataro, who served as CFO of Eddie Bauer for five years before moving to Spiegel in 2001.

J.C. Penney, Avon to End Trial Cosmetics-Sales Deal |
By a Wall Street Journal  Staff Reporter
January 31, 2003

J.C. Penney Co. and Avon Products Inc. are parting ways after an 18-month test, with both companies citing a change in strategy.

Penney began selling Avon's beComing line of higher-end cosmetics in August 2001, the first store sales of the Avon brand in the direct-seller's long history. Penney has been selling Avon products in about 90 stores.

However, Penney, of Plano, Texas, is expected to announce Friday that it will halt most of its cosmetics sales and rearrange the fronts of its bigger mall stores to include more women's accessories.

Penney said it will pull out the Ultima II line, which it sells in about 435 stores, and Color Me Beautiful, which is in 280 stores, as well as discontinue the Avon line. It plans to continue to sell a selection of cosmetics kits rather than offering brand-name makeup sold over cosmetics counters.

The department-store retailer plans to make over the space with the faster-growing category of ladies' accessories by adding more handbags, belts, costume jewelry and fragrances. The company expects to start remaking stores in the spring and to complete the transition by Aug. 1.

Meanwhile, Avon Products, of New York, is expected to say Friday that it made a strategic decision to sell the beComing brand through an elite group of direct- selling representatives with special training. The company expects the change to improve the sales growth of the line, in part because direct sales have been stronger than retail sales during recent months.

Despite the change, Avon is expected to continue to look at ways to reach retail customers. The first foray, however, was relatively short. The direct-seller said it would begin selling cosmetics through both Penney and Sears, Roebuck & Co. in fall 2000. But Sears backed out in July 2001, just a month before the launch, when it decided to leave the competitive cosmetics and skin care business.

Kmart Launches Ad Blitz as Store Closings Start
Reuters
January 30, 2003

TROY, Mich., Jan 30 (Reuters) - Discount retailer Kmart Corp. <KMRTQ.PK> said on Thursday it would give out coupon books worth $150 to draw customers to its remaining stores as it begins closing more than 300 outlets as part of its plan to get out of bankruptcy.

Kmart said it would roll out an advertising campaign on Sunday that it calls "Savings Are Here To Stay", giving customers coupons including money off total store purchases if they transfer drug prescriptions to a nearby store that is staying open.

Kmart declared bankruptcy a year ago, struggling to compete in a discount sector dominated by Wal-Mart Stores Inc. (nyse: WMT - news - people). The retailer expects to get out of bankruptcy by April, about three months earlier than originally planned.

The company received bankruptcy court approval on Tuesday to close up to 318 stores, which it said would cost about $300 million. The store closings are expected to eliminate 35,000 jobs, or about 17 percent of Kmart's work force.

Combined with the 283 it closed last year, Kmart will have cut some 30 percent of its store base once the second round of store closings is complete, leaving it with about 1,500.

Kmart has said the closing stores carry some $2 billion in inventory, and close-out sales are expected to generate $500 million in proceeds.

GOING-OUT-OF-BUSINESS SALES

Kmart's lawyer told a bankruptcy judge on Tuesday it expects the going-out- of-business sales to hurt demand at its nearby stores because customers will likely go out of their way to find cheaper merchandise at a closing store.

However, it hopes that once the clearance sales are completed -- a process it expects to take about 77 days -- its other stores will reap the benefit.

Analysts have said the store closing sales could also hurt demand at nearby Wal-Marts and Target Corp. (nyse: TGT - news - people) stores, but the two discounters stand to benefit in the long run.

"Kmart's loss is Wal-Mart's and Target's gain," said Emme Kozloff, retail analyst with Sanford Bernstein. "The Kmart (store) closings could translate to additional annual earnings per share of 2 cents for Wal-Mart and 4 cents for Target."

Kozloff said there is it least one Wal-Mart within a 10-mile radius of 94 percent of the closing Kmarts, and at least one Target within a 10-mile radius of 70 percent of the closing stores.

That could make it difficult to lure shoppers to a Kmart store if they have to drive past a closer Wal-Mart or Target to get there.

Kmart said closing stores will give out special cash register receipts good for savings of up to $12 off a purchase of $100 made at a nearby Kmart. Those stores will also put maps and addresses of the nearest open Kmart in every shopping bag.

"The 'Savings Are Here To Stay' campaign is designed to give our loyal customers the incentive and information they need to transition to a new store, while assuring shoppers nationwide that Kmart remains open and ready for business," Julian Day, Kmart's newly named chief executive officer, said in a statement.

Moody's Confirms Ratings of Sears, Certain Affiliates
Dow Jones Newswires - January 30, 2003

The following is a press release from Moody's Investors Service:

(SENIORBaa1/PRIME-2); OUTLOOK REMAINS NEGATIVE

Moody's Investors Service confirmed the long- and short-term ratings of Sears, Roebuck and Co. and certain affiliates and maintained a negative rating outlook.

The ratings confirmation is based on (1) the actions that Sears has taken to stem credit losses in its Sears Gold MasterCard (SGMC) portfolio; (2) the expectation that delinquencies and charge-offs will increase moderately in 2003 and improve thereafter; (3) the expectation that continued, improving profitability at the retail stores will continue to offset the impact of higher than expected credit losses.

Following aggressive growth of its SGMC portfolio through conversions from its proprietary Sears Card (SC) and the acquisition of new accounts, as well as the soft economy, Sears is now experiencing higher than expected credit losses. Reflecting this higher level of delinquencies and charge-offs, Sears has significantly increased the provision for uncollectible accounts, causing a 15% decline in fourth quarter operating income from its credit operations. In response to these issues, Sears announced certain senior management changes, including the departure of the credit division head and the move of CFO Paul Liska into this critical position. Sears also moderated some earlier underwriting practices and its aggressive growth targets for the SGMC portfolio that had contributed, along with the soft economy, to this higher-than- anticipated degree of asset quality deterioration. Moody's expects that delinquencies and charge-offs will, as a result of these measures and the seasoning of the SGMC portfolio, increase only moderately during 2003 and that they will decline thereafter. Additionally, our Baa1 rating assumes that credit losses will result in only modest further deterioration in the earnings generated by Sears' credit operations, which remains the major engine of the company's profitability and a cornerstone of the company's ratings. However, we also caution that a prolonged soft economy or additional, currently unforeseen problems in the SGMC or SC portfolios could result in asset quality deterioration that is more severe than we are currently anticipating.

An important factor underpinning Sears' Baa1 rating is the degree to which improved profitability from its retail operations is offsetting weaker earnings from credit. While same store sales were depressed in 2002, and although revenues remained flat year-over-year, increased operating efficiencies boosted Sears' lackluster earnings from its retail stores. We expect that Sears will be able to identify further opportunities to cut costs, although significant cost savings may over time become incrementally more difficult to achieve. It is still too early to be certain of the extent to which management's efforts to reposition the retail stores will result in significant, sustainable improvements in same store sales and profitability. Top line growth and the ongoing integration of Lands' End will remain a key challenge over the intermediate term. Nonetheless, Moody's expects that Sears will be able to continue to improve the earnings and cash flow generation of its retail operations as it continues to implement cost savings initiatives, to develop its proprietary Covington brand, and to roll out Lands' End merchandise in its full-line stores.

The negative rating outlook reflects (1) the risk asset quality deterioration could be significantly worse than currently anticipated, either because of the soft economy or due to additional problems in the SGMC or SC portfolios; and (2) Moody's concern with the large and growing proportion of asset-backed debt in Sears' capital structure. Asset-backed debt has grown from 37% of Sears' capital structure to about 47% between 2001 and 2002. Moody's recognizes that Sears' ready access to both the asset-backed term and CP markets significantly broadens its sources of funding -- a meaningful positive in a difficult credit market. However, the current high proportion of asset-backed debt in Sears' capital structure creates a significant degree of effective subordination for unsecured lenders, including bondholders. If Sears were to decide to maintain its current heavy reliance on the securitization market on a permanent basis, Moody's could modestly notch down the company's long-term senior unsecured debt rating.

Sears maintains a diversified funding base with a good spread of maturities, while its access to the asset-backed debt markets significantly broadens the company's sources of funding beyond the traditional unsecured debt markets. Sears maintains 100% back up for its unsecured commercial paper borrowings in the form of committed bank facilities and its portfolio of short term, high quality investments. However, although Moody's takes some comfort from the range of funding sources available to Sears, including its significant portfolio of short term investments, the lack of any multi-year component to its proposed new bank facility materially weakens, in our view, the overall quality of Sears' alternate liquidity arrangements.

Ratings confirmed:

Sears, Roebuck and Co.-- Debentures, notes, medium term notes and issuer rating at Baa1; senior unsecured shelf registration at (P)Baa1, preferred stock shelf registration at (P)Baa3.

Sears Roebuck Acceptance Corp.- Notes, medium term notes, debentures, bonds, and Eurobonds at Baa1; subordinated medium term note program at (P)Baa2; senior unsecured Shelf registration at (P) Baa1, Commercial Paper rating at Prime-2.

Sears DC Corp.- Medium term notes at Baa1.

Sears, Roebuck and Co., headquartered in Hoffman Estates, Illinois operates more than 870 full-line department stores and approximately 1,300 specialty stores. It is the third largest retailer in the U.S. on a revenue basis and has the largest retail credit card operation of any U.S. retailer.

Dell Is Planning to Peddle PCs Inside Sears, Other Big Chains

Kiosks to Allow Customers to Try Computers Before Placing Orders
By Gary McWilliams and Ann Zimmerman
Staff Reporters of The Wall Street Journal
January 30, 2003

Buy a Dell at Sears? Why not, the computer maker says.

Direct-sales champion Dell Computer Corp. soared in the 1990s by selling PCs on the phone and over the Internet. Now it's also courting old-line retailers by offering to pay for floor space and launching trials of a Dell store-within-a- store with big-name chains. It also is making its mall-based sales kiosks permanent.

Dell started putting online kiosks in shopping malls a year ago to allow customers to see and try its computers before they bought. By year end it had expanded the concept to nine U.S. states, Canada, Japan and England.

On Wednesday, Dell launched a trial with retail company Sears, Roebuck & Co., opening the first of about 10 stores-within-a-store in Austin, Texas, according to John Hamlin, a Dell senior vice president. "We see it as another marketing vehicle to extend the direct [sales] model," he says.

Dell isn't the only computer maker expanding its retail presence. Apple Computer Inc. and Gateway Inc. have both opened retail stores in the U.S. to supplement their online sales. But both companies stock their computers in their stores. Dell customers will be able to pick out their computers at the stores but will then either place their orders online at the kiosks or phone in their orders from home. The company says it learned its lesson about stocking stores with PCs in the early 1990s, when it tried to sell through Wal-Mart Stores Inc.'s Sam's Club, Staples Inc. and CompUSA. That push failed in 1994 as customers struck better deals over the phone directly with Dell and the retailers were stuck with unsold stock.

So far, Dell's new approach has met resistance from some retailers, particularly those that see the company's in-store kiosks as a Trojan horse. Best Buy Co., the largest U.S. consumer electronics retailer, spurned Dell's overtures. A Best Buy spokeswoman confirms that an approach was made, and says the company considers Dell a competitor.

Dell was also rebuffed at computer superstore CompUSA, where it sought to install kiosks in exchange for a fee for sales. "They couldn't make us happy," says CompUSA President Larry Mondry. The two companies disagreed on which one would handle non-PC sales such as extended warranties, accessories and upgrades. CompUSA, which operates some 229 stores, is a subsidiary of Mexico's Grupo Sanborns.

Mr. Hamlin maintains that Dell isn't suffering from any lack of potential retail partners. "On any given day, I can tell you of 50 or 100 guys who have approached Dell trying to do business with us," he says.

The latest retail moves reflect the Round Rock, Texas, company's drive to expand its consumer sales amid a weak corporate-PC market. Indeed, even as rivals such as Gateway are retrenching and analysts see overall PC revenue falling 4% this year, Dell is rapidly expanding home-PC sales and preparing for the launch of its own printer brand.

On Feb. 13, Dell is expected to report its fourth-quarter profit rose 30% to $600 million, or 23 cents a share, on a 20% jump in revenue to $9.7 billion, according to estimates compiled by Thomson First Call.

Consultant Adam Levin, who advises technology companies on retail strategies, says that despite Dell's early rebuffs, retailers are more willing to experiment with new sales ideas than they used to be. But he adds that Dell does face resistance because of its insistence on selling computer add-ons in addition to PCs.

At Sears and at Japan's Jusco supermarkets, the kiosks link directly to Dell.com (www.dell.com). But Dell has been more flexible elsewhere. Since November, warehouse chain Costco Wholesale Corp. has sold Dell PCs through its own Web site (www.costco.com) at prices below Dell's. Dell supplies 11 prebuilt PCs for the retailer's Web site. Recently, a Dell PC marketed on Costco.com was priced nearly $300 lower than a machine configured to the same specifications on Dell's Web site.

"Most of the time our prices are cheaper," says Doug Schutt, Costco's senior vice president for electronic commerce.

Costco also recently installed a PC kiosk that lets customers order Dell PCs in addition to its other products from inside the store adjacent to its Issaquah, Wash., headquarters. "We are excited to test something with such a great name," says Chief Financial Officer Richard Galanti.

Analysts say a permanent retail presence now may well be critical to Dell, especially as it tries to sell its own printer line. "It's still not clear to me how Dell can be successful in consumer-printer sales with a pure direct model," says Bill Shope, a computer analyst at J.P. Morgan Chase & Co.

Stephen Baker, an analyst at sales-tracker NPD Group Inc., says Dell's move to align itself with retailers is part of its plan to challenge printer market leader Hewlett-Packard Co. "They're looking long-range and they know they can't keep people happy just by selling [printer] ink through a Web site," he says.

Smaller kiosks went up last month at five Japanese supermarkets. Dell's Japanese subsidiary began putting kiosks in book and electronics stores and then broadened its approach to include well-known retailers. Its Japanese retail partner is Aeon Co., the nation's second-largest retailer.

The kiosks have helped the company quickly expand its sales to the home. Dell's world-wide share of home-PC shipments rose to 11% in last year's third quarter from 6.8% when it first began setting up the kiosks, according to market watcher International Data Corp. Dell also says its third-period unit sales to the home jumped 51%.

Wal-Mart's Influence Grows
By Jim Hopkins, USA TODAY - January 29, 2003

We are a Wal-Mart Nation. Wal-Mart's influence on the U.S. economy has reached
levels not seen by a single company since the 19th-century rise of Standard Oil, economists and historians say.

Wal-Mart continues to expand rapidly, adding stores throughout the country.

Even if you don't shop at Wal-Mart, the retail powerhouse increasingly is dictating your product choices "and what you pay" as its relentless price cutting helps keep inflation low.

RETAIL HEAVYWEIGHT
Wal-Mart is the biggest customer, or tied for biggest, at a host of large U.S. businesses:

Share of annual revenue at:

Source: Company reports

Wal-Mart is the top seller of groceries, jewelry and photo processing. It is creating more of its own brands. Some, such as Ol' Roy dog food and Equate vitamins, quickly became the USA's top sellers. It is moving into banking, used car sales, travel and Internet access. It averages 100 million customers a week. That's 88.5 million more people than U.S. airlines fly in a week.

Anyone whose stocks rose in the late 1990s owes Wal-Mart, the world's biggest company. It alone accounted for as much as 25% of the U.S. productivity gains from 1995-99, says consultant McKinsey & Co. Such gains drove corporate profits, thus stock prices. Wages in retailing, one of the biggest sources of new jobs in the '90s and current decade, are also affected by Wal-Mart. With 1.3 million workers, it is the world's largest private employer. It employs one of every 123 U.S. workers and nearly one of every 20 retail employees.

"I joke we're all going to be working for Wal-Mart someday," says economist Mark Zandi of consultant Economy.com.

That may not be too far off.

Although Wal-Mart is hitting speed bumps because of growing labor challenges, employment lawsuits and higher costs, few doubt it will stop besting competitors as it expands. While other retailers such as Home Depot, tech giants such as Microsoft and manufacturers such as General Electric played big parts in the 1990s productivity gains, Wal-Mart, with its massive buying power and technology advantage, played the biggest role, economists say. As it grows, its influence, largely unknown to consumers, will continue to seep into more parts of the USA and the global economies.

"Everyone knows Wal-Mart," says Jim Hoopes, a business history professor at Babson College, "but nobody has a real sense of how big and how powerful it is."

Wal-Mart, responding to criticism over its growing influence, says it creates thousands of jobs a year and pays competitive wages and benefits. Its push for productivity is meant to keep prices low, benefiting its customers, says spokesman Tom Williams. "We're doing good, but we could do better," he says.

Few companies have moved so far so fast. Founded 40 years ago in rural Arkansas by Sam Walton, Wal-Mart has swelled to 4,300 stores in nine countries and annual revenue near $250 billion. Its computer network, a critical part of its success, rivals the Pentagon's.

It is now the biggest customer for many of the world's leading consumer- products companies, including Kraft, Gillette and Procter & Gamble. At P&G, Wal- Mart accounts for 17% of annual revenue, up from 10% just five years ago. That makes those companies more dependent on Wal-Mart's success, more vulnerable should it stumble and more likely to respond to Wal-Mart's requests for lower prices and product changes.

The chain's buying power is so immense that 450 suppliers have opened offices — many in the 1990s — near Wal-Mart headquarters in tiny Bentonville, Ark. As many as 800 more such offices are expected in the next five years. Sales representatives want to be near Wal-Mart buyers to beat the competition, says Rich Davis, a local economic development official. "I've had them sit here and say, 'Look, if we're not here, our competitor will be,' " Davis says.

As such, Wal-Mart is increasingly affecting:

Product choices. P&G is dumping weak brands, such as Crisco and Jif peanut butter, sold to J.M. Smucker last year. It wants to focus on heavy hitters, such as Tide detergent, most desired by Wal-Mart and other big retailers, P&G says. That strategy helped P&G boost fiscal second-quarter net income 14% year- over-year to $1.5 billion, it said Tuesday.

Other companies have likewise tweaked products so that they pass muster with Wal-Mart. Video game maker Planet Moon Studios two years ago wanted an industry group to give its Giants game a teen rating. Why? So it would be carried by Wal- Mart and others. Planet Moon changed the color of blood in the video to green from red, toned down the language and put a bikini on a topless character, says CEO Bob Stevenson. Without those changes, he says, "The risk to sales was too high."

Wal-Mart is also challenging its suppliers by developing more of its own products, called "private labels." It stepped up that effort in the mid-1990s as it expanded into vitamins, batteries and bathroom tissue. Its Great Value grocery line has 1,475 items, from beans to salsa, up from 194 two years ago.

Wal-Mart says it is committed to keeping shelves full of well-known brands such as Kellogg cereals and Tide. But, in general, private-label profits run as high as 30%, vs. 15% on brand-name items, says Burt Flickinger, managing director of consultant Reach Marketing.

Private-label products also promise Wal-Mart more profit as the chain expands abroad, because U.S. brands don't have the same clout there. In Europe and the United Kingdom, where Wal-Mart is battling for Britain's Safeway grocery chain, private-label goods are 50% of its sales vs. 25% in the USA.

TOP SELLER OF GROCERIES
Groceries are Wal-Mart's No. 1 source of revenue in its biggest division, discount stores and Supercenters.

Percentage of 2002 revenue:

1 fiscal year ended Jan. 31
Source: Company reports

Product prices. Big food companies including Kraft, which gets 10% of its revenue from Wal-Mart, have not been able to raise prices as quickly as they once did because of Wal-Mart's demands, says Jonathan Feeney, a consumer products analyst at investment firm SunTrust Robinson Humphrey. Kraft declined to comment.

History has shown that suppliers suffer if they run afoul of Wal-Mart. Rubbermaid raised the prices it charged Wal-Mart in the mid-1990s because of an 80% jump in the cost of a key ingredient in its plastic containers. The retailer responded by giving more shelf space to lower-priced competitors, helping drive Rubbermaid into a 1999 merger with rival Newell, says John Mariotti, a former Rubbermaid executive. "Rubbermaid earned Wal-Mart's wrath by not giving it the best deal," he says.

Employment. Wal-Mart's impact on wages was first felt in rural towns in the South and Midwest where Wal-Mart got its start. Often, it became the biggest employer overnight, setting wage rates for all retailers, experts say.

Now, its impact on retail employment has spread nationwide, contributing to slower wage growth throughout the sector, economist Zandi says.

Pay for retail workers rose 43% from 1990 to 2001, vs. 50% for non-retail workers, according to Bureau of Economic Analysis data. No one knows exactly how big a part Wal-Mart played, Zandi says. But its influence is "undeniable" because it created more jobs in the 1990s than any other company, he says. More retail jobs are on the way. Wal-Mart plans to add 800,000 workers in the next five years. U.S. retailers are expected to add 3.1 million jobs by 2010, the government says.

Manufacturers, which pay more, will add fewer than 600,000 jobs in the same period. Labor unions that represent factory workers are alarmed. They say Wal-Mart, in demanding ever-lower prices from suppliers, has helped drive thousands of U.S. manufacturing jobs abroad, where labor costs are lower.

Now they worry about Wal-Mart's push into the unionized supermarket industry. Wal-Mart has no unions. That means its employees earn less than those at competing supermarkets, says the United Food and Commercial Workers (UFCW).

Wal-Mart's hourly pay averages $7 to $8 an hour, vs. $11 at Kroger, Safeway and other competitors with unions, says UFCW spokesman Greg Denier.

Not true, says Williams, the Wal-Mart spokesman. While he would not disclose wages, which vary by market, he says Wal-Mart pay is close to or equal to union wages.

Productivity. Wal-Mart's key role in the 1995-99 economic boom came partly because of its legendary use of technology to analyze costs and speed delivery of goods from its 30,000 suppliers to dozens of sprawling warehouses, say retail and financial analysts.

Wal-Mart says it has the USA's biggest private satellite communications network, one that links stores to Bentonville by voice, data and video. Suppliers tap directly into Wal-Mart's computers to track sales of everything from soup to nuts, which improves inventory controls and cuts costs.

Other retailers, including Kmart, tried matching Wal-Mart's tech prowess but failed. Kmart filed for bankruptcy-court protection last year and is cutting 67,000 jobs and closing nearly 30% of its stores.

Wal-Mart also teaches manufacturers to be more cost effective so product prices can stay down. For example, Wal-Mart might suggest that a supplier cut its labor costs by shipping toasters in their cartons, rather than packing them in bigger boxes and shrink-wrapping them onto shipping pallets, says James Champy, chairman of Perot Systems' consulting unit, which advises Wal-Mart suppliers.

Such close communication between a retailer and supplier is unusual. But it's being adopted by more companies, including Dell Computer, as U.S. businesses seek more productivity to better compete globally.

"It's where the future of business has to be," Champy says.

That future may also include fewer companies. To achieve economies of scale, more consumer products companies are merging. Wal-Mart's demand for low-cost products partly influenced Kellogg's purchase of Keebler in 2001, and the merger of Kraft and Nabisco in 2000, analyst Feeney says.

Speed bumps ahead?

Meanwhile, Wal-Mart's productivity continues driving its bottom line. The retailer is expected to report nearly $250 billion in annual revenue for the fiscal year ending Friday — a 15% gain from the previous year, despite the
so- so holiday shopping period.

Expected earnings of $1.78 a share would be 19.5% higher than fiscal 2002, say analysts surveyed by Thomson First Call.

The chain has 8% of all U.S. retail sales, excluding restaurants and auto dealers. That's up from 6% just five years ago, an "incredibly significant" gain, Zandi says.

Still, that's not big enough to impose unjustified price increases, as some monopolies have done in the past, Zandi says. And Wal-Mart would likely need to be much bigger before it could stifle product innovation, retail analysts say.

If Wal-Mart suddenly imploded like an Enron or WorldCom, no doubt stock markets would react. Consumer confidence would fall. Big Wal-Mart suppliers would be hurt. But other retailers would quickly grab Wal-Mart executives, customers and suppliers. Any disruption to the flow of goods would be temporary, retail experts say.

A more likely scenario is that Wal-Mart's growth could be pinched as it digs deeper into urban areas, where wages are higher, competitors more numerous and scarce land more expensive. That's one reason the chain is rolling out smaller Neighborhood Markets grocery stores that are better suited for urban areas.

Slower Wal-Mart growth could, though, muffle the still-tepid economic recovery. "If only one company is adding 25% of our productivity," Hoopes says, "it means a lot of other companies are not growing fast enough."

Sears Is Sued by Executive It Dismissed at Credit Unit
By Constance L. Hays - New York Times
January 29, 2003

Sears, Roebuck & Company, which dismissed the president of its credit division in October shortly before announcing unexpected losses at the unit, is being sued by the executive, Kevin T. Keleghan, for defamation and breach of contract.

The lawsuit, filed in an Illinois state court in November and reported yesterday in The Chicago Tribune, says that Mr. Keleghan has not received the severance pay he was entitled to after signing a contract in September. It also accuses the chief executive of Sears, Alan J. Lacy, of defaming Mr. Keleghan when Mr. Lacy said he withheld information and otherwise "wasn't forthcoming" about problems at the credit division. Sears set aside an additional $222 million to cover unpaid debt from its credit card operations in the third quarter.

Sears, which is seeking to have the claims dismissed, said Mr. Lacy's comments were "protected expressions of opinion." In its response, filed on Jan. 17, the company accuses Mr. Keleghan of signing the severance agreement "without disclosing to Sears facts" that might have led to his dismissal.

"They have probably been negotiating with him, to no avail," said Anita Boomstein, a credit executive in Manhattan who once worked with Mr. Keleghan. "He is taking steps he feels are appropriate to protect his reputation."

The announcement on Oct. 17 about problems at the credit division, stemming largely from a campaign to move many Sears cardholders to Gold MasterCard accounts that offered more generous credit limits and check-writing privileges, came nearly two weeks after Mr. Keleghan left the company. It angered many analysts, who felt Sears should have detailed its credit problems sooner.

Sears derives 60 percent of its income from its credit operations. About 37 percent of its credit card receivables come from MasterCard, and the rest from Sears cards. Since the Depression, credit cards have been an integral part of the Sears business, and the company says the cards help to drive sales of big- ticket items like washing machines and refrigerators.

At the time, Mr. Lacy said Mr. Keleghan had failed to give him information about the status of the money owed to Sears by cardholders. He later said that Mr. Keleghan "was not forthcoming about what was happening in his business," and added: "My statement that I had lost confidence in his credibility is an accurate statement, and it's as nice as I can phrase it."

Some analysts said that Mr. Lacy, who once managed the credit division, should have been aware of any problems. On Oct. 17, the share price of Sears stock plunged 32 percent, losing more than $10 a share in a single trading session.

Yesterday, shares of Sears closed at $25.65, down $1.08.

The company also confirmed yesterday that Anastasia D. Kelly, its general counsel, had resigned. A Sears spokeswoman said she did not know why Ms. Kelly was leaving or what her plans were. Another executive, Ronald Culp, who has spent 10 years at Sears in the public relations department, said last week that he would retire, the spokeswoman said.

"At this point, I would say that everybody is pretty weary," said Roz Bryant, a retail analyst for Morningstar in Chicago, "and announcements like this don't help."

Copyright 2003 The New York Times Company

Sears Sued by Ex-Credit Exec

CEO Accused of Defamation
By Susan Chandler - Staff Reporter - Chicago Tribune - January 28, 2003

The former executive that Sears, Roebuck and Co. sent packing last fall after big trouble appeared in its credit card business is suing the company, saying Chief Executive Alan Lacy defamed him while Lacy struggled to calm Wall Street's fears.

Kevin Keleghan, who was president of Sears' credit division, also claims that Sears has wrongfully withheld severance benefits due him under his employment contract.

The suit was quietly filed in Lake County Circuit Court in November, just weeks after Keleghan was publicly dismissed Oct. 4. Days after Keleghan was fired, Lacy told analysts and reporters that Keleghan had withheld information from him about the rising level of delinquencies plaguing Sears' nearly $30 billion credit card portfolio.

After Sears added $189 million to its loan-loss provision, a much bigger hit than expected, Lacy told analysts that he had "lost confidence" in Keleghan's "personal credibility" and that Keleghan "had become a barrier" to getting accurate information.

The revelations about the credit business caused a sell-off in Sears stock that sent its shares to their lowest level in more than a decade.

Keleghan's suit says that "by scurrilously attacking Keleghan's character and credibility, Sears and Lacy have raised the false question of whether Keleghan is fit to serve in any position of trust in any executive capacity in any business where shareholder interests are at stake."

A Sears spokeswoman said the Hoffman Estates-based retailer believes it "acted appropriately in regard to Kevin" and intends to fight the suit. Earlier this month, Sears filed a motion asking the judge to dismiss the defamation claim. The judge has not yet ruled on that motion, and the case is scheduled for a status hearing March 6.

Such legal battles are relatively uncommon because most corporations don't want former high-ranking executives telling stories about the company's inner dealings. Typically, executives reach a financial settlement with the company in exchange for a "gag order," a vow not to discuss the company in negative terms.

Chicago attorney Thomas DiCianni, who represents Keleghan, says his client had some discussions with Sears soon after his firing, "but they went nowhere, so we filed suit."

DiCianni says he hasn't been able to figure out what Sears' justification is for not paying severance to Keleghan, but "I assume there will be some claim that he was fired for cause.

"If they wanted to make a business decision and change leadership of that division, that's their prerogative. But he is entitled to certain benefits under the contract," he added.

Keleghan's executive non-compete agreement, which is attached to the suit, spells out the various monies due if he is "involuntarily terminated for any reason other than cause."

In its response, Sears argues that Keleghan "fraudulently induced" Sears to enter into the severance agreement, dated Sept. 4, a month before he was fired, by failing to disclose facts that he "feared would lead to his termination."

Sears also claims that Keleghan "breached the duty of good faith and fair dealing that he owed to Sears and Mr. Lacy."

The suit does not specify how much compensation Keleghan is seeking. But it would undoubtedly be a lot.

Keleghan's 2001 compensation of $1.1 million made him the third-highest-paid executive at the company, second only to Lacy and Paul Liska, Sears' former chief financial officer, who took over Keleghan's post as head of credit.

This is the time for Sears retirees and others to contact their Congressperson to put pressure in eliminating the unfair taxation on Social Security and Medicare!

N A T I O N

The Really Unfair Tax

Bush wants to drop the "double tax" on dividends,
but that's not the one that burdens most Americans.

By Donald  L. Barlett and James B. Steele - Time Magazine
February 3, 2003

When President Bush talks about his plan to stop taxing dividend income, he says he's doing it, in part, for philosophical reasons. "It's unfair to tax money twice," he said as he unveiled his economic-stimulus plan earlier this month. "There's a principle involved. The government ought to be content with taxing revenue streams or profits one time, not twice."

But Bush was silent about the biggest double tax of all, one that hits every working American, not just the one-fourth of tax-return filers who report stock dividends. It's the income tax layered upon the portion of a worker's paycheck that is withheld to pay Social Security and Medicare taxes.

Say a family has $60,000 in wage income. Of that, $3,720 is deducted from its pay-checks for Social Security taxes, and an additional $870 is taken out for the Medicare tax. That's $4,590 that the family never sees. Nevertheless that money is taxed as personal income, as if the family received it. What it amounts to is a tax upon a tax.

And that's only the beginning. Some 10 million Americans are triple taxed, and that group's ranks swell by 1 million a year. When retirees begin to collect Social Security benefits, the income tax is again imposed on up to 85% of their benefits for those whose overall income exceeds a fixed level. For a husband and wife, it's $32,000 a year. For a single person, it's $25,000.

Because these base amounts do not rise with inflation, the number of retirees subject to the triple tax will grow each year. As a result, the tax will eventually hit many who can ill afford to pay it. And this is happening at a time when an increasing number of Americans are forced to work past their planned retirement age because of depleted pensions and retirement accounts. For 2000, 7.7 million individuals and families with incomes below $75,000 were taxed on their Social Security checks.

Be that as it may, the President's plan focuses on stockholders rather than workers. With certain exceptions, citizens would no longer pay tax on corporate dividends. The President's rationale: corporations already pay an income tax on their profits from which the dividends are paid to stockholders, and then those stockholders pay individual income tax on the dividends, thereby creating a double tax.

For 2000, the latest year for which complete tax data are available, 34 million tax filers reported receiving dividends. But the benefits flow largely to upper-income people. Just 7.9 million individuals and families — those who filed returns with incomes of more than $100,000--reaped two-thirds of the total dividends of $147 billion. In short, 6% of 129.4 million tax filers would enjoy most of the benefits from ending the double tax on dividends.

By contrast, TIME estimates that 100 million wage earners would profit from elimination of the double tax on Social Security and Medicare. And some 90% of those people take home less than $100,000 a year. People like Michael Kasprzak and Betty Williams of Seattle.

Kasprzak, 50, who grew up in the Rocky Mountains, is the director of a child-care center and preschool. Williams, 45, a Tennessee native, teaches family and child studies at Seattle Central Community College and does consulting work. They have an 11-year-old daughter at home and a 22-year-old daughter who is on her own. With a 12-year-old Mercury Sable, a three-year-old Toyota pickup truck, a mortgage on a two-bedroom home, and a trip to the movies their idea of an exciting night out, the couple is solidly Middle America.

Kasprzak says the family income varies, depending upon his wife's consulting and teaching assignments, but is usually between $65,000 and $70,000. Their income in 2001 was a bit higher. So how would they do if the Social Security and Medicare double tax are eliminated? The couple would have an extra $1,600 to spend. (Among the 100 million individuals and families who would benefit if this double tax were canceled, the savings would range from several hundred dollars to more than $2,000.) On the other hand, if Bush's current stockholder proposal is enacted, the Seattle couple would save $3, because their dividend income is just $12.

Nothing unusual there. Indeed, Kasprzak and Williams are like the overwhelming majority of middle- and low-income families who would derive little or no benefit from the President's elimination of the dividend double tax. Of 109.9 million returns filed for 2000 by those with incomes of less than $75,000, only 20% reported dividend income.

So who would be the real beneficiaries of the President's tax-cutting initiative? They are people who include the charter members of the Bush "Pioneers," the corporate executives, lawyers, oilmen and others who each raised more than $100,000 for the President's election campaign. People like Maurice (Hank) Greenberg, chairman of American International Group (AIG), the global insurance carrier that has been the beneficiary of many special-interest laws over the years.

This one would go straight to his wallet. In 2002 Greenberg ranked 47th on the Forbes list of the 400 richest Americans, with an estimated worth of $3.3 billion. Much of his wealth was tied up in AIG stock. In 2001, the latest year for which complete data are available, Greenberg owned about 44 million shares of AIG. The company paid 16˘ a share in dividends, meaning Greenberg would have collected $7 million. The President's tax plan would give Greenberg an extra $2.7 million from his newly tax-free AIG dividends. That does not include the dividends he received from other stockholdings.

Other members of the Forbes 400 would also do quite nicely, based solely on their stockholdings in their companies. Philip Knight, Nike's billionaire founder and chief executive, who turned a sneaker into a household name, could save $14 million or more in taxes. Michael Eisner, ceo of the Walt Disney Co., could shave off $1 million. Still others belong to an elite tax-savings fraternity. Most notably: the five members of the Walton clan of Arkansas, the first family of Wal-Mart Stores, who could pocket $187 million.

Then there's the man credited with persuading President Bush to dump the dividend tax — Charles Schwab. Founder of the discount brokerage firm, Schwab took part in the President's Economic Forum in Waco, Texas, in August 2002. As the President listened to speakers lay out proposals for getting the economy moving, Schwab ticked off several ideas, including a recommendation "to reduce the double taxation of dividends."

The President seized on it. "I love your ideas about...double taxation of dividends," he said. "That makes a lot of sense." Five months later the proposal was incorporated into the Bush tax plan. As for Schwab, he could trim $4 million from his tax bill.

If a picture is beginning to emerge of the Bush plan as a windfall for the upper crust, it's the correct one. Fewer than 600,000 individuals and families with incomes of more than half a million dollars — less than one-half of 1% of all tax-return filers — collect 29% of the dividends that would become tax free.

Why kill the tax on dividends rather than offer double-tax relief to a broader swath of Americans? The Bush Administration makes the argument that tax relief for investment income is better for the economy than relief for paycheck income. A White House spokeswoman told TIME, "Taxes on capital are very inefficient. So your bang for your buck in terms of lost revenue compared to the amount of jobs and growth that would be created by removing the tax on capital is very high."

However, one could argue that the double tax on Social Security and Medicare, which affects every working person, has grown inequitably large. For much of Social Security's existence, it mattered little because the tax rate was low and the amount of earnings subject to tax was low as well. In 1950 the rate was 1.5%, and it applied to only the first $3,000 of earnings. No one paid more than $45 in Social Security tax. Even by 1970, after the rate had gone up to 4.2%, taxable earnings were $7,800, some $2,000 below the median family income. By 1980 the rate had climbed to 5.08%, and it was levied on the first $25,900 of income, well above the median family income of $21,023. Over the past 25 years, Social Security and Medicare taxes paid by a median-income family have spiraled 333%, from $937 to $4,055. That pace was 11/2 times as fast as the growth in median family income and three times as fast as the increase in the minimum wage.

Middle-income and lower-income taxpayers are hit hardest by Social Security's double tax for yet another reason. The amount of income subject to tax rises annually with inflation, making it the most regressive of all levies. This year workers pay the 6.2% tax on all wage income up to $87,000. Above that, wages are not subject to the tax. As a result, the true Social Security tax rate declines as income rises. A working family that earns $50,000 pays $3,100 in Social Security taxes — the full 6.2%. A corporate executive or Hollywood entertainer with wage income of $3 million pays $5,394--the tax on the maximum earnings of $87,000. The Social Security tax rate works out to less than two-tenths of 1%, meaning that middle-income folks pay the tax at a rate 34 times as large.

There is one final inequity. In the case of stock dividends, the double tax is paid by two different parties. Corporations pay the corporate income tax on earnings that are distributed in dividends. Shareholders pay the individual income tax on those dividends. But Social Security's double and triple taxes are all paid on the same income of the same working person.

To be sure, repealing either the double tax on dividends or Social Security and Medicare would add to the federal deficit. The Administration calculates that tax-free dividends would cost the Treasury about $20 billion in the first year. In the case of Social Security and Medicare, the cost would be substantially higher.

Would there be any support in President Bush's inner circle for ending Social Security's double tax? Six years ago, several members of Congress took note of the inequity. That April, a Missouri lawmaker introduced legislation, called the Working Americans Wage Restoration Act, to make Social Security taxes deductible from income. To the sponsors it seemed only fair, since contributions to IRAs and 401(k) plans are deductible. And corporations deduct the portion of Social Security taxes they pay their employees. Calculating that his bill would save the average two-earner family $1,227 in income tax, the lawmaker said, "Ending this unfair double taxation is an excellent way to affirm the value of work, provide tax relief to those who deserve it most and stimulate economic growth. For nearly 73% of American families, payroll taxes exceed income taxes. It is middle-income Americans who are hammered the hardest by the double taxation of payroll taxes."

The legislator? None other than John Ashcroft, then a Senator and now President Bush's Attorney General.

— With reporting by Laura Karmatz/New York and research by Joan Levenstein and Dody Tsiantar

If the Double Tax on Social Security Were Eliminated:

MICHAEL KASPRZAK BETTY WILLIAMS:  
Lifting this tax would benefit millions of workers, including this Seattle couple THEIR SAVINGS: $1,600

If the Tax on Dividends Were Dropped, As Bush Proposes:

CHARLES SCHWAB: As co-CEO of the brokerage firm, he had a pay package for 1999-2001 that was more than $18 million. A participant in Bush's economic summit in 2002, he suggested that dividends be made tax free. Five months later, Bush included Schwab's idea in his economic package HIS SAVINGS: $4 million

PHILIP KNIGHT: The Nike boss had $9 million in pay for 2000-02, plus more from dividends HIS SAVINGS: $14 million

MICHAEL EISNER: As Disney chief, he got paid $14 million for 1999-2001 and reaps dividends too HIS SAVINGS: $1 million

HANK GREENBERG: The global insurer got $36 million for 1999-2001 and collects AIG dividends as well HIS SAVINGS: $2.7 million

MICHAEL KASPRZAK BETTY WILLIAMS:  They would benefit little, since they earn just $12 in dividends THEIR SAVINGS: $3

Sears' Top Attorney Resigns
By Kelly Quigley - Crain's Chicago Business
January 28, 2003

Sears, Roebuck and Co. confirmed Tuesday that General Counsel Anastasia Kelly stepped down after nearly four years with the Hoffman Estates-based department store chain.

A Sears spokeswoman wouldn't comment on why Ms. Kelly left and said Sears doesn’t know what her future plans are. Her resignation, described as "a normal course of operations," took effect Monday. Prior to joining Sears in 1999, Ms. Kelly, 53, worked for several years as general counsel for Virginia-based Fannie Mae.

Sears has begun a search for a new general counsel. Steve Cook, vice-president and deputy general counsel, will head the company’s legal department in the meantime.

Among the legal challenges facing Sears is a lawsuit filed in November by the former head of Sears’ credit card business. Kevin Keleghan was ousted in October because Sears CEO Alan Lacy lost confidence in his “personal credibility.”

Mr. Keleghan’s lawsuit claims Sears fired him to justify the credit card unit’s shortfalls, and accuses the retailer of wrongfully withholding severance benefits. A status hearing is scheduled March 6 at Lake County Circuit Court.

Sears shares were down $1.28, or 4.8%, to $25.24 in Tuesday afternoon trading.

Sears' General Counsel Kelly Resigns
Jan. 28, 2003

Sears, Roebuck and Co. (nyse: S - news - people), the largest U.S. department store operator, on Tuesday said that its general counsel, Anastasia Kelly, had resigned.

Sears spokeswoman Janice Drummond confirmed Kelly's resignation, which had been announced internally on Monday, and said it was "nothing more than the normal course of executive changes in a company this size."

Shares of Sears, weak since concerns about the company's credit card business emerged in October, were down $1.24, or 4.6 percent, at $25.48 in mid-afternoon New York Stock Exchange trade.

Ron Culp, Sears' senior vice president for public relations, communications and government affairs, is also leaving the company.

His retirement was announced internally last Monday, Drummond said. Culp will leave at the end of February, capping 10 years with the Hoffman Estates, Illinois-based retailer.

Kelly, who had worked at the company for four years, also held the title of senior vice president.

Copyright 2003, Reuters News Service

The Masses Have Arrived...
And E-commerce Will Never Be the Same
By Michael Totty - Wall Street Journal
January 27, 2003

Here comes everybody.

In the early days of e-commerce, online shoppers were a pretty elite bunch. As a group, they were generally wealthier, younger and more tech-savvy than the average offline shopper, and they were predominantly men. The first book sold at online bookseller Amazon.com Inc. (www.amazon.com1) says a lot about the early Web shopper: "Fluid Concepts and Creative Analogies," a book on artificial intelligence.

That was then. In 1999, less than a quarter of U.S. households made an online purchase; last year, more than a third hit the Internet stores. What's more, the newcomers tend to be older, with lower income and less experience with technology. And a lot more of them are women. In other words, the online marketplace is looking like the rest of the marketplace.

This long-awaited maturing of e-commerce has tremendous implications for online retailing. For one thing, expect it to give a boost to mainstream retailers like Wal-Mart Stores Inc. and Sears, Roebuck & Co., whose Web stores have gotten off to a sluggish start; now, their offline shoppers are coming online. Meanwhile, if veteran e-commerce companies want to compete for the loyalties of these new shoppers, they will have to adjust, offering different products and modifying their delivery policies to offer such features as free shipping and pickup at stores. Stores also are going to have to better integrate online and storefront operations by making it easy to research products online and buy them offline.

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"This group is different from the first group of customers that came to your site," says Kate Delhagen, retail research director for Forrester Research Inc. in Cambridge, Mass. "Ignore them at your peril."

Going Mainstream
Consider this snapshot taken late last year by Forrester: Shoppers who have been buying online for more than six years have an average income of $79,300, and 57% of those shoppers have college degrees. Only 34% were women. In contrast, those who have shopped online for less than one year have an average income of $52,300, about 57% are women and 39% have a college degree.

Forrester also predicts that mainstream shoppers with an annual household income of between $25,000 and $75,000 a year will bring a surge of spending to e-commerce. It estimates that this group spent nearly $32 billion online last year, about 44% of all U.S. e-commerce sales, up from less than $8 billion in 1999.

So far, this is a mainly U.S. trend. While 66% of U.S. households surf the Web, only about 40% of Europeans are online at all, and those are mainly in the kinds of young, upmarket households that dominated the early days of U.S. e- commerce. Half of European online consumers are under 35, nearly 60% are men and nearly 40% are classified by Forrester as "higher income." (The amount varies by country.) As computer prices fall, though, Forrester predicts that two-thirds of European consumers will be online by 2006, creating opportunities for sellers of clothing and household goods.

In the U.S., as might be expected, the pioneers of online shopping saw evidence of this change first. Though Amazon doesn't track the demographic makeup of its customers, says a spokesman, the Seattle bookseller saw a sign the site was moving beyond its techy roots in 1997. The best-selling title that year: "Into Thin Air," an account of a fatal Mount Everest expedition that topped most mainstream bestseller lists. Four of the top five Amazon titles were mainstream.

Catering to New Tastes
Of course, the Amazon example only shows that its customers now have mainstream literary tastes. Other online retailers have had to make real changes to accommodate their new shoppers.

Blue Nile, an e-commerce pioneer that specializes in selling diamond jewelry online, grew up catering to the old online shopper. The last time closely held Blue Nile profiled its customers, in 2000, the Seattle company found that 85% were male and 85% had a college degree. The median income was more than $80,000 a year, and the average shopper was between 25 and 35 years old -- "a prototypical engineer in Silicon Valley," says Mark Vadon, chief executive.

But more and more women -- looking to buy their own jewelry -- are finding the site, and the company is having to add to its product assortment to meet the new demand. Blue Nile in the fall of 2000 began offering lower-priced sterling- silver jewelry. It offers merchandise priced as low as $40, compared with a low price of $300 before it added the new items.

"If you're going to appeal to a broader audience, you need to have that broader product assortment," Mr. Vadon says.

The appearance online of more women -- who directly influence more than 80% of all retail spending, according to BIGresearch LLC, a market-research firm in Worthington, Ohio -- is a boon for those who bet early that this would occur. When New York-based Bluefly Inc., a retailer of upscale close-out clothing, was launched in mid-1998, the e-commerce market was still a predominantly male place, and an apparel start-up looked like a sure loser. But the company (www.bluefly.com4) looked ahead to the day the Internet would attract more women. "We went after this particular category based on the expected shifts," says Jonathan Morris, executive vice president. "We think that's one of the reasons that we're still here."

Bricks and Clicks
The big payoff from the masses coming to e-commerce is probably going to go to bricks-and-mortar retailers that target mainstream shoppers in their offline businesses, such as Wal-Mart and Sears.

Sears, Hoffman Estates, Ill., has been riding the demographic wave as more of its customers go online. Though it opened Sears.com (www.sears.com5) in mid-1996 as a product-information site, it didn't offer anything for sale until a year later, when it put its Craftsman tools catalog online. Large appliances such as refrigerators followed in 1999, and fitness and electronics goods were added a year later.

Sears didn't choose this roll-out schedule entirely for demographic reasons. It was easy to sell Craftsman products online because the line had existing catalog and shipping operations. (Sears suspended catalog operations in the early 1990s.) There was also infrastructure already in place for delivering appliances.

But even now, the product categories dovetail with those with those Sears shoppers who were already online: Men are big tool buyers, and because Sears is the leading appliance retailer in the U.S., its online store was capturing a big share of those who went online to research and buy stoves and refrigerators. The average Sears.com shopper is a slightly wealthier, younger and more male subset of Sears' offline customers.

"It was a conscious decision on our part to start out with a segment that was catering more to the profile of the online shopper," says Chris Shimojima, vice president of customer-direct marketing.

To draw in more offline shoppers, though, the company is going to have to appeal more to women, and that means adding clothing and household goods to the online mix. Today, click on "clothing" at Sears.com, and you're advised to go to a Sears store or to the site for Lands' End Inc., which Sears bought last year. Even so, apparel is the most searched-for category, ahead of appliances, says a spokeswoman.

Sears has delayed rolling out such soft goods in part because it was revamping its lagging in-store clothing lines. Also, since eliminating catalog operations, it no longer had experience in the systems for ordering and shipping apparel. With Lands' End, it gets both a national clothing brand and expertise in online and catalog sales. Sears doesn't break out revenue from online operations, but a spokeswoman says Sears.com sales rose 75% last year. Holiday sales were double those of the previous year.

Identity Crisis?
Wal-Mart, like Sears, has been slow to capitalize fully on its Web presence. Though it has had a Web site (www.walmart.com6) since 1996, it has struggled to find its footing online, launching and relaunching online sales at least three times. Although the company can boast that a third of U.S. shoppers visit a Wal- Mart every week, a Forrester report in November found that no more than 2% of households had made a purchase at Walmart.com in the past month.

Walmart.com set out to have a separate identity from its Bentonville, Ark., parent, which based the Internet unit in Silicon Valley. Two years ago, it even had a separate logo and marketing campaign.

"When we first started, we were going after the customers who were shopping the pure [e-commerce] plays," like Amazon, says John Fleming, president and CEO of the unit. Now, he adds, the emphasis is getting more Wal-Mart shoppers to buy online as well as in stores.

How to do that? One way is to give Walmart.com shoppers products and services that aren't available in stores. Where it began by trying to create an online version of a Wal-Mart store, now it has eliminated many small-ticket items, like vitamins or toothpaste. It has extended its online assortment of books, movies and music and added whole new categories, including textbooks and mattresses, that aren't sold in the stores.

For instance, the online store has more than 500,000 book titles, compared with only about 1,000 in the average store. The site also offers a greater selection of tires, which customers can have mounted at a store. Walmart.com offers a DVD subscription service to compete with Netflix Inc.'s service.

Wal-Mart doesn't break out online sales or release official online-traffic figures. But according to Nielsen/NetRatings, Walmart.com saw 11.7 million visitors in November, 53% more than the same month a year ago -- although that was still far below the 41 million visitors received by online leader Amazon.

"The expanded selection we offer online has been critical to bringing customers to Walmart.com," Mr. Fleming says. For instance, once customers see the assortment of books online, he says, "they become more and more comfortable shopping online not just for books, but for other items."

-- Mr. Totty is a news editor for The Wall Street Journal Reports in San Francisco.

2 Investors Will Dominate Kmart
By Constance L. Hays - New York Times
January 27, 2003

The future of Kmart stores will be largely under the control of two investors once the company emerges from bankruptcy protection, according to a reorganization plan filed on Friday with the United States Bankruptcy Court in Chicago.

The investors, Edward S. Lampert and Martin J. Whitman, are promising to turn over at least $140 million to Kmart, in addition to the debt they already own. Both are known for putting money into companies they consider undervalued, and both became involved with Kmart after the retailer sought bankruptcy protection a year ago. Their prerogatives, whenever Kmart emerges from its Chapter 11 bankruptcy reorganization, will include naming a fresh set of directors to the company's board. Kmart says it will emerge from bankruptcy by April 30 and continue to compete with other discounters, including Wal-Mart and Target.

A spokesman for Mr. Lampert, who runs ESL Investments, would not comment when asked about his vision for Kmart. Retail experts have said the chain, which will have about 1,500 stores in 46 states by the time the latest round of store closings is completed in April, lacks a strong identity with shoppers. Wal-Mart is best known for low prices, and Target has carved out a niche as a destination for fashion-conscious discount shoppers.

Kmart does have exclusive mass-market licensing agreements with brands like Disney, Sesame Street, Joe Boxer and Martha Stewart, all of which are thought to be essential in luring consumers to shop there instead of somewhere else.

Kmart has secured $2 billion in exit financing from a consortium led by GE Capital, according to the reorganization plan. The other lenders are Fleet Retail Finance, Fleet Securities and the Bank of America. The financing was obtained on Jan. 13, the day before Kmart announced it would close 326 stores and lay off as many as 35,000 workers. Kmart also reported a $349 million profit on Jan. 14, its first since seeking protection.

The reorganization plan affects some of Kmart's contracts with suppliers, among them the Fleming Companies, which sells grocery items to Kmart, and Walt Disney, which sells it licensed apparel. The Fleming agreement states that either Kmart or Fleming can end the contract, with a year's notice, upon the sale of more than 30 percent of the company. The Disney contract "requires consent for transactions involving a change of control," according to the plan.

Other contracts are not affected. A spokesman for Martha Stewart Living Omnimedia, which sold about $1.5 billion worth of Martha Stewart Everyday merchandise at Kmart stores last year, said that agreement was not affected by a change in control. Some stock plans and bonus programs for Kmart employees are accelerated by a change in control as well, the plan notes.

Owners of shares in Kmart, which was delisted from the New York Stock Exchange in November, will receive nothing under the plan. A shareholders' committee, headed by Ronald W. Burkle, was approved by the judge overseeing Kmart's case last spring. A creditors' trust is being formed to allow creditors to take legal action against former executives of Kmart, after the company's investigation of management's conduct in the months before the bankruptcy filing.

Under the plan, institutions that lent money to Kmart before the bankruptcy filing will receive 40 cents on the dollar. Kmart owes those lenders $1.08 billion. Landlords and other holders of Kmart debt will receive shares of Kmart stock that will be issued after the emergence from bankruptcy, and manufacturers will be given liens against Kmart-owned property.

The company's five-year plan promises that Kmart will be profitable by next year, and that cash flow will reach $1.8 billion by 2007.

Copyright 2003 The New York Times Company

Kmart Accuses Former Officials of Misconduct
By Constance L. Hays - New York Times
January 25, 2003

Former executives of Kmart engaged in a broad pattern of abusive practices — like cutting off payments to suppliers, dispensing generous loans to themselves and masking personal air travel as "store visits" — in the months leading up to its filing for bankruptcy protection, an internal investigation has concluded.

The investigation, prompted by anonymous letters to Kmart describing some of the practices, took a year to complete and uncovered a corporate free-for-all that escalated in 2001. Kmart suppliers were pressed for money, known as vendor allowances, and then were not paid for their goods, according to the investigation, whose results were disclosed late yesterday in a reorganization plan filed with the bankruptcy court in Chicago. Senior executives urged subordinates to make "unrealistic" forecasts about the company's prospects, demoted those who did not comply, hired unqualified candidates at excessive salaries and altered company records to conceal their activities, the report said.

In some cases, executives avoided paying for personal trips aboard company planes "by loading aircraft with Kmart personnel who otherwise had no need to travel," the report said. One former executive ordered $850 million in merchandise for stores without authorization, which the report said "substantially contributed to Kmart's liquidity crisis in the fall of 2001." Junior employees were transferred or demoted "when they resisted a manager's demand to incorporate numbers they believed to be unrealistic into the company forecasts and financial reports." Executives also took out $24 million in loans and spent $12 million for new jets as Kmart's finances wobbled.

The findings bear out the complaints of many Kmart suppliers, who said they were not being paid on time or were being pressed to give money back to Kmart, starting in the early fall of 2001. Kmart's chief executive at the time, Charles C. Conaway, said he was seeking to manage the company's accounts more aggressively and denied that the company was running low on cash.

Mr. Conaway's lawyer could not be reached for comment last night. Mr. Conaway was deposed this week as part of the investigation.

The report on the internal investigation, conducted by Kmart's law firm, Skadden Arps Slate Meagher & Flom, described a program known as Project Slow It Down, which began in September 2001. In an effort to stave off a cash shortage, senior Kmart executives would delay or shrink payments to suppliers of products sold in Kmart's stores. When vendors tried to log on to a computer program that would show their account information, they were "purposefully denied access" to the records, the report said. In addition, "deceptive responses were given to vendors who inquired concerning the reasons they were not being paid."

The program began while Kmart was waging a price war against Wal-Mart, its far larger rival, that Mr. Conaway named Bluelight Always. In a meeting with analysts on Sept. 10, 2001, he said that prices had been cut on thousands of items in the stores and promised to expand the cuts further. Wal-Mart's response was to lower its own prices, and Kmart's sales dwindled as a result.

The report depicts a frenzied organization that seemed almost not to care that its business was in a free fall. The loan program, created to retain crucial executives, was approved by a committee of Kmart's board in October and November 2001.

The report said "management failed to disclose" important details about the program that might have influenced the board's decision, although it gives no details. When the loans were made, according to the report, they "deviated in certain significant respects from what the committee approved" and substitute documents, replacing those that had been approved by Kmart directors, were placed in the company's files "after the fact." During the investigation, the report added, former employees tried to hide details from Skadden lawyers about the loans.

The report does not specify which executives engaged in particular activities, because the investigation is continuing.

Similar investigations are under way by the Securities and Exchange Commission and the Justice Department. The report also does not accuse Kmart directors of failing to oversee the company.

Mr. Conaway received a $5 million retention loan, the largest of all, but he was hardly alone. Kmart's former president, Mark S. Schwartz, received $3 million, and 23 other executives, all of whom have resigned or been dismissed, received loans ranging from $300,000 to $2.5 million.

Two of them, Lorna Nagler, who received $750,000, and Leland Viliborghi, who received $300,000, have repaid their loans. Mr. Viliborghi was among five Kmart executives dismissed last week because the company wanted to end the controversy surrounding the loans.

The report indicates that Kmart creditors, who include many of the vendors that said they were squeezed for payments and other concessions before the bankruptcy filing, can file lawsuits against former executives. A creditors' trust is being set up that will be able to pursue such claims.

Kmart also announced a reorganization plan in which two of its largest investors, ESL Investments and the Third Avenue Value Fund, will invest at least $140 million in the company once it emerges from bankruptcy. ESL is headed by Edward S. Lampert, who was briefly kidnapped from a Greenwich, Conn., parking garage earlier this month.

A hearing on the plan is scheduled next month. Kmart says it will emerge from bankruptcy by April 30.

A spokesman for Mr. Lampert declined to comment.

Since its Chapter 11 filing, Kmart has struggled to reverse declining sales and store traffic, with limited success. The company closed 283 stores last year and announced plans to shut another 326 last week. It has laid off 22,000 workers and will eliminate 30,000 to 35,000 more by the time the latest round of store closings is completed in April.

Last Sunday, the chief executive who succeeded Mr. Conaway abruptly resigned. That executive, James B. Adamson, will remain chairman but has agreed to step down by the time the company emerges from bankruptcy. He is expected to receive a $3.6 million bonus for his work with the company.

Sears Canada Cutting Back 'Costly' Promotions
By Andy Georgiades - Dow Jones Newswires
January 24, 2003

TORONTO -- While Sears Canada Inc. (T.SCC) spent much of 2002 reducing "costly" promotional activity, such as giving deep discounts on excess inventory, the company still sees a place for promotional programs.

"We want a better balance of promotions against the entire business because our promotional program in recent years has been too expensive," Vincent Power, the company's director of corporate communications, told Dow Jones.

The strategy appeared to work in 2002. Although the department-store operator reported last week that full-year sales fell to C$6.54 billion from C$6.73 billion, it also said that sales of regular-priced merchandise rose 19.7%, while sales of promotional and clearance merchandise declined 31.2%.

In 2003, the plan is to link much of its promotional activity to the retailer's 50th anniversary. For instance, the company will launch a series of "limited edition" home and hardline items next month that will be available throughout the year.

The products, which will include garage-door openers, refrigerators and treadmills, are being timed to arrive in February, which is the month of the company's "first foray" into Canadian retailing 50 years ago, Power said.

Sears Canada is 55%-owned by Sears, Roebuck & Co. (S) of Chicago.

In addition, the company will feature different "anniversary specials" every week that will be available through the online, catalog, and retail store channels.

The new programs will run alongside the company's "more value" program, which is also being expanded this year.

Labor Unions Face a Fight Over Health-Care Benefits

By Johanna Bennett
Dow Jones Newswires - January 22, 2003

Health-care costs and benefits are expected to be hot-button items during union contract negotiations this year. Nonunionized workers, meanwhile, may just have to accept whatever changes to health-care benefits their employers make.

Unions, which represent only a small portion of U.S. workers, are typically protective of employee benefits, especially health coverage. But with little relief from health-care inflation in sight, some predict that employers will threaten to withhold salary raises if steps aren't taken to mitigate costs.

The first shot was fired last week when more than 17,000 workers at General Electric Co.'s two key unions -- the International Union of Electrical Workers and the United Electrical, Radio and Machine Workers of America -- staged the first nationwide labor action at the company in more than 30 years when they walked off the job for two days to protest an increase in health-care payments.

General Electric said health-care costs rose 45% to $1.4 billion in 2002 from 1999. The company expects costs to rise an additional 15% this year and anticipates similar increases in the near future.

As a result, participants in a preferred-provider organization, a popular type of health plan, will pay an additional $200 a year, according to company estimates. The union, however, predicts a $300 to $400 annual increase.

"We are asking our employees to share less than 10% of the increases experienced by the company," said Bill Contay, senior vice president for human resources, in a prepared statement released last week. Health-care costs have been on the rise for the past several years due to a combination of events, from drug-price increases to new medical technologies available for conditions once considered untreatable.

Premiums will rise an average of 15% in 2003, according to national studies. Overall spending on health care hit $1.4 trillion in 2001, rising at the fastest rate since 1991, according to federal statistics released this week.

Employers and health insurers are looking for new strategies to curb costs. Most major health plans already have elaborate programs in place to monitor severely ill members and offer new health plans that make employees accountable for their health-care spending.

But many employers have crossed their threshold of pain, said Blaine Bos, a consultant for Mercer Human Resource Consulting, a Washington, D.C., employee-benefit consulting firm.

Small and medium-size companies have been hit the hardest, many to the point where they have dropped their employees' health plans.

Almost half of large employers said they plan to raise payroll deductions for health benefits in 2003, according to figures from Mercer. About 44% said they plan to boost deductibles, co-insurance or co-payments this year.

Many companies are also targeting retiree health benefits.

In the biggest revamping of its health-benefits program since switching to managed care in the 1980s, DuPont Co. raised employee premiums 13% in 2003 and 135% for retirees over the age of 65.

For the first time, Northwest Airlines is charging its workers for health benefits, which cost the company $345 million last year. As of Jan. 1, employees at the nation's fourth-largest airline pay 20% of the cost of their health plan, which equals about $60 a month for a single employee and $174 to $190 for family coverage.

Computer services giant Electronic Data Systems Corp. is anticipating a 15% increase in its employee health-coverage costs for 2003, according to projections from the Towers Perrin Consulting firm. As a result, workers will pay 22% of their premiums, compared with 19% last year.

At DaimlerChrysler AG's Chrysler unit, nonunion employees will have a $25 co-payment for emergency room and hospital visits in 2003. The auto maker's health- care costs rose 10% to 12% this year, the company said.

"This has been the worst year in the existence of our organization," said Larry Boress, vice president of the Midwest Business Group on Health, a coalition of employers in an 11-state region whose members include Sears Roebuck & Co., Ford Motor Co. and 3M Co.

How union employees bear up in 2003 and after remains to be seen.

"The general union position is hard-line resistance," says Tom Beauregard, practice leader with Hewitt Associates, one of the nation's largest employee- benefits consulting firms. "The general attitude is that members played by the rules of the game and [management] is changing the rules."

In 2002, workers threatened to strike over the issue at New York City's Metropolitan Transit Authority and did walk out at Hershey Foods Corp. Health- care costs were also a major bone of contention in talks with Navistar International Corp. and its workers last fall.

Not everyone believes another strike or walk out is likely this year, given the weak job market.

In 2003, contract talks are nearing for several large companies, including the Big Three automobile manufacturers, General Motors Corp., Ford and Chrysler.

The United Auto Workers, which has more than 700,000 active members, has already said it won't stand for cuts to health benefits when it launches contract negotiations later this year with the three behemoths.

Representatives for Ford, Chrysler and GM wouldn't talk about management's plans for contract talks.

"It is premature to talk about potential negotiation issues. It is too early to tell whether health-care costs will be an issue in future negotiations," said a GM spokeswoman.

--James Covert and Peter Loftus contributed to this article.

Big Retailers Start to Think Small
By Constance L. Hays - New York Times - January 22, 2003

After carpeting the country with stores measuring 150,000 square feet or more, retailers are discovering that people do not always have the time or the inclination to get all the way through them.

Yes, the abundance of a 200,000-square-foot Wal-Mart Supercenter is impressive: the equivalent of four football fields of stuff. And sure, it is handy to be able to buy just about everything at a single 175,000-square-foot SuperTarget. But at the same time, time-pressed shoppers, particularly millions of aging baby boomers, are sometimes finding these stores to be too large, too inconvenient and too tiring to get all the way through.

And the big-box retailers have noticed. Wal-Mart Stores has been aggressively opening scaled-down versions of its Supercenters — less than one-quarter their size — called Neighborhood Markets. So far the company has built 46 smaller stores scattered through Oklahoma, Arkansas, Texas, Mississippi and Tennessee; a handful opened in Florida, Alabama and Utah in the last week. Retail analysts have taken to calling them Small-Marts.

In Brooklyn, Home Depot has opened a shrunken version of its usual model. Other retailers, including Toys "R" Us and Staples, are retrofitting stores to make them smaller, cozier and more intimate, qualities the big-box format was supposed to displace.

"Customers are demanding respect for their time," said David M. Szymanski, director of the Center for Retailing Studies at Texas A&M University. "One way to respond to that is to offer formats that cater to that."

Leisa Still suffers at times from big-store fatigue. Ms. Still, who lives in Seligman, Mo., and who herself works at a Wal-Mart, was looking through a rack of men's golf shirts recently at a Dollar General store in Pea Ridge, Ark. She had chosen to go there to pick up a few things she needed, and then get out.

"I would rather come here than fight the crowds at Wal-Mart," Ms. Still said. "It's a lot easier, and it's quicker."

Dollar General is one of several retailers whose mini-discount marts have thrived in the shadow of Wal-Marts and other large stores around the country. Dollar General's stores are built on the hunch that a smaller assortment in a more efficient structure will attract shoppers who do not want to wander through a vast retail space, not to mention the parking acreage surrounding it.

For the small-scale retailers, speed can be a point of pride: Walgreen, the drugstore chain with outlets that are typically 14,500 square feet, has even clocked how quickly shoppers can accomplish their missions. "Our customers can be out of the store in six minutes," said Carol Hively, a spokeswoman. "They're in a hurry, and they want to grab a couple of things. They don't necessarily want to have an extended shopping trip to a larger store."

Other retailers are trying to make their stores smaller or more inviting to customers, for reasons ranging from shopper rejection to real estate concerns.

Toys "R" Us, confronted with declining sales, spent more than $600,000 each to renovate its warehouse-style stores into cozier spaces. The toy retailer has switched from ceiling-high racks stacked with Barbies, Lego sets, Hot Wheels and stuffed animals to a format in which toys are grouped by maker or type. More than half of its 703 stores have been converted to the new look.

A concept called Dover has been changing the look of many Staples stores. The first Dover store, about 20 percent smaller than the old Staples prototype, opened last year in Dover, N.H., and removed much of the warehouse atmosphere that Staples has long had. The stores now have low-rise shelves and conveniently placed stacks of merchandise like toner and inkjet cartridges that customers said they needed most.

Home Depot opened its first experimental smaller store in Brooklyn last year. For the Brooklyn store, which measures about 62,000 square feet, Home Depot took over an empty Pergament hardware store in the Mill Basin section. "This is close to home, it's quick, and there are no lines," said Donna Connelly, who had stopped in for one item — an outdoor light fixture — for her home in Belle Harbor, Queens. "It's overwhelming when the store is so big, if you're just coming for something specific."

At Staples, "customer feedback to us said, `We can't find certain items in your store, or we can't find your associates,' " said Demos Parneros, the company's president for United States stores. About 250 Staples stores have been converted to the new style, with about 850 to go. The redone stores are 17 percent smaller: 20,000 square feet, down from the original 24,000.

Even though America is a land that values plenty, offering a tighter assortment can pay off, a study conducted by Procter & Gamble a few years ago found. When variety was reduced in a store, purchases went up — countering the idea that the less people saw, the less they would buy.

"It's information overload," said Aradhna Krishna, professor of marketing at the University of Michigan. "There's an optimum amount of information that consumers want to process." In the study, she said, people's perception was that the size of the assortment was larger, even though there were fewer types of products before them.

Being small can also give stores a toehold in cities or towns where real estate is in short supply, or where the store would not appear to have a huge natural customer base. A smaller size provides "a way for them to be in markets where the economics don't make sense for a large store," said Mr. Szymanski, whose retailing studies center at Texas A&M is sponsored in part by Wal-Mart.

In addition, he said, "pressure to grow the business, especially in difficult times, and to reach out to new markets" is behind the new small stores, as well as the trend among many consumers to shop at big stores for some things and at small ones for others.

Other retailers could also find strength in smallness, contends Kurt Barnard of Barnard's Retail Consulting Group. "There are a lot of markets left in the United States where you could have a Wal-Mart, or a Sears or a Home Depot, but not at the size you are accustomed to having it," he said. "The real estate may not be available. Given the fact that space and sites for large stores is almost exhausted in America, they have to think about it."

Home Depot thought about it, and the Mill Basin store is the company's solution. "It's an infield strategy in an urban neighborhood," said Jerry Edwards, Home Depot's executive vice president for merchandising. "The stores will go where we have determined the need for a store but may not be able to find enough acreage for a large store."

Geared to expect huge expanses, , some shoppers may need to adjust. "I find it is not really a Home Depot," said Winston Thornhill, a contractor renovating a house in the Bedford-Stuyvesant section of Brooklyn, who was eyeing a display of plumbing fixtures in the new store. "It seems like they don't really have the variety of items."

But smaller formats may attract shoppers who either cannot or will not go to a big store all the time. "Some people find the Supercenter to be less convenient if they are in a hurry to do just some food shopping," said Ed Kolodzieski, Wal- Mart's senior vice president in charge of Neighborhood Markets.

The first Neighborhood Market opened in 1998 in Springdale, Ark., not far from Wal-Mart's corporate headquarters in Bentonville. The stores are typically about 40,000 square feet, with a mix of groceries, over-the-counter drugs and beauty products. They appear to be typical grocery stores, with friendly touches like an honor-system coffee bar, and conveniences like prepared foods just inside the front door.

Neighborhood Markets try to be convenient, but without the higher prices found in many convenience stores. "There is no premium for speed," Mr. Kolodzieski said. "We don't look at it as what our customers are willing to pay. Our approach is, What is the lowest-cost way to deliver what customers are looking for?"

But there are only about 24,000 products on the shelves at a Neighborhood Market, compared with 100,000 in the Supercenters. A parking area surrounds the store, as at a Wal-Mart, but it is far smaller than those at the company's 200,000-square-foot stores. "It is a convenience alternative to the Supercenter," said Wayne P. Hood, a retail analyst for Prudential Securities in Atlanta. "If I was a supermarket or drugstore chain and I saw this coming, I'd be worried."

While the stores are intensifying competition between Wal-Mart and local grocery chains, particularly around Bentonville, it is not clear whether Wal-Mart can wring the same advantages from its smaller stores that it does at Supercenters.

"Out of the first four Neighborhood Markets they opened, three of them were right across the street from us," said Kim Eskew, vice president for marketing of Harp's Food Stores, a 45-store chain based in Springdale. But Harp's executives have found the effect less devastating than they feared. "Most of the business the Neighborhood Market does has come from the Supercenters that are nearby," Mr. Eskew said.

Certainly that was true for Kirby Hamby, who was waiting in line at the deli counter at the Neighborhood Market in Rogers, Ark., one morning. "My house is halfway between the Supercenter and here," she said, "but if I'm just looking for quick things, I come here."

Mr. Kolodzieski said the same cost-cutting that built success at the Supercenters was saving money for the Neighborhood Markets, too. But Mr. Eskew said that profitability in the new, small stores may be lower than what Wal- Mart typically expects from its stores.

"The verdict may still be out on whether or not they can make money when a high percentage of the sales are food," Mr. Eskew said. "In the Neighborhood Markets, they are in the same boat with everybody else."

Kmart Promotes Day to CEO,
Fires Executives in Loan Deals
By Amy Merrick - Staff Reporter - The Wall Street Journal
January 20, 2003

As it prepares to emerge from Chapter 11 bankruptcy-court protection, Kmart Corp. Sunday promoted Julian Day, its president and chief operating officer, to chief executive.

The discount retailer also fired all remaining executives who had received so-called retention loans before the company sought Chapter 11 protection last year, and it is demanding repayment of the loans -- worth a total of $28.9 million -- from all 25 recipients.

Mr. Day, 50 years old, joined Kmart in March. The former president and chief operating officer of Sears, Roebuck & Co., and the former chief financial officer of grocery chain Safeway Inc., he succeeds James B. Adamson. Mr. Adamson, 54, was named chairman in January 2002 and added the CEO title in March, succeeding Charles C. Conaway, who left the company after a disastrous tenure that led it into bankruptcy proceedings.

Kmart, based in Troy, Mich., has been investigating the retention-loan program since at least May, when it suspended severance payments to former senior executives and said it was "reviewing the stewardship" of the company under their reign.

The retailer said Friday that its stewardship review turned up "credible and persuasive evidence" that the loan program was established "without appropriate disclosure of material information to the board of directors by former members of executive management."

While most of the corporate loans ranged from $300,000 to $750,000, Kmart granted several executives millions of dollars. The largest loans were a $5 million payment to Mr. Conaway, the former CEO, and a $3 million loan to Mark S. Schwartz, the former president and chief operating officer.

The five executives Kmart dismissed Friday were the only remaining members of the original group of 25 who received the loans. Among them were Kmart General Counsel Janet Kelley and Lee Viliborghi, a regional vice president.

Mr. Viliborghi, 51, said he repaid his $300,000 loan in May but was ordered to leave. Kmart confirmed the repaid the loan. The other executives couldn't be reached for comment.

Kmart filed for bankruptcy-law protection in Chicago last January and expects to emerge around April 30. The retailer said it expects to file its five-year business plan with the bankruptcy court in roughly the next week.

Kmart said it expects to include further information about its investigation in a "disclosure statement" that it plans to file with the bankruptcy court on or around Jan. 24.

According to documents filed with the Chicago bankruptcy court, executives who received the retention loans got a rallying letter from Mr. Conaway, the former CEO. The letter, dated November 2001, said: "This special incentive is built to encourage you to stay with Kmart for at least another three years."

The court documents say the full amount of the principal and accrued interest on the payments would be forgiven if the executives remained employed by Kmart through Jan. 31, 2005. If employees quit or were fired with cause before that date, they would have to repay the loans. Executives were forbidden to disclose the existence of the loans or details about their terms.

Kmart Names Next Leader
Day Faces Challenge of Company Remake
By Jennifer Dixon - Free Press Business Writer
January 20, 2003

Kmart Corp. promoted its president to chief executive officer Sunday, giving him the job of pulling the discounter through the final months of its messy, expensive bankruptcy.

JULIAN DAY

Julian Day, 50, must also find a chief of merchandising who can set Kmart apart with the selection of goods on its shelves. He also will need to hire new financial advisers and an in-house lawyer as the retailer tries to remake itself into a serious competitor against Wal-Mart and Target.

Day replaces Jim Adamson, a Kmart board member since 1996 and the company's chief executive since March. Adamson will remain through the bankruptcy as nonexecutive chairman.

"I am honored that the board has asked me to serve as chief executive as the company repositions itself for the future," Day said Sunday in a statement. "Having the opportunity to address in the most senior leadership role the challenges Kmart currently faces is indeed exciting to me."

Day's appointment comes just two days after Kmart tried to put controversy over corporate excesses behind it by firing the last of 25 executives who received $28 million in loans shortly before Kmart became the largest retailer to declare bankruptcy in January 2002.

Its financial collapse will cost 59,000 workers their jobs when Kmart closes the last of 600 stores across the country in its struggle to stay alive after more than a century of retailing.

Kurt Barnard, president of Barnard's Retail Trend Report in Upper Montclair, N.J., said Day will be "saddled with the enormously difficult tasks of dealing with the nitty-gritty of emerging from bankruptcy, and then with creating the kind of conditions that will make it possible for Kmart to continue as a viable, going concern."

Barnard also questioned the timing of the announcement.

"Neither the investment community nor vendors like the uncertainty that is brought about by a transition of this kind without any reason given," Barnard said. "A transition that is announced over a long weekend with Wall Street closed the next day is a very strange thing."

Day joined Kmart in March as its president and chief operating officer. He had worked at Sears for 19 months, starting as an executive vice president in 1999 and moving up to chief financial officer and chief operating officer before leaving in 2000 when he was passed over for the top job.

He also spent five years at Safeway Inc., a chain of grocery stores based in Pleasanton, Calif.

Day is credited with giving store managers limited authority to order what they needed -- rather than insisting that headquarters do it. Day also launched new in-stock guarantees.

Under his first contract with Kmart, Day was given a $775,000 bonus, $775,000 annual salary and perks such as a car and driver. His new contract is expected to be filed this week in bankruptcy court.

Yorkshire-born and educated at Oxford, Day is a former rugby player who enjoyed surfing while living in San Diego, before coming to Michigan to work for Kmart.

In a 1999 analysis, Mark Husson, a supermarket analyst at Merrill Lynch, said: "Calling Julian Day just a chief financial officer is like calling a Bentley just a car."

Kmart's board said in a statement that Day had a key role in developing the company's business strategy for the first five years after bankruptcy.

"His clear commitment, as outlined in that plan, to position Kmart to compete aggressively in the discount retail sector underscores our confidence in his ability, desire and passion to decisively lead this company going forward," the board said.

Sunday's announcement included word that Adamson would be retiring. He was named chairman of the board five days before Kmart declared bankruptcy and is to remain in that job throughout the reorganization. Kmart has said it will be out of Chapter 11 by the end of April.

Neither Day nor Adamson was available for comment.

Since filing for bankruptcy, with Adamson as Kmart's chairman and chief executive officer, the retailer has lost more than $2 billion as shoppers deserted the discounter for competitors like Wal-Mart and Target. Analysts have complained that Kmart lacks a strategy to lure customers back.

In a statement, Kmart's board of directors said: "We will be forever grateful for Jim Adamson's unwavering dedication to Kmart as an institution as well as its employees and other stakeholders. He answered our call during Kmart's darkest days and placed Kmart on the road to financial recovery."

The board also said that Day's "zest for tackling the challenging operational issues that have plagued Kmart for years has resulted in making this company stronger, leaner and more efficient as it prepares to exit Chapter 11 . . . "

Although Day is a considered a get-it-done, tough decision-maker, he has not run a major corporation like Kmart, which had sales of $36 billion in 2001.

That was also one of the complaints about Chuck Conaway, who was hired from CVS Corp., the drugstore chain, to run Kmart in May 2000. Over the next 20 months, Kmart's finances spun out of control as Conaway and his team tried to beat Wal-Mart on prices, slashed advertising and spent billions to improve the stores and the company's inventory and distribution system.

Kmart's slide into bankruptcy is the focus of investigations by its board, the FBI and the Securities and Exchange Commission.

The board's role in the company's collapse, meanwhile, is under the scrutiny of the House Energy and Commerce Committee.

Adamson's stewardship of the company has been questioned by anonymous letter writers claiming to be employees.

Adamson, a member of Kmart's board for six years before the bankruptcy filing, was on the search committee that hired Conaway and was chairman of its audit committee as Kmart's finances unraveled.

Yet Adamson claimed he had no idea Kmart was collapsing until he read an analyst's report in early January 2002 warning that the retailer could be facing bankruptcy.

Adamson has also said that had he known the company was in such a precarious condition, he would not have approved giving the $28 million in loans to 25 executives.

The last five still working at Kmart were fired Friday, including the company's chief counsel, Janet Kelley.

As the company's lawyer in Troy, Kelley had been overseeing the board's investigation of Kmart's collapse.

In one letter, to U.S. Rep. Billy Tauzin of Louisiana, the Republican chairman of the House Energy and Commerce Committee, the anonymous letter writers complained that Adamson and Kelley were working closely with the company's law firm to "deflect the internal investigation away from themselves."

"Mr. Adamson has been more concerned with controlling the internal investigation than in formulating a plan to pull this company out of its tailspin," the letter writers said.

Kmart is expected to complete its investigation this week, and is to reveal the results when it files its reorganization plan in court. The plan is to also describe how Kmart will be run over the next five years.

The company's new owners are expected to put together a new board. The new owners would be those holding Kmart's debts.

"The strategic announcements the company has made will ensure the go-forward executive management team will be completely new," said Kmart's chief bankruptcy lawyer, Jack Butler.

Sears Considers Change of Scenery --
Freestanding Store Going Up in Utah
By Susan Chandler - Staff Reporter, Chicago Tribune
January 19, 2003

For decades, Sears, Roebuck and Co. and shopping malls almost have been synonymous. Sears developed many of the nation's shopping centers as it followed its customers to the suburbs. It almost always secured a prime anchor spot.

But today's biggest retail winners--Wal-Mart Stores Inc., Target Corp. and Kohl's Corp.--aren't in malls. And now Sears is thinking it should be looking elsewhere, too.

The nation's third-largest general merchant is building a prototype for a freestanding store in West Jordan, Utah, a rapidly growing middle-class bedroom community in the Salt Lake City metropolitan area.

If the store is a hit, it could be a model for Sears' future growth, Sears Chief Executive Alan Lacy said last week. After all, few new shopping malls are being built. The things that Sears learns from the experiment could show up in its mall-based department stores as well.

Just building a regular Sears store on a parking pad won't be enough, Lacy acknowledged. "We have to redesign the business and change it quite a bit. Taking our existing store and plopping it next to a Wal-Mart will not be successful."

The freestanding prototype is still a work in progress; Sears hasn't even decided what to call it yet. But Lacy offered some details.

Like Sears' current stores, it will be centered on home and family. And it will be big: 200,000 square feet of selling space on one level, more than twice as large as an average Sears.

The extra space will allow the store to carry merchandise that Sears currently doesn't.

An outdoor nursery will offer plants and fertilizer for do-it-yourself gardeners and landscapers.

There will be a bigger children's department. There will be a toy department, something Sears abandoned years ago in the face of growing competition from specialty stores and discounters. Sears recently dipped its toe back into the toy business by featuring KB Toys boutiques in 77 of its stores during the holidays.

The consumer electronics department will receive supersizing treatment. Instead of selling only CD and DVD players, the new Sears will offer customers the music and movies that go with them.

But one of the most dramatic surprises will be edible. A convenience food section will offer bags of chips and bottles of soda.

It that sounds familiar, it should. Convenience food is a strong seller at retailers like Target, which has used Skittles candy and Hershey's chocolate in some of its acclaimed image advertising.

So far, Sears' plans are getting high marks from retail experts.

"It sounds like what they should have done a long time ago," says Sid Doolittle, retail consultant with Chicago's McMillan/Doolittle. "If it does work, it could be a big win for them."

Shoppers want to get in and get out, he adds. Rightly or wrongly, they believe that going to a mall takes longer than driving up and parking outside a freestanding store.

And there's another advantage--shoppers become a captive audience because there aren't any other stores to distract them, Doolittle says.

George Whalin, president of Retail Management Consultants in San Marcos, Calif., says Sears is trying to create a retail hybrid.

"Sears is trying to get closer to a discount-store format without giving up things that make a department store work such as better quality merchandise," Whalin said.

In a way, it isn't that different from what Target has done, taking a traditional discount store and scaling up the merchandise, he said.

But won't there be a disconnect for shoppers when they see Lands' End's
high- quality parkas and pants in a store that also sells pretzels and Pepsi?

Whalin isn't overly concerned. "There would be some conflict, but consumers are less concerned about status than they were in the past. There are some very upscale consumers who shop in Target and find it acceptable," he says. "Sears may be on to something here."

Willingness to try new things
If the prototype doesn't pan out, it's no big deal, retail experts agree. "You can always stop doing it if it doesn't work," Doolittle says.

At a minimum, it could answer the question of where Sears goes from here. With 870 full-line stores around the country and few shopping malls being built, the Hoffman Estates-based retailer doesn't have much room to grow its core business. But standing still isn't an option for retail companies because investors insist on top-line growth and healthy profits.

When retail experts talk about innovative retailers, Sears isn't usually at the top of the list. Maybe it should be.

Since the early 1990s, it has built a freestanding hardware chain, launched NTB, a tire and battery store, and created from scratch the Great Indoors, an upscale home remodeling and redecorating chain that now numbers 20 stores.

Not all its experiments have been successful, however. The HomeLife Furniture chain, which Sears created and later sold off, declared bankruptcy and liquidated in 2001, and the long-term verdict is still out on Sears Hardware and NTB, which haven't generated the returns that Lacy expects.

But the freestanding project is much less risky than those examples because Sears is just augmenting its current store model. Maintaining its department store heritage by carrying better brands like Levi jeans and Dockers pants will be one way the new store differentiates itself from Wal-Mart, Lacy said.

Sears veteran Jerry Post is spearheading the freestanding prototype. Post, who joined Sears in 1976, was on the team that developed the Great Indoors, which got off to a bang-up start after its first store opened in Denver five years ago. His current title is senior vice president for Sears' off-mall strategy.

Store name uncertain
One important thing to be decided is what to call the off-the-mall store. Some Sears executives are arguing it must be named something more than just Sears to differentiate from traditional Sears stores, sources at the company say.

There's plenty of precedent for their argument.

Target operates larger-format stores called Target Greatland and Super Target. Wal-Mart calls its grocery/discount store combos "Wal-Mart Supercenters." "Big K" is the moniker Kmart Corp. attached to its biggest and best stores.

But others think it would be foolish to abandon the brand equity built into the Sears name.

"It's a no-brainer to call it Sears," Doolittle says. "Not to call it Sears would be a terrible mistake."

Lucent Ends Retirees` Death Benefit
Reuters - January 17, 2003

Telecommunications equipment maker Lucent Technologies Inc., trying to cut costs and restore profits, said on Friday it would end a death benefit for its management retirees and might also reduce their health care coverage.

Lucent, based in Murray Hill, New Jersey, said it alerted former management employees in a Jan. 2 letter that beginning Feb. 1 it will no longer pay death benefits to former management employees' spouses, children under the age of 23 or dependent parents.

The former managers are still covered by Lucent's group life insurance, and no change has been made to their health care coverage at this point. Analysts have said Lucent could significantly cut costs by reducing retiree benefits.

Lucent and other telecom equipment makers have struggled for some two years as telephone companies slashed spending. Its retirees have feared the company would reduce their benefits as a way to cut costs, and Lucent has said cuts in health care coverage are possible.

"It's always a possibility," Lucent spokesman John Skalko said. "We look at all our expenses to determine if any adjustments are needed to reflect what's going on in the marketplace."

In fiscal 2002, Lucent posted a net loss of almost $12 billion. To get back to profitability, it has sold noncore assets, eliminated money-losing products and announced plans to slash two-thirds of its work force.

In a research note released Thursday, Sanford C. Bernstein analyst Paul Sagawa cited regulatory filings in noting that Lucent's post-retirement benefit obligations were underfunded by $7.4 billion at the end of September. However, he said fears that the underfunding hurt the company's liquidity were overblown as Lucent would likely cut benefits.

If, for example, Lucent were to restrict coverage to catastrophic emergencies of more than $5,000, the cost of health insurance would be halved, Sagawa said.

Lucent reached a new 20-month contract with the Communications Workers of America union this week that cuts the company's costs. Sagawa estimated the annual savings at $30 million.

Lucent's pension plan was also underfunded, by $1.7 billion at the end of September, but that gap -- less than 6 percent -- was likely erased since the market has improved since then, he said. He said he does not expect the company to make any payments into its pensions, and the expected payment of about $300 million to cover 2003 benefit obligations is likely to drop in subsequent years.

The death benefit, which has been in existence since 1913 when Lucent was part of AT&T Corp. (T,Trade), is equal to a year's salary at the time of retirement. That could range from $50,000 to more than $100,000, according to former company employees.

The change affects up to 31,000 former management employees, or one quarter of Lucent's 127,000 total retirees, Skalko said. "It's another step that we're taking to assure our viability as a going concern going forward," he said.

Sears Gets a Lift from Lands' End
By Susan Chandler - Tribune staff reporter - Chicago Tribune
January 17, 2003

CEO cautious in predicting '03 earnings gain

Despite a disappointing downturn in its credit business and declining same- store sales, Sears, Roebuck and Co. posted strong fourth-quarter and annual income Thursday.

Sears' numbers were helped by its acquisition of Lands' End Inc. and a sale of its interest in an auto-parts chain, which generated a nearly $200 million gain in 2002's final quarter.

Sears Chief Executive Alan Lacy said he was "very pleased" with the results, which occurred while "nearly every aspect of our business has undergone change."

Investors were pleased as well. They bid up Sears stock $1.83, or almost 7 percent, to $28.53 per share.

Even so, Lacy wasn't making any big promises for 2003.

Sears' earnings per share, excluding one-time items, will rise only about 5 percent this year, he told analysts, as the company continues to work through a rocky economy and rising delinquencies among its credit-card customers.

That growth rate is less than a third of the 17 percent increase Sears posted in 2002.

Lacy vowed to increase sales at Sears' department stores this year, although most of the improvement is projected to come in the second half. Rising sales would be a welcome change from 2002, when Sears' same-store sales declined every month of the year, sometimes by double digits.

Part of the improvement will come from Lands' End's casual apparel, Lacy predicted. Lands' End's corduroys and sweaters will be in place in 400 Sears stores by spring and throughout the 870-store chain by the fall.

But the predictions weren't as rosy for Sears' credit business, which frequently generates more than half of the Hoffman Estates-based retailer's annual operating profit.

Acknowledging 2003 will be a workout year, Paul Liska, Sears' president of credit, said bad debt levels will continue to rise, peaking in the second half.

Write-offs of uncollectible debt also will increase as the $12 billion Sears Gold MasterCard portfolio continues to mature, Liska said. The result: 2003 operating profit from credit is expected to fall by about 5 percent.

Sears recognized that it had a new round of problems with its credit card business last October when rising bad debt levels forced the company to revise its earnings target.

In the fourth quarter, operating earnings for Sears' credit card unit fell $63 million, or 15 percent, to $363 million, as its provision for bad debt rose $160 million, or 41 percent.

The news was far better on the retail side of the business, where operating earnings rose 10 percent to $726 million.

Overall, Sears posted fourth-quarter net income of $848 million, or $2.67 per diluted share, up 72 percent from $494 million, or $1.52 per diluted share, in the year-earlier period.

The bottom line was boosted by an after-tax gain of $179 million, or 56 cents a share, from the sale of Sears' stake in Advance Auto Parts Inc.

Excluding one-time items, Sears' net income rose only 2 percent, to $669 million, or $2.11 per share, from $657 million, or $2.02 per share, in the year- earlier period. Revenue rose 2 percent to $12.52 billion from $12.22 billion.

For the year, Sears reported net income of $1.38 billion, or $4.29 per diluted share, up from $735 million, or $2.24 per diluted share, in 2001.

Revenue rose less than 1 percent to $41.37 billion from $40.99 billion.

Home Depot Is Struggling To Adjust to New Blueprint
By Dan Morse - Staff Reporter - The Wall Street Journal
January 17, 2003

New Chief Bob Nardelli Tightened Central Control,
Angering Employees

ATLANTA -- When Bernie Marcus ran Home Depot Inc., he fired up store managers inundated by paperwork from headquarters with this advice: "Get a rubber stamp that says 'Bulls -- ' on it, stamp it, and send it back to whatever bureaucrat sent it to you." The message: It's your store; do what's best.

Bob Nardelli came to the company from General Electric Co. two years ago with a very different approach: one that increasingly favors directives from headquarters in Atlanta. As chairman and chief executive, he has cut costs, centralized purchasing and tightened control of hiring and store displays. Performance is now measured by lingo that leaves many employees scratching their heads: receiving minutes per bill, percent of E-Velocity and SPR audits, to name a few.

By all accounts, the country's No. 1 home-improvement chain needed at least some tightening. But so far, Mr. Nardelli's swift, aggressive renovations have disrupted employees and spooked many shareholders. Home Depot's once-roaring stock has fallen close to its five-year low, having dropped 51% since Mr. Nardelli arrived.

Sales growth, which started to slacken the year before he took over, has slowed considerably. The company said earlier this month that sales in stores open at least a year will plunge as much as 10% in its fourth quarter, which ends Feb. 2. For the fiscal year, overall sales are expected to rise 10%, compared with 17% the year before.

At a company traditionally known for independent-minded managers and workers, some confusion and resentment have set in. After Mr. Nardelli arrived, "things weren't presented to you; they were told to you," says Tony Calveiro, a former store manager in Kansas City, Mo. He left in July 2001 to become an assistant manager for Costco Wholesale Corp., where he says he has more freedom.

Mr. Marcus says the company lost a lot of talented employees after Mr. Nardelli's arrival, although departures have tapered off. The company plays down the suggestion that it had sizable departures of talented employees because of the changed leadership.

Mr. Nardelli has emphasized hiring more part-timers to handle weekend crowds, but customers are complaining that the quality of service has lagged. The CEO's order to keep store inventory leaner made sense on paper, but in practice it has meant that homeowners and contractors couldn't always find what they were looking for.

Meanwhile, Home Depot is no longer cruising along as it did for nearly two decades, with strong sales and earnings quarter after quarter. Among other factors, the company has blamed cautious consumer spending and big promotions last winter that inflated sales in the same period a year ago. No. 2 Lowe's Cos. -- a retailer known for its disciplined operations -- has been chipping away at Home Depot's strong lead. (Because the housing market has remained strong, the overall slow economy hasn't hurt home improvement as much as it has other retailers, some industry executives say.)

Three big institutional investors -- Fidelity Management & Research Co., Alliance Capital Management Inc. and Janus Capital Management LLC -- have dumped Home Depot stock valued at a total of $4.2 billion in recent months, according to FactSet Research Systems Inc. This week, Gary Balter and Neel Gandhi, analysts at Credit Suisse First Boston who have issued a generally favorable rating on the stock, nevertheless fired a broadside at the CEO. Based on their own store visits, the analysts wrote, "Mr. Nardelli in two years at the helm has not yet shown the retail acumen that defines the winners." They cited a lack of skilled employees, poor store displays, missing products and poor purchasing decisions.

'Change Creates Fear'
Mr. Nardelli, 54 years old, is sticking to his strategy. "Change creates fear," he says. The only way for Home Depot to thrive, he adds, is for headquarters to know what's going on. "The naysayers could say, 'Well jeez, you're adding all these metrics.' Well, take all the gauges off the car. Why do you need a gas gauge? Why do you need a speedometer?"

Morale is holding up, he says, given all of the changes and the slumping stock price. "I love the entrepreneurial spirit. I just want to have some compliant entrepreneurial spirit at a certain time," he said in an interview last year.

Since he arrived, margins and cash on hand are up. The balance sheet is strong. The company continues to add stores, so overall sales are still climbing. Ken Langone, an influential board member who helped hire Mr. Nardelli, says the CEO's strategy will pay off. "We think Bob is doing a superb job and is making the changes going forward that are necessary."

Today, the chief executive will spell out more improvement plans at the company's annual investor conference. On tap: continued programs to refurbish stores, more new merchandise and efforts to boost customer service.

A big part of Home Depot's success story has been the energy its managers customarily invested in taking command of their stores, ordering as many hammers and faucets as they thought their customers expected and hiring knowledgeable retired tradespeople and hungry newcomers to work the aisles. "You had these evangelists, if you will, who sold lumber," says consultant Robert Oxley. He used to train Home Depot employees and now teaches vendors trying to sell products to the company. These days, he says, "there's nowhere near the passion as there was under the old guard," saying that's one of the consequences of Mr. Nardelli's approach. "It's not manageable through a computer."

Mr. Marcus, who helped lead the company from its founding in 1978 through early 2001, acknowledges that the old ways sometimes got a little "loosey-goosey." And some of Mr. Nardelli's critics concede that a company that had grown to more than 1,000 stores needed to show more discipline, especially in light of increased competition.

Mr. Nardelli arrived in December 2000, after losing out in the race to replace Jack Welch atop GE. The new Home Depot chief, who lacked any retail experience, burrowed into the new job. Atlanta staffers remember him calling meetings for 8 p.m. on weekdays and 7:30 a.m. on weekends.

A number of executives left, some with strong encouragement, as Mr. Nardelli brought more subordinates under his direct control. He attacked labor costs, setting more structured "wage bands" for specific jobs and limiting merit raises, which he says were "out of control."

Home Depot's deflated stock has weighed on morale, because many employees have received bonuses in the form of stock options whose value has fallen. In break rooms and on the Internet, they grouse about their CEO's $13.8 million in total compensation last fiscal year, not including options.

Mr. Nardelli's challenges are compounded by the reverence with which many employees regard Mr. Marcus and Arthur Blank, the retired founders and longtime executives. Months after Mr. Nardelli arrived, workers who spotted Mr. Marcus in their store would beseech him to come back. But that is fading, says Mr. Marcus, who stresses that Mr. Nardelli is making needed changes that employees are starting to appreciate.

In a 1999 book, Messrs. Marcus and Blank wrote, "We hire people who couldn't work for anybody else, who might otherwise be well-suited to being self- employed or running their own shop, and many of them become store managers." The authors lauded employees for outlandish stunts. Larry Mercer, who would go on to become a top executive, once refunded money to a customer who showed up with a set of car tires, even though Home Depot hadn't sold them. After the customer left, Mr. Mercer hung his tires over the service desk to remind everyone that the customer is always right.

By the time Mr. Nardelli arrived, sales growth had started to slow. On Oct. 12, 2000, Mr. Blank, who was then the CEO, warned that profits would fall short of expectations for the remainder of the fiscal year. Investors bailed out, driving the stock down 28%, its biggest one-day decline ever. Home Depot's board accelerated the succession process that brought Mr. Nardelli aboard.

Purchasing Shift
One of the biggest changes he has pushed involves purchasing. Home Depot had nine regional buying offices, each one acquiring products independently. Mr. Blank had said that the structure helped boost sales 15% to 20%, because the people doing the buying understood so well what customers in their local markets wanted.

But the company's decentralized buying diluted its negotiating clout. And because each region would do things its own way, the company couldn't easily coordinate nationwide buys with nationwide store displays. Some vendors complained that the company was difficult to deal with. "It was like having nine different wives," says one Midwestern tool maker, who requests anonymity.

Mr. Nardelli's solution was to centralize buying in Atlanta. At the same time, he moved to clean out dead and redundant items from store shelves. The company, after all, didn't really need 13 different round-point shovels, he notes.

The buying changes, he says, have yielded better terms from vendors that have widened the company's gross margin, or gross profit as a percentage of sales, to 31.6% in the third quarter, from 30.2% for the same period the year before. Cutting inventory has helped Home Depot amass $4 billion in cash, up from $167 million two years ago.

Mr. Nardelli has forced stores to increase weekend staffing by hiring more part-time workers: college students, for example, and people who have other weekday jobs. Stores went from 30% part-time staffing in December 2001 to 50% just four months later.

But longtime employees say that some part-time workers aren't as committed to Home Depot as full-timers. Customers, meanwhile, have complained that they sometimes can't find knowledgeable sales help -- or, in some instances, any help at all.

In Decatur, Ga., Don Schneider, owner of Old Timers Renovations, a residential- contracting business, spent 20 minutes one day, waiting for a forklift operator to arrive and pull out a stack of drywall. "They need to speed up their pit times," Mr. Schneider said, hefting the load into his pickup truck.

Mr. Nardelli has acknowledged he went too far with part-timers. The company has scaled back to a mix of 40% part-time and 60% full-time. He says customer service has had its "ups and downs" but is improving.

Managers also were directed to increase their "inventory velocity," or the speed at which merchandise flows through their stores. When some responded by ordering fewer products, customers couldn't find what they needed. "On paper, all these changes make sense," says Steve Mahurin, a former Atlanta merchandising executive at Home Depot who left voluntarily 14 months after Mr. Nardelli arrived. "Unfortunately, they don't work on the floor of the stores."

The company's buyers "in Atlanta truly do care," Mr. Mahurin says. "They just have 1,500 stores to deal with and it's impossible to give them the attention they need." Home Depot officials counter that they still have plenty of divisional merchants who, while they don't buy, keep tabs on local needs and communicate them to Atlanta.

Many on Wall Street have urged the company to imitate Lowe's, which caters strongly to women shoppers. But some Home Depot veterans chafe at new products purchased by Atlanta, such as crockpots, which don't have much appeal to the company's core customers. Mr. Nardelli also has pushed redesigned large- appliance sections in the stores but says Home Depot will always serve the contractor and serious do-it-yourselfer. And some of the new buys -- cleaning products, for example -- have been hits.

Mr. Nardelli also says centralized buying will work more smoothly once he gets new computer systems online. He acknowledges that some inventory directives have caused problems and that every buying decision hasn't been flawless.

"Has everything that's happened been perfect? No, this guy has made some errors," says Mr. Marcus, the co-founder. That said, "when he makes an error, he backs off of it, and he isn't ashamed to say, 'I made a mistake.' And he learns from it."

Sears Beats 4Q Views Despite Credit Business Losses
Dinah Wisenberg Brin - Dow Jones Newswires
January 17, 2003

PHILADELPHIA -- Sears Roebuck & Co. (S), buoyed by improved retail profits, substantially beat Wall Street earnings forecasts in the fourth quarter, but the credit division lost ground as the company increased the provision for uncollectible accounts.

Citing caution over an uncertain economy, the retailer Thursday forecast a low to mid-single-digit percentage rise in earnings per share for 2003. Sears posted income of $4.92 a share, excluding special items, for the full 2002.

Sears expects operating income in its retail and related services business to increase in a mid-teens range this year, and the credit and financial services division to decline by a low to mid-single-digit rate.

The company expects "flattish" comparable-store sales in 2003, with sales lower in the first half and higher in the second, one official told analysts on a conference call.

The Hoffman Estates, Ill., company on Thursday reported net income of $848 million, or $2.67 a share, in the fourth quarter, compared with $494 million, or $1.52, in the comparable 2001 period.

Excluding a gain of 56 cents a share on the sale of Sears' remaining investment in Advance Auto Parts in the latest quarter and special items in the year- earlier period, the company posted operating income of $2.11 a share, compared with $2.02 a share in the 2001 fourth quarter. A Thomson First Call survey of analysts produced a consensus earnings estimate of $1.91 a share for the latest period.

Sears shares changed hands recently at $28.40, up $1.70, or 6.4%, on volume of 10.1 million, compared with average daily volume of 6.7 million shares.

"Management is likely to be seen as slowly rebuilding investor confidence by beating fourth fiscal-quarter expectations while still raising the provision for bad debt," a Goldman Sachs research note said.

The investment firm, which rates Sears stock at underperform, raised its 2003 earnings estimate for the company by 20 cents, to $5 a share, and said Sears' EPS guidance for the year is "not hugely below the current consensus of $5.25." Goldman Sachs or an affiliate received compensation for investment banking services from Sears or an affiliate within the past 12 months, the note said.

Operating income in the retail and related services segment rose 9.7% in the fourth quarter due to overall margin improvements and the acquisition of Lands' End, the company said. The gross margin rate improved 140 basis points in the segment.

Operating income in the credit and financial-services division declined 14.8%, with the higher provisions for uncollectible accounts more than offsetting favorable funding costs and higher revenue, the company said.

The domestic provision for uncollectible accounts rose $160 million, or nearly 41%, because of higher charge-offs and a $150 million increase, to $1.8 billion, to the allowance for uncollectible accounts, Sears said.

The higher allowance reflects increases in Sears Gold MasterCard receivables, delinquencies and the net charge-off rate. The charge-off rate rose in the fourth quarter mostly because of customer bankruptcy filings over the past year, Sears said.

A note from UBS Warburg characterized the decline in the credit division's operating income as "fairly modest," and said the charge-off rate, while higher than in the year-ago period, was lower than in the third quarter and below the firm's forecast.

"The major question remains whether reserves are adequate, and we would feel more comfortable about the outlook with a larger increase in the allowance," the UBS note said. The firm had expected a $314 million increase, rather than $150 million, in the allowance for uncollectible accounts.

UBS Warburg rates Sears stock at buy. The firm or an affiliate has conducted investment banking business for Sears within the past year, the note said.

A Sears official said on the conference call that Sears is searching for a new chief of risk management for its credit operations.

While the credit results for 2002 were disappointing, the fundamentals remain strong, Sears Chairman and Chief Executive Alan Lacy said on the call. Sears had a strong finish to the year and record 2002 earnings per share, he said.

Chief Financial Officer Glenn Richter said Sears is taking a "relatively conservative view" in its 2003 outlook because of the uncertain economic environment.

Richter also said Sears plans a credit facility of $3.5 billion to $4 billion to back up its unsecured commercial paper program. The facility should be complete in February, he told analysts.

Sears Posts 72% Rise in Net With Help from Asset Sale
By Amy Merrick - Staff Reporter - The Wall Street Journal
January 17, 2003

Despite a slowdown in its credit business, Sears, Roebuck & Co. said fourth- quarter net income jumped 72%, boosted by a big gain from the sale of its stake in an auto-parts retailer and better-than-expected retail results.

The company, based in Hoffman Estates, Ill., also issued a cautious outlook for this year, saying that it expects little overall improvement in store sales and warning that profits from its credit-card unit probably will continue to weaken.

"The economy is going to be a challenge for everybody in the first half of the year, and we're still working our way through a lot of stuff in the first half" as Sears tries to turn around its struggling department stores, Chief Executive Alan J. Lacy said in an interview.

His caution was reflected in predictions Thursday from Federated Department Stores Inc., the owner of Macy's and Bloomingdale's, which said it expects sales and earnings to be roughly flat this year.

For the quarter, Sears posted net income of $848 million, or $2.67 a share, which includes an after-tax gain of $179 million, or 56 cents a share, from its sale of its investment in Advance Auto Parts Inc.

Excluding income from the sale, Sears would have earned $669 million, or $2.11 a share, which is 20 cents above a Thomson First Call consensus estimate of $1.91 a share. In the year-earlier quarter, the retailer earned $494 million, or $1.52 a share.

Sears said operating income for its retail and services unit rose 9.7%, aided by aggressive cost-cutting, improved merchandise throughout its stores, and the acquisition in May of apparel-seller Lands' End.

But the company was unable to lift its sales much during the tough holiday season. Its fourth-quarter revenue was $12.52 billion, with slight increases from both merchandise sales and credit revenue. The total was 2.5% above the $12.22 billion it posted in the 2001 fourth quarter. While Sears typically gets the best sales results from big-ticket items, it said sales of appliances and home electronics slipped during the quarter.

Operating income from Sears' credit business dropped 15% because the retailer had to increase the amount it sets aside to cover bad credit-card debt. It added $150 million to its allowance for uncollectible accounts during the quarter.

Its charge-off rate increased to 5.40% from 5.23% in the year-earlier quarter, primarily because of a spike in bankruptcy filings, Sears said. Charge-off rates, or the proportion of credit-card accounts that a company has to write off as uncollectible, are likely to peak during the second half of this year, the retailer said.

The company's credit business has come under close scrutiny since Sears suddenly and substantially increased its allowance for bad debt during the third quarter.

For the full year, Sears' net income increased 87%, to $1.38 billion, or $4.29 a share, from $735 million, or $2.24 a share. Revenue edged up to $41.37 billion from $40.99 billion.

Sears shares were up $1.83, or 6.9%, to $28.53 in 4 p.m. New York Stock Exchange composite trading Thursday.

Excerpts From Sears 4Q Conference Call
Dow Jones Newswires - January 17, 2003

The following are edited excerpts of a transcript provided by Fair Disclosure
Financial Network of Sears Roebuck & Co.'s (S) fourth-quarter conference call.

Earlier Thursday, the retailer reported fourth-quarter net income of $848 million, or $2.67 a share, beating a Thomson First Call analyst estimate of $1.91 a share. In the year-earlier quarter, the company reported earnings of $494 million, or $1.52 a share.

Speaking on behalf of the company were Alan Lacy, chairman and chief executive; Glenn Richter, senior vice president and chief financial officer; and Paul Liska, president of credit and financial products and executive vice president.

LACY: Before turning it over to Glenn, let me provide a few comments on 2003 earnings. Overall we are in a very uncertain economic environment and we anticipate that the first half of the year will be challenging. As a result we are projecting that comparable earnings per share will grow modestly at the low- to mid-single-digit level over 2002. We anticipate that retail operating profit results will be up strongly with operating profit increasing in the midteens and are projecting a mid-single-digit decrease in credit profitability. Glenn will provide you more detail on our key assumptions. With those brief remarks I will now have Glenn take you through more of the specifics on the financials then I will come back to close with some additional thoughts on 2003 priorities.

Top Five Operating Goals For 2003
LACY: There are five areas of focus that I want to highlight relative to 2003.

First of all, staying the course with the full-line stores with all of the initiatives that we have just recently put into place in 2002 (re-evaluating product lines, expanding popular departments, centralizing check out and adding shopping carts). We are still settling in and need to continue to improve our execution of these initiatives.

Second, restore top line growth in full-line stores. The pieces are now largely in place and we anticipate to begin to show positive comparable store sales in the second half of the year supported by improved marketing.

Third, to grow what is working in credit and fix what is not. The fundamentals of our credit business remain sound and while we anticipate earnings will be down modestly this year we will still deliver $1.4 billion in operating profit.

Our fourth priority is to grow our leading customer direct business. The combination of Lands' End and Sears' direct businesses creates the leading Internet and catalog hardlines and softlines company with significant growth opportunities.

Our fifth priority for the year is to continue our focus on productivity. We have made a lot of the progress but still have much to do to get our cost structure where it needs to be.

On The Recent Acquisition Of Lands' End
LACY: We bought Land's End for two reasons. One is we thought it was a great business and secondly we thought that brand at Sears would be very helpful to our repositioning efforts.

The great business that we bought performed even better than we thought it might. Lands' End had a record year last year and they're both top-line and bottom-line performance in the second half of the year after we acquired them, was greater than what we had anticipated in our acquisition plan. We were very pleased with their catalog sales during the fourth quarter in the holiday season. The brand continues to grow very nicely.

In terms of the addition of the product at our stores...we were very pleased with the absolute level of Lands' End sales in our stores. ...The vast majority of the stores that had Lands' End saw a significant lift in overall apparel sales versus those stores that didn't. ...The people that appear to be buying Lands' End in our stores in December were not people that we typically see on our apparel floors. So we do think it has attracted a different customer.

On Pricing Competition
CALLER: On the softline side can you just comment quickly on the competitive environment? We have seen JC Penney's being very aggressive from a pricing perspective. We have seen Kohl's put out some rather volatile numbers. Just any color would be much appreciated, Alan.

LACY: I think that I would say that certainly the middle market apparel retailing sector is giving no reason for the customer to buy something unless it is 50% off. The promotional intensity was significant. Fifty percent off was sort of the price of entry to get the customer's attention through the holiday selling season and I don't see that abating anytime soon.

The only way to basically insulate yourself from that is obviously to have unique product and I think in our case having Lands' End at good value day in and day out is a point of differentiation at good margin for us as well. But I think this promotional intensity is going to continue certainly in the near- term.

On Its Consumer Credit Business
LACY: Overall credit and financial products operating income decreased by 15 percent to $363 million in the fourth-quarter, better than the low 20s decline forecast that we had communicated in October. ...The growth in receivables reflects the continued growth of the Sears Gold MasterCard product which ended the quarter with balances of $12.3 billion. Portfolio yield declined by 126 basis points versus the prior year, primarily a reflection of a shift in balances to the lower yield Sears Gold MasterCard product.

Sears Profit up, Credit Woes Linger
CRAIN'S CHICAGO BUSINESS - January 16, 2003

(Reuters) — Sears, Roebuck and Co. Thursday reported stronger-than-expected fourth-quarter earnings as solid holiday sales from recently acquired Lands' End made up for weaker profits at its credit card division. Sears, the largest U.S. department store operator, said the retail side is also likely to outperform the credit card business in 2003. It forecast that earnings this year would show a percentage increase in the low- to mid-single digits.

The credit card division, which generates about two-thirds of Sears' profits, struggled for the second straight quarter as it set aside more money for people unable to pay their bills in a soft economy. A 26 percent jump in personal bankruptcies forced Sears to write off more unpaid credit card balances.

Sears shares, weak since mid-October, were up nearly 4 percent at midday.

Sears said its credit card unit set aside $160 million more in the fourth quarter than it did in the same period last year to cover for people unable to pay their bills.

Delinquencies for the quarter rose to 7.69 percent from 7.58 percent a year earlier, and the domestic allowance for uncollectable debt swelled to $1.8 billion from $1.6 billion in the third quarter.

Sears started offering a high credit limit Gold MasterCard about two years ago, hoping to get customers to spend more money at its stores and elsewhere.

Sears' credit card business has been producing huge profits as customers have transferred balances from other cards and made big-ticket purchases, but it has also exposed the company to greater risk as a slumping economy pushed more people into bankruptcy.

Fourth-quarter operating income for the credit card unit fell 14.8 percent from a year earlier.

CREDIT WOES
A weak economy has made conditions tougher for the credit card business. Sears fired the head of the unit in October, saying he had sugar-coated the outlook.

Many investors say they lost faith in Sears management because the company should have foreseen that a weak economy would make it harder for people to keep up their credit card payments.

"Once you lose that trust, it is a long-term proposition to gain it back,'' said Roz Bryant, a retail industry analyst with Morningstar. "I'd need to see more than a few quiet quarters (before confidence is restored). There really needs to be some substantial top-line (revenue) growth in 2003.''

Overall, Sears reported earnings of $669 million, or $2.11 per share, for the fourth quarter, ended Dec. 28, up from $657 million, or $2.02 per share, in the same period a year ago. The figures exclude one-time items.

Analysts on average were expecting $1.91 per share, according to research firm Thomson First Call, which tracks analysts' estimates.

In the latest quarter, Sears also had an after-tax gain of $179 million, or 56 cents per share, from the sale of its Advance Auto Parts Inc. stake.

Including one-time items, Sears earned $848 million, or $2.67 per share, in the fourth quarter, up from $494 million, or $1.52 per share, a year earlier.

For 2003, the company said it expects operating income in the retail unit to grow in the mid-teens on a percentage basis, while operating income in the credit card side will likely fall at a low- to mid-single-digit rate.

The retail unit, which had been struggling as lower-priced department stores such as Kohl's Corp. expanded, turned in a 9.7 percent gain in operating income in the fourth quarter.

Sears began rolling out Lands' End merchandise in some of its stores in time for the holiday shopping season. On a conference call, the company said stores that carried Lands' End had better clothing sales than other stores.

Still, analysts were quick to point out that cost cutting and Lands' End accounted for much of the improvement, and overall sales remained weak.

"This doesn't give us any reason to change our view that Sears' retail strategy is flawed,'' Bryant said. "The big thing for them in 2003 is to show that they're able to grow sales. Cost-cutting is an easier thing to do.''

Sears said it expects higher sales at stores open at least a year in the second half of 2003. Through December, it had reported 17 straight monthly declines.

Sears shares were up $1.02 at $27.72 near midday on the New York Stock Exchange. The shares have fallen about 22 percent since mid-October, when the company reported very disappointing third-quarter earnings because of problems in its credit card business.

Sears Chisels Out A Better Quarter
FORBES.COM - Ari Weinberg
January 16, 2003

Thursday's fourth-quarter earnings announcement from Sears Roebuck has given the company's investors reason to charge back into the stock.

Despite a 14.7% decline in profitability at its credit-card unit, the company's retail sales unit saw operating income increase 9.7% and sales inch 2.8% higher. For the year Sears (nyse: S - news - people ) saw net income of $1.4 billion, or $4.29 per share, compared to $735 million, or $2.24 per share, for 2001. Fourth-quarter earnings, excluding a one-time gain, came in at $669 million, or $2.11 per share, ahead of analyst expectations of $1.91 per share. This improvement provided Sears investors reassurance that the retailer is headed back the way of Target (nyse: TGT - news - people ) and Kohl's (nyse: KSS - news - people ), not in the direction of now-bankrupt Kmart (otc: KMRTQ - news - people).

Sears Chairman and Chief Executive Alan Lacy, who took over the retailer in late 2000, has been charged with getting the 118-year-old retailer humming again. He's exited several peripheral businesses and sold the company's remaining interest in Advance Auto Parts (nyse: AAP - news - people ) to help boost the bottom line. But it is closer scrutiny of the company's credit-card receivables and improved store efficiencies that will ultimately make the stock desirable again.

Sears' stock bottomed at $19.71 in mid-November, a month after the company announced some emergency reparations to its credit-card portfolio. The stock is up 40% since then and gained nearly 6.85%, or 1.83, to $28.53 on Thursday's results.

But for a company whose primary business is selling appliances and house wares, the company's executives answered numerous questions on Sears' credit card business and corporate funding position in today's conference call.

In the coming months, Sears is planning to refinance $4.7 billion of current liabilities, $2.7 billion in unsecured debt and $2 billion of asset-backed securities. Last year Sears also cut its outstanding commercial paper to $2.9 billion from $4 billion at the beginning of 2002. Additionally, the company is negotiating for a new credit facility, as its current $4.4 billion U.S. facility, backed by Citigroup (nyse: C - news - people ) and Bank One (nyse: ONE - news - people ), expires in April.

Why the focus on funding at Sears? After spending roughly $1.8 billion to buy catalog-retailer Lands End in June--a key part of the company's drive to increases in store sales--Sears awoke to the downtrend in its Sears card business and had to provision more cash to shore up rising net chargeoffs and delinquencies. To maintain its own credit rating, Sears must ensure that credit- losses don't cut into the company's ability to pay interest.

The company has been switching its better customers to Sears Gold MasterCard, which has higher credit limits and better performance records. At the end of 2002 MasterCard receivables constituted 40% of the company's $30 billion in managed receivables, compared to 18.8% at the beginning of the year. But the safety of MasterCard accounts may be overstated by the company: Chargeoffs and delinquencies for the MasterCard portfolio increased at a faster rate than the Sears Card book.

Chargeoffs for the Sears Gold MasterCard grew to 3.41% from 1.65% at the beginning of the year. Sears Card chargeoffs grew to 6.28% from 5.70%. Deliquencies on the MasterCard jumped to 3.78% from 1.98%, while deliquencies for the Sears Card went to 10.31% from 8.9% a year ago. This trend caused one analyst to question whether Sears was selectively shifting its card customers or moving them regardless of credit prospects.

A retailer offering credit cards to its customers is not new, but the current consumer credit environment has some analysts questioning how far stores are willing to take their credit operations. Concerns about Target's growing card operations gave its shares a little ruffle in December. And recent Fed data that consumer credit actually retracted in November means that new receivables could be slower to arrive.

Sears has already been in and out of the consumer financial services market-- buying Dean Witter in 1981 and spinning out it and its Discover Card operations in 1993 (both now part of Morgan Stanley (nyse: MWD - news - people ). While Sears still derives a third of its profits from cards, the shift to MasterCard, a credit network of major consumer banks, could prepare Sears to exit from the card game once again.

Sears Reports Record 2002 Earnings Per Share Comparable EPS of $4.92 For Year; $2.11 For Fourth Quarter
January 16, 2002

HOFFMAN ESTATES, Ill., Jan. 16 /PRNewswire/ -- Sears, Roebuck and Co. (NYSE:S) reported today net income, excluding noncomparable items of $1.6 billion, or $4.92 per share for 2002 as compared to $4.22 in 2001, a 17 percent per share increase. On a reported basis, net income was $1.4 billion or $4.29 per share for 2002 as compared to $2.24 last year. Non-comparable items are detailed in a schedule at the end of this release.

"2002 was a year of tremendous change for Sears," said Chairman and Chief Executive Officer Alan J. Lacy. "We made significant progress in repositioning and restructuring our core retail business, full-line stores, resulting in improved earnings for Sears. 2002 was a record year for Sears in terms of earnings per share."

Fourth Quarter Earnings

The company also reported fourth quarter 2002 net income, excluding non- comparable items, of $669 million, or $2.11 per share compared to $657 million, or $2.02 per share in 2001, a 4.5 percent per share increase. The increase is due to improved profitability in the company's Retail and Related Services segment as well as a decrease in the number of shares outstanding, partially offset by a decline in the Credit and Financial Products segment.

"Despite a challenging retail environment and soft sales, we made strong progress in improving our core retail operations," said Lacy. "The acquisition of Lands' End, continued improvement in merchandise assortments, inventory management and vendor sourcing, and an improvement in the cost structure of the full-line stores all contributed to increased profitability."

Fourth quarter of 2002 was affected by one non-comparable item - the gain on the sale of the company's remaining investment in Advance Auto Parts, Inc. The sale resulted in an after-tax gain of $179 million, or $0.56 per share and generated after-tax cash proceeds of $335 million. Non-comparable items affecting the fourth quarter of 2001 consisted of charges relating to implementation of productivity initiatives, product category exits, and the Exide battery litigation settlement. These non-comparable items, on an after- tax basis, were $163 million, or $0.50 per share.

Reported fourth quarter 2002 net income, including the non-comparable items, was $848 million or $2.67 per share, compared with $494 million, or $1.52 per share in the fourth quarter of 2001.

Retail and Related Services
Retail and Related Services segment operating income for the fourth quarter, excluding non-comparable items, increased 9.7 percent to $726 million due to improvements in margin, as well as the addition of Lands' End. "We are pleased by our strong profit performance in retail in the fourth quarter especially in light of the challenging retail environment during the holiday selling season," said Lacy.

Retail and Related Services revenues for the fourth quarter of 2002 of $9.7 billion were 2.8 percent above last year's fourth quarter revenues of $9.5 billion. Increased revenues due to the acquisition of Lands' End, and the addition of seven new The Great Indoors stores were partially offset by declines in full-line stores revenues. In hardlines, revenue declined in big- ticket categories such as home appliances, home electronics and lawn and garden. Softline sales declined compared to the prior year, however, sales improved over the prior quarter's performance.

Retail and Related Services gross margin rate improved by 140 basis points to 29.4 percent. The improvement in margin was due to the inclusion of Lands' End and improved inventory management and product sourcing in full-line stores.

Selling and administrative spending was 7.5 percent higher than fourth quarter 2001. The increase was due to additional expense related to the inclusion of Lands' End and higher investment in The Great Indoors, partially offset by a reduction in operating costs for full-line stores. Selling and administrative expenses were 19.9 percent of sales compared with 19.0 percent last year.

Credit and Financial Products
Operating income decreased by $63 million or 14.8 percent from the prior year as favorable funding costs and higher revenues were more than offset by a higher provision for uncollectible accounts.

Fourth quarter domestic Credit and Financial Products revenues increased 4.4 percent from a year ago, to $1.4 billion due to higher average receivable balances. Credit receivables at the end of the fourth quarter grew 11.5 percent over the prior year to $30.8 billion.

Funding costs declined by $43 million or 15.1 percent from last year's quarter due to a favorable interest rate environment.

The domestic provision for uncollectible accounts increased by $160 million or 40.9 percent over last year's period due to higher charge-offs and a $150 million increase to the allowance for uncollectible accounts. The allowance increase reflects the growth in Sears Gold MasterCard receivables, as well as increases in the net charge-off rate and delinquencies. The net charge-off rate for the fourth quarter increased to 5.40 percent from 5.23 percent last year primarily due to increased customer bankruptcy filings over last year. Delinquencies for the quarter increased to 7.69 percent compared to 7.58 percent last year. The domestic allowance for uncollectible accounts of $1.8 billion is 5.79 percent of ending credit receivables as of the end of the fourth quarter of 2002 compared to 5.57 percent at the end of last quarter.

2003 Outlook
The company's preliminary outlook for 2003 is for comparable earnings per share to increase in the low- to mid- single digits. The Retail and Related Services business is expected to grow operating income in the mid-teens, while operating income for the Credit and Financial Products segment is expected to decline at a low- to mid-single-digit rate. Sears Canada is anticipated to post increased year- over-year profitability, and the Corporate and Other segment is expected to remain relatively flat with productivity savings being offset by higher benefit and insurance costs.

Forward-Looking Statements
This release contains guidance on 2003 comparable earnings per share, which is a forward-looking statement based on assumptions about the future that are subject to risks and uncertainties, such as competitive conditions in retail; changes in consumer confidence and spending; changes in interest rates; delinquency and charge-off trends in the credit card receivables portfolio; continued consumer acceptance of the Sears Gold MasterCard Program; the successful execution of and customer reactions to Sears' Full-line store strategy and other performance improvement initiatives; Sears' ability to integrate and operate Lands' End successfully; anticipated cash flow; the possibility of increased hostilities in the Middle East; general economic conditions and normal business uncertainty. In addition, Sears typically earns a disproportionate share of its operating income in the fourth quarter due to seasonal buying patterns, which are difficult to forecast with certainty. While the company believes its forecasts and assumptions are reasonable, it cautions that actual results may differ materially. The company intends these forward- looking statements to speak only as of the time of this presentation and does not undertake to update or revise them as more information becomes available.

About Sears
Sears, Roebuck and Co. is a broadline retailer with significant service and credit businesses. In 2002, the company's annual revenue was more than $41 billion. The company offers its wide range of apparel, home and automotive products and services to families in the U.S. through Sears stores nationwide, including approximately 870 full-line stores. Sears also offers a variety of merchandise and services through its Web site, www.sears.com. In June 2002, Sears acquired Lands' End, a direct merchant of traditionally styled, classic Lands' End clothing offered to customers around the world through regular mailings of its specialty catalogs and online at www.landsend.com .

Kmart Will Lay Off Up to 35,000 and Close 326 Stores
By Constance L. Hays - Washington Post - January 15, 2003

Faced with fierce competition and sales that continue to decline, Kmart will lay off as many as 35,000 workers and close 326 stores around the country over the next three months.

The plan, which the executives described as necessary for Kmart to become "a stronger company," was submitted yesterday to the federal judge overseeing Kmart's reorganization, as was a financing plan that includes an option to close 400 more stores.

But Kmart's president, Julian C. Day, said there were no plans "at this time" to close more. The plans require approval from the judge, who has scheduled a hearing on Jan. 28.

The cuts exceed those announced last March, when Kmart shut 283 stores and cut 22,000 jobs. As part of the current round, which includes shutting a distribution center in Corsicana, Tex., Kmart is organizing a "customer relocation plan" in which shoppers whose local Kmart disappears will be directed to another store.

"We want them to know that we are a competent and forward-looking organization," Mr. Day said.

The closings, while widely expected, will presumably affect the hundreds of manufacturers who sell their products through Kmart as well as the employees who will be out of work. Among the stores that will close are about 60 Super K stores, which have the highest sales volume among Kmart stores. The number represents more than half of the Super K's around the country, and indicate that the strategy of selling groceries to compete with Wal-Mart, begun under previous management, has been curtailed.

By April, when all the closings are expected to have been completed, Kmart will have fewer than 1,500 stores — about three-fourths the number it had when it filed for Chapter 11 bankruptcy protection in January 2002.

And while some retail experts have said that it would be more effective to close all stores in certain regions, Kmart's latest plan calls for the same kind of scattershot approach used in last year's plan. Asked whether the company had considered regional closings, Mr. Day said, "We're thoroughly convinced that this is the right option."

A retail consultant disagreed. By closing stores in the manner Kmart has, said Burt Flickinger III, a partner in the Strategic Resource Group, "the capital overhead shifts to the remaining stores and makes profitable stores marginal."

"And ultimately, marginal stores become unprofitable," he added.

Kmart also moved up its reorganization timetable, saying it now plans to emerge from bankruptcy by April 30 and has secured $2 billion in loans that will replace the $2 billion of debtor-in-possession financing that it currently uses. Management has said for months that it expects the bankruptcy to conclude by July.

The company also announced that it posted a slim profit for the first time since declaring bankruptcy nearly a year ago. For the five weeks ended Jan. 1, the company said it earned $349 million on sales of $4.7 billion. Sales in stores open at least a year were down 5.7 percent compared with the period last year, which did not include Thanksgiving holiday weekend sales the way this year's figures did.

Company executives called the profit encouraging, particularly considering the weak retail industry over all. "We're very pleased to see that," said Al Koch, Kmart's chief financial officer.

Kmart will file documents on Jan. 24 that detail a five-year business plan and the results of a company investigation into the conduct of executives before the bankruptcy filing. Related inquiries by the Securities and Exchange Commission and the Justice Department continue.

Under the current reorganization plan, creditors would receive shares of Kmart stock and current shareholders would receive nothing for their equity, said Ronald Hutchinson, the chief reorganization officer.

"A lot of people have been speculating about the future of Kmart," said James B. Adamson, the chairman and chief executive. "I hope they will recognize that there is a future."

Kmart Store Closings to Cut As Many as 35,000 Positions
A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
January 14, 2003

DETROIT -- Kmart Corp. will close 326 stores and eliminate 30,000 to 35,000 jobs, the company announced Tuesday.

Chief Executive James Adamson said the retailer plans to emerge from bankruptcy by April 30. "We don't want to remain in bankruptcy a day longer than necessary," he said in a conference call with reporters. Kmart is done with store closings for now, Mr. Adamson said.

The store closings, which involve 44 states and Puerto Rico, are subject to court approval. Kmart is scheduled to appear in U.S. Bankruptcy Court in Chicago on Jan. 28. The Troy, Mich., retail giant now operates roughly 1,830 stores.

The reorganization plan includes a five-year restructuring program based on the company's traditional strategy of promotional retailing, Mr. Adamson said. The plan has been approved by board members, and under the reorganization plan creditors will receive issues of new stock in exchange for their claims. Specific terms of stock awards are still being negotiated.

Current Kmart equity holders will receive nothing for their shares under the reorganization plan, Chief Restructuring Officer Ron Hutchison said.

Some Kmart suppliers that fell victim to the company's Chapter 11 filing will be entitled to two years of first lien on some Kmart real estate, Mr. Hutchinson said.

Tuesday's announcement marks the second round of closings in less than a year. Last March, Kmart closed 283 stores, affecting 22,000 jobs. Analysts had predicted that the latest move would shutter 300 to 600 stores.

The closings also include one distribution center in Texas.

"We're all upset. I've been here since 1998. I helped build this store up," said Sharon Knight, an employee at a Detroit Kmart who learned Tuesday morning that her store is one of those closing. "It's kind of a tremendous loss to me."

Ms. Knight, who works behind the jewelry counter, said employees were told at a meeting that the store is planning to close within 60 to 70 days.

Kmart filed for bankruptcy nearly a year ago after a stock dive and disappointing 2001 holiday sales. The discounter needs to close stores while under bankruptcy protection to allow it to get out of leases.

Burt Flickinger, a retail analyst with Reach Marketing, says while store closings are necessary, the company isn't going about it the right way. Kmart is basing its closures on performance over the last year "and should be looking at what the business will look like the next 12 months," Mr. Flickinger said.

Since Kmart filed for bankruptcy on Jan. 22, 2002, it has lost an additional $2 billion and battled declines in same-store sales, or sales at stores open at least a year. Earlier Tuesday, Kmart reported $349 million in net income for the five-week period ended Jan 1, 6% lower than the same period a year earlier.

"As the company contracts, there's still no sign that it can make any money," Mr. Flickinger said. "There's so much uncertainty in what Kmart can do to solve its problems."

But Jordan Kaplan, a professor of managerial science at Long Island University, said the store closings may buy some time for Kmart. "Hopefully, it will stave off a complete liquidation of Kmart -- which of course is always a possibility," he said.

Kmart has yet to stanch its market-share losses to discounting giants Target Corp. and Wal-Mart Stores Inc. Some analysts have suggested there isn't room for Kmart unless it finds some way of distinguishing itself and luring customers.

Other troubles plague the company beyond its business plan. Just before its bankruptcy filing, Kmart began receiving anonymous letters, purporting to be from employees, that suggested wrongdoing at the company. The letters spawned an investigation into the way the company was run under its former management. Congress, the Justice Department and the Securities and Exchange Commission also are investigating Kmart's decline into bankruptcy.

Sears Deploys StorePerform Solution in Full-Line Stores
January 13, 2003

DENVER, Jan. 13 /PRNewswire/ -- StorePerform Technologies announced that Sears, Roebuck and Co. (NYSE: S) will deploy the StorePerform Workforce Productivity and Store Performance Management Solution within all its full- line stores. The deployment is part of an initiative designed to provide Sears' full-line store management with a single source for role-based communications, task management, reporting, and access to other key systems. Full rollout to Sears' approximately 870 full-line stores is on an aggressive schedule and planned to be complete within the first quarter of 2003.

"Our experience with StorePerform has been positive, for users at both our corporate office and in the field. It is an intuitive, easy-to-learn product, and our field offices and stores appreciate having all tasks arrive in one format, through one consistent channel," said Michael Buxton, Sears vice president of store operations for full-line stores.

At the corporate level, the StorePerform solution allows users to track compliance and know when there are problems -- this assists in the drive for consistent store-level execution and increased productivity. "We believe these capabilities will support our key strategic imperatives, including cost reduction and revenue enhancement," Buxton said.

"The software installation process has been smooth and timely, and the product is stable and fits well with our technology environment," added Steve Junk, Sears vice president of information technology.

More details on the rollout will be shared at a seminar during the National Retail Federation's Big Show on Tuesday, January 14, 2003 at 4:30 pm in the Jacob Javits Center, New York City. The seminar is entitled "Performance Chain Management - Execute Superbly to Grow Profitably", and will feature Michael Buxton, Steve Junk and Srikant Vasan, as well as Greg Girard from AMR Research, Inc.

StorePerform's Intranet-based solution helps retailers:
a) reduce store communication costs, labor costs, and training costs,
b) increase revenues, speed-to-floor and store management floor-time,
c) execute consistently across stores, and
d) provide visibility for above-store management into the status of process execution at each store, allowing them to manage by exception.

About StorePerform Technologies, Inc.
StorePerform Technologies, Inc., with headquarters in Denver, Colo., offers the first comprehensive workforce productivity and store performance management solution in the retail market. StorePerform's software helps retailers improve their store operations by combining task management, performance monitoring, and process-driven analytics. StorePerform can help optimize a wide range of retail business processes, such as task management, store communications, standard operating procedures, store feedback, store openings/closings/remodels, and workload optimization. For more information, please visit http://www.storeperform.com, or email info@storeperform.com.

About Sears, Roebuck and Co.
Sears, Roebuck and Co. (NYSE: S) is a broadline retailer with significant service and credit businesses. In 2001, the company's annual revenue was more than $41 billion. With headquarters in Hoffman Estates, Ill., the company offers its wide range of apparel, home and automotive products and services to families in the U.S. through Sears stores nationwide, including approximately 870 full-line stores. Sears also offers a variety of merchandise and services through its Web site, www.sears.com. In June 2002, Sears acquired Lands' End, a direct merchant of traditionally styled, classic Lands' End clothing offered to customers around the world through regular mailings of its specialty catalogs and online at www.landsend.com.

Sears, Citigroup Aim to Limit Board Access
Bloomberg News  - January 11, 2003

WASHINGTON -- Citigroup Inc. and Sears, Roebuck and Co. are opposing proposals that would help large stakeholders gain board representation by letting them list their own candidates for board seats on company-issued ballots.

Shareholders led by the American Federation of State, County and Municipal Employees are calling for a vote at 2003 annual meetings on rewriting bylaws at Citigroup and Sears so investors with at least 3 percent of shares can name board candidates.

Citigroup and Sears have asked the Securities and Exchange Commission for a legal opinion on excluding the bylaw proposals from their annual meeting agendas. They say the bylaw change would allow investors, specifically corporate raiders, to circumvent election rules requiring challengers to make additional disclosures and to identify themselves by sending out separate proxies, or corporate ballots.

Retail Consultant Says Kmart Will Seek to Close 312 Stores
By Constance Hays  - New York Times
January 11, 2003

The Kmart Corporation is expected to file a plan with the United States Bankruptcy Court next week seeking to close at least 312 stores, a retail consultant said yesterday.

The consultant, Burt Flickinger III of the Strategic Resource Group, said that the filing, which could come as early as Tuesday, would ask the court's approval for the closings, as well as for an option to close 122 more stores.

Kmart has been evaluating its 1,800 discount stores for several weeks to decide on possible closings.

A spokeswoman for Kmart, Lori McTavish, would not confirm the numbers. But she said that "we expect to complete our evaluation of the store base in mid- January," in time for a hearing scheduled Jan. 28 before a bankruptcy judge in Chicago.

Kmart, which is based in Troy, Mich., filed for Chapter 11 bankruptcy protection last January. It closed 283 stores and laid off 22,000 workers last March. The company has sought to revive its fortunes by carrying exclusive brands and increasing its advertising to minority shoppers as well as by cutting costs. Still, it has been unable to reverse declining store traffic and sluggish sales.

"This means that the company wasn't able to stop the bleeding with the 283 stores they closed last year," Mr. Flickinger said.

Ms. McTavish said employees would be notified about store closings before any public announcement.

Kmart had a loss of $383 million in the third quarter of 2002. Sales in November at stores open at least a year were down 17.2 percent, to $2.47 billion. Sales were $6.73 billion in the third quarter. In the third quarter of 2001, Kmart had sales of $8.02 billion. The 2002 November sales figures do not include the Thanksgiving holiday.

Sears to Pay $125,000 to Settle Discrimination Suit
Bloomberg News
Posted on January 10, 2003

Sears, Roebuck & Co. agreed to pay $125,000 to settle a lawsuit claiming the retailer discriminated against a blind employee, the U.S. government said.

The largest U.S. department store chain failed to provide a specialized computer and other equipment to accommodate Carl P. Davenport's disability, the U.S. Equal Employment Opportunity Commission said. Davenport was hired in 1999 as an asset management assistant at the retailer's credit facility in Greensboro, North Carolina, though he never went to work, the EEOC said. Sears denied violating federal law.

As part of the settlement, Sears will continue training its supervisors about the Americans With Disabilities Act, and will designate a manager at the facility responsible for disability issues, the EEOC said. The company also will monitor applicants who request a disability accommodation, the government said.

The government is "encouraged by Sears's commitment to comply with the ADA," said Michael Whitlow, acting director of the EEOC's Charlotte office. "Every individual deserves the freedom to compete in the workplace on a level playing field without being subjected to discrimination."

Sears spokeswoman Peggy Palter said the company denied violating the ADA and that it has been recognized for its efforts to accommodate disabled people. The company settled to put the issue behind it and to avoid litigation costs, Palter said.

The suit was filed in federal court in Greensboro in June 2001. The settlement requires a judge's approval.

Shares of Hoffman Estates, Illinois-based Sears rose $2.24 to close at $27.29 in New York Stock Exchange composite trading today.

J.C. Penney Unveils Job Cuts
As Restructuring Continues
A Wall Street Journal Online News Roundup
January 10, 2003

J.C. Penney Co. unveiled plans to cut 2,000 jobs and close three offices related to its catalog business and said it expects to take charges of about $40 million, or 10 cents a share, to cover the costs.

The Plano, Texas, catalog and department-store retailer will shutter its catalog fulfillment center in Atlanta and telemarketing offices in Atlanta and Lenexa, Kan, in the first half of the year. Some of the job cuts will made at its remaining fulfillment centers. The company currently employs 250,000 people.

The cuts are part of a long-running restructuring at the retailer, which will have closed 17 outlet stores, four telemarketing centers and two catalog fulfillment centers since January 2000. The hope is to reduce its reliance on catalog sales and better balance catalog, Internet and department-store sales.

The charges will be split, with $20 million in the first quarter and the remainder in the second. Pending real-estate transactions could cut the sizes of the charges.

Penney expects the move to generate annual savings of about $30 million, or seven cents a share, starting in 2004.

Chairman and Chief Executive Allen Questrom said the change is partly the result of productivity gains. "In the last two years, [the catalog division] has made significant strides in improving its profit contribution by eliminating unprofitable sales, improving inventory management and reducing expenses," he said, cutting the need for space by about 40%.

The retailer was one of the few to report strong holiday sales, with a same-store sales increase of 4.7%, ahead of its forecast of a 4.5% gain. Aided by deep, widely advertised weekly discounts, Penney said it saw particularly brisk sales of children's apparel, fine jewelry and home furnishings.

The company has seen improvement in its earnings lately, crediting more fashionable merchandise, better pricing and more appealing store layouts.

Sears Dec. Comparable Store Sales Decrease 4.6 %
Dow Jones Newswires
January 9, 2003

Sears Roebuck & Co.'s December same-store sales fell 4.6%, a smaller drop than Wall Street's expectation of a 5% decline.

In a press release Thursday, Sears said total sales fell 2.6% to $4.07 billion from $4.18 billion, despite strong showings from its sales at its Web site and its Lands' End business, which it acquired in June.

The retailer said its full-line stores had solid performances in footwear, sporting goods and fine jewelry.

According to Sears' monthly prerecorded sales call, same-store sales of children's clothes and home fashions had the steepest decline.

Sears expects January same-store sales to fall in the mid-single digit range, according to the sales call.

For the 48 weeks of the fiscal year to date, Sears' same-store sales fell 6%. Total sales dropped 3.6% to $26.79 billion from $27.79 billion.

Company Web site: http://www.sears.com

Sears Senior Debt Rating Cut by Fitch
Reuters - January 9, 2003

Fitch Ratings on Thursday (1/9/03) cut its senior unsecured debt ratings for Sears, Roebuck and Co. and its Sears Roebuck Acceptance Corp. and Sears DC Corp. units.

Fitch lowered the ratings one notch to "BBB-plus," its third lowest investment grade, from "A-minus," and affirmed its "F2" commercial paper rating, its second lowest investment grade.

The downgrade was based on heightened competitive pressures facing the company's retail operation, challenges with executing a new full-line store strategy, concerns surrounding the overall retail environment and Fitch's revised internal capital allocations for the credit business.

Fitch said its rating outlook is "negative," reflecting weak operating trends and uncertainty surrounding the timing of a turnaround of the retail businesses. A negative outlook means another cut is more likely than an upgrade.

Sears had $12.2 billion of domestic senior debt and $4.3 billion of domestic commercial paper outstanding as of Sept. 28, 2002, Fitch said.

Copyright 2003, Reuters News Service

Wal-Mart Dec. Sales Rise 2.3 Percent
CNBC  - January 9, 2003

Mega-retailer meets lowered same-store forecast

Wal-Mart Stores Inc. , the world’s biggest retailer, on Thursday said December sales at stores open at least a year rose 2.3 percent, meeting its lowered forecast.

A LAST-MINUTE JUMP in holiday sales came too late to make up for a slow start, it said. The retailer said total sales in the five-week period ended Jan. 3 rose 9.5 percent from a year earlier, to $31.6 billion.

Wal-Mart said on Dec. 26 it expected same-store sales for December to be up 2 percent to 3 percent. It initially forecast a gain of 3 percent to 5 percent.

Maltbie's Mix Long: Michaels Stores;
Short: Sears
Robert Maltbie - CFA - Forbes.com
January 6, 2003

NEW YORK - Each week Robert Maltbie, money manager and chief executive of Stockjock.com, selects a pair of stocks--one he recommends investors to go long on and the other that they should short.

The Long
Michaels Stores (nyse: MIK - news - people )
Recent price: $32.50
Target price: $40

The Short
Sears, Roebuck (nyse: S - news - people )
Recent price: $24.50
Target price: $18

The Thinking
Robert Maltbie

Since early November, after pre-announcing that profits would fall short of estimates, shares of Michaels, the nation's largest arts and craft retailer, have tumbled more than 35%.