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Federated Deal to Buy May Creates Department-Store Giant
Companies Plan $1 Billion in Charges
A Wall Street Journal Online News Roundup
February 28, 2005

Federated Department Stores Inc. formally unveiled its $11 billion pact to buy rival May Department Stores Co., in a deal that underscores the dire condition of department-store retailing.

The deal creates a national colossus of nearly 1,000 department stores. Federated is the parent of Macy's and Bloomingdale's, while May's stable of stores includes Marshall Field's, Lord & Taylor and Filene's. Executives said they expect the deal will involve $1 billion in charges, spread over three years.

Squeezed by big-box retailers like Wal-Mart Stores Inc. on the low end and upscale stores like Neiman Marcus Group Inc. on the high end, department-store retailing -- a way of doing business that dates from the 19th century -- sector has been losing market share consistently since the early 1980s.

In a conference call to discuss the merger, Federated Chairman and Chief Executive Terry Lundgren said the company is very committed to the department-store business and that he believes the merger will allow the companies to better compete in such a tough environment. "We are proving that department stores can be a vibrant, very much alive form of retail."

According to terms of the deal, announced early Monday, Federated will pay $35.50 a share in cash and stock for its longtime rival. Each share of May will be converted into the right to receive $17.75 a share of cash and 0.3115 shares of Federated stock. Both boards have approved the deal. Federated will assume $6 billion in May debt, and added that, as part of the deal, it will also increase its annual dividend to $1 a share from the current 54 cents a share.

Deal Will Mean $1 Billion in Charges

Executives said they expect the deal will involve $1 billion in charges for items such as severance, retention, markdowns and facility-shutdown costs, spread over three years ˆ 25% in 2005, 50% in 2006, and 25% in 2007. The company also confirmed that it would suspend its stock-buyback plan and said it expects same-store sales, or sales at store open at least a year, will rise 2.5% after the merger is complete.

Shares of May slipped Monday as investors expressed some disappointment in the offer.

In morning trading, shares of May were down 51 cents, or 1.4%, to $34.84 on the New York Stock Exchange, after climbing 4.4% Friday in anticipation of the deal. Federated shares climbed 69 cents, or 1.2%, to 57.48 on the Big Board, after sliding 0.4% in the previous session.

Shares of Dillard's Inc. also dropped, sliding over 6%, as the Federated-May pact damped hopes that Federated might have bid for Dillard's instead. Shares of Sak's Inc., the other main player in the mid-tier department-store sector, dropped 2.1%. Dillard's and Sak's are likely to acquire some stores from Federated and May, but if the combined Federated-May company performs well, it would ratchet up pressure on Dillard's and Sak's to improve their performance.

Analysts Reactions Are Mixed

In the short term, some analysts expect the combination to bring big efficiencies to both May and Federated. May fills important gaps in Federated's national presence, particularly in the Midwest, through the Marshall Field's chain, and in Texas, with the Foley's chain. Marshall Field's famed Chicago store adds to Federated's already impressive collection of retail flagships, including the Macy's location in New York, the world's largest department store. In the longer term, the combination places a bold bet on the survival of department-store retailing. During the past two decades, department stores have steadily lost market share in nearly every category.

For consumers, meanwhile, "this will create sharper price points and better fashions that will help bring back shoppers away from other full-price department stores and discounters," said Burt Flickinger III, managing director at Strategic Resources in New York.

Dan Hess, president and chief executive of Merchant Forecast, a New York-based independent research company, had a different take. "Generally, it is bad for the industry, for the vendors and for the consumers," he said. "Consumers will get fewer options because there will be one point of view." He noted that it will be harder for some of the smaller suppliers to break into the merged entity's new vendor structure. Mr. Hess added, "Department stores will no longer be looked at for innovation and newness. Innovation will come from specialty stores."

The combination of Federated's 458 stores with May's 491 may raise antitrust concerns, as it raises the prospect that one or more stores from the combined entity may become the only source for certain products in a given area. Federated attorneys are likely to argue that retailing has changed dramatically in the past 10 years, with myriad retailers and online stores selling apparel, cosmetics, accessories and home furnishings.

Wisconsin Town Reeling Over Closing of
Lands' End Call Center
By Aaron Nathans – New York Times
February 28, 2005

CROSS PLAINS, Wis., Feb. 24 - This village of 3,084 lost two major employers in two years. But Lands' End was supposed to be different.

The company, known for its fleecy clothes and folksy sales pitch, has long been a great source of employment for people of Cross Plains, a 15-minute drive from Madison.

But Lands' End, which was acquired by Sears, Roebuck & Company two and a half years ago, announced this week that it would close its Cross Plains call center in June, putting the 200 people there out of work. They are among the 375 full- and part-time employees in Wisconsin who have lost their jobs in a revamping of the company. Additional seasonal employees will also be cut.

"It puts a lot of close-knit people out of work, said Diana Kolden, a Cross Plains resident taking a break at Sport Bowl, a four-lane bowling alley. "They worked for years and depended on that company. They burned us."

Jackie Schutty, a Lands' End spokeswoman, said customers were more apt now to buy over the Internet than the telephone. Three call centers in other Wisconsin towns will remain, she said.

"Lands' End is still very committed to our customers and our employees," Ms. Schutty said.

But some residents of Cross Plains were more skeptical.

"With a major buyout like Sears, you know there's going to be cost-cutting measures," said Mike Roessler, a Cross Plains real estate broker. "They have to watch the bottom line. When you're owned by the person who started the company, these decisions are harder to make."

Sears announced late last year that it would merge with Kmart. Many business analysts have said the fit between Sears and Lands' End has been awkward, and that the Kmart merger only further complicates it. Sears deferred comment on the layoffs to Lands' End.

Lands' End was founded in 1963 in Chicago by Gary Comer and initially sold sailboat hardware and equipment. It eventually turned to selling casual clothing and moved its headquarters to Dodgeville, Wis., 35 miles from Cross Plains. The company offers on-site child care and an 80,000-square-foot fitness facility at its Dodgeville plant, and is known for flexible work hours and generous corporate donations.

Ray Aldag, professor of management at the University of Wisconsin-Madison School of Business, said the layoffs "shatter the culture" of Lands' End's small-town family feel. Mr. Aldag spoke of a "psychological contract," in which the employees work hard, "and the company will provide you with secure employment and a family-oriented culture. This is a body blow."

"It's a situation where the culture was developed over decades. These sorts of things can just be destroyed overnight," Dr. Aldag said.

Residents of this village have been dealt several setbacks in recent years. Zander's, the oldest butter manufacturer in the state, went out of business last year, the victim of a major recall of its butter. And a tool maker, Roto Zip, closed its Cross Plains headquarters in 2003, when it was sold to the Robert Bosch Tool Corporation, based in Chicago. About 50 jobs were lost with each closing.

All the closings are adding up, said Jane Bautch, who said a friend with four children under age 10 lost her job at Lands' End. The family had just built a new house in Cross Plains near the call center, she said.

"It's two minutes from home, two minutes from school. It's convenient, it's easy. And they have no idea what they're going to do," she said.

The village president, Richard Anderson, said there were a lot of hurt feelings. .

"This is a real disappointment. Since Lands' End has been purchased by Sears, it's no longer a family-oriented company," Mr. Anderson said. "It's creating turmoil in our village."

One resident, Dave Parmeter, 62, said he understood why the change had to happen. The call centers are quickly becoming a relic, he said. Even libraries are becoming quaint in a world where children can do all their research from home, he said.

"I believe management has taken into consideration what's happening in the real world," Mr. Parmeter said. "We are no longer a function of snail mail."

Don't Blame Wal-Mart
By Robert B. Reich – New York Times
February 28, 2005

Berkeley, Calif. ˜ BOWING to intense pressure from neighborhood and labor groups, a real estate developer has just given up plans to include a Wal-Mart store in a mall in Queens, thereby blocking Wal-Mart's plan to open its first store in New York City. In the eyes of Wal-Mart's detractors, the Arkansas-based chain embodies the worst kind of economic exploitation: it pays its 1.2 million American workers an average of only $9.68 an hour, doesn't provide most of them with health insurance, keeps out unions, has a checkered history on labor law and turns main streets into ghost towns by sucking business away from small retailers.

But isn't Wal-Mart really being punished for our sins? After all, it's not as if Wal-Mart's founder, Sam Walton, and his successors created the world's largest retailer by putting a gun to our heads and forcing us to shop there.

Instead, Wal-Mart has lured customers with low prices. "We expect our suppliers to drive the costs out of the supply chain," a spokeswoman for Wal-Mart said. "It's good for us and good for them."

Wal-Mart may have perfected this technique, but you can find it almost everywhere these days. Corporations are in fierce competition to get and keep customers, so they pass the bulk of their cost cuts through to consumers as lower prices. Products are manufactured in China at a fraction of the cost of making them here, and American consumers get great deals. Back-office work, along with computer programming and data crunching, is "offshored" to India, so our dollars go even further.

Meanwhile, many of us pressure companies to give us even better bargains. I look on the Internet to find the lowest price I can and buy airline tickets, books, merchandise from just about anywhere with a click of a mouse. Don't you?

The fact is, today's economy offers us a Faustian bargain: it can give consumers deals largely because it hammers workers and communities.

We can blame big corporations, but we're mostly making this bargain with ourselves. The easier it is for us to get great deals, the stronger the downward pressure on wages and benefits. Last year, the real wages of hourly workers, who make up about 80 percent of the work force, actually dropped for the first time in more than a decade; hourly workers' health and pension benefits are in free fall. The easier it is for us to find better professional services, the harder professionals have to hustle to attract and keep clients. The more efficiently we can summon products from anywhere on the globe, the more stress we put on our own communities.

But you and I aren't just consumers. We're also workers and citizens. How do we strike the right balance? To claim that people shouldn't have access to Wal-Mart or to cut-rate airfares or services from India or to Internet shopping, because these somehow reduce their quality of life, is paternalistic tripe. No one is a better judge of what people want than they themselves.

The problem is, the choices we make in the market don't fully reflect our values as workers or as citizens. I didn't want our community bookstore in Cambridge, Mass., to close (as it did last fall) yet I still bought lots of books from Amazon.com <http://amazon.com/> . In addition, we may not see the larger bargain when our own job or community isn't directly at stake. I don't like what's happening to airline workers, but I still try for the cheapest fare I can get.

The only way for the workers or citizens in us to trump the consumers in us is through laws and regulations that make our purchases a social choice as well as a personal one. A requirement that companies with more than 50 employees offer their workers affordable health insurance, for example, might increase slightly the price of their goods and services. My inner consumer won't like that very much, but the worker in me thinks it a fair price to pay. Same with an increase in the minimum wage or a change in labor laws making it easier for employees to organize and negotiate better terms.

I wouldn't go so far as to re-regulate the airline industry or hobble free trade with China and India - that would cost me as a consumer far too much - but I'd like the government to offer wage insurance to ease the pain of sudden losses of pay. And I'd support labor standards that make trade agreements a bit more fair.

These provisions might end up costing me some money, but the citizen in me thinks they are worth the price. You might think differently, but as a nation we aren't even having this sort of discussion. Instead, our debates about economic change take place between two warring camps: those who want the best consumer deals, and those who want to preserve jobs and communities much as they are. Instead of finding ways to soften the blows, compensate the losers or slow the pace of change - so the consumers in us can enjoy lower prices and better products without wreaking too much damage on us in our role as workers and citizens - we go to battle.

I don't know if Wal-Mart will ever make it into New York City. I do know that New Yorkers, like most other Americans, want the great deals that can be had in a rapidly globalizing high-tech economy. Yet the prices on sales tags don't reflect the full prices we have to pay as workers and citizens. A sensible public debate would focus on how to make that total price as low as possible.

Robert B. Reich, the author of "Reason: Why Liberals Will Win the Battle for America," was secretary of labor from 1993 to 1997.

Federated Buying Rival May in $11B Deal
By John Nolan – Associated Press Writer – Chicago Tribune Online
February 28, 2005

CINCINNATI -- Federated Department Stores Inc. is buying rival May Department Stores Co. for $11 billion in cash and stock in a deal that would create a powerhouse better able to compete against discount giant Wal-Mart Stores Inc. at one end of the retailing spectrum and specialty stores and other upscale merchants at the higher end.

The deal announced Monday would bring together the operator of Macy's and Bloomingdale's with May, a company known for its Marshall Field's and Lord & Taylor chains, creating a company with 1,000 stores and $30 billion in annual sales.

Federated shares rose while May share slipped in early trading after the announcement of the widely anticipated deal.

"For consumers, this will create sharper price points and better fashions that will help bring back shoppers away from other full-price department stores and discounters," said Burt Flickinger III, managing director at Strategic Resources in New York.

But not everyone applauds the merger.

"Generally, it is bad for the industry, for the vendors and for the consumers," said Dan Hess, president and chief executive of Merchant Forecast, a New York-based independent research company. "Consumers will get fewer options because there will be one point of view." He noted that it will be harder for some of the smaller suppliers to break into the merged entity's new vendor structure.

He added,"Department stores will no longer be looked at for innovation and newness.. Innovation will come from specialty stores."

The boards of both companies approved the deal Sunday. It is still subject to approval by regulators and shareholders. Federated and May said they hope to close the deal in the third quarter.

Federated's merger with May will extend Federated's 34-state retail operation into a total of 49 states, along with Guam, Puerto Rico and the District of Columbia. Alaska is the only state in which they don't have a store.

"Today, we have taken the first step toward combining two of the best department store companies in America, creating a new retail company with truly national scope and presence," said Terry J. Lundgren, Federated's chairman, president and chief executive officer.

The merger is the latest consolidation to occur in the department store industry, particularly the mid-tier sector, which has been under pressure from all types of retailing and have steadily lost market share for more than a decade. Such moves reduce advertising and other costs while gaining bargaining power with suppliers. Just last November, Kmart Holding Corp. agreed to buy Sears, Roebuck & Co. for $11.5 billion.

And there's more dealmaking in the offing.

Saks Inc. may sell or spin off its middle-market department store division in order to concentrate on its Saks Fifth Avenue unit, which targets the luxury market, one of the hottest areas in retailing. It is expected to make a decision in a few weeks. Richard A. Smith, the 81-year-old chairman of Neiman Marcus Group Inc. whose family controls the company, may be planning to sell, hoping to cash in on a white-hot luxury market.

"In today's retail environment, competition comes from every conceivable retail format," said John Dunham, May's president and acting chairman and chief executive. "To succeed, we have to operate more efficiently and compete more effectively against players at all levels of the retail demographic. There is no question that this is a bold and exciting move, and one I believe will have a positive impact on competitive retailing for American consumers in the longer term."

Federated said it expects the merger to begin contributing to the combined company's earnings per share in 2007. The company said it anticipates $450 million in cost savings by 2007 from combining purchasing and other central functions, integrating divisions and adopting best practices from both companies.

Federated said it also expects one-time merger costs of about $1 billion, to be spread out over three years starting in 2005.

Under the deal, each share of May will be converted into the right to receive $17.75 per share in cash and 0.3115 shares of Federated stock. Based on the 10-day trading average of Federated stock as of last Friday, that equates to $35.50 per share, or $11 billion.

May shares slipped 35 cents to $35 in early trading on the New York Stock Exchange. Its stock has been rising in recent weeks in anticipation of a deal, including a 4 percent jump on Friday. The stock has ranged in price from $23.04 to $36.48.

Federated shares rose $1.21 to $58 in early trading Monday, approaching the upper d fend of its 52-week range of $42.80 to $59.91.

Federated also said that it will assume May debt that totaled about $6 billion at the end of 2004.

The deal will double Federated's size, just as the retailer doubled its size in 1994 when it bought R.H. Macy & Co. out of Chapter 11 bankruptcy reorganization.

Federated said Monday that it plans no division consolidations or store name changes before 2006. But it ultimately will convert most of May's regional department stores to the Macy's nameplate, as it is now doing with its own regional chains including Lazarus, Rich's and Burdines.

Still uncertain is how the Federated-May deal will affect the companies' combined work force of 243,000.

Federated said it plans to merge May's St. Louis corporate headquarters functions into Federated's Cincinnati and New York corporate offices, beginning this year. But, Federated said it will make St. Louis the headquarters of one of the combined company's major operating divisions, to take advantage of the talent pool there.

Federated and St. Louis-based May have discussed a possible merger on and off for a couple of years, but speculation heated up when May's chief executive and chairman Gene Kahn abruptly left in January. That cleared the way for Federated's Lundgren to lead the combined entity.

Kahn resigned seven months after helping May acquire Target Corp.'s more than five dozen Marshall Field's stores and nine Mervyn locations for $3.24 billion -- a price many analysts panned as too steep by hundreds of millions of dollars. Federated had dropped out of bidding for Marshall Field's by then, saying the price was too high.

May's performance has lagged behind competitors such as Federated and J.C. Penney Co. as it has failed to come up with a compelling merchandising vision under Kahn and has consequently resorted to aggressive price cutting to bring in customers.

May is given or its warehouse and distribution operations, while Federated has done a good job in upscaling Bloomingdale's.

Some analysts have suggested that uniting two of the nation's largest department store chains would create a more efficient operation better equipped to go up against discounters. Together, the companies also could wring savings out of their merged retail systems and buying clout, some analysts suggested.

Others questioned whether the two retailers would be a good fit, citing the belief that Federated may be more upscale and May always margin-oriented while lacking on the merchandising side.

Federated has annual sales of $15.6 billion and 111,000 employees. It operates more than 450 stores in 34 states, Guam and Puerto Rico under the names Macy's, Bloomingdale's, Bon-Macy's, Burdines-Macy's, Goldsmith's-Macy's, Lazarus-Macy's and Rich's-Macy's. The company also operates macys.com and Bloomingdale's By Mail.

May has 132,000 employees in 46 states and annual sales of $14.4 billion. The company operates about 490 department stores under the names Famous-Barr, Filene's, Foley's, Hecht's, Kaufmann's, Lord & Taylor, L.S. Ayres, Marshall Field's, Meier & Frank, Robinsons-May, Strawbridge's and The Jones Store. The company also has 229 David's Bridal stores, 458 After Hours Formalwear stores, and 11 Priscilla of Boston stores.

Sears, Kmart Enter 5-Year, $4B Credit Facility
Dow Jones Newswires – Wall Street Journal Online
February 28, 2005

WASHINGTON -- Units of Kmart Holding Corp. (KMRT) and Sears Roebuck & Co. (S) signed a five-year, $4 billion credit agreement contingent upon the completion of the companies' pending merger, Kmart and Sears disclosed Monday.

Kmart Corp. and Sears Roebuck Acceptance Corp. formed the agreement last week with Citicorp USA Inc. and Bank of America as syndication agents, along with Barclays Bank PLC, Lehman Commercial Paper Inc., HSBC Bank USA, Merrill Lynch Bank USA, Morgan Stanley Bank, Royal Bank of Scotland PLC and Wachovia Bank National Association as documentation agents.

J.P. Morgan Securities Inc., Citigroup Global Markets Inc., and Bank of America Securities LLC will serve as lead arrangers and joint bookrunners, the filing said.

JPMorgan Chase Bank NA will serve as administrative agent, the filing said.

Sears and Kmart agreed to merge last November, and the companies have said the deal is expected to be completed in March.

Would May fit Federated Like a Glove?
By Bruce Horovitz, USA TODAY
February 28, 2005

In a Hollywood movie, the romantic leads must have cosmic chemistry or the film's almost certain to flop.

In the retailing world, merger partners like Federated Department Stores  also need very special synergy ˜ or the deal is virtually destined to implode.

But is this a merger with synergy ˜ whose whole is somehow bigger than the sum of its department-store parts? Most retailing analysts say it could be, but they stress the "could."

"It doesn't just come down to the finances," says David Szymanski, director of the Center for Retailing Studies at Texas A&M University. "You can't underestimate the human factor in this."

Here's how analysts say these two very different corporate cultures could ultimately click:

Getting bigger is better. "This will be the department store version of Wal-Mart," says Cynthia Cohen, president of Strategic Mindshare.

Both grew by purchasing other chains. Combined, they'll be able to squeeze better deals from vendors, she says. And they would save on advertising, real estate and staffing costs, says Wendy Liebmann, president of WSL Strategic Retail.

"The consumer may see some benefits," Cohen says.

Expanding their reach. The deal gives Federated immediate presence in areas it has none, or virtually none, Szymanski says.

For example, it inherits the Foley's chains in Texas and Colorado. That's a much quicker ˜ and cheaper ˜ way to expand than to build stores from the ground up. "These are markets that would be otherwise very difficult to enter," he says.

Appealing to the upscale. The two hottest areas in retailing are the lower-end of the scale (like Wal-Mart and Target) and the higher end of the scale (like Neiman Marcus and Saks Fifth Avenue).

While Federated has tried, it has been unable to lift its Bloomingdale's brand to the very top of the scale, Liebmann says.

But with the Marshall Field's line it inherits from May, this is a chance for Federated to boost itself into the more affluent league of department stores, Liebmann says.

"Marshall Field's is a marketing icon in Chicago with brand recognition there that's above that of a Bloomingdale's," she says.

Consolidating the middle. Instead of competing for the "midrange" department store shopper, the Macy's brand and various regional May brands could consolidate and become a force, says Gary Ruffing, head of retail services at BBK, a consulting firm.

Controlling the mall. If Federated opts not to turn gobs and gobs of the May stores into Macy's stores, it has an opportunity to "expand its presence" by operating department stores that are regional favorites, Szymanski says.

This way, Federated is not just inheriting chunks of real estate but ˜ more important ˜ capturing the brand loyalty of consumers, he says.

May has Struggled with its Identity
By Thor Valdmanis, USA TODAY
February 28. 2005

NEW YORK ˜ A 19th-century hunger for woolen undergarments and Levi's overalls made May Department Stores the hot property it is today.

In 1877, a 29-year-old German immigrant named David May, weary of making a living as a silver miner in an obscure Colorado town called Leadville, decided to open a clothing store.

It took off, and by 1892, May made his move to St. Louis by purchasing the Famous Clothing Store.

He later merged it with the William Barr Dry Goods company to form the Famous-Barr department store.

Despite its storied past, May has suffered in recent years and clearly needed a savior.

Whether that role will be filled by Federated, the nation's largest upscale department store chain, remains to be seen.

The low-key St. Louis-based retailer tried to recast its stores as a magnet for the young and hip, but with mixed results, leading to the sudden departure of May CEO Eugene Kahn last month.

In truth, May, with $14 billion in annual sales, has been in a funk for years.

Its reliance on discounting at stores such as Foley's and Filene's undermined the brand appeal of its best-known upmarket stores, including Lord & Taylor.

The nation's second-largest department store chain watched sales tumble for three consecutive years and profits slide for the past four.

Shareholders suffered quietly in the knowledge that up until 2001 May had delivered 26 consecutive years of sales and earnings growth.

May tried to shake things up with last year's $3.2 billion purchase of Marshall Field's but was widely criticized by Wall Street analysts for overpaying.

The May family has established close links with St. Louis over the years, giving generously to the arts and other community projects.

Buster May, the last family member to help manage the company, left an endowment to the St. Louis Art Museum and ran the group that helped build the Gateway Arch, the city's biggest tourist attraction.

As it brokered a merger deal with Federated, May executives negotiated hard to maintain the company's presence in St. Louis, centered on its 21-story, boxlike headquarters downtown with "Railway Exchange Building" over its entrance.

Retail analysts say Cincinnati-based Federated will have to tread lightly if the deal is to work.

As the owner of Macy's and Bloomingdale's, Federated management is highly rated for its ability to grow same-store sales and retain the appeal of fashionistas.

‘May has Some Problems,'
but Federated CEO Up to the Task
By Lorrie Grant, USA TODAY
February 28, 2005

If department stores still have a future in retailing, Terry Lundgren is determined to be the executive to prove it.

With his bid for May Department Stores is poised to lead a giant competitor in a retail format some industry analysts consider past its prime.

If the merger goes through, Federated, parent of Macy's and Bloomingdale's, would add May's upscale gems Marshall Field's and Lord & Taylor, strengthening Federated's presence at retailing's upper tier.

But along with May's diversity of midtier and high-end stores comes a challenge that could prove the toughest of Lundgren's 30-year career.

"May has some problems: A fair number of stores are in poor locations or not in prime malls. And the stores are cluttered and dirty," says George Whalin, president of Retail Management Consultants.

Retail executives say the 53-year-old native of Long Beach is up to the task.

"He's an outstanding executive and probably today the best merchandise manager, leader, visionary in retailing," says Allen Questrom, retired CEO of J.C. Penney and former head of Federated earlier in Lundgren's career with the firm.

"He's a good student and spends a lot of time trying to understand the issues," Questrom adds. "He doesn't give up easily, and his work echoes."

Adds Tracy Mullin, CEO of the National Retail Federation: "He is viewed as a true merchant, someone who understands the merchandise and cares about it passionately."

Lundgren, Federated's president since 1997, became CEO in 2003 and chairman last year. He began his retailing career in 1975 with Bullock's, then a separate division of Federated.

After having held positions of increasing responsibility with the division over the next decade, he was named vice president and general merchandising manager of the Los Angeles-based division in 1985. Two years later he was named president of Bullock's Wilshire, then a specialized fashion group owned by Federated.

Lundgren left Federated after its acquisition by Campeau in 1988.

He joined Neiman Marcus as executive vice president of stores, with responsibility for store management, visual presentation, store design and construction.

By 1990, Lundgren was named chairman and CEO of Neiman Marcus, a position he held until returning to Federated in April 1994 as chairman of merchandising operations.

He is credited with effectively easing the merger of Federated's and Macy's merchandising and product development functions and with developing and marketing a strong private-brand program within Federated.

As department stores struggle to differentiate their merchandise lines, Federated improved its stable of powerhouse private-label brands, including Charter Club and Alfani.

Perhaps his boldest move was to rebrand Federated's established regional stores ˜ Rich's, Burdines, The Bonmarché, Lazarus ˜ as Macy's. The changeover, which is to be completed March 6, capitalizes on the cachet of the Macy's name, made famous in the movie Miracle on 34th Street and the Macy's Thanksgiving Day Parade.

"This is a bold and exciting step toward fulfilling our vision of Macy's as 'America's department store,' " Lundgren said when the plan was announced in fall.

Saturday Board Meeting Seen as Sign that
May Expects a Bid
By Tracie Rozhon and Andrew Ross Sorkin – New York Times
February 25, 2005

The board of May Department Stores plans to meet Saturday, an indication that it expects to receive a bid from its rival, Federated Department Stores, an executive close to the negotiations said last night.

The meeting of May's board, which had been unscheduled, would come after a meeting today by Federated's board. Federated directors are expected to weigh whether to offer about $12 billion for May, other executives close to the talks said.

If Federated's board authorizes it to proceed, a deal could be reached as early as Monday, the executives said. The two chains have been running neck and neck for the distinction of being the country's largest department store chain: right now, May has the most stores (491, versus 459) but Federated sells the most ($15.6 billion last year, versus $14.4 billion).

Negotiations between Federated, which owns Macy's <http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&amp;symb= R H| &amp;> and Bloomingdale's, and May, which owns Lord & Taylor and Marshall Field's, have moved briskly in recent days, the executives said. Still at issue is the final price Federated is willing to pay.

May is pushing Federated to pay more than $40 a share, the executives said, a 17 percent premium to May's closing price of $34.10 yesterday. Shares of May have risen 22 percent since word of possible talks emerged.

At Federated's board meeting, which was scheduled before merger talks began, the directors are also expected to consider issues including selling the company's credit and store-card portfolio and other acquisition candidates. The board is also expected to be given an update on plans to change the name of several stores to Macy's.

Retail executives say Federated still wants Marshall Field's, whose flagship store is known for its antique sidewalk clock on State Street in Chicago.

In a bidding war last spring for Marshall Field's, Federated dropped out only after May bid an aggressive (many analysts say overly aggressive) $3.2 billion for the 62-store chain.

Dana E. Cohen, a retail analyst with Banc of America Securities, said a deal between Federated and May would make strategic sense.

"This is a deal with the capacity to reinvent the department store business for the combined entity and improve their competitive position," she wrote on Tuesday.

Ms. Cohen said the deal would accomplish that by increasing the clout with suppliers for more interesting products, and by increasing the use of private brands (eliminating the famous-designer middleman) and increasing the stores' profit. Ms. Cohen said the deal would also permit Federated to do more national advertising. If May and Federated combined their advertising budgets, Ms. Cohen wrote, the merged stores would outrank Target, J. C. Penney and Kohl's in the amount of ad money spent in a year. The two companies now spend a combined $1.3 billion on advertising.

Federated is expected to close a significant number of underperforming May stores if it buys the chain.

In the last few days, as a merger appeared more realistic, a number of analysts have praised Terry J. Lundgren, Federated's chief executive, for running America's best department store chain.

But yesterday, Carol Levenson, an analyst for Gimme Credit, an independent bond research service, said in a report: "It's been a long time since Federated announced anything more paradigm-shifting than some merchandise and layout tweaking and the Macy's rebranding" and said she did not "expect meaningful improvement in its credit profile" - with or without the merger.

Donnelley Lands Sears' Exiting CFO
By Becky Yerak - Tribune staff reporter – Chicago Tribune
February 25, 2005

Less than a week after unexpectedly announcing his departure from Sears, Roebuck and Co., the retailer's chief financial officer has accepted the top finance job at Chicago-based printer R.R. Donnelley & Sons Co.

Glenn Richter had been slated to remain CFO of the Hoffman Estates retailer even after its acquisition by Kmart Holding Corp., a deal expected to close next month.

But on Feb. 18, Sears disclosed that Richter, 42, would leave Sears after the merger to pursue other opportunities in what's expected to be the first of several departures by key Sears executives.

"Half of the people I know at Sears are worried about losing their jobs," said Steven Platt, director of Hinsdale-based Platt Retail Institute.

Seven of 10 members of the proposed board of directors of the new Sears Holdings Corp., for example, will be from Kmart, including Edward Lampert, the Kmart chairman who'll hold the same post at Sears Holdings.

Richter joined Sears as controller in 2000, the same year that Sears Chief Executive Officer Alan Lacy was promoted to the top job. Richter was named CFO in 2002.

"People thought he'd be staying in the new organization, but people watching him didn't think he was a happy camper," a former Sears executive said Thursday.

Early on, Richter was named Sears' point person on the integration with Kmart.

One source inside Sears said Richter had grown increasingly uncomfortable with the direction of the company as Lampert exerted more control over decisions. The source said other high-profile departures are likely and that Richter made it clear to Chief Executive Alan Lacy that he was unhappy and might be considering outside opportunities.

At Sears, Lacy frequently relied on Richter to help manage crises. Lacy turned to him to untangle the company's credit card troubles when Lacy ousted the head of the credit unit in 2002, while accusing that executive of being less than forthcoming about the conditions in the business. Richter helped Lacy unravel the credit problems that had caused Sears to log a dramatic $222 million increase in its reserve for uncollectable credit card accounts in 2002.

In early 2004, Richter also was among the first executives to call Lacy's attention to delivery shortfalls that led to a costly delayed switch to spring merchandise and left the Lands' End division short of inventory.

A Feb. 18 Securities and Exchange Commission filing outlines terms of an agreement with Richter that was amended on Feb. 17.

Under the new pact, as long as Richter remains at Sears through the completion of the merger, he'll receive $641,000 in lieu of any severance payments or benefits to which he might have been entitled under the previous pact.

A Sears spokesman said Thursday that Richter plans to remain until the deal closes. Shareholders for both Sears and Kmart are set to vote on the deal on March 24.

"And now he goes someplace with a large salary and probably fewer headaches," one former executive said.

At Donnelley, which has annual sales of $8 billion, a far cry from the annual sales of $55 billion expected at Sears Holdings, Richter replaces a CFO who lasted less than a year in the job.

Kevin Smith became CFO of Donnelley last April. He had previously been CFO of Heidrick & Struggles.

Smith will remain with Donnelley until March 31-- the one-year anniversary of Donnelley announcing Smith's hiring. Richter will start April 1.

Asked whether it was Smith's decision to leave, Donnelley spokesman Doug Fitzgerald preferred to focus on Richter, calling him an "opportunistic hire" and "the right person to become CFO." Donnelley hasn't yet released Richter's compensation package.

According to a Sears filing Thursday, Richter had annual compensation in 2004 of about $877,000 and long-term compensation of more than $100,000. In 2003, Richter was awarded $1.2 million in restricted stock.

According to Donnelley's latest proxy, its CFO received about $390,000 in annual compensation and $1.2 million in long-term compensation.

Lacy Gets Smaller Bonus but Bigger Package
By Sandra Guy – Business Reporter – Chicago Sun-Times
February 25, 2005

Sears Roebuck and Co. CEO Alan Lacy got a $768,731 bonus in 2004, his lowest bonus in the past three years, but he will realize $24.5 million from the sale of his stock options if Sears is bought by Kmart Holding Corp., according to a report Sears filed Thursday with federal regulators.

Lacy's total compensation came to $2.8 million in 2004, an increase of about 46 percent from the year before.

Lacy received a base salary of $1.024 million in 2004, an increase of less than 1 percent from his salary in 2003.

He is scheduled to get a raise, to $1.5 million in salary, after Kmart buys Sears, and Lacy is promoted to vice chairman and CEO of the merged company, to be called Sears Holdings Corp.

Lacy's bonus in 2004 was lower than his 2003 bonus of $897,813, and his 2002 bonus of $1.8 million. His bonus was based on Sears' earnings-per-share performance and the successful sale of Sears' credit-card business to Citigroup, among other items, a Sears spokesman said.

In the merged Sears-Kmart, Lacy is slated to get a bonus that is 150 percent of his $1.5 million salary if he meets performance goals.

Lacy, whom some shareholders have criticized for weakening Sears, must exercise stock options that he has accumulated as part of Kmart's agreement to buy Sears.

The shares are worth $50 million, but Lacy will reap $24.5 million because he must first buy the options.

A Sears spokesman noted that Lacy has never before exercised any of his stock options for cash, but is required to do so under terms of the Kmart buyout.

Lacy intends to own $10 million worth of shares in Sears after he exercises his stock options, the spokesman said.

Lacy also holds $1 million worth of restricted stock based on Sears' 2003 performance. One-third of the restricted stock will vest when Kmart and Sears merge, and the rest will convert to the new company's shares.

Besides the salary, bonus and stock, Lacy also received $5,166 in "other" compensation in 2004, which included financial planning, "ground transportation" and the use of a corporate airplane.

If Lacy were to be terminated without cause from the merged Sears-Kmart, he would get a pro-rata bonus, two times his salary and target bonus, accelerated vesting of equity-based awards and two more years of benefits.

The only one of Sears' top five executives to get a bonus near Lacy's was Luis Padilla, who received a $750,000 bonus.

Sears hired Padilla as its top merchandiser on Sept. 15 because of his reputation for putting the "chic" into Target stores' cheap.

Padilla also received restricted stock worth $2 million.

Other executives and their pay and bonuses are:

*Gwendolyn Manto, head of apparel, who received a base salary of $482,708 and a bonus of $467,500.

*Mindy Meads, chief executive of the Lands' End division of Sears, who received $594,231 in salary and a $222,400 bonus.

*Glenn Richter, who is leaving Sears and will become chief financial officer at R.R. Donnelley, earned $538,805 in salary and a $338,219 bonus in 2004. He agreed to a payment of $641,000 instead of severance payments.

An editorial: Help Lands' End spin off
MADISON, WIS., CAPITAL TIMES
February 25, 2005

The bad news about Lands' End may have been delivered this week, but everyone who was paying attention had seen it coming since the day that the clothing company was sold to Sears in 2002.

It would have been nice to believe that a product line that had grown phenomenally successful could remain so based on functional, good quality clothes sold - mainly over the phone - by friendly folks from small-town Wisconsin. But that was a pipe dream.

Something is always lost when a company with a distinct character is bought up by a large corporation, even one with the reasonably good reputation that Sears Roebuck and Co. has been able to maintain in a competitive climate increasingly defined by a lowest common denominator known as Wal-Mart. And with Sears itself now in the process of selling out to the next highest bidder, the full extent of the loss is rapidly becoming evident.

One of Wisconsin's largest employers is downsizing, rapidly.

Dane County took the hardest hit, with the announcement Tuesday that the company's call center in Cross Plains, an important employer in the western part of the county, would be shuttered in June. Some 345 seasonal jobs at the Cross Plains facility will disappear, in addition to 200 full-time and 175 part-time jobs the company plans to cut in Wisconsin.

But the cuts did not just come in Cross Plains. At the company's Reedsburg warehouse and call center, 12 supervisors and the entire cleaning staff were dismissed. Jobs are being lost in Stevens Point and in Dodgeville, the Wisconsin community that has been most closely associated with Lands' End since the early 1980s.

Lands' End officials make the point that the company will still have 6,400 employees in Wisconsin after this round of cutting is done. But employees in Dodgeville and other communities have reason to ask when the next round will come.

The scenario that is being painted is an ugly one that suggests that the dire headlines of this week could be repeated - perhaps in even more dire form - in the months or years to come. As Kathy Dooley, a longtime employee at Reedsburg, put it, "Everyone's upset. Everyone's worried" about more cuts and more closings.

And those cuts and closings, if they come, will be devastating not just to the Wisconsin communities that have come to rely on Lands' End as a key employer. They also will undermine the surrounding counties - as Lands' End jobs often provided the steady income and benefits that helped couples keep farms in the family.

So the news from this week is not just a Cross Plains story, or a Reedsburg story. It is a Wisconsin story.

And it is one in which Wisconsin officials might yet play a role in finding a happy ending.

As Iowa County Clerk Greg Klusendorf notes, the people in communities such as Dodgeville believe that their best hope is for Lands' End to spin off from the Sears/Kmart conglomerate and again become an independent firm.

"Everybody's got their high hopes about a benevolent owner coming in," says Klusendorf. "They feel that for the long run, it would not only be best for the company (but also) best for the employees."

Klusendorf is right. And if the business press is to be believed, there are prospects for a Lands' End spinoff. But the state needs to turn those prospects into a reality.

Gov. Jim Doyle and Senate Majority Leader Dale Schultz, R-Richland Center, who represents the Dodgeville area, should work together to establish a task force to explore and encourage moves that could again make Lands' End an independent company. Every option should be on the table, including the possibility of an employee takeover of Lands' End, with financial assistance from the state.

Wisconsin officials talk a good game about working to develop a diverse economy in rural regions of the state. If they want to do more than just talk, however, they are going to have to make saving Lands' End mission critical.

Scores of Lease-Acctg Errors Surface Amid SEC Warning
By Siobhan Hughes – Dow Jones Newswires – Wall Street Journal Online
February 25, 2005

WASHINGTON -- More than 60 companies in the retail, restaurant and wireless-tower industries have said in recent months that they will clean up their lease-accounting practices in what appears to represent the most sweeping bookkeeping correction in so short a period since the late 1990s.

J.C. Penney Co. (JCP), the department store; Starbucks Corp. (SBUX), the coffee chain; and Crown Castle International Corp. (CCI), which engineers shared wireless infrastructure, are among the latest to add their names to the list.

"It's always disturbing when our accounting is not followed," Don Nicolaisen, chief accountant at the Securities and Exchange Commission, said last week during an interview. He published a letter on Feb. 7 urging companies to follow accounting standards that have been on the books for many years.

The charges and restatement announcements that have followed the SEC letter suggest companies for years have failed to adhere to what regulators see as clear lease-accounting standards. While the SEC isn't accusing companies of intentional wrongdoing, the accounting cleanup raises questions about the role of the auditing firms hired to keep corporate books in order.

"Where were the auditors?" said J. Edward Ketz, an accounting professor at Pennsylvania State University. "Where were the people approving these things? This doesn't seem like something that really requires new discussion. If we have to go back and revisit every single rule because companies and their professional advisers aren't going to follow the rules, then I think we're in very serious trouble in this country."

Tom Fitzgerald, a spokesman for auditing firm KPMG, declined to comment. Spokespeople for Deloitte & Touche LLP, PricewaterhouseCoopers LLC, and Ernst & Young LLP, didn't return several phone calls.

The last time some regulators recall triggering a swath of restatements over a single accounting issue was the late 1990s, when the SEC challenged the initial charges reported for research and development acquired through mergers. Until regulators intervened, the tactic had the effect of improving future earnings by allocating all the charges upfront.

Leasehold Improvements

Now, the SEC is tackling the practices for leasing property for everything from coffee stores to wireless towers. The most prominent of issues involves the accounting for all the upgrades - fixtures, shelves, store counters - that a company will make to a property in order to conduct business.

Companies are supposed to book these "leasehold improvements" as assets on their balance sheets and then depreciate those assets, incurring an expense on their income statements, over the duration of the lease. Instead, companies such as Pep Boys-Manny Moe & Jack (PBY) had been spreading those expenses out over the projected useful life of the property - typically a longer time period.

The effect was to defer expenses and add to current income. At the same time, investors were also potentially left in the dark about the impact of a landlord's decision not to renew a lease. If a company suddenly had to search for a new property, it would have to take a write-off to account for the leasehold improvements it hadn't yet expensed.

Many companies say switching bookkeeping tactics hasn't made a big difference for the measurements, such as cash flow, that they say investors use to evaluate financial health. Still, the charges have in some cases run into the tens of millions of dollars.

McDonald's Corp. (MCD) took a charge of $139.1 million, or 8 cents a share, in its fourth quarter to correct a lease-accounting strategy that it says had been in place for 25 years. Pep Boys said it would book a charge of 80 cents a share, or $52 million, for the nine months through Oct. 30, 2004.

'Rent Holidays'

The SEC is also honing in on the accounting for the period when retailers make renovations to a property before opening a store and paying rent. Many companies, such as Safeway Inc. (SWY) had been recording rental expense when a store opened, instead of when they first had access to the property.

"If we got a rent holiday that said you didn't pay rent for the first six months the store is operating, we charged ourselves expense from the time the store opened," said Leslie Gordon, chief financial officer of A.C. Moore Arts & Crafts Inc. (ACMR). "But now they're moving it back to when we got the keys."

Companies say they had no idea their accounting was improper, and point to auditing firms who had approved their practices for years.

"We've had unqualified opinions all the way along the process," said Jay Brown, treasurer of Crown Castle, which plans to quantify the impact of its lease-accounting changes in coming weeks. Bill Furtkevic, a spokesman for Pep Boys, said his company had operated under the same accounting standards for more than a decade, and that it has always received a clean bill of health from auditor Deloitte & Touche.

SEC officials have declined to comment on whether they will seek to bring civil charges or take other actions in connection with lease accounting errors. Instead, they say they are grappling with the full extent of the accounting errors.

"Like you, we'll need to see how broad this is; then we'll have to evaluate what it means," said Scott Taub, deputy chief accountant at the SEC.

Following is a list of companies that have said they have already booked charges, or may book charges or restate financial records, following a review of lease accounting practices.

Abercrombie & Fitch Co. (ANF)
A.C. Moore Arts & Crafts Inc. (ACMR)
Albertsons Inc. (ABS)
American Tower Corp. (AMT)
AnnTaylor Stores Corp. (ANN)
Applebee's International Inc. (APPB)
Arris Group Inc. (ARRS)
Bakers Footware Group (BKRS)
Benihana Inc. (BNHN)
Big Lots Inc. (BLI)
Borders Group Inc. (BGP)
Brinker International Inc. (EAT)
CBRL Group Inc. (CBRL)
CEC Entertainment Inc. (CEC)
Charming Shoppes Inc. (CHRS)
CKE Restaurants Inc. (CKR)
Crown Castle International Corp. (CCI)
Darden Restaurants Inc. (DRI)
Denny's Corp. (DNYY)
Domino's Pizza Inc. (DPZ)
Gap Inc. (GPS)
Global Signal Inc. (GSL)
Gymboree Corp. (GYMB)
Hudson's Bay Co. (HBC)
Hypercom Corp. (HYC)
J.C. Penney Co. Inc. (JCP)
J. Jill Group Inc. (JILL)
Lowe's Cos. (LOW)
Internap Network Services Corp. (IIP)
Jack in the Box Inc. (JBX)
Kohl's Corp. (KSS)
Landry's Restaurants Inc. (LNY)
Lone Star Steakhouse and Saloon Inc. (STAR)
Marsh Supermarkets Inc. (MARSA)
May Department Stores Co. (MAY)
McDonald's Corp. (MCD)
Nextel Partners Inc. (NXTP)
Nordstrom Inc. (JWN)
O'Reilly Automotive Inc. (ORLY)
Outback Steakhouse Inc. (OSI)
Pacific Sunwear of California Inc. (PSUN)
Panera Bread Co. (PNRA)
Peets Coffee & Tea Inc.(PEET)
Pep Boys Manny Moe & Jack (PBY)
P.F. Chang's China Bistro Inc. (PFCB)
Red Robin Gourmet Burgers Inc. (RRGB)
Rubio's Restaurants Inc. (RUBO)
Ruby Tuesday Inc. (RI)
Safeway Inc. (SWY)
SBA Communications Corp. (SBAC)
Sears, Roebuck & Co. (S)
Starbucks Corp. (SBUX)
Target Corp. (TGT)
TJX Cos. Inc. (TJX)
Total Entertainment Restaurant Corp. (TENT)
Toys 'R' Us Inc. (TOY)
United Retail Group (URGI)
Wendy's International Inc. (WEN)
West Marine Inc. (WMAR)
Wild Oats Markets Inc. (OATS)
The Yankee Candle Co. Inc. (YCC)
Yum! Brands Inc. (YUM)

United Retail Group Inc. (URGI) is among a group of companies that have said they have already booked charges, or may book charges or restate financial records, following a review of lease-accounting practices.

May, Federated Move Closer to Deal
By Ellen Byron and Dennis K. Berman – Staff Reporters – The Wall Street Journal
February 25, 2005

Boards Could Set a Pact That Tops $10 Billion,
Overcoming Major Hurdle

Negotiations by Federated Department Stores Inc. to acquire May Departments Stores Co. are reaching a critical point, as boards of both companies are scheduled to meet in the next two days to finalize terms of a possible merger valued at more than $10 billion, say people familiar with the matter.

The two sides have been split on financial terms of the deal, with May wanting more than Federated is willing to pay, these people say. But after at least four weeks of discussions, the talks seem to have reached a culmination point. Federated has a regularly scheduled board meeting today at which directors likely will discuss a formal proposal, which May's board then will vet over the weekend, these people say.

Should May agree to a revised offer, a deal could be agreed upon this weekend. Precise terms couldn't be determined, but three people briefed on the matter say an offer for May could be somewhat below $40 a share. May also is negotiating over its presence in St. Louis, its headquarters since 1905.

Spokeswomen for May and Federated declined to comment.

Federated's chairman and chief executive officer, Terry Lundgren, is widely expected to lead a combined Federated and May, which would include nearly 1,000 stores operating under some of the oldest, most iconic names in retailing, including Macy's, Bloomingdale's, Lord & Taylor, Filene's and Marshall Field's. In addition to significant cost savings, a merger would boost the companies' clout with vendors and landlords.

While price has been a sticking point in the talks, few other problems have been immediately apparent, say people familiar with the matter. The two chains have little overlap in geography; brokerage firm Smith Barney estimates that just 94 malls have both Federated and May stores.

Federated and May have held discussions for at least the past month. News of the talks surfaced just days after May CEO Gene Kahn unexpectedly stepped down last month. His resignation cleared concerns over management that were partly to blame for a breakdown in merger talks between the two companies in 2002, according to people familiar with those talks.

May's share price has surged more than 20% since Mr. Kahn's departure and subsequent news reports of a possible merger. In 4 p.m. composite trading on the New York Stock Exchange yesterday, May shares closed at $34.10, up 12 cents. Federated's stock price has suffered little, even though an acquirer's stock typically falls in merger situations. Since the day before news of the talks broke on Jan. 20, Federated's stock is down just seven cents, closing yesterday up 39 cents at $57.01 in Big Board trading, just $2.90 off the 52-week high hit earlier this month.

Throughout the talks, Wall Street has consistently expressed confidence that Federated won't overpay for May. This is bolstered by a widely held belief that Federated, which is based in Cincinnati, showed restraint in its bidding war with May over Marshall Field's last summer. Many investors criticize the $3.2 billion that May paid to acquire the upscale chain as too high.

Sears CEO Lacy Received Total 2004 Pay Of $2.8M
Dow Jones Newswires – Wall Street Journal Online
February 24, 2005

WASHINGTON -- Sears Roebuck & Co. (S) disclosed Thursday that its top executive received $2.84 million in total compensation for fiscal 2004, about 40% more than a year ago.

The Hoffman Estates, Ill.-based retailer is scheduled to be acquired by Kmart Holding Corp. (KMRT) to create a new company called Sears Holdings Corp.

According to Sears' annual report filed with the Securities and Exchange Commission, for fiscal 2004 ended Jan. 1, the pay of Sears Chairman and Chief Executive Alan J. Lacy included a $1.02 salary, $768,731 bonus and about $1 million in restricted stock.

His pay the year before included a $1.02 million salary and an $897,813 bonus but no restricted stock.

If the Kmart acquisition closes, unvested portions of Sears restricted stock will be converted into restricted shares of the new company, according to the filing.

Kmart and Sears have disclosed previously that Lacy, expected to become vice chairman and chief executive of the combined company, will get a salary increase to $1.5 million a year and will have a target bonus of 150% of his annual base salary.

Lacy is also scheduled to receive 75,000 restricted shares of Sears Holdings upon completion of the merger.

Kmart and Sears shareholders are each scheduled to vote next month on the proposed deal.

Separately in the filing, Sears disclosed that financial chief Glenn R. Richter, who is expected to leave the company when the Kmart acquisition closes, agreed to accept $641,000 in lieu of any severance payments or benefits to which he might be entitled.

As reported, Richter plans to join printer R.R. Donnelley & Sons Co. (RRD) as chief financial officer and executive vice president.

Sears, Wisconsin Reach Deal on Policy
MarketWatch.com – Associated Press
February 24, 2005

MADISON, Wis., Feb 24, 2005 (AP Online via COMTEX) -- Sears, Roebuck & Co. reached an agreement Thursday with the state to resolve customer complaints about the company's "Satisfaction Guaranteed or Your Money Back" policy.

The state took action against Sears after 105 customers complained between 2002 and 2004 that Sears was not honoring the guarantee, according to the Wisconsin Department of Justice.

Under the agreement, if Sears continues to advertise the guarantee or similar promises after May 16, the company will tell customers at the point of purchase all terms and conditions they must satisfy to get a full refund. That will include any time limits for returns.

The state's investigation found the company told some Sears employees to require customers to meet certain conditions before they could get a full refund, according to the Justice Department.

The Hoffman Estates, Ill.-based company did not tell customers of those conditions before they made their purchases, according to the agency.

The state found in most cases, the customers tried to resolve their problems with Sears employees before filing a formal complaint.

A spokeswoman for Sears did not immediately return a message Thursday.

Attention, Shoppers: Sears Is Up
By Gregory Fuzkerman, Amy Merrick and Ray A. Smith Staff Reporters
The Wall Street Journal
 February 24, 2005

Wall Street has been buzzing in recent days about the odd trading behavior of Sears, Roebuck & Co. shares, suggesting that the retail giant -- which last November agreed to an $11 billion takeover by Kmart Holding Corp. -- might attract another suitor.

The Sears-Kmart combination is close to being done, with shareholders of Kmart and Sears expected to approve the transaction March 24. Despite that fact, investors have bid up Sears shares to $49.87 as of 4 p.m. yesterday in New York Stock Exchange composite trading, or 69 cents higher than a proposed takeover price that works out to $49.18 a share.

Most of the time, companies trade below their takeover offer weeks before they are acquired, not above it, because there is always the slight possibility that the suitor, in this case Kmart, could walk away at the 11th hour.

The biggest reason Sears is trading above its takeover offer is continuing speculation that a new suitor for Sears could yet emerge, takeover traders say. Most of those following the situation point to Vornado Realty Trust, the big real-estate investment trust that holds more than 4% of Sears' shares, as the most likely party to make a move on Sears. Some have suggested that Vornado could join with a private-equity fund, hedge fund or even another retail company, to make such an offer. A recent registration by Vornado to sell as much as $7.5 billion in stock and debt helped renew the speculation.

"Of all the cacophony of chatter about Sears' fate, the most intriguing prospect is Target potentially teaming up with Vornado and others to make a bid for Sears," Jonathan Litt, an analyst at Smith Barney, wrote in a report last week. Target Corp. didn't return phone calls seeking comment.

But in something out of a high-school love triangle, investors and analysts following Vornado say the company likely has more affection for Toys "R" Us Inc. as a potential acquisition target than it does for Sears.

"Sears seems like more of a long shot" for Vornado, says John Lutzius, a principal with Green Street Advisors Inc., a real-estate research firm based in Newport Beach, Calif. But Toys "R" Us "is more of a real-estate story" that could attract Vornado.

"There's still a month to go before the shareholders' meetings, so anything can happen," says Chris Brathwaite, a Sears spokesman. He says Sears doesn't comment on rumors or speculation. A Kmart spokesman says, "We believe the combination is attractive and compelling for both Sears and Kmart shareholders." A spokeswoman for Vornado declined to comment.

According to terms of the deal, Sears' shareholders will have the right to elect $50 in cash for each of their Sears shares, or 0.5 share of Kmart, which will turn into shares of the merged company and be called Sears Holdings. Shareholder elections will be prorated to ensure that in the aggregate 55% of Sears shares will be converted into Sears Holdings shares and 45% of Sears shares will be converted into cash.

Either way, the odd trading has arbitragers, who specialize in buying stocks involved in takeover deals, scratching their heads. Sears has traded above its takeover price by an average of $1.62 since the deal was announced, narrowing lately as at least some become a bit more convinced that Kmart will be able to get Sears.

"The gap is puzzling and persistent, and it speaks to the speculation about another bidder," says Paul Glazer, a takeover trader at Glazer Capital Management LP in New York.

There are other possible explanations for why Sears is trading above its proposed takeover price. One is that Kmart Chairman Edward S. Lampert has been so convincing in selling the pending deal that investors have bet that there is little chance he will walk away, and that the shares of the combined companies will rise when the deal is done. That has encouraged investors to shift into Sears shares. Mr. Lampert has said he will take shares in the new company in exchange for his 15% stake in Sears, rather than take cash.

Bill Dreher, a Deutsche Bank retail analyst, says that Mr. Lampert "really needs this deal. Sears is trying to get off-mall; Kmart has the locations. And Kmart needs private brands, which Sears has." Mr. Dreher has a "buy" rating on Sears' stock.

At the same time, Sears' real-estate assets have been rising in value so its shares might even rise in price if Kmart were to have a change of heart about a deal, some speculate. So buying Sears shares at a slight premium to the takeover price allows an investor to speculate on a more lucrative competing offer, as well as the slight possibility that Kmart gets cold feet and Sears shares go up anyway.

Others say that Sears has more long-term, individual shareholders than many companies, and many of these investors have been loath to sell as holders usually do when their stocks get a lucrative takeover offer. That is because these investors would incur a big capital-gains tax bill resulting from the run-up in the shares. Instead, they are holding on to get shares of Kmart as part of the takeover offer, a tax-free transaction. As a result, takeover traders flooded into Sears shares after the deal was announced, but there were fewer individual investors bailing out than usual, creating unusual demand.

The odd trading demonstrates how the takeover game has changed lately. There has been a flood of money into all kinds of hedge-fund strategies in the past couple of years, including takeover trading. But returns from the game have been disappointing, in part due to a paucity of deals to choose from and to low interest rates that have allowed many more to play the game. So more of these arbitragers have been tempted to branch out and become more speculative, buying stocks like Sears that have the possibility of attracting a more lucrative competing bid.

Some analysts say Sears could in fact be worth more to another buyer eager for its real estate. Smith Barney's Mr. Litt and his colleague, Michael Bilerman, say they believe Sears could be worth $70 to $90 a share, far ahead of the Kmart offer.

But even they argue that Sears hasn't made public all the information about its store base that would be necessary for another investor to consider a competing bid. Others say the value of Sears' real-estate holdings is more dubious, and if talks between May Department Stores Co. and Federated Department Stores Inc. result in a merger it likely would lead to store closures and more real estate on the market, reducing Sears' value.

Sears Slates Last Payout
Chicago Sun-Times
February 24, 2005

Sears, Roebuck and Co. announced Wednesday its final dividend before shareholders vote March 24 on the retailer's takeover by Kmart Holding Corp. The quarterly dividend of 23 cents per share is scheduled to be paid April 1 to shareholders on March 4. The merged Sears-Kmart, to be called Sears Holdings Corp., will issue no dividend. The new company will trade under the ticker symbol "SHLD," replacing Sears' current symbol, "S."

R.R. Donnelley Names Sears Exec As New CFO
Associated Press – Forbes.com
February 24, 2005

Printing services provider R.R. Donnelley & Sons Co. said Thursday it named Sears, Roebuck and Co. Chief Financial Officer Glenn R. Richter as executive vice president and chief financial officer, effective April 1. To ensure an orderly transition, Kevin J. Smith has agreed to remain with R.R. Donnelley as CFO until the end of the company's first quarter on March 31.

Prior to joining Sears, Richter held a number of senior financial positions, including chief financial officer of Dade Behring Holdings Inc., and various finance roles at PepsiCo.

The company also said it will meet or exceed previously announced earnings guidance for the fourth quarter and fiscal 2004, and reaffirmed estimates for 2005. In December, R.R. Donnelley forecast fourth-quarter and fiscal year operating profit from continuing operations of 57 cents and $1.61 per share, respectively.

Fiscal 2005 earnings are expected to be $1.95 per share, assuming $200 million shares are repurchased during that year.

Analysts surveyed by Thomson First Call are expecting the company to post profit of 56 cents and $1.61 per share for the fourth quarter and full year, respectively, and currently predict 2005 earnings of $1.95 per share.

 

Sears Announces Regular Quarterly Dividend
SEARS NEWS RELEASE
February 23, 2005

HOFFMAN ESTATES, Ill., Feb. 23 /PRNewswire/ -- The board of directors of Sears, Roebuck and Co. (NYSE: S) today declared a regular quarterly dividend of 23 cents per share on Sears outstanding common shares, scheduled to be paid on April 1, 2005, to shareholders of record at the close of business on March 4, 2005.

Sears Sizes Up Lands' End
By Becky Yerak - staff reporter – Chicago Tribune
February 23, 2005

6% of workforce to be cut in division; talk of sale heats up

Sears, Roebuck and Co. said Tuesday that it will cut about 6 percent of the workforce at its Lands' End division in a widespread restructuring that some speculate could be the first step toward a sale of the struggling clothing line.

The Wisconsin-based business, whose products have been stocked in all 870 Sears stores since August 2003, said 200 full-time and 175 part-time jobs will be cut because shoppers buy less of their clothing through catalogs and over the telephone.

An unspecified number of seasonal jobs will also be trimmed.

Nearly half of the cuts will occur when a call center in Cross Plains, Wis., closes on June 5. The rest will come from the Dodgeville headquarters of Lands' End.

That will leave the company with about 6,400 workers in Wisconsin, where it has most of its operations.

The layoffs are the latest setback for the Hoffman Estates-based department store chain that paid $1.9 billion for Lands' End in 2002 in hopes of getting a marquee clothing brand into its stores.

Widespread consumer acceptance of Lands' End has remained elusive, with Sears experiencing 11 straight months of declining sales in its overall apparel business.

The stumbles come at an inopportune time for Lands' End.

In November, Sears announced plans to merge with Kmart Holding Corp., raising questions about Lands' End role at the combined $55 billion retailer.

And speculation is widespread that Edward Lampert, the Kmart Holding Corp. chairman who'll also head Sears Holdings, will sell off not only excess real estate but certain retail assets to raise cash.

"I wouldn't be surprised to see Lampert sell Lands' End," a former Sears executive said last month. "He doesn't have an emotional investment in it. He'd get $1.2 billion for it."

Another former executive said Tuesday that the "fact that they're doing layoffs at this point either says they're trimming the fat to sell it or they're going to hold onto it" and try to improve profits.

Online sales at Lands' End rose to $511 million in 2003 from $435 million in 2002. Figures for 2004 have not been released.

"They used to call a 1-800 number and say, `Do you have red turtlenecks?' Now they go online and can see there's a red turtleneck," a Lands' End spokeswoman said Tuesday. "There has been a decline in the number of phone calls to the phone centers."

But it's not just phone jobs that are being eliminated. Merchandising, design, inventory, quality control, purchasing and Internet operations all will be restructured.

One retail industry observer believes that Sears' 54 percent stake in Sears Canada and Lands' End are high on the list of non-real estate assets that could be spun off easily.

The number he hears batted around for Lands' End is $1.3 billion or $1.4 billion.

"Speculation is high that it gets spun off," he said. Private equity groups are interested, he said, and noted rumors that apparel companies such as Liz Claiborne could bid.

"I'm sure a lot of companies are contacting Sears. The question is whether Sears is doing anything about it," he said.

The Lands' End spokeswoman declined to comment on the speculation.

The "brand is as strong as it has always been, and it continues to make the necessary changes to position itself for the future," she said.

But is that future with Sears?

"We'd certainly not speculate on any type of change. Right now Lands' End and Sears have a great working relationship," she said.

A Sears spokesman recently called Lands' End a "cornerstone brand" and declined to comment on the possibility of a spinoff.

"One of the most attractive elements of the proposed merger with Kmart is the opportunity for the proprietary brands of both companies being found under one roof," Sears spokesman Chris Brathwaite said. "This could include not only Lands' End, but Martha Stewart Everyday, Craftsman, Kenmore, Joe Boxer and others."

Sid Doolittle, retail consultant with Chicago's McMillan/Doolittle, offered two suggestions.

"If Sears was in investing mode, they should open Lands' End specialty stores and stop fooling around with carrying it inside Sears stores. It's not working," he said. "If they don't want to do that, they ought to sell it."

Things started out on a hopeful note, but a clear strategy for the clothing line has yet to emerge.

In early 2004, Sears said that sales of Lands' End merchandise in 2003 rose more than 20 percent over 2002 largely due to the brand's introduction in all stores.

Sears said it was "pleased" with Lands' End.

But results varied wildly depending on the market, with the top 200 stores "better than we ever dreamed," and the bottom 200 "worse than expected."

Last April, Sears said apparel sales, including Lands' End, had taken a turn for the worse. Some of the problems had as much to do with execution as with demand.

Lands' End products, for example, arrived late to stores as one key supplier went bankrupt and others shipped late. Rather than accept late shipments, Sears canceled the orders.

Last summer, Sears said it was pleased with Lands' End. Sales for 2004 were expected to exceed the 2003 total sales of $2 billion.

As fall approached, Sears said Lands' End assortments would be edited on a store-by-store basis. It also scaled back children's offerings, recognizing that parents were reluctant to spend $24 on a pair of Lands' End shorts.

Last month, Sears said that direct sales for Lands' End were off 5 percent in 2004.

 

Sears Tower to Pamper Visitors
By Thomas A. Corfman – Chicago Tribune
February 23, 2005 

The venture that owns Sears Tower has hired a well-known local real estate firm to optimize the retailing and restaurant experience in the 110-story skyscraper.

Key to the assignment is capitalizing on the roughly 1 million visitors who annually visit the tower's observation deck, said Bruce Kaplan, president of Northern Realty Group Ltd., which takes over leasing the building's 159,000 square feet of retail space on four levels.

The Skydeck's separate entrance takes visitors to a lackluster lower level, where there are a ticket booth, souvenir shops and a viewing area for an introductory video.

"During the peak tourist season, there can be very substantial wait times, and you can turn that from a tedious experience into an enjoyable one by adding interesting attractions, retailing and food," Kaplan said.

The 103rd-floor Skydeck underwent a $4 million renovation in 2000, but the attraction was hurt by anxiety over the terrorist attacks. Skydeck revenues declined almost 10 percent, to $7.9 million, in 2001, the most recent year available, according to a summary prepared for financial analysts.

Since then, attendance has bounced back, said Kaplan, who declined to comment about revenues.

Restaurants and retailing accounted for just 6 percent of the tower's total revenues of $138.4 million in 2001, according to the summary.

Security measures, put in place after Sept. 11, make visitors' access to the restaurants and retailers inconvenient, diminishing profitability.

A venture that includes New York entrepreneur Joseph Chetrit bought the 3.81 million-square-foot building in April.

MB to manage complex: Loeb Realty Partners LLC confirmed that it has awarded to MB Real Estate Services LLC the leasing and management of Michigan Plaza, two buildings totaling nearly 1.9 million square feet of space at 205 and 225 N. Michigan Ave.

The coveted assignment is believed to be the third-largest office building management contract in downtown Chicago, behind only Sears Tower and Aon Center, said Peter Ricker, MB's chairman.

New York-based Loeb put the contract up for bid after its January acquisition of the buildings, part of the Illinois Center complex.

The contract, which sources said is worth at least $400,000 annually, not including leasing commissions, raises MB's downtown management portfolio to more than 8million square feet.

Wal-Mart, Discover Launch New Credit Card
By James Covert – Dow Jones Newswires
February 22, 2005

NEW YORK -- Wal-Mart Stores Inc. (WMT) launched a general-purpose credit card with Discover Financial Corp. - boosting the retailer's relatively small involvement in the consumer credit business, as well as Discover's standing versus its larger rivals.

In a deal whose outlines were made public last month, Wal-Mart and Discover - which is a unit of the investment bank Morgan Stanley (MWD) - launched Wal-Mart Discover cards on Tuesday. The issuer is GE Consumer Finance, a unit of General Electric Co. (GE), which already processes an in-house credit card for Wal-Mart.

Jane Thompson, president of Wal-Mart's consumer finance division, declined to discuss specific terms of the deal, but said that Discover "offered the best value for our customers." The agreement comes after several years of talk that Wal-Mart might buy a bank in order to issue its own credit cards.

"When I first got here a few years ago, that might have been a consideration, but our whole strategy has been to work with partners," Thompson says, citing the vendors used by Wal-Mart to provide other services including money orders and transfers. "We're the retailer in financial services, and we find the financial-services companies to be the
manufacturers."

It's not just lower fees that likely won the Wal-Mart account for Discover. In a type of deal that is becoming increasingly common between retailers and credit-card networks, Discover's network will carry only the transactions that occur outside Wal-Mart stores. Inside the stores, the cards will function like Wal-Mart's proprietary cards.

Discover - which is far smaller than rivals including Visa International (VSA.XX), MasterCard Inc. (MST.XX) and American Express Co. (AXP) - said last month that the Wal-Mart deal will substantially boost its transaction volume, although it won't significantly add to income. Morgan Stanley has said recently it may consider selling Discover if business doesn't improve.

"Discover has been losing share for five years now, although it's still highly profitable," said David Robertson, publisher of the Nilson Report, a trade publication covering the credit industry. "The long-term viability of that brand is questionable unless you can get millions and millions of new cards into that market."

Discover estimates that it has about a 6% share of the general purpose card market, versus the combined 80% market share held by Visa and MasterCard.

Wal-Mart and Discover are "natural partners," Robertson added. He noted Discover's experience with beginning credit customers, as well as the "blue-collar market." Wal-Mart in recent years had offered a MasterCard issued by JPMorgan Chase & Co. (JPM) under a 1996 agreement, but that card was discontinued several months ago.

The Wal-Mart card is Discover's first new issue since the U.S. Supreme Court last October upheld an antitrust verdict over Visa and MasterCard, forcing them to allow their member banks to issue credit cards on rival networks. American Express has been growing its business in the wake of the ruling, teaming up with card issuers MBNA Corp. (KRB) and Citigroup Inc. (C).

Wal-Mart has had a prickly relationship with Visa and MasterCard in recent years. The world's largest retailer was one of a number of chains involved in a landmark antitrust case that alleged that Visa and MasterCard were overcharging to process debit transactions. In a May 2003 settlement, the credit-card companies agreed to pay the merchants $3 billion.

Martha Stewart Living May Make a Comeback
FORBES.COM - Associated Press
February 22, 2005

When Martha Stewart is released from prison next week, the doyenne of domesticity will return to the multimedia company she founded which faces a much brighter outlook than when she was convicted of lying about a stock sale only a year ago.

Back then, Martha Stewart Living Omnimedia Inc.'s future looked gloomy. Stewart's syndicated daily TV show was placed on hiatus. The company's stock dropped 23 percent, hitting $10.86 on March 5, 2004, the day of her conviction, and sank further over the next few days. Some even predicted the death of the brand.

But that was the bottom.

Martha Stewart Living's shares stock has more than tripled, trading Tuesday at $34.48 on the New York Stock Exchange, at the high end of it's 52-week range of $8.25 to $36.53 per share.

Advertising executives were more upbeat after Stewart started her five-month sentence in early October. And Stewart's, TV career is also being revived through two deals struck with reality TV guru Mark Burnett. One is a revision of her daily homemaking show; the other will have Stewart star in her own version of Donald Trump's "The Apprentice."

The company, meanwhile, is hiring again after paring down its work force, and has continued to diversify beyond the Martha Stewart name.

Susan Lyne, a board member and former ABC entertainment president who was installed as chief executive after the board ousted Sharon Patrick, pulled off the January launch of "Every Day Food" television program on PBS, building on the success of its magazine that bears the same title.

But while Martha Stewart Living Omnimedia is showing signs of a comeback, the question is whether the recovery can be sustained. The company has reported a string of quarterly losses and reduced revenues as advertisers have fled. Martha Stewart Living Omnimedia is expected to report another loss when it reports fourth-quarter results on Wednesday. Analysts polled by Thomson First Call project a 17 cent per share loss and a 21 percent drop in revenue compared to a year ago.

The primary challenge is restoring the luster to the Martha Stewart the brand, which was built on perfect living and stamped on all sorts of products from sheets to magazines and has suffered since its namesake's personal legal problems began almost three years ago.

Seth Siegel, co-founder of The Beanstalk Group, a trademark licensing agency, and other brand consultants believe the TV deals, in particular, will improve Stewart's image and breathe new life to her merchandise and magazines.

"I'm going to be very surprised that there isn't a rebound and recovery back to the days before Martha had any problems and her legal problems will not result in any long-term decline in product and publishing," Siegel said.

But Wall Street analyst Dennis McAlpine of McAlpine Associates is wary, dismissing the stock price's rise as pure short-term hype.

"I think the stock is overpriced. Ultimately, it will catch up" with the company, said McAlpine.

Some believe Kmart Holding Corp.'s planned acquisition of Sears, Roebuck and Co. will be a blessing for the Martha Stewart Everyday brand, which has seen sales hurt at a time when Kmart has been closing stores. Others, like consultant Burt Flickinger III, managing partner at Strategic Resource Group, see little benefit, saying Sears has had problems with merchandising, and doesn't have sufficient space for another line.

Flickinger warned that the time frame to pull off a comeback is narrow. Martha Stewart Living faces increasing competition from magazines like Cottage Living and Real Simple, as well as from budding home personalities such as Chris Madden.

"She has this year and next year," Flickinger said. He added, "The stock price has no basis on retail or magazine subscription reality."

The big question is when will advertisers return.

Last year, the number of ad pages at Martha Stewart Living's flagship magazine dropped 46.6 percent, according to the Publishers Information Bureau. That compares with competitors like Real Simple, which saw a 23 increase.

Company officials, who declined to be interviewed for this article, have predicted a print-based advertising recovery in the second half of 2005.

"Conversations are more positive than negative. That changed in my opinion when she started her sentence," said Brenda White, director of print investment for Starcom USA, which handles media and advertising planning for dozens of companies.

Since reports surfaced in June 2002 that tied Stewart to a questionable sale of stock in biotech ImClone Systems Inc., her name has taken a beating. During her trial, Stewart was portrayed as rude, demanding and cheap. But while incarcerated, Stewart has drawn sympathy from outsiders. She's stayed in touch with fans through her own Web site, marthatalks.com, taking swipes at the prison food and calling for sentencing reform.

How the former CEO will remake her image and what role she will carve out when she returns as founding editorial director remains to be seen. Stewart is scheduled for a March 6 release from prison. After that, she will serve five months of house arrest, though she'll be allowed to work outside her home for 48 hours a week.

Company executives have been in an awkward position of preparing for Stewart's return to the company, while moving ahead, continuing to diversify beyond her name. While company officials have visited her in prison, Stewart is forbidden to conduct business.

Industry observers will be watching the reunion closely.

Lands' End Announces Restructuring
Wall Street Journal Online – Dow Jones Newswires
February 22, 2005

DODGEVILLE, Wis. -- Sears Roebuck & Co.'s (S) Lands' End unit will cut more than 375 positions and shutter its Cross Plains call center as part of a restructuring plan to help the apparel retailer respond to "changing customer shopping habits."

Lands' End, which Sears bought in 2002 to spruce up its apparel department, expects to cut 200 full-time employees. The company also will reduce its work force by about 175 part-time positions and a number of seasonal jobs.

Those job cuts include positions lost in the planned closing of Lands' End's Cross Plains call center, which is scheduled for June 5. In a press release Tuesday, Land's End said it will offer employees severance packages that include outplacement and educational assistance.

Company officials couldn't immediately be reached to provide additional information about the restructuring and its financial impact.

The news comes less than a week after Sears and Kmart Holdings Corp. (KMRT) set a meeting date for shareholders to vote on the companies' proposed $11.5-billion merger. When the Sears-and-Kmart deal was announced in November, the Lands' End brand was fairing well in the upscale markets, but reported disappointing sales in less-affluent areas.

Lampert Picks Members of Sears Board of Directors
By Jewel Gopwani – Free Press Business Writer – Detroit Free Press
February 22, 2005

Analysts say choices ideal for transition

As the $11-billion merger between Kmart Holding Corp. and Sears, Roebuck and Co., shapes up, each step is being watched closely.

And so far, so good, say corporate management and retail experts.

Billionaire Edward Lampert, who masterminded the deal, announced Monday the board of directors for Sears Holdings Corp., which will become the nation's third-largest retailer.

The companies also named Kmart's senior vice president of finance, William Crowley, as the chief financial officer for Sears Holdings and announced a special shareholders meeting March 24 to vote on the proposed merger.

Lampert assembled a strong board, said Gerald Meyers, professor of management at the University of Michigan's Stephen M. Ross School of Business in Ann Arbor.

Seven of the new company's 10 directors will come from Troy-based Kmart Holding's board, including Lampert, Kmart President and CEO Aylwin Lewis, and Julian Day, Kmart's former president and CEO.

Meyers said of Day: "He's an asset and it's good they haven't let him go."

From Sears' board, Lampert chose Sears Chairman and CEO Alan Lacy; Michael Miles, former chairman and CEO of Philip Morris Companies Inc., and Donald Carty, former chairman and CEO of AMR Corp. and American Airlines Inc.

At a time when many corporations are trying to become more transparent by putting fewer insiders on their boards, Sears Holdings' board will hold four Sears and Kmart executives: Lampert, Lacy, Lewis and Crowley.

That is too many in an ideal situation, Meyers said.

But this is a company going through a major transition.

"They should move away from that once they get themselves straightened out," Meyers said.

As for the new company's executive team, Sears Chief Financial Officer Glenn Richter plans to resign after the merger from his positions as chief financial officer for Sears, Roebuck and chairman of Sears Canada Inc.

The appointment of Crowley to CFO could be noteworthy, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based national retail consulting and investment banking firm.

It's hard to say why Richter is leaving, he said. But both Richter and Crowley had worked closely in recent months to lead the integration of the two companies.

"Lampert got a chance to see both of them working on the same job and sort of assess their effectiveness," Davidowitz said.

Crowley is also the president and chief operating officer of Lampert's firm, Greenwich, Conn.-based ESL Investments Inc.

Crowley's appointment could be a sign of which company will have more weight on Sears Holdings' executive team, said Gary Ruffing, senior director of retail consulting at BBK Ltd. in Southfield.

"I think that there will be a large carryover of people from the existing Kmart company that have basically weathered the storm, have gone through the transition. They are tested, so to speak," Ruffing said.

The companies also announced that the ticker symbol for Sears Holdings will be SHLD. It will trade on the Nasdaq exchange.

Shareholders who owned stock in either company as of Jan. 26 can vote March 24 at Sears' headquarters in Hoffman Estates, Ill., where the merged company will be based.

Finance Chief at Sears to Depart
By Becky Yerak - Tribune staff reporter – Chicago Tribune
February 22, 2005

Kmart exec to fill role after merger

The top Sears, Roebuck and Co. finance executive, who was to hold the same key post after completion of the company's merger with Kmart Holding Corp., unexpectedly resigned.

Glenn Richter, 42, chief financial officer of Sears, was identified as recently as last week as finance chief for the new Sears Holdings Corp., Instead, William Crowley, 47, Kmart's senior vice president of finance, will fill that role.

Crowley's appointment to CFO of the new entity was revealed in a Securities and Exchange Commission filing Friday, as was the news that Richter would leave the company after the merger.

Richter, who has been Sears' point person on a transition team integrating the two retailers, was unavailable for comment Monday.

"He felt he could better satisfy his career goals by pursuing a position outside the company, as he assessed his career options inside and outside the company," Sears spokesman Chris Brathwaite said.

Richter also will leave as chairman of Sears Canada, of which Sears owns 54 percent.

Asked about Richter's career goals, Brathwaite replied, "He hasn't specified his future plans."

The filing also revealed that Sears Holdings will trade on the Nasdaq stock exchange under the ticker symbol SHLD, and that the meeting for both companies' shareholders to approve the merger is March 24.

The change to Crowley reinforces that the shots are being called by Troy, Mich.-based Kmart, despite the merged company's headquarters being in Hoffman Estates.

When Sears and Kmart announced their $11 billion merger in November, Sears workers took some solace in knowing that the merged company would do business out of familiar confines.

But workers are bracing for job cuts that'll be necessary if Sears Holdings wants to achieve its target of $300 million in cost savings through more purchasing clout and reduction of administrative and operating expenses.

Other issues to be resolved include how many stores will be sold, what other assets will go on the block and how store workers will be compensated.

"That's information we won't be able to talk about until after the merger closes," Brathwaite said.

Despite the fact that hundreds of Kmart stores will be converted to the Sears nameplate, Sears will operate more like Kmart in some ways.

Sears Holdings has said that it will be more restrictive about granting stock options and that, unlike Sears, it won't pay a dividend.

Also, of 10 Sears Holdings board members, seven are from Kmart, according to an SEC filing last week.

"Kmart bought Sears, so it doesn't surprise me that Kmart executives are taking high-level jobs in the new organization," said Gary Ruffing, senior director of consulting firm BBK Ltd. and a former Kmart marketing vice president.

Ruffing said he expects big job cuts.

"They can get some cost savings out of rent and selling some leases, but the biggest thing is the duplication of jobs in the field, buyers, human resources [and] accounting," he said.
- - -
What's ahead
- Shareholder vote: Shareholders of Kmart Holding Corp. and Sears, Roebuck and Co. are scheduled to vote on the companies' proposed merger March 24. Adoption of the merger agreement requires approval of at least two-thirds of the outstanding shares of Sears common stock and a majority of Kmart's outstanding shares.

- Ticker change: The new Sears Holdings Corp. has been approved for quotation on the Nasdaq stock market under the symbol SHLD. Sears now is traded on the New York Stock Exchange under its one-letter symbol, S.

May-Federated Merger Talks Showing Life
By Andrew Ross Sorkin and Tracie Rozhon – Market Place - The New York Times
February 22, 2005

May Department Stores, which owns Lord & Taylor and Marshall Field's, has suspended its search for a chief executive as merger talks with Federated Department Stores advanced over the weekend, executives close to the company said yesterday.

May's decision to halt the search process is the most significant indication yet that it is seriously considering a takeover bid from Federated, the nation's largest department store company, with chains like Macy's and Bloomingdale's. May instructed the executive recruitment firm it had hired, Spencer Stuart, to "put the search on the back burner" while it negotiates with Federated, one executive said. May had hired Spencer Stuart a month ago when its chairman and chief executive, Gene S. Kahn, was ousted. His resignation led Federated to approach May.

The talks between Federated and May, which have taken place in fits and starts, appear to have gained momentum over the weekend, the executives said.

"Up until now, there's been a lot of posturing," one participant in the talks said. "This is the first time I've felt there's a legitimate chance we will get across the finish line."

While a deal is not expected in the next several days, the executives said they were increasingly optimistic an agreement could be struck. Whether a deal will be reached will turn on the price of Federated's final offer for May, executives from both camps agreed. So far, May has been holding out for a price "north of $40 a share," one executive said. Federated, which has a history of walking away from deals, had indicated it only wanted to pay in the "mid-30's" but in recent days indicated it may be willing to "stretch," as one executive described it.

And May has "been more willing to compromise," the executive said. Shares of May closed at $33.45 on Friday. A spokeswoman for May declined comment last night; Federated officials could not be reached for comment.

While a $40-a-share deal for May might seem steep, it would represent about a 40 percent premium over the company's share price when Mr. Kahn resigned. Analysts suggest that Federated would still benefit by the cost savings it could create by shutting down overlapping stores and eliminating back-office functions. According to Wayne Hood, an analyst at Prudential Equity Group, Federated would probably save $200 million in the first year of a deal.

But Joshua R. Goldberg, a managing director of Mercantile Capital Partners, a private equity firm in Manhattan, said that any merger or acquisition would have to address more than account books and underperforming locations.

"There may be back-office synergies, but will a combined May-Federated be more attractive and effective with customers than each is now?" he asked. "The great challenge facing department stores today is improving their creativity to compete with the best specialty stores in the mall."

Although neither Federated nor May has performed spectacularly recently, May has performed far worse, with declining sales figures going back three years. While Federated's sales at stores open at least a year fell 0.4 percent in January, May's decline was 7 percent.

Meanwhile, Terry J. Lundgren, Federated's chief executive for the last two years, continues to receive plaudits from retail analysts, bankers and rivals.

"Federated is the best traditional department store chain out there," said Bill Dreher, an analyst from Deutsche Bank who covers both Federated and May, but does not own either stock.

Like many other analysts and retail consultants, Mr. Dreher said he felt that May was bringing little to the table, "other than $15 billion in sales volume and 500 stores."

In the first three to five years after such a merger, he predicted, there would be "no doubt dramatic improvement in May's operating matrix that should be able to drive sales and earnings." The problem, he said, might come after that, "without more revolutionary change."

May, led by interim chief executive John L. Dunham, has been under increasing pressure to accept an offer from Federated. The news of Federated's interest had made the search for a chief executive nearly impossible and has led to a slowdown in productivity among the employees, the executives acknowledged.

Several executives close to May blame Federated for fanning the takeover speculation "to put us in a box," as one said.

Federated, based in Cincinnati, and May, based in St. Louis, have done the merger dance before. About two and a half years ago, the two companies came close to merging, but disputes over who would run the company led the talks to breakdown. With Mr. Kahn out, and May in need of a new chief executive, a deal with Federated would seem natural.

In addition, many analysts and investment bankers say they cannot see anyone else buying such a huge chain as May, especially with its weak performance.

The only other alternative - which some on the May board favor, according to several retail executives - is turning the chain around first, to make it worth more.

"It's highly unlikely that a financial sponsor in the private equity community or a real estate investment trust would take it on," said Mr. Dreher of Deutsche Bank. "And Federated is certainly the only department store that could do it."

Costco's Deep Discounts Don't Extend to Its Share Price
By Kortney Stringer – Staff Reporter – The Wall Street Journal
February 22, 2005

Costco Wholesale Corp. sells everything from diamond rings to French wines at steep discounts, but its shares don't come cheap.

Shares of Costco, the nation's largest members-only warehouse-club retailer in terms of sales, have jumped more than 30% over the past year to close at $45.80, down 30 cents as of 4 p.m. in Nasdaq Stock Market composite trading Friday. That is up from about $35 a year ago and partly reflects Costco Wholesale's growth, which has far outpaced competitors. But the Issaquah, Wash., retailer also is getting a lift by reining in labor and other costs and increasing the efficiency at its warehouse clubs.

Now, some investors and analysts say increased competition from supermarkets, discounters and Wal-Mart Stores Inc.'s Sam's Club -- the No. 2 warehouse club -- may slow Costco's momentum. Indeed, Costco may represent a classic Wall Street/Main Street split. The company continues to perform well, but its shares have become too expensive to entice buyers.

Stephen Yeatman, a vice president and portfolio manager at BTR Capital Management Inc., said he reduced his firm's Costco holdings in the past year because of the difficult time retail stocks are facing in the months ahead. "It's a reasonable stock to hold," Mr. Yeatman said, "but at this price, I wouldn't be a strong buyer." The San Francisco firm has about $140 million in assets under management.

Costco's stock is pricey, trading at about 24 times this year's earnings. That compares with 154-warehouse-club BJ's Wholesale Club Inc.'s multiple of 17 and a typical price-to-earnings ratio of 20 in specialty retailing. Retail behemoth and Costco rival Wal-Mart trades at 23 times earnings.

"I admire the management team and what they've done, but the stock is expensive," said Deborah Weinswig, a Smith Barney retail analyst who has a "hold" rating and a $50 target price on Costco shares. Her firm owns Costco stock.

Costco Chief Financial Officer Richard Galanti declined to comment on his company's stock price. But he said, "We continue to work hard to drive our business in the right direction and increase shareholder value over the long term."

Indeed, there are some good reasons why Costco shares have become expensive. The retailer averages $795 a square foot in annual sales, far above the $516 a square foot at Sam's and more than double the national average at malls. The average Costco store posts $115 million in average annual sales, nearly double Sam's Club's per-store average and almost triple per-store sales at BJ's. And with 449 warehouse clubs and $47.1 billion in annual revenue excluding membership fees, Costco easily outsells Sam's Club with 550 locations and $37.1 billion in comparable revenue.

Costco manages that feat because it attracts more affluent customers than Sam's Club. By luring high-spenders with such fancy fare as Ralph Lauren clothing, Waterford crystal and Dom Perignon champagne, Costco has posted five consecutive quarters of at least 7% growth in same-store sales -- or sales at stores open at least a year -- the most consistent performance among the three major warehouse clubs. The retailer also is renowned for stocking treasure-hunt items such as Prada handbags -- merchandise designed to spur impulse buys and give customers a reason to visit its clubs more often because such items are carried only briefly.

Costco dominates on the West Coast, where Wal-Mart has a weaker presence. Even when Costco enters markets such as Texas, where Sam's Club rules, Costco is posting double-digit sales increases.

In the past year, Costco also has focused on shaving costs to improve its bottom line. Long known for having the best employee benefits in retail, Costco has begun demanding that employees pick up a bigger chunk of their health-care costs. Costco also has sought to improve efficiencies at its warehouse clubs, installing pneumatic tubes at check-out areas to speed the movement of cash to a store's back office and adding self-checkout lanes in some stores, among other things.

As a result, Costco's profit jumped 21% to $193.2 million, or 40 cents a share, in its fiscal first quarter ended Dec. 21, despite a $6.5 million charge because of the Florida hurricanes. Revenue rose 10% to $11.3 billion, while same-stores sales rose 7%.

"Costco shares are likely benefiting from the company's ability to better control corporate overhead," said Bill Dreher, an analyst at Deutsche Bank Securities Inc. in New York, who has a hold rating on Costco with a positive bias. Deutsche Bank owns at least 1% of Costco shares. "It's executing well, but I wouldn't be willing to pay any more for its stock."

The road ahead may get bumpy for Costco as competition heats up. For starters, supermarkets and discounters are aggressively competing on prices for such goods as canned vegetables and paper towels and other items found in grocery stores, which make up about 60% of Costco's merchandise mix. As a result, some consumers no longer see a price advantage in shopping at Costco for items they can get at a supermarket. Consequently, in the latest quarter, while margins on grocery-store items were healthy, Costco posted an 8% same-store sales gain in fresh food, down from a 15% comparable gain in 2003.

On top of that, Sam's, which stumbled several years back by getting rid of products and services that appeal to entrepreneurs, in the past couple of years has renewed its focus on small-business owners, also Costco's primary customer. Sam's Club is offering more upscale products such as pricier wines to directly compete with Costco. And BJ's, the No. 3 warehouse-club operator with about $6 billion in annual revenue excluding membership fees, is aggressively carving out a niche among consumers by beefing up departments that appeal to them and making plans to open locations in other markets outside the East Coast.

Even though the more than $90 billion members-only warehouse-club industry as a whole is growing rapidly, some analysts and investors say the three major players are likely to cannibalize each other's sales as they increasingly expand into each other's territories. Costco disagrees.

"It remains very competitive out there both in general and more specifically with regard to Sam's," Costco's Mr. Galanti told investors last fall. Still, he says, "We are as an industry growing our business but not necessarily from one another but from other forms of retail and wholesale."

Kmart and Sears Set Shareholder Vote for March 24, 2005
Sears News Release
February 21, 2005

Mailing to Shareholders of Definitive Joint Proxy Statement Begins

TROY, Mich. and HOFFMAN ESTATES, Ill., Feb. 21 /PRNewswire-FirstCall/ -- Sears Holdings Corporation, currently a wholly owned subsidiary of Kmart Holding Corporation created to facilitate the merger between Kmart Holding Corporation (Nasdaq: KMRT) and Sears, Roebuck and Co. (NYSE: S) and which will become the new holding company of Sears, Roebuck and Kmart following the merger, said that the registration statement filed with the Securities and Exchange Commission in connection with the proposed merger has been declared effective.

The joint proxy statement is being mailed to both companies' shareholders beginning Tuesday, February 22, 2005. A form of election will be mailed shortly under separate cover to Sears, Roebuck shareholders of record at the close of business on January 26, 2005 to be used to elect cash or Sears Holdings stock in respect of each of their Sears, Roebuck shares, as provided in the merger agreement.

Sears, Roebuck and Kmart will hold special meetings of their shareholders on March 24, 2005 to vote on the companies' proposed merger. Kmart and Sears, Roebuck shareholders of record at the close of business on January 26, 2005 will be entitled to vote on the proposal. The special meeting of Kmart shareholders will be held at Sears, Roebuck's headquarters, which will serve as the headquarters of the combined company following the merger, in Hoffman Estates, IL in the Merchandise Review Center, General Session Room at 8:30 a.m. CST / 9:30 a.m. EST.

The special meeting of Sears, Roebuck's shareholders will be held at its headquarters in Hoffman Estates, IL in the Merchandise Review Center, General Session Room at 11:00 a.m. CST / 12:00 p.m. EST. Under the merger agreement, Sears Holdings Corporation will have a ten- member Board of Directors, which will include a total of seven members from the current Kmart Board and three members from the current Sears, Roebuck Board. Sears Holdings will be the holding company for the Sears, Roebuck and Kmart businesses, which will continue to operate separately under their respective brand names.

The merger is subject to approval by both Kmart's and Sears, Roebuck's shareholders and customary closing conditions. The members of the Board of Directors upon the completion of the merger will be as follows:

The company also announced today that the new stock symbol for Sears Holdings Corporation will be "SHLD." The companies previously announced that Sears Holdings stock will trade on the Nasdaq National Market.

In addition, Sears Holdings said that Mr. Crowley will assume the additional responsibility of chief financial officer of Sears Holdings Corporation upon the closing of the merger. Glenn R. Richter, executive vice president and chief financial officer of Sears, Roebuck, will leave the company upon completion of the merger to pursue other professional opportunities.

Edward S. Lampert, chairman of Kmart, and Alan J. Lacy, current chairman and chief executive officer of Sears, Roebuck, thanked their respective boards for their support in establishing the board structure of the merged company.

About Sears Holdings Corporation
Created to facilitate the merger of Kmart and Sears, Roebuck announced on November 17, 2004, and subject to the receipt of shareholder approvals and the satisfaction or waiver of other conditions, upon the closing of the merger, Sears Holdings Corporation is expected to be the nation's third largest broadline retailer, with approximately $55 billion in annual revenues, and with approximately 3,800 full-line and specialty retail stores in the United States and Canada. Sears Holdings is expected to be the leading home appliance retailer as well as a leader in tools, lawn and garden, home electronics and automotive repair and maintenance. Key proprietary brands are expected to include Kenmore, Craftsman and DieHard, and a broad apparel offering, including such well-known labels as Lands' End, Jaclyn Smith and Joe Boxer, as well as the Apostrophe and Covington brands. It is also expected to have Martha Stewart Everyday products, which are now offered exclusively in the U.S. by Kmart and in Canada by Sears Canada.

About Kmart Holding Corporation Kmart Holding Corporation and its subsidiaries (together, "Kmart") is a mass merchandising company that offers customers quality products through a portfolio of exclusive brands that include Thalia Sodi, Jaclyn Smith, Joe Boxer, Martha Stewart Everyday and Route 66. For more information visit Kmart's website at http://www.kmart.com . About Sears, Roebuck and Co. Sears, Roebuck and Co. is a leading broadline retailer providing merchandise and related services. With revenues in 2004 of $36.1 billion, Sears, Roebuck offers its wide range of home merchandise, apparel and automotive products and services through more than 2,300 Sears-branded and affiliated stores in the U.S. and Canada, which include approximately 870 full-line and 1,100 specialty stores in the U.S. Sears, Roebuck also offers a variety of merchandise and services through sears.com, landsend.com, and specialty catalogs. Sears, Roebuck is the only retailer where consumers can find each of the Kenmore, Craftsman, DieHard and Lands' End brands together -- among the most trusted and preferred brands in the U.S. The company is the largest provider of home services, with more than 14 million service calls made annually. For more information, visit the Sears, Roebuck website at http://www.sears.com .

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include, but are not limited to, statements about the benefits of the business combination transaction involving Sears Holdings Corporation, Kmart Holding Corporation and Sears, Roebuck and Co., including future financial and operating results, the combined company's plans, objectives, expectations and intentions and other statements that are not historical facts. Such statements are based upon the current beliefs and expectations of Kmart's and Sears, Roebuck's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward- looking statements.

The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: the ability to obtain governmental approvals of the transaction on the proposed terms and schedule; the failure of Kmart's and Sears, Roebuck's stockholders to approve the transaction; the risk that the businesses will not be integrated successfully; failure to quickly realize synergies and cost-savings from the transaction as a result of technical, logistical, competitive and other factors; disruption from the transaction making it more difficult to maintain relationships with clients, employees or suppliers; competitive conditions in retail and related services industries; changes in consumer confidence, tastes, preferences and spending; the availability and level of consumer debt; anticipated cash flow and the ability of Sears Holdings to maintain sufficient operating cash flow and liquidity; the successful execution of, and customer response to, strategic initiatives, including the full-line store strategy and the conversion and integration of the Kmart stores and other new store locations; the pace of growth in store locations, which may be higher or lower than anticipated; the possibility that new business and strategic options for one or more business segments will be identified, potentially including selective acquisitions, dispositions, restructurings, joint ventures and partnerships; trade restrictions, tariffs, and other factors potentially affecting the ability to find qualified vendors and access products in an efficient manner; the ability to successfully implement initiatives to improve inventory management capabilities; anticipated cash flow; changes in interest rates; the outcome of pending legal proceedings and bankruptcy claims; social and political conditions such as war, political unrest and terrorism or natural disasters; the possibility of negative investment returns in any pension plans; volatility in financial markets; changes in debt ratings, credit spreads and cost of funds; the possibility of interruptions in systematically accessing the public debt markets; the impact of seasonal buying patterns, which are difficult to forecast with certainty; and general economic conditions and normal business uncertainty. These forward-looking statements speak only as of the time first made, and no undertaking has been made to update or revise them as more information becomes available. Additional factors that could cause Kmart's and Sears, Roebuck's results to differ materially from those described in the forward-looking statements can be found in the 2003 Annual Reports on Forms 10-K of Kmart and Sears, Roebuck filed with the SEC and available at the SEC's Internet site (http://www.sec.gov ).

Sears Holdings Corporation has filed a Registration Statement on Form S-4 with the SEC (Registration No. 333-120954) containing the joint proxy statement regarding the proposed transaction. Stockholders are urged to read the definitive joint proxy statement regarding the proposed transaction because it contains important information. Stockholders are also be able to obtain a free copy of the definitive joint proxy statement, as well as other filings containing information about Sears Holdings, Kmart and Sears, Roebuck, without charge, at the SEC's Internet site (http://www.sec.gov ). Copies of the definitive joint proxy statement and the filings with the SEC that are incorporated by reference in the definitive joint proxy statement can also be obtained, without charge, by directing a request to Kmart Holding Corporation, 3100 West Big Beaver Road, Troy, Michigan, 48084, Attention: Office of the Secretary; or to Sears, Roebuck and Co., 3333 Beverly Road, Hoffman Estates, Illinois, 60179, Attention: Office of the Secretary. Sears, Roebuck's shareholders may also obtain copies of the definitive proxy statement or form of election from D.F. King & Co., Inc., 48 Wall Street, New York, NY 10005 (Telephone: (800) 549-6650 or, for calls from outside the U.S., (212) 269- 5550). Kmart shareholders may also obtain copies of the definitive proxy statement from Innisfree M&A Incorporated, 501 Madison Avenue, 20th Floor, New York, NY 10022 (Telephone: (888) 750-5834 or, for banks and brokers, (212) 750-5833).

The proposed directors and executive officers of Sears Holdings, the respective directors and executive officers of Kmart and Sears, Roebuck and other persons may be deemed to be participants in the solicitation of proxies in respect of the proposed transaction. Information regarding Sears Holdings' proposed directors and executive officers, Kmart's and Sears, Roebuck's directors and executive officers and other participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, is available in the joint proxy statement contained in the above-referenced Registration Statement on Form S-4.

Wal-Mart Is Upgrading Its Vast In-Store Television Network
By Constance L. Hays – New York Times
February 21, 2005

PEARLAND, Tex. - Here in the Houston suburbs, Banana-Vision has arrived. That's the industry nickname for the 42-inch high-definition L.C.D. monitor installed directly over a pyramid of bright yellow bananas in the produce section of the local Wal-Mart store.

This TV screen and others scattered through the store are part of the Wal-Mart TV Network, a Web network of in-store programming that the company started in 1998. These days it shows previews of soon-to-be-released movies, snippets of sports events and rock concerts, and corporate messages from the world of Wal-Mart, including some intended to improve its battered public image.

But the principal reason for Wal-Mart TV is to show a constant stream of consumer product ads purchased by companies like Kraft, Unilever, Hallmark and PepsiCo. And little wonder. According to Wal-Mart and to an agency that handles its ad sales, the TV operation captures some 130 million viewers every four weeks, making it the fifth-largest television network in the United States after NBC, CBS, ABC and Fox.

While other retailers have experimented with in-store television, Wal-Mart's network, which is available in almost all its 2,600 locations, is the most extensive. The company, eager to promote it, is upgrading its broadcasting plans and equipment.

"It's sort of a neat idea," said Beatrice White, a Houston resident who said she bought bananas every time she went to the store, but had just noticed the screen above them. "I just walked up here and I was looking at it. I think if you've got children with you, it would entertain them."

Armando Rivera, a Wal-Mart worker who was shopping after his shift, said the programs included sports from time to time, and "sometimes I'll stand and watch it for a while."

Late last year, the company hired Nielsen Media Research to evaluate its network (Nielsen does not regularly measure Wal-Mart TV viewers the way it does with the broadcast networks). The study found that shoppers watched Wal-Mart TV an average of seven minutes a store visit, 44 percent longer than in a similar study in 2002.

That growth has caught the eye of marketers that in the age of TiVo  and proliferating cable channels are searching for other ways to send their messages to an increasingly hard-to-reach consumer.

According to Wal-Mart's rate card, advertisers pay $137,000 to $292,000 to show a single commercial for a four-week period, depending on the length of the ad and the number of stores where it is shown.

PepsiCo's Frito-Lay division has been bulking up on its ads in Wal-Mart for the last five years, said Haston Lewis, a vice president at Frito-Lay.

"From a marketing standpoint," Mr. Lewis said, "we want to be on the cutting edge of identifying and leveraging the most effective vehicles to capture consumers. The reality is unlike 40 or 50 years ago, more and more of your customers are shopping at Wal-Mart. So they have become a new medium to reach consumers."

As part of Wal-Mart's TV upgrade, some 600 of the 42-inch screens are to be installed by December and eventually every store will have them. The monitors they are replacing were one step removed from 1960's models, able to broadcast color but bolted high above shoppers' heads and easily overlooked.

And the company plans to tailor its broadcasts more specifically to areas of its stores - like electronics, produce or deli - and to individual stores, based on regional tastes and situations.

The placement of the wide, difficult-to-ignore screen at the store near Houston in the last few months represents one part of Wal-Mart's effort to capitalize on its captive audience. In the produce aisle, the TV screen gets shoppers' attention, thanks to its big size and lighted face, and from speakers installed on the ceiling, which create a kind of pathway of sound that can make even focused buyers turn toward its source.

Across the way in the delicatessen area is another screen, with different programming, and on the other side of the store, in electronics, is another.

The power of televised distraction is clear.

"A lot of them are picking up bananas and not even looking at them," said Dale Koehler, the store manager, referring to his customers. "They're looking at the TV."

While Wal-Mart wants to use Wal-Mart TV, which is controlled from company headquarters in Bentonville, Ark., to actively push consumers toward products advertised there, its media chief, Troy Steiner, insisted that there was no quid pro quo for manufacturers requiring them to buy air time on the network.

But he added that demand had been growing "double digit," in terms of advertisers and dollars spent, over the last several years.

"It's not like we strong-arm them or anything," Mr. Steiner said. "They see that this is a benefit. They see the decline in ratings" on other networks.

While many of the ads on the Wal-Mart network are just 10 seconds long - someone trying to shop in a hurry does not have a lot of time to spend watching television - Frito-Lay has developed longer ads as well, Mr. Lewis said.

"One ad we developed encourages moms to buy our multipacks to share during soccer games with their children," he said. Sometimes national ads appear on the network; others are created solely for Wal-Mart. Like other companies' ads on the network, Frito Lay's include directions to the aisle where the Tostitos, Doritos and other Frito-Lay products are stacked.

Unilever is also a longtime Wal-Mart advertiser, and has created a campaign for its Dove line using Wal-Mart workers as actors.

"Wal-Mart TV presented a unique opportunity for us to bring this to life in their stores," said Kathy O'Brien, who is overseeing the ads for Dove's Campaign for Real Beauty. "We've had a lot of success with other campaigns, and that's why we continue to invest in Wal-Mart TV."

Stacey Lynn Koerner, a vice president at Initiative, a media research company, said there was a limit to the kinds of advertising that Wal-Mart TV could poach from other media.

"You wouldn't advertise a car there," she said. "But for certain advertising categories, it's the right place. It's the right thing for advertisers to explore, too." While some large advertisers are spending some of their dollars in Wal-Mart, she said, "you can't build mass reach in a retail outlet alone."

How much money does Wal-Mart TV make? The company refused to say, but others say it takes in millions of dollars a year.

"It's a lot of money and for a retailer, that's usually a below-the-line profit center so it goes right to the bottom line," said Phil Lempert, editor of Xtreme Retail 23, an industry newsletter, and food editor on the "Today" program on NBC.

The network's profit is not siphoned off to support the rest of the chain, Mr. Steiner said, but is used to finance upgrades and other projects. Ads are handled by Premier Retail Networks, which works with a variety of retailers.

"Up to 70 percent of brand decisions are made right inside the store," said Mark C. Mitchell, executive vice president for ad sales at Premier, "and the idea that you can deliver the power of television as a marketing message inside a store has made it attractive to those marketers."

Mr. Lempert argues that the current setup does not do enough for customers. "They should have a 60-inch monitor that's triggered by consumers, and prints out coupons and recipes," he said. "That's what people want."

He added: "You might be able to say it's the fifth-largest network based on the number of people who walk by it, but it doesn't mean they are paying attention to it and that it's empowering them to buy those products."

The in-store network serves another important function: it is Wal-Mart's private tool for defending itself against increasingly vocal critics, including labor unions and local governing bodies, that have questioned the company's rapid expansion, employment practices and competitive behavior.

About five minutes of every hour on the network is set aside for Wal-Mart to make its case, typically showing national or local ads championing the company's community service efforts or the kinds of jobs found there.

"That's one of the big assets we have with our network," Mr. Steiner said. "We can reinforce those messages in our stores."

The network has also been used by Wal-Mart executives who want to rally the employees, and from time to time its programming is replaced by widely televised news events like coverage of military activity in Afghanistan early in 2003. The broadcasts cannot be switched off by store managers, only by someone in the control room at company headquarters.

And if it does not sell customers on Wal-Mart's public image, or induce them to buy more chips, lotion and fruit, it may help sell more flat-panel  TV's.

"One of these days, I'll buy one of them for my house," Mr. Rivera, the Wal-Mart worker, said.

Manufacturers Try to Thrive on the Wal-Mart Workout
By Dan Mitchell – New York Times
February 20, 2005

It used to be so simple. Big manufacturers with powerful brands called the shots in the marketplace, and retailers played along. About the only decision retailers had to make was whether to stock a manufacturer's product. If consumers wanted it, stores carried it.

Then came the rise of Wal-Mart and other big-box retailers, which turned the power relationship on its head. Suddenly, manufacturers had to play by the retailers' rules. As consumers were increasingly drawn by the stores' low prices rather than the manufacturers' brand names, these retailers built enough market share to start making demands of their suppliers: about prices, marketing and even product design and production methods.

Manufacturers responded in various ways, and with different degrees of success. Some just played along, by cutting costs to shore up margins in the face of ever-lower retail prices. Others sought to avoid the big boxes by focusing more on selling to businesses other than retailers. The biggest companies have another option: becoming even bigger to achieve more market power, as Procter & Gamble did last month when it moved to acquire Gillette.

A few manufacturers, though, are trying to find a way to live with deep-discount mass merchandisers without sacrificing their traditional network of smaller retailers - or their traditional profit margins. These companies, like Toro and Levi Strauss, are offering specially made low-cost goods to the big boxes while continuing to sell higher-priced products through specialty stores.

For years, Kendrick B. Melrose, the chief executive of Toro, had resisted selling his mowers through Wal-Mart and Home Depot. Toro is "the Cadillac of mowers," he said, and he was worried about diluting the brand and alienating his dealers.

All that changed in the late 1990's, when sales sagged and costs rose. The summer of 1998 was particularly painful, because heavy rains in many areas kept people indoors; consumer sales fell 8.5 percent, and Toro's stock sank to a six-year low. Mr. Melrose said that he ran into his friend Bernard Marcus, Home Depot's founder, at an industry meeting that year, and that Mr. Marcus good-naturedly drove his finger into Mr. Melrose's chest and said, "You will sell us mowers or you will die."

Mr. Melrose relented, and Toro began racking up quarter after quarter of increases in sales, profits, market share and stock price. Profits surged 26 percent last year alone. Toro, based in the Minneapolis suburb of South Bloomington, said it expected profits to grow 12 to 15 percent this year, and sales by 7 to 9 percent.

What surprised many people at Toro - and more than a few of its competitors - was that the company managed to ignite sales through the big-box stores without brand dilution or anger among the independent dealers, who often compete with those megaretailers.

When asked about the growing power of retailers over suppliers, John Costello, Home Depot's executive vice president for merchandising and marketing, said, "We work closely with our supplier partners to develop products that meet customer needs."

And Tara Stewart, a Wal-Mart spokeswoman, said: "We expect our suppliers to drive the costs out of the supply chain. It's good for us and it's good for them."

Although Toro's story shows that some American manufacturers can thrive despite - or even because of - the growing power of huge retailers, many other companies live in dread of Wal-Mart, Home Depot and others grinding down their profit margins to the point where they feel compelled to move the bulk of their production overseas or throw in the towel. Rubbermaid, for instance, was on shaky ground before Wal-Mart's ascendance and found the price demands of the big-box stores too much to bear. In 1999, its profits falling even as sales rose, a wobbly Rubbermaid was acquired by the Newell Corporation.

Because these manufacturers had little choice but to sell through the retail chains that dominate the market, they had to swallow the demands of the chains - and the tiny margins that came with them. Rubbermaid, under Newell's ownership, finally agreed to produce cheaper goods for Wal-Mart. Other companies, particularly smaller suppliers, simply can't match the prices offered to the big chains by overseas manufacturers, and many have gone out of business or have been dropped by the chains.

But among the many manufacturers that have learned how to work with - or work around - the Wal-Marts of the world, Toro was especially well positioned. At its low point in 1998, it had fallen victim to the trends in retailing that had been hurting other manufacturing industries for years.

Shoppers were increasingly heading to Home Depot, Lowe's and Wal-Mart to buy their lawn mowers, snow blowers and weed-whackers, avoiding the garden centers and independent hardware stores that were the core of Toro's dealer network.

Toro had tried selling its products through lower-margin mass merchandisers in the 1970's, but Mr. Melrose said that was "a poor experience" for the company. "We got burned because we didn't protect our dealers very well, and they revolted," he said.

Mr. Melrose kept that experience in mind as he devised his strategy for the big boxes. Toro designed a low-priced mower to sell through discounters. To avoid dilution of the brand, Toro embarked on a companywide cost-cutting campaign, so it could sell the low-priced model without sacrificing on quality - or profit. It streamlined purchasing, for example, and designed the new mower to use many parts from existing products.

To keep its dealers happy this time, Toro offered its new mower to them as well, and made sure that the big retailers sent customers their way for service. Under this approach, dealers can still make money despite Toro's sales to big-box retailers.

Sometimes, customers who are happy with their inexpensive mowers will upgrade to pricier models sold only by independent dealers. "It's win-win," Mr. Melrose said.

AS it reduced costs, Toro also expanded its lines of professional-grade mowers. Selling products and services to golf courses and office parks now accounts for two-thirds of its revenue, up from just a third in 1990. Toro sees a big future in golf-course maintenance in Asia, particularly as China's middle class expands.

As part of the cost-cutting plan, Toro did close some United States plants and opened two in Juarez, Mexico. Of Toro's 5,300 employees, only about 15 percent of them are at the Juarez plants. Mr. Melrose says he resists moving production overseas just to save money.

"Obviously we can't compete with the labor costs in China," he said. But "to maintain the consistency of our quality," he tries to keep production close to home.

Profit margins have fallen only a little, Mr. Melrose said. In the 1990's, margins were often more than 30 percent; now they are in the high 20's.

Now other manufacturers may also learn to thrive in a big-box world. Gib Carey, a partner at Bain & Company, a consulting firm that advises companies on how to deal with Wal-Mart and others, said companies had often improved their profitability and success by working with the retailers.

The idea will be tested with Procter & Gamble's plan to buy Gillette. While Procter executives have said the acquisition has nothing to do with Wal-Mart, retailing analysts and consultants have said that it could give Procter added leverage in its dealings with discounters.

Often, Mr. Carey said, working with hard-nosed retailers imposes sorely needed discipline. He likens it to working with a personal trainer: "You might complain about the pain and suffering you go through, but you come out stronger and healthier."

Levi Strauss knows the drill. The company was flailing for years as its once-formidable business withered, especially among younger people who were looking for both newer styles and lower prices.

Levi responded in 2003 with its moderately priced Signature brand of jeans for sale through big discounters like Wal-Mart. The margins are much lower than they are for Levi's other brands, but volume makes up much of the difference. "Our inventory turns two to three times faster" than Levi's older brands, said Scott LaPorta, president of Levi's Signature division.

As it did at Toro, he said, the cost discipline imposed on the division has reached all parts of the company, improving margins. And rather than lowering Levi's reputation, the Signature line has improved Wal-Mart's, according to Mr. LaPorta. "We're a legitimizing brand for them," he said.

Sears Updates Return Policy
FROM SEARS RETIREES' WEB SITE
February 19, 2005

Sears has updated its return policy to eliminate ambiguity and set more clearly defined terms for its customers.

Sears' previous policy allowed customers to return merchandise within a "reasonable period of time" -- a non-specific statement that has resulted in inconsistent interpretations. The updated policy provides a time element to the otherwise ambiguous "reasonable period of time." Since both customers and associates can interpret a reasonable period of time several different ways, this updated policy will make the return process easier for all parties involved.

Much of our competition has a time element to their return policies -- anywhere from 15 to 90 days after the initial purchase. Sears' updated return policy specifies a generous but market-competitive time element of 30 to 90 days.

Here's the updated policy which becomes effective Feb. 17:

Satisfaction Guaranteed or Your Money Back

We hope that you are completely satisfied with your purchase. If for any reason you are not satisfied, simply return your purchase with your receipt within 90 days of your purchase, 30 days for home electronics, for a full refund or exchange. If you are not satisfied with your purchase after these time periods, please let us know. Your satisfaction is important to Sears.

Please note that this does not change Sears' long-standing policy of "Satisfaction Guaranteed or Your Money Back." The policy states that if for any reason the customer is unhappy with his or her purchase, returns will be accepted within the time frame.

All warranties, including KidVantage and Craftsman Hand Tools, are still honored. The Lands' End guarantee also remains.

This policy update has not been influenced by the Sears-Kmart proposed merger. We have been researching and reviewing the return policy for many months prior to the merger announcement.

The updated policy will be reflected on signs at the cash register and on customer receipts. Store associates have also been trained in communicating the policy to our customers.

Spiegel to Close Home Stores;
Reorganize as Eddie Bauer
Daily Herald – Suburban Chicago
February 19, 2005

Bankrupt Downers Grove-based Spiegel Inc. Friday said it plans to reorganize around its profitable Eddie Bauer division, closing the division's 34 Home furniture stores and cutting its work force by 700, or 8 percent. The Home stores will close in the second half of 2005. Local locations include Chicago, Deer Park, Naperville, Oak Brook, Vernon Hills.

Eddie Bauer will continue to sell outdoor-inspired clothes, gear and home furnishings through its 418 stores, catalogs and the Internet. It will be headquartered in Redmond, Wash.

Spiegel last April put the Eddie Bauer unit up for sale after it failed to strike a deal with creditors to restructure the company. Bill Kosturos, Spiegel's interim chief executive officer and managing partner in turnaround specialist Alvarez and Marsal, said the company took Eddie Bauer off the block because buyers were not offering what Spiegel executives thought the company was worth.

"We are very confident in Eddie Bauer going forward," Kosturos said. "This has just been a home run for everyone."

Spiegel filed for bankruptcy in March 2003 in a move analysts attributed to huge losses in Spiegel's credit card business and because Eddie Bauer brand's no longer had the kind of cachet that had allowed it to charge premium prices for causal apparel.

Under the reorganization plan, unsecured creditors, excluding Spiegel Holdings Inc. and its affiliates, would recover about 90 percent of their $1.3 billion in claims through a combination of cash and common stock, Spiegel said.

Current shareholders get nothing and Hamburg, Germany-based Otto GmbH will no longer own Spiegel. As part of the plan, Otto, the world's largest mail-order company, will make a $104 million payment to unsecured creditors to release the company and Chairman Michael Otto from potential legal claims.

The company, which is valued at $865 million under the plan, will be renamed Eddie Bauer Holdings Inc.

The company sold its 99-year-old Spiegel catalog and Newport News women's-apparel units to Pangea Holdings Ltd. for $82 million in separate transactions last year.

The plan calls for Spiegel to exit bankruptcy on May 31. Creditors, with some exclusions, would initially receive 100 percent of the equity in the new company. Eddie Bauer will seek to register its shares on the Nasdaq Stock Market and trade as a public company, Kosturos said.

"The creditors' committee enthusiastically supports the plan and is very excited about the business and the management," said David LeMay, a lawyer for the committee.

Sears/KMart Shareholders' Vote Scheduled March 24
Chicago Tribune
February 19, 2005

Shareholders of Kmart Holding Corp. and Sears, Roebuck and Co. are each scheduled to vote on the companies' proposed merger on March 24, according to a regulatory filing Friday.

Shareholders of record as of Jan. 26 may vote at meetings related to the deal, which would create a new company called Sears Holdings Corp.

The adoption of the merger agreement requires the affirmative vote of at least two-thirds of the outstanding shares of Sears common stock and a majority of Kmart's outstanding shares, according to the Securities and Exchange Commission filing.

The companies announced the cash-and-stock deal, valued at about $11.5 billion at the time, in November. It would create the third-largest retailer in the U.S. with nearly 3,500 stores.

The companies said in the filing that the new Sears Holdings Corp. has been approved for quotation on the Nasdaq stock market under the symbol "SHLD."

Sears is currently traded on the New York Stock Exchange, under its rare one-letter symbol, S.

Kmart shareholders will receive one share of new Sears Holdings common stock for each Kmart share. Sears shareholders will have the right to elect $50 in cash or 0.5 shares of Sears Holdings for each Sears share they hold.

Sears-Kmart  Board Choices Draw Ire from Shareholders
By Sandra Guy – Business Reporter – Chicago Sun-Times
February 18, 2005

The incoming board of directors of a combined Sears-Kmart looks familiar, and that upsets some activist Sears shareholders.

The 10-member board of the new Sears Holdings Corp. will include two controversial Sears board members -- Donald J. Carty and Michael A. Miles.

Sears shareholders have protested Carty's presence on Sears' board at the past two annual meetings, held at the retailer's Hoffman Estates headquarters.

Carty, 58, is the former chairman of financially ailing American Airlines. He was forced to resign from American two years ago after he failed to disclose a plan to give the airline's top managers bonuses and special pension protections when employees were voting to accept wage and benefit cuts.

Carty is scheduled to be a member of the merged company's audit committee, even though the California Public Employees Retirement System withheld its votes on his Sears re-election bid, because he was a member of the audit committee that authorized auditor Deloitte & Touche to perform non-audit services, a possible conflict of interest.

Shareholders last year also criticized the other carry-over board member, Miles, because he served on seven other boards at the time. Miles, 65, a retired CEO of Philip Morris Cos., also served as Sears CEO Alan Lacy's mentor when the two worked at Kraft Foods and Philip Morris.

Miles served as chairman of the Sears board's search committee when the board hired Lacy as CEO in October 2000. At the merged company, Miles will serve on the nominating and corporate governance committees.

Sears shareholders are making plans to protest the two men's inclusion on the new board of the merged Sears-Kmart.

Lacy, 51, is Sears' third member on the board of Sears Holdings. The new board will take effect after Kmart's $11 billion acquisition of Sears is complete, expected sometime in March. Lacy is set to become the merged company's vice chairman and CEO.

Retail analysts, Sears shareholders and corporate governance activists have expressed bewilderment that Sears' board has kept Lacy on as CEO and given him pay raises and lucrative stock-option grants, despite the retailer's poor performance. Sears has had four straight years of sales losses.

"Who does the board [of directors] hold accountable, and when do they hold him accountable?" said retail analyst Howard Davidowitz in a recent interview. Davidowitz is chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm based in New York City.

Under Lacy's tenure, Sears has slashed its operating costs, its work force -- it employs 201,000 compared with 275,000 in 2002 --and relied on buying back its stock to boost earnings.

Kmart will have seven members on the board because Kmart Chairman Edward Lampert will own more than 40 percent of the merged company's stock.

An ironic twist: Julian C. Day, who lost a bid for Sears' top job to Lacy, is one of Kmart's representatives on the new board.

The board members from Kmart will be:

* Lampert, 42, the Connecticut multimillionaire who engineered Kmart's takeover of Sears. Lampert, who runs hedge fund ESL Investments Inc., also serves on the boards of AutoNation Inc. and AutoZone Inc. Lampert will serve as chairman.

*Aylwin B. Lewis, Kmart's president and CEO. Lewis, 50, will become one of the highest-ranking African-American executives in the United States when he becomes president of the new Sears Holdings Corp. and CEO of Sears Retail.

*William C. Crowley, 47, Kmart's senior vice president of finance and a Kmart board member. Crowley previously served as president and chief operating officer of Lampert's ESL Investments.

*Day, 52, who served as president and CEO of Kmart until October 2004. He also served as chief financial officer of Safeway, Inc., from 1993 to 1998. Safeway bought Dominick's grocery stores in 1998.

*Steven T. Mnuchin, 42, a Kmart director who leads Dune Capital Management LP. Mnuchin previously worked at ESL.

*Ann N. Reese, 51, a Kmart director who co-founded the Center for Adoption Policy Studies in New York and serves as its executive director. Before that, she held senior corporate posts.

*Thomas J. Tisch, 50, a Kmart director who is a managing partner of Four Partners, a private investment firm.

Outlooks Differ at Wal-Mart and Target
By Constance L. Hays – New York Times
February 18, 2005

Wal-Mart Stores, the discount retail giant, rang up more than $288 billion in sales last year, the company announced yesterday, an impressive total that kept it in first place among American corporations in terms of revenue.

But the fine print told another story - of higher expenses, slower growth and profit increasingly coming from sources other than the stores themselves - that had the company pledging to investors that it would plan better for this year.

Target, Wal-Mart's chief discount rival, reported yesterday that sales for the year were $46.84 billion, an increase of 11 percent over 2003, with net income of $3.51 a share. Analysts cheered the Minneapolis-based chain's performance.

At Wal-Mart, earnings per share rose to $2.41 for fiscal year 2005, up from $2.07. Total revenue was $288.2 billion, compared with $258.68 billion a year earlier, and net income increased to $10.27 billion, from $9.05 billion. Wal-Mart's fiscal year, like many retailers, ran to the end of January.

Sales in Wal-Mart stores open at least a year, known as same-store sales, rose 1.5 percent in the quarter, which includes the all-important holiday shopping season. For the year, same-store sales increased 3.3 percent, with a 2.9 percent increase at Wal-Mart Stores and a 5.8 percent increase at its Sam's Club warehouse division.

For most of the year, Wal-Mart was hampered by the effect of high gasoline prices on its customers, who typically are hourly wage earners. When gasoline prices rise, Wal-Mart executives have said, customers buy less.

In addition, concern about the economy has made many shoppers more cautious. Sales of groceries may remain steady, while sales decline for more discretionary items, like sporting goods or electronics, that are more profitable than groceries.

The chief executive, H. Lee Scott Jr., told investors in a conference call yesterday that Wal-Mart stumbled in its merchandising in the second half of last year. Unexpectedly sluggish post-Thanksgiving sales led Wal-Mart to reduce prices sharply on a small assortment of goods and to take out newspaper ads - both unusual moves for it.

Mr. Scott also said that Wal-Mart left "a ton of business on the table" by buying too little in some categories, which reduced inventory costs but also meant lost opportunities.

Whatever the reasons, sales did not increase the way Wal-Mart would have liked.

"Thank goodness they had MoneyGram," said Emme P. Kozloff, an analyst for Sanford C. Bernstein, noting that income from services like MoneyGram and check cashing through Wal-Mart contributed more than usual to the company's profits.

"But what you can tell is that over 60 percent of their profit came from these noncore items," Ms. Kozloff said. "The results were not particularly strong."

Other analysts also spotted signs of problems. "Operating-expense pressure remains a challenge for Wal-Mart," Wayne Hood, an analyst at Prudential Securities, wrote in a note to investors. "Expense pressure was the result of higher wage and utility costs, below-plan sales, and rising health care expenses. Management does expect to show improvement in expense management in 2005, although we would be surprised if expense growth didn't continue to outpace top-line growth."

Among the costs that increased at Wal-Mart was interest expense, which grew 47.8 percent, to $297 million in the fourth quarter, Shari Schwartzman Eberts, an analyst for J. P. Morgan Chase, said in a note to investors, calling it "worse than expected."

At the same time, corporate expenses fell 18.3 percent, to $277 million, she added, which was better than forecast.

Mr. Hood expressed concern about the performance of Sam's Club, the Wal-Mart warehouse division that caters to small businesses as well as consumers. Noting that profit grew 3.5 percent in the fourth quarter, compared with 13.3 percent in the third quarter, he wrote: "We are forecasting 10 percent profit growth in 2005, but now have less confidence in that forecast."

The results at Target, which included growth of 5.3 percent for the year in stores open at least a year, won far more praise from analysts. Revenue for the year increased 11.5 percent, including $485 million in income from credit card operations. The company reported a charge of $65 million for the year because of an adjustment to its lease accounting system. Earnings per share rose to $3.51 for the year, from $1.97.

"A lot of accounting changes made it tough to see things clearly, but at the end of the day, they are out-executing Wal-Mart," Ms. Kozloff said. "They are feeling very good about the business," she said, predicting 5 percent sales growth for this year as well.

Target also reported higher expense rates, but benefited from a trimmed-down operation that sold its Mervyn's and Marshall Field's chains for $4.9 billion during 2004. In addition to intensifying its focus on Target Stores, its star performer, the sale means "they don't have nearly as much debt anymore," Ms. Kozloff said.

Federated Resumes Its Takeover Talks with Rival May
By Ellen Byron and Dennis K. Berman – Staff Reporters
The Wall Street Journal
February 18, 2005

Federated Department Stores Inc.'s on-again, off-again takeover talks for rival May Department Stores Co. are back on, and are reaching a more-serious stage, according to a person familiar with the situation. The two sides resumed negotiations by phone this week, and as of yesterday were about $2 a share apart on a deal price, people familiar with the matter said.

Talks between two of the nation's leading department-store chains faltered late last week, as May's interim Chief Executive John Dunham and Federated Chief Executive Terry Lundgren couldn't agree on a price Federated would pay for May.

Negotiations frequently break down and restart later in merger situations. The current talks remain fluid, one person says. May has come under increasing pressure from Wall Street to take action -- by either selling to Federated or announcing a new CEO -- after reporting lower-than-expected fourth-quarter results last week. May's former CEO, Gene Kahn, abruptly resigned in January, clearing a significant management hurdle to a union between the two companies, but also complicating May's negotiating position.

A spokeswoman for May declined to comment. A spokeswoman for Federated also wouldn't comment

Since Mr. Kahn resigned on Jan. 14, and news reports of the merger talks surfaced on Jan. 20, May's shares have risen 13.2%. Volatile stock prices -- which often are affected by news reports of discussions -- can make it difficult to complete a transaction at first pass.

As of 4 p.m. in New York Stock Exchange composite trading yesterday, Federated shares were at $57.37, down two cents on the day, while May shares were at $31.52, down 41 cents, giving the company a market capitalization of $9.2 billion.

Price has remained a sticking point between Cincinnati-based Federated, parent of Macy's and Bloomingdale's, and St. Louis-based May, whose chains include Marshall Field's, Lord & Taylor and Filene's. The May board has been weighing proposals to turn around the company against the value a merger would bring, according to one person familiar with the matter.

Meanwhile, many analysts remain optimistic that a merger will take place. An offer between $36 and $40 a share likely would be satisfactory to both Federated and May, estimated Deborah Weinswig, managing director at Smith Barney in a research note published Tuesday.

“Just Our Opinion” . . . .

“SATISFACTION GUARANTEED”  HAS LEFT THE BUILDING!
THE DEATH OF BULLETIN 0-277!
February 17, 2005

Sears' “Satisfaction Guaranteed or Your Money Back” return policy, that dates back to the turn of the last century, has been replaced with a “90-day with receipt” return policy. We have heard that “Home Electronics” returns have a 30-day return limit.

Contrary to Sears' explanation of this change as “simply updating the policy to include a time limit,” by inserting specific return dates in the Satisfaction Guaranteed policy, Sears, for the very first time, has defined for the consumer his/her return rights in days. The consumer is no longer the sole judge of satisfaction. And Sears now determines what is fair for the consumer -- not the consumer. This is not a clarification of a policy. This is a significant change in policy!

As background, at the core of all of Sears policies was “Satisfaction Guaranteed or Your Money Back.” Under this policy, which was explained in Bulletin 0-277 Rev. the customer had the right to use any product or service purchased from Sears for a reasonable period of time to determine whether it was satisfactory . If the customer was not satisfied, and he/she was the sole judge of satisfaction, Sears would do whatever was necessary to correct the cause of the customer’s dissatisfaction, including a full refund or exchange.

After a reasonable period of time had passed, the pledge of fairness kicked in. If the product or service did not give the customer the service or performance they reasonably expected, a determination would be made as to whether the written warranty on the item or service, if any, would satisfactorily correct the problem. If not, then Sears would try to make a policy adjustment that the customer would consider fair.

In 1886 Richard Sears understood that his promise of “Satisfaction Guaranteed or Your Money Back” could establish the bond of mutual trust with customers, and also form the basis for a successful business.

Through the years, as his business expanded, Sears employees at all levels were encouraged to make the promise of satisfaction with customers a reality in every way possible. Few companies have shared this reputation for satisfying the customer.

In recent years Kmart Corp. has not shared this enviable reputation. Only the courts can verify the number of investors, suppliers, employees and retirees and their damages resulting from Kmart’s bankruptcy, while other wealthy investors profited by their loss. This is hardly an example of “satisfaction guaranteed” for the American shopping public.

Now bankrupt Kmart plans to buy recently floundering Sears. No big deal. Corporate takeovers happen all the time. But what about the differences in Corporate cultures? What happens when one company who use to believe in customer “satisfaction guaranteed or your money back” meets the other company who believes in seeking bankruptcy as an escape, when it can’t meet its obligations?

When the merger takes place, where will American investors and shoppers place their trust and spend their money?

Veteran Sears executives and employees who for years made the guarantee of satisfaction a reality have been replaced with “short timers” from other companies with no similar experience.

American investors and shoppers have many choices, many places to spend their money. Where they spend their money will depend on those investments they can trust, and the stores that will guarantee their satisfaction.

American workers also have many choices to make, and will seek employers whose promises they can trust, now and in the future when they are older. Trust is a fragile thing, taking years to build and sometimes lost in seconds with a thoughtless act.

Now, with the change of Sears return policy to “Satisfaction Guaranteed or Your Money Back - Within 90 or 30 days,” what other changes will be coming? With the Red Lights flashing, there is no Green Light. We loved you Sears and we will miss you.

Sears Puts Limit on Famous Return Policy
By Sandra Guy, Business Reporter  -  Chicago Sun-Times
February 17, 2005

Satisfaction is guaranteed at Sears Roebuck and Co., but it had better be within 90 days.

Sears today will change its historic promise, "Satisfaction guaranteed or your money back," and require that goods be returned within 90 days of when they were bought.

The new policy applies to goods that shoppers buy today and in the future.

"We are simply updating the policy to include a time limit," Sears spokeswoman Corinne Gudovic said Wednesday.

The former policy, made famous with Sears' founding 119 years ago, stated that Sears shoppers could return goods "within a reasonable time" and get a full refund or an exchange for a similar item.

"The term 'within a reasonable time' was ambiguous. We'd have differing opinions between customers and sales associates in many cases," Gudovic said.

The change has nothing to do with Sears' impending takeover by Kmart Holding Corp., Gudovic said.

Sears started doing research on the return policy early in 2004, seeking to find out when most shoppers return goods and their ideas on a reasonable period of time for returns.

The Hoffman Estates-based retailer talked with more than 800 people by telephone and conducted several focus groups.

Sears also determined that more than 70 percent of all returns to its stores happen within 30 days, said spokesman Chris Brathwaite.

Sears salespeople have been trained to tell shoppers about the new policy, and signs at the cash registers will spell out the 90-day policy. Shoppers' receipts will also spell out the policy.

Shoppers who return goods without a receipt will continue to get a store credit; that policy will not change.

Ron Olbrysh, chairman of the National Association of Sears Retirees, said he hopes to ensure that Sears removes the "Satisfaction Guaranteed" motto from its older Sears stores.

"It's a good-bye to Sears as we knew it," Olbrysh said.

Wal-Mart's Profit Rises 16%
A Wall Street Journal Online News Roundup
February 17, 2005

Wal-Mart Stores Inc. Thursday said its fiscal fourth-quarter earnings rose 16% on a 9.9% increase in revenue. U.S. same-store sales rose 1.5%.

The Bentonville, Ark.-based retailer's earnings for the fiscal year topped $10 billion for the first time. Wal-Mart President and Chief Executive Lee Scott called it a "solid" performance but added "we can do better."

For the quarter ended Jan. 31, Wal-Mart's net income increased to $3.16 billion, or 75 cents a share, from $2.72 billion, or 63 cents a share, in the year-ago period.

Wal-Mart, the world's largest retailer, said revenue rose to $83.02 billion in the latest quarter from $75.19 billion a year earlier.

A Thomson First Call survey of analysts projected fourth-quarter earnings of 74 cents a share on revenue of $82.8 billion.

During the quarter, the company struggled with its early holiday sales and changed its advertising strategy after post-Thanksgiving sales numbers were flat. Sales picked up after Wal-Mart cut prices on some select popular products and began advertising specific bargains, a shift from its emphasis on the overall shopping experience.

Wal-Mart said total U.S. same-store sales, or sales at stores open at least a year, rose 1.5%, including a 1.4% increase for Wal-Mart stores and a 2% increase for Sam's Club.

Net sales totaled $82.2 billion in the latest quarter, up 10% from $74.49 billion in the year-earlier period, the company said.

For the full year, same-store sales were up 3.3%, comprised of a 2.9% gain at Wal-Mart stores and a 5.8% increase at Sam's Club.

Full-year net income totaled $10.27 billion, or $2.41 a share, up from $9.05 billion, or $2.07 a share, for the prior fiscal year. The company said revenue rose to $288.19 billion from $258.68 billion.

For the fourth quarter, operating income at Wal-Mart stores climbed 9.3% to $4.24 billion from $3.88 billion a year earlier. Sam's Club's fourth-quarter operating income increased 3.5% to $355 million from $343 million.

The company also said its international unit reported fourth-quarter operating income of $978 million, up 13% from $862 million a year earlier.

"In the year just completed, we added almost $29 billion in sales and topped $10 billion in net income for the first time in our history. It was a solid performance, but we can do better," Mr. Scott said. He said he expects improved results for the current fiscal year.

Wal-Mart has been bedeviled by a series of labor problems. Earlier this month, the company settled charges by the U.S. Department of Labor that it broke child labor laws. The violations, which occurred at stores in Arkansas, Connecticut and New Hampshire, involved teenage workers who operated hazardous equipment such as chain saws and forklifts. Wal-Mart denied the allegations but agreed to pay the penalty.

Two years ago, Wal-Mart was investigated by the Department of Justice because the contractors cleaning its stores used undocumented workers. And last year, a federal judge approved class-action status for a lawsuit charging that the company discriminated in how it promotes and pays women. Wal-Mart, which has 1.2 million workers in the U.S., is appealing the decision.

Meanwhile, the Canadian arm of the United Food and Commercial Workers Union last week said it will file charges against Wal-Mart Canada for "bargaining in bad faith" during contract talks at the store in Jonquiere, Quebec. Wal-Mart Canada says it is shutting the store in Jonquiere because it is losing money and demands from union negotiators would make it impossible for the location to become profitable. The store, which is located north of Quebec City and employs 190 people, will close in May.

Wal-Mart's decision to close the store came less than a week after the union ended contract talks and filed a request with Quebec's Minister of Labour for binding arbitration, saying negotiations had reached an impasse. The company said union demands wouldn't allow the store to operate efficiently and profitably, compounding its already "fragile" economic state. In October, a few months after the store received automatic union certification by the Quebec Labour Relations Board, the company first revealed the store wasn't making money.

Retailer Sears Canada to Restate '03, '04 Results
February 16, 2005

TORONTO (Reuters) - Sears Canada will restate financial results for the past two years to correct the way it accounts for lease incentives, leading to lower profits, the retailer said on Wednesday.

The company said the change will cut reported profits by between C$39 million ($31 million) and C$42 million.

That means profit will be C$10 million, or 10 Canadian cents, lower for 2004 with a similar reduction for 2003.

The retailer, which is majority-owned by Sears, Roebuck & Co., reported 2004 profits of C$139 million, or C$1.30 a share including items, on Jan. 27. In the previous year, it had profit of C$134.7 million or C$1.26 cents a share.

Sears Canada said it normally classifies lease allowances on its balance sheet as a reduction of property and equipment. The allowances were amortized over the estimated useful life of the related property and equipment, it said.

"The company has now determined that lease allowances should be recorded as a deferred credit and amortized as a reduction of rent expense over the term of the related lease," Sears Canada said in a release on Wednesday night.

"Generally, the lease term is a longer period of time than the estimated useful life of the related property and equipment."

Sears Canada said it decided to make the changes after an internal review. It said the restatement would not affect it revenues, cash flows or lease payments.

($1=$1.24 Canadian)
Retailer Sears Canada to Restate '03, '04 Results

Sears Must Restate Credit Card Finances
By Sandra Guy – Business Reporter – Chicago Sun-Times
February 16, 2005

The Securities and Exchange Commission ordered Sears Roebuck and Co. to correct an error in the way it accounted for its credit card cash flows, the retailer reported Tuesday.

The Hoffman Estates-based retailer also will correct a separate error in the way it accounts for store lease terms, which will force Sears to cut 5 cents to 10 cents a share from its previously reported fourth-quarter earnings. Sears had announced a profit of $1.76 a share on Jan. 27.

Separately, Sears said it will start testing the sales of its appliances, most notably its Kenmore brand, in select Kmart stores, a move that could hurt its dealer stores. The tests will start in the 25 Kmart stores that Sears will convert into Sears Essentials stores, Sears' new mid-size stand-alone format.

In the credit card accounting change, Sears will now separate its Sears Card cash flows from those of its Sears Gold MasterCard. Cash flows from the MasterCard will now be listed as investing activities because shoppers use the credit cards mostly to buy services and merchandise at stores other than Sears.

The result should be a clearer picture for Sears' investors, said Daniel Dens, an accounting professor at the University of Chicago's Graduate School of Business.

"It could be useful to investors to know, 'How much is coming from Sears' merchandise sales?' and 'How much is coming from all other merchants?' " he said.

Sears said it will correct its financial statements for the past four years to reflect the change.

The change will have no affect on Sears' net income for those years.

Sears also will lengthen the time in which it recognizes allowances that landlords give Sears to upgrade Sears stores. The change reflects changes in lease accounting.

Separately, the Wall Street Journal reported Tuesday that Sears is leaving open the option of stocking Sears' Kenmore appliances in Kmart stores near Sears' existing dealer stores, a development that could ruin the dealerships.

Sears had previously entitled its dealer stores to sell Kenmore appliances exclusively in their local territories.

"Sears is committed to the dealer store program," said Larry Costello, spokesman for Sears home and specialty stores.

But Costello said some of the dealer stores may be hurt by the conversion of Kmarts into Sears Essentials stores.

"We don't know what that may look like," he said. "We will fully honor the contracts that we have with our dealer-owners."

Kmart Credits Canceled
By Susan Chandler and Geoff Dougherty
Tribune staff reporters – Chicago Tribune
February 16, 2005

Widely reported billions in tax assets were wiped out during exit from Chapter 11

When Kmart Holding Corp. Chairman Edward Lampert was heralded last year as the next Warren Buffett, the parallels were obvious.

Buffett, one of the country's most successful value investors, began his run by buying struggling companies with loads of losses and using their tax-loss carryforwards to offset income at his healthy companies.

Similarly, hedge fund operator Lampert picked up a controlling share in Kmart for less than $1 billion in bankruptcy court and walked away with $3.8 billion in net operating loss carryforwards, also known as NOLs.

Or did he?

Kmart's NOLs were wiped out when the company exited Chapter 11, a fact that has been widely overlooked or misunderstood by the media, several Wall Street analysts and an unknown number of investors.

"There are tax credits, but they were offset by cancellation of indebtedness," confirmed Jon Gieselman, Kmart's vice president of advertising and public relations.

Here's the math.

In January 2004, almost nine months after Kmart exited bankruptcy, the company reported it had $3.8 billion in net operating losses, according to its 10-K filing. Given Kmart's tax bracket, that translates into a $1.41 billion tax benefit.

But that tax credit was more than offset by $1.65 billion in debt canceled by Kmart's creditors.

"There's no free lunch," said Haresh Sapra, associate professor of accounting at the University of Chicago Graduate School of Business.

The comparison between Kmart and Berkshire Hathaway was never really apt, accounting experts say. Tax laws that allowed Buffett to put NOLs to such profitable use were tightened in the 1980s, restricting their utility.

So how did the idea get started that Kmart had nearly $4 billion in NOLs at its disposal?

Kmart points to an April 2 report by brokerage firm UBS that trumpeted the importance of the company's NOLs and estimated they represented almost $11 of Kmart's share price, which then was about $41.50.

Kmart was seriously undervalued, wrote UBS retail analyst Gary Balter, who was initiating coverage of the Troy, Mich.-based retailer with a "buy" rating and target price of $54 a share.

"This reflects what we believe is a stellar cash flow and asset story, currently masquerading as a market share-losing discount store retailer," Balter wrote.

Gieselman, Kmart's spokesman, says the company did call UBS and point out there was a problem with the report, which was updated by the brokerage. But the corrected April 5 report shows that UBS only changed "NOLs" to "DTAs," or deferred tax assets. UBS' estimates of their value to Kmart remained the same.

UBS said it stands by the information in its April 5 report.

Other tax credits held

Even without NOLs, Kmart does have about $2 billion in other tax credits held in a reserve, its filings show. But how quickly they can be used is unclear because they depend on varying rates of depreciation for property and equipment.

"They're not as good as an NOL," said Thomas Lys, a professor of mergers and acquisitions at Northwestern University's Kellogg School of Management.

Under certain circumstances, Kmart might be able to use all $2 billion in tax credits in one year, Lys explained. Under other scenarios, the tax benefit might be as little as $80 million annually.

The perception that Kmart had billions in tax assets was one reason that its stock had risen to more than $100 a share in mid-November when Kmart announced an $11 billion takeover of Sears, Roebuck and Co.

Lampert, Kmart's chief, did nothing to clear up the confusion about the company's tax situation in a conference call with analysts Nov. 17, the day the deal was announced.

In response to a question about whether the combined company could use its NOLs to offset gains from potential sales of Sears' real estate, Lampert responded: "In terms of NOLs, I think the NOLs are available. I think that we've described the limitations on the NOLs in our SEC filings. So I think that there are some use of the NOLs and some limitations of the NOLs."

Lampert did not misspeak, Kmart says, because the NOLs do exist even if they are being offset by the cancellation of indebtedness.

But his remarks reinforced the misperception about Kmart's NOLs. A cover story in BusinessWeek magazine comparing Lampert to Buffett a week after the merger announcement cited the company's $3.8 billion in NOLs. So did a Street.com story in November and a Forbes magazine story in December. (The Chicago Tribune mentioned Kmart's NOLs last July).

Kmart said it hasn't been calling media outlets and asking for corrections or clarifications.

"If we responded to every single misstatement and inaccurate report, we'd be doing nothing but doing that all day," Gieselman said.

 

Sears Exec:Success Depends On Marketing Across Many Media
by Desiree J. Hanford – Dow Jones Newswires
February 16, 2005

PALM DESERT, Calif. -- Companies that want to be successful selling products across all channels need to have good organizational structure, efficient multi-channel marketing and solid merchandising, a Sears Roebuck & Co. (S) executive said Tuesday.

How a company is organized is key to successful sales online, in stores and in catalogs, said Bill Bass, vice president and general manager of Sears Customer Direct and senior vice president of e-commerce for the Lands End unit

One decision companies have to make is whether to separate online business from the store and catalog businesses, or whether the trio should be integrated, Bass said during a presentation at e-Tail 2005, an electronic retailing conference.

Both ways have advantages and disadvantages, and ultimately, companies need to do a bit of both, Bass said.

A company's online business needs to be individual enough to take advantage of the "rhythm and dynamics" of the Internet, yet integrated enough with catalogs and stores to take advantage of their strengths, Bass said.

How a company doles out salaries and bonuses is also critical in the organizational structure, because, for example, if a store employee has no incentive to send a customer to the Internet for a product the store doesn't carry, that employee likely won't do so, and the sale could be lost, Bass said.

At Sears/ Land's End, if a customer buys an item online, both the store and the online businesses get credit for the sale for bonus purposes, Bass said. However, the sale is taken out of the store category when it is reported to the Securities and Exchange Commission.

"It doesn't matter to customers where they shop, and it shouldn't to you," he said.

Retailers can do their customers a disservice if they handle their multi-channel marketing incorrectly, Bass said. Very few catalogs, for example, are designed and easy to read online. Search engine ads, however, tend to be effective, because they're targeted, he said.

As for merchandising, retailers need to remember that it is all about giving customers the desired product, Bass said.

For example, Sears sold KitchenAid mixers in a limited number of colors in stores, but had notices in those stores informing customers who sought more choices they could contact a customer service representative, who would order another color mixer from the retailer's Web site for home delivery. Although Sears.com is just a small portion of the retailer's total sales, Web site sales accounted for 25% of the total KitchenAid mixers sold when Sears used the notice, Bass said.

Retailers need to be consistent across their sales channels, but not religiously so, because customers understand logical inconsistencies, Bass said. They know, for example, that a store can't carry every color of a given product, but that all the options can be seen on a retailer's Web site, he said.

Analysts: Vornado- Target Bid Isn't Likely
By Becky Yerak - staff reporter – Chicago Tribune
February 16, 2005

A real estate investment trust has again popped up as a possible hostile acquirer of Sears, Roebuck and Co., but this time the speculation includes Target Corp. as a potential partner in the deal.

Vornado Realty Trust, which owns 4.3 percent of Sears' stock, has held preliminary talks with a number of potential partners, ranging from a private equity group to Wal-Mart Stores Inc., about teaming to bid on Sears, according to a report Tuesday in Women's Wear Daily.

Citing unidentified sources, the industry publication reported that Vornado's most likely partner is Target, which has been looking to expand to better compete against Wal-Mart.

Sears and Kmart Holding Corp. announced an $11 billion merger deal in November, shortly after Vornado disclosed its stock position in Sears. The deal is expected to close in March.

Despite the buzz created by the story, several real estate and retail observers downplayed a pairing of Vornado and Target to acquire Sears.

"To take on Sears ... Vornado has to be cognizant of how its own shareholders would react," said an analyst familiar with the situation. "We don't assign a big probability to a transaction like this occurring."

Sears' shares did edge higher Tuesday, gaining 0.9 percent, to $52.38. Vornado's stock gained 0.6 percent, to $72.30.

Sears' stock has consistently traded above the price that Kmart is offering, suggesting that the market is waiting for another bidder to emerge. That's also based in large part on analysts' estimates that Sears' break-up value exceeds the price offered by Kmart.

Through its proposed merger with Kmart, Sears shareholders may receive either $50 in cash or half a share of the new Sears Holdings, which is pegged to the price of Kmart stock. Kmart shares closed Tuesday at $102.97, up 68 cents.

The deal calls for 55 percent of Sears' shares to be converted into Sears Holdings and 45 percent into cash.

It is not Vornado's style to mount a hostile takeover, said David Shulman, a real estate analyst who covers Vornado for Lehman Brothers. And less than a year ago, Minneapolis-based Target sold two department store chains--Marshall Field's and Mervyn's.

"Why would it buy [Sears] now?" Shulman said, echoing others who say Target could have simply turned those department store locations into its namesake discount store. "I don't think Target wants to own Sears. They want some stores, but not the whole company. I don't see why they'd sell Marshall Field's and buy Sears."

Burt Flickinger III, managing partner of Strategic Resource Group, expressed similar sentiments.

"It would have made more sense when Target had Marshall Field's. That's not to rule it out, because Target did buy some Montgomery Ward sites, but those were in selective markets," the retail consultant said.

"Vornado makes sense, but Target really has to fill in only a couple of areas, most notably Florida and some areas in New England and Long Island," Flickinger said.

In those areas, either Sears isn't particularly strong, or zoning is friendly enough that it makes more sense for Target to build from scratch, he said.

Target has some mall stores, but running Sears' multilevel stores wouldn't be its preferred modus operandi, retail observers point out.

Vornado disclosed its 4.3 percent stake in Sears on Nov. 5. Sears' stock soared 23 percent on the news. The real estate investment trust has never explained why it acquired the stock, although analysts and sources have said Vornado is looking at retailers for the value of their real estate.

On Nov. 17, Sears and Kmart announced their $11 billion deal.

The Women's Wear Daily story is the second time in less than a month that speculation has been fueled about a Vornado bid. On Jan. 27, Vornado disclosed its intention to sell, at an unspecified price and at an unspecified time, up to $2.5 billion in stock and $5 billion in debt. That led some to wonder what Vornado might do with proceeds from such sales.

But a New York investment banker who has worked with Vornado Chairman Steve Roth on past deals believes the Kmart-Sears deal will be consummated, partly because it was engineered by Edward Lampert, the Kmart chairman who has long owned about 15 percent of Sears.

"This is not your typical bidding situation. Lampert has so many cards--control of board, control of management--that it'll be a tough deal to overturn," said Howard Davidowitz, chairman of Davidowitz & Associates. "If someone wants to overturn it, it'll be very expensive."

- - -

Sears to restate profit

Sears, Roebuck and Co. said Tuesday that it will restate its fourth-quarter earnings because of an error in the way it accounted for leasing transactions.

Sears said it expects to reduce its fourth-quarter earnings by 5 to 10 cents a share after an internal review and advice from outside auditors. It reported profit of $1.76 per share on Jan. 27.

Sears said the review uncovered an error in its accounting of construction allowances.

The company said it will switch its accounting method to amortize those transactions over a longer period, which will result in the earnings reduction.

Sears said the accounting change will not affect financial results from previous years.

The company also said it will file amended annual reports for fiscal year 2003 and quarterly reports from 2004 to correct statements of cash flows related to its domestic credit card business. It said that change did not affect net income for any of those periods.

Kmart Name HitsLow Point with Shoppers
By Sandra Guy – Business Reporter – Chicago Sun-Times
February 15, 2005

Kmart hit an all-time low with shoppers in 2004, according to a survey being released today.

Kmart tied its previous record-low 67 points on a 100-point scale in customer satisfaction, thanks to its reputation as a poorly stocked, dimly lit and badly serviced store.

"Kmart is in a very difficult competitive situation, squeezed between Target with presumably a bit better quality and Wal-Mart with lower prices," said Claes Fornell, a business professor at the University of Michigan who heads the survey.

The Troy, Mich.-based Kmart, set to buy Sears Roebuck and Co. in an $11 billion deal, has scored at or near the bottom of the retail ranks nearly every year of the survey's 11-year history.

Kmart said Monday that it is working to improve its products, keep shelves stocked and better serve customers.

Kmart's score dropped 4.3 percent from 2003, the deepest decline among the nation's major discount and department-store retailers. Its score plunged 9.5 percent from the first year of the survey.

Sears' score stood at 74, up 1.4 percent from 2003 and tied with Federated Department Stores, owner of upscale retailers Macy's and Bloomingdale's. Sears' score has ranged from 71 to 76 throughout the survey's history. The yearly nationwide survey asks 20,000 people by telephone how they rate retailers.

Kohl's, a Sears rival, scored the highest, a 79, the same as in 2003.

Among grocers, Albertson's, the parent company of Jewel-Osco, saw the biggest drop in shopper satisfaction, a 5.5 percent decline from 2003, to 69. Safeway, Dominick's parent, inched up 1.4 percent to score a 72.

The entire retail industry's score dropped 3 percent, to 72.6, which may cause shoppers to tighten their purse strings this year, Fornell said.

Shoppers also cited their first drop in satisfaction with e-commerce, and in particular the two online giants Amazon.com and eBay, the survey showed.

Both companies have changed the nature of their businesses -- Amazon to a virtual shopping mall and eBay to a shopping comparison and selling site -- and customers have yet to applaud, said Larry Freed, CEO and president of online measuring firm ForeSee Results.

Merger may pit Sears chief against rival
BY SANDRA GUY Business Reporter

Sears Roebuck and Co. CEO Alan Lacy may have to battle an old rival to stay atop a merged Sears and Kmart.

Rumors are circulating that Julian Day may be in line to seize the top job of the merged retailer.

Day, a Kmart board member and former Kmart president and CEO, shared an "office of the chief executive" with Lacy at Sears before Lacy won the CEO's job in October 2000. Day left Sears after he lost the CEO job.

Neither Kmart nor Sears would comment Monday.

Retail analysts had differing opinions.

Day showed brilliance by closing Kmart's poorly performing stores and cutting employees, inventory and assortments -- even though he also drove away shoppers, said Howard Davidowitz, chairman of Davidowitz & Associates, a retail-consulting and investment-banking firm based in New York.

"[Day's] techniques resulted in the raising of a tremendous amount of cash," Davidowitz said. "He was a very good asset manager."

Day also gained grocery-store experience when he served as an executive at Safeway, Davidowitz said. Sears' new stand-alone stores sell staples from cereal to soda pop.
Analyst George Whalin cannot see it.

"Lacy is better suited to run this combined company than Day is," said Whalin, president of Retail Management Consultants, based in San Marcos, Calif.

No one doubts that Eddie Lampert, the Greenwich, Conn., multimillionaire who controls the most stock, will have the final say on what happens at the merged Sears-Kmart.

Sears Roebuck Restates Cash Flows For FY00-FY03
DOW JONES NEWSWIRES
February 15, 2005

WASHINGTON -- Sears Roebuck & Co. (S) said Tuesday it restated its consolidated statements of cash flow for fiscal 2000 through fiscal 2003, relating to the divestiture of its domestic credit card portfolio in November 2003.

The Hoffman Estates, Ill.,-based retailer of apparel, home products and automotive services said the restatements don't affect its results of operations, net income, financial condition, or net changes in cash and cash equivalent for the years ended Dec. 29, 2001, Dec. 28, 2002, and Jan. 3, 2004.

For the year ended Jan. 3, 2004, Sears Roebuck restated its net cash provided by investing activities to $19.5 billion from its previously reported figure of about $20.76 billion.

The company said for the year ended Dec. 28, 2002, it restated net cash used in investing activities to about $9.71 billion from its previously reported figure of $2.32 billion. For the year ended Dec. 29, 2001, the company restated net cash used in investing activities to $5.05 billion from its previously reported figure of about $1.09 billion.

Sears Roebuck said historically it presented the aggregate cash flows generated from both its Sears Card and MasterCard as cash flows from operating activities in the consolidated statements of cash flows.

The company said it has changed its classification of cash flows from the MasterCard portfolio to investing activities from operating activities within the consolidated statements of cash flows, as the loans generated were predominately related to activities external to Sears merchandise and services.

Sears Roebuck said its domestic credit card receivable portfolio consisted mainly of its proprietary Sears card and Sears Gold MasterCard.

On Nov. 3, 2003, Sears Roebuck completed the sale of its domestic credit and financial products business to Citigroup Inc. (C) and entered into a long-term marketing and servicing alliance with Citibank (USA) N.A. In August 2003, Dow Jones Newswires reported that on July 15, 2003, Sears signed a definitive agreement to sell its entire credit and financial products business to Citigroup for about $32 billion.

Shares of Sears Roebuck closed Monday at $51.89 each.

On Nov. 17, 2004, Sears Roebuck and Kmart Holding Corp. (KMRT) announced an agreement to merge and to form a new retail company named Sears Holdings Corp. Under terms of the merger agreement, Kmart shareholders will receive one share of new Sears Holdings stock for each Kmart share owned. Sears shareholders will be able to choose either $50 cash or 0.5 share of Sears Holdings for each Sears Roebuck share owned.

Federated, May End Merger Talks Over Price Gap
By Dennis K. Berman and Ellen Byron – Staff Reporters
The Wall Street Journal
February 15, 2005

Merger talks between Federated Department Stores Inc. and rival May Department Stores Co., broke down late last week, said people familiar with the matter, as the two leading department-store chains couldn't agree on the price Federated would pay for May.

The May board was prepared to negotiate a deal, these people said, and on Friday May's interim chief executive officer, John Dunham, spoke on the telephone to Federated CEO Terry Lundgren. The two executives couldn't get any closer on a price. The two ended the call, and current negotiations, without a deal.

A spokeswoman for May declined to comment. A Federated spokeswoman declined to comment.

There is a gamesmanship that goes into any merger negotiation, with parties often walking away from talks only to renew them. Volatile stock prices -- which often are affected by news reports of discussions -- also can make it difficult to consummate a transaction. But for now it appears that Federated will continue operating on its own, and May will redouble its efforts to find a new chief executive to succeed the recently resigned Gene Kahn.

Shares of May, whose department-store chains include Lord & Taylor, Marshall Field's and Filene's, climbed significantly last month when Mr. Kahn abruptly left his post. Investors were hoping that the St. Louis-based retailer finally would move to accept a long-rumored tie-up with Federated. Since then, the shares have retreated, and eased to $31.86, down 12 cents yesterday in 4 p.m. composite trading on the New York Stock Exchange. Since Mr. Kahn's resignation was announced, May's stock has risen 14%, to a market capitalization of about $9.3 billion.

Shares of Federated, parent of Macy's and Bloomingdale's, also were boosted by news of the talks, reflecting Wall Street's confidence that the Cincinnati-based company wouldn't overpay for an acquisition. In 4 p.m. New York Stock Exchange composite trading, Federated's stock was at $57.25, down 25 cents.

The breakdown of talks intensifies the spotlight on May's CEO search. Vanessa Castagna, an operations executive who was passed over for the top job at J.C. Penney Co. last fall, has interviewed with the search firm Spencer Stuart, according to a person familiar with the matter. Meanwhile, Roger Farah, president and chief operating officer of Polo Ralph Lauren Corp. is another serious candidate, this person said, as are candidates from the consumer-products industry. The May board's search committee is led by James Kilts, CEO of Gillette Co.

Despite implementing several strategic initiatives over the course of 2004, May last week still reported dismal fourth-quarter results, as its net profit fell to $339 million, or $1.10 a share, down 20% from the year earlier. Many of May's new initiatives were close variations of Mr. Lundgren's "Reinvent" program at Federated, including price scanners and more-prominent directional signs for shoppers inside stores, which have proven successful for Federated's Macy's division.

Following May's latest results, many analysts expressed confidence that a deal between May and Federated would happen, given how difficult fixing May's problems would be for an incoming CEO.

Now that a deal with May appears off the table, Federated could turn to other acquisition targets, particularly the department-store division of Saks Inc. The Saks board is expected to make a decision about a spinoff or sale of the group, which includes 238 department stores under names including Proffitts and Younkers, in the next several weeks.

Small Sears Dealers See Kmart as a Threat
By Amy Merrick - Staff Reporter -  The Wall Street Journal
February 15, 2005

Plans to sell Kenmore, Craftsman and other popular Sears, Roebuck & Co. brands at Kmart stores have alarmed some local retailers, who worry they'll be run into the ground in the combined Kmart-Sears era.

The potentially endangered small businesses, found in small towns across the nation, aren't ordinary mom-and-pop stores. They sell Sears products in Sears-branded stores; many of them took out loans to open their dealerships under one of the oldest names in American retailing.

For the past decade or so, Sears has had an army of so-called dealer stores selling its Kenmore appliances, Craftsman tools and lawn-and-garden products and electronics in towns too tiny to support a full-size Sears store. The stores are something in between a franchise and an independent store: Sears owns the merchandise and sets the prices; the dealers pay expenses and receive sales comissions, which are set by Sears and vary from item to item. For the fiscal year that ended in January 2004, Sears' roughly 818 dealer stores contributed about $1.5 billion to the Hoffman Estates, Ill., retail giant's $36 billion in annual sales, several dealers say.

But three months after the $11.5 billion acquisition of Sears by Kmart Holding Corp., of Troy, Mich., was announced, the deal is threatening to throw a wrench into the dealer stores' operations. In recent contract extensions offered to dealers, Sears conspicuously left open its option to stock Sears brands in nearby Kmart stores, often without offering compensation for the unexpected competition.

Mini-Marts
Sears pays a small army of independent stores commissions to sell its merchandise.
Number of store: 818
Sales: about $1.5 billion in 2003
Store size: 6,000 to 10,000 square feet
Locations: Nationwide in small towns near highways
In stock: Appliances, lawn and garden equipment, tools, electronics
Not sold: Sears apparel or home décor items

Sources: Sears, Roebuck & Co.: Sears dealer store owners

Many of the Sears dealers say if the combined Kmart-Sears chooses to compete with them for local sales of their most popular brands, their stores will go out of business. Sears says it is still determining what to do with dealer stores and Kmarts nearby. With few details of its plans known, dealers say it is impossible for them to bail out and sell their stores.

Reassured by Sears' long-established name and brands, some dealers borrowed heavily, mortgaged their homes or cashed in retirement savings to keep their stores going. "We invested time and money to be Sears representatives," says Richard Leidy, who has a dealer store in Toccoa, Ga. "Now they're cutting us off at the knees." Mr. Leidy says he has sunk $90,000 into his store, which had sales last year of about $1.3 million.

The controversy gives early insight into the changes that may be in store at the new company, which will be called Sears Holdings Corp. after the deal's expected closing next month. A scenario pitting two divisions of the same company against each other in direct competition underscores how complicated it will be to mesh two sometimes overlapping operations and to reconcile the competing interests involved.

Edward S. Lampert, the hedge-fund operator who forged the deal and who will serve as the new company's chairman, is focused on cost-cutting and efficiency. The changed relationship with dealer stores may indicate that Mr. Lampert is looking to streamline by favoring Kmart locations and allowing some of the dealer stores eventually to fold.

In a letter being sent to dealers, Sears says it will test appliance sales in a limited number of Kmarts to measure the effect on dealer stores. Sears will talk with owners of affected stores "to explore whether we can find a mutually beneficial arrangement to keep operating the dealer stores." Sears spokesman Larry Costello says Sears has "a real positive relationship with our dealer-store owners, and we plan to continue that good relationship."

The dealer stores tend to be located just off highways in small towns, such as Waynesburg, Pa., about 40 miles outside Pittsburgh, or Lake Geneva, Wis., a resort area more than 60 miles north of Chicago. Ranging from about 6,000 to 10,000 square feet, the one-level stores are far smaller than Sears's traditional mall stores, which average more than 90,000 square feet. The dealer stores stock Kenmore washers and dryers, lawn tractors, tools and electronics -- but not clothing or home-decorating items.

The dealer-store format originated in the early 1990s under then-Chief Executive Arthur C. Martinez after he closed Sears's giant catalog business. In an effort to maintain Sears's presence in small towns, some catalog-sales outlets were converted into dealer stores. Sears executives envisioned a store network that would fuel growth outside malls, where opportunities were limited.

But a decade later, Sears still is talking about getting out of malls and closer to its customers. At Sears's mall stores, sales have been stagnant for years. Executives at Sears and Kmart have said a major advantage of the deal is to jump-start growth by putting popular Sears brands in Kmart stores away from malls.

Even more competition may be looming: Last week, Sears said it is moving ahead with plans to convert some of the 50 Kmart stores it bought last year -- before the Kmart acquisition -- into a format it has dubbed "Sears Essentials." The Essentials stores, in locations Sears says are more convenient than its older mall stores, will sell appliances, tools, electronics and clothing, as well as some groceries and drugstore merchandise. In a statement, Sears said the Essentials stores will feature "strong brands like Kenmore, Craftsman and Apostrophe," a young women's clothing line. It plans to open the first 25 stores this spring; none of them conflict with a dealer store.

Sears has protected its dealer stores by giving them the exclusive right within their ZIP Codes to sell Kenmore appliances, a line that is estimated to contribute as much as half the dealers' sales. If Sears wanted to open another store or sell the brand at a nearby location, it had to buy out the dealer at a price equivalent to 10% of the store's gross sales.

For its part, Sears says the six-month contract extension has the same effect as previous contracts. And since it has always retained the right to sell Kenmore merchandise anywhere outside the dealer's ZIP Code, there was always the possibility it would open a full-size Sears store near a dealer store, the company says.

In the months since the Kmart-Sears deal was announced in November, Sears has indicated it might play hardball with dealers. Dealers who are in the same ZIP Code as a Kmart or within 15 miles of one, and whose contracts have come up for renewal, have been forced to sign an extension of just six months, instead of the typical three years. The contract offers dealers no protection against having Kenmore goods sold in a Kmart within 15 miles of the dealer's store if the two stores are in different ZIP Codes.

About 200 dealers appear to fall into this category. Some dealers say if the company starts shipping Kenmore appliances to Kmarts just down the road they will be ruined. Dealers also say they worry the new Sears will simply drop their contracts after the six months are up, leaving them with either nothing in compensation or a token $50,000 or $60,000.

A group of dealers is beginning to emerge and consider seeking legal representation. Some plan to meet at a hotel near the St. Louis airport in mid-March to choose leaders and discuss their next moves. "My desire is to have an excellent relationship with Sears and not contribute to their pain," says Scott Jackman, who has owned a dealer store in a bustling shopping area in Napa, Calif., for over six years and is helping organize the fledgling dealer association.

Mr. Jackman says the Kmart acquisition is a good idea overall, because it will put popular Sears brands in better locations and increase the retailer's buying power. He says he also understands some dealer stores will probably have to close. "But my belief is that if Sears is going to be the competition, they should buy the owners out at 10% so [the dealers will] at least have some money to reduce their damages," he adds.

Around Christmas, Mr. Jackman received a six-month contract extension with no protection against new products at the nearest Kmart, which although outside his ZIP Code is only 14.9 miles from his store "as the crow flies through a mountain," he says. He asked for and eventually got a reprieve -- and a three-year deal -- because the trip from one store to the other by car is 22 miles.

Medco's Profit Gets Boost From Mail-Order Volume
A Wall Street Journal Online News Roundup
February 15, 2005

Medco Health Solutions Inc. said its profit rose 12% in the fourth quarter, led by robust mail-order prescription volume.

The Franklin Lakes, N.J., company also backed its 2005 earnings forecast. "We ended the year with a record $21 billion in client renewals [and] achieved over $2.2 billion in new business wins for 2005," said David B. Snow, Medco's chairman, chief executive and president. "[W]e have positive momentum going into 2005."

The pharmacy-benefit manager reported Tuesday its net income improved to $132.8 million, or 48 cents a share, from $118.3 million, or 43 cents a share, in the 2003 fourth quarter.

The latest quarter's results included 10 cents a share for amortization of intangible assets, compared with five cents a share a year earlier. Excluding these items, earnings came to 58 cents a share, up from 48 cents a share a year earlier.

Gross profit margin climbed to 5% from 4.6% a year earlier. Mail-order prescription volume increased more than 13%. The company said it provided 22.3 million prescriptions through its mail-order pharmacies in the latest quarter and 87.7 million prescriptions in 2004.

Revenue, meanwhile, slipped 1% to $8.91 billion from $9 billion, reflecting lower retail-prescription volume and the rising use of lower-cost generic drugs, which was partially offset by price increases from brand-name drug makers.

Medco said generic-drug use, a key element in lowering costs for clients and members, rose to 48%. Medco's business model is designed to reduce the level of prescription-drug increases, known as drug trend. The company said it was able to limit the average drug trend for plans that include both retail and mail order to 8.5% in 2004, after it topped 10% in 2003.

For full-year 2004, net income increased 13% to $481.6 million, or $1.75 a share; the company earned $2.14 a share excluding amortization. Revenue jumped 32% to $35.35 billion.

Medco affirmed its 2005 profit outlook of $1.94 to $2.03 a share. Excluding amortization, the view ranges from $2.33 to $2.42 a share.

Sears to Restate Q4 Earnings
By Dan Burrows – MarketWatch
February 15, 2005

NEW YORK (MarketWatch) -- Sears, Roebuck & Co. will restate its fourth-quarter results by as much as 10 cents a share to correct an accounting error, the department store company said Tuesday.

Hoffman Estates, Il.-based Sears said its previously reported fourth-quarter earnings of $1.76 a share will likely be reduced by 5 to 10 cents a share.

The company said the restatement was to correct its accounting for the amortization of construction allowances.

Sears has been spreading out the amortization of those allowances for a longer period of time than "historically had been the practice," the company said.

Sears added that prior years' financial results will not be restated, as the accounting adjustments would be immaterial to results of operations, cash flows and the retailer's financial position for the current year or any earlier fiscal period.

The accounting change will affect the company's classification of certain items on its income statement, Sears said, by increasing depreciation expense and reducing the line for sales, buying and occupancy costs.

Additionally, Sears said the change will have no impact on the company's historical or future cash flows or timing of payments under related leases.

Sears' stock added 13 cents to $52.02 in pre-market trading after closing down 41 cents to $51.89 Monday.

Dan Burrows is a reporter for MarketWatch in New York.

Speculation Swirls About Lands' End Spinoff
By Becky Yerak – Inside Retailing – Chicago Tribune
February 15, 2005

Lands' End: As Sears and Kmart Holding Corp. prepare to merge next month, speculation swirls about what assets might go on the block, aside from the real estate that some believe has helped drive the merger.

"Lands' End has to be high up on the list of assets that are non-core that could be spun off to raise cash and not impact, short-term, what the company is trying to do," said a retail observer who asked not to be named.

Sears' 54 percent stake in Sears Canada Inc. also would be a "pretty easy spinoff," he said, countering others who believe Sears might buy the remaining stake it doesn't already own.

Sears bought Lands' End for $1.9 billion in 2002. "The number batted around now is $1.3 billion, $1.4 billion. I hear everyone in the world is lining up and that there are a lot of informal talks," involving such parties as private equity firms, former Lands' End executives and makers of apparel.

Lands' End has failed to halt the slide in Sears' apparel sales, but Sears is likely to want to continue to sell the preppy line, he said, noting, "there are still a lot of stores where having Lands' End is a benefit."

A spokesman for Sears said Lands' End is a cornerstone brand and would not comment on the speculation of a spinoff.

"One of the most attractive elements of the proposed merger with Kmart is the opportunity for the proprietary/exclusive brands of both companies being found under one roof," he said.

"This could include not only Lands' End, but Martha Stewart Everyday, Craftsman, Kenmore, Joe Boxer and others."

Outlet manager out: Karen Peters, Sears, Roebuck and Co.'s outlet stores director, left the Hoffman Estates retailer last month.

She was Sears' point person on opening 30 appliance outlets--a 70 percent increase in the company's format.

Peters joined Saks as senior vice president and director of stores for Off 5th, reporting to the division's president. "She's responsible for all store operations for the outlet division," Saks said.

New Penney: Chain Goes for 'Missing Middle'
by Ellen Byron – Staff Reporter – The Wall Street Journal
February 14, 2005

It's no secret that as Wal-Mart Stores Inc. thrives on low prices and Neiman Marcus Group Inc. prospers on luxury, stores in the middle are being squeezed. To cope with such a competitive retail environment, many department stores either are cultivating a tonier image to lure the affluent or moving down-market.

But J.C. Penney Co., long synonymous with middle-market tastes, is taking a different approach: to stay that way.

In its latest strategy, which the company plans to announce tomorrow, the 1,020-store chain will set out to better target a part of the closet it calls "the missing middle," or casual clothing that suits the tastes of middle-income women between ages 35 and 54. "The core of America is up for grabs in terms of their heart and soul," says Mike Ullman, Penney's new chairman and chief executive officer, who comes to the job with extensive experience in luxury retailing. "This customer is underserved."

DRESSING DOWN?
Isaac Mizrahi's Fashion for the Masses\
To appeal to this demographic, Penney is launching two lines of moderately priced, casual women's clothing, including one from designer Nicole Miller. It will broadcast its new attitude in ads to run during the Academy Awards, a largely female-viewing event that its marketing team calls the "Super Bowl for Women."

Penney's sharpened focus marks the latest phase in an aggressive, four-year-old turnaround strategy mapped out by recently retired chairman and CEO Allen Questrom. He closed underperforming stores and centralized back-office operations. His plan is beginning to pay off: After years of dismal results, Penney recently reported an 86% climb in third-quarter earnings. And its January sales beat even the company's expectations, rising 3.3% for stores open at least a year.

The latest initiative may be the Plano, Texas, company's most important. Penney is attempting to shed a persistently dowdy image that has turned off many shoppers and pushed them away -- to mass merchants such as Target Corp. or to more-upscale stores such as those of Nordstrom Inc. Most old-style department-store chains are grappling with similar competitive pressures, prompting a flurry of merger activity.

In recent years, department-store chains have done plenty of soul-searching in a bid to win over more middle-income women. Last year, companies such as Federated Department Stores Inc. and May Department Stores Co. carved up their apparel floors to display new, gently priced career offerings from name-brand designers including Michael Kors, Ralph Lauren and Tommy Hilfiger.

The Missing Middle Woman
Who J.C. Penney's core female shoppers are ...

35-54 years old
$69,000 medium household income
Married with children
Buy many of their casual clothes elsewhere
... and the casual clothes they look for...:
Stylish, but not overly trendy
Form-fitting, but not too tight
High-quality fabrics, stitching and buttons

Source: the company

As part of its turnaround strategy, Penney, meanwhile, lured away behind-the-scenes designers from competitors to overhaul and upgrade its private-label collections, particularly in its Arizona jeans brand, which targets juniors and young men, and it added exclusive home-furnishing lines by Chris Madden and Colin Cowie. While the company already sells contemporary sportswear labels such as Bisou Bisou and Bongo, which aim to deliver the latest fashion trends, Penney realized it didn't resonate with its missing middle customer.

While its competitors with their new designer lines sought to dress women in more formal clothing for the workplace, Penney found that its target women had a more casual lifestyle, and wanted separates that offered a more laid-back but trendy feel that was missing from the careerwear suits of its Worthington private label. Penney executives felt that female customers faced a big apparel void: in-between, pulled-together styles suitable for relaxed office dress codes, eating out, parties, luncheons and their children's school events. They even gave this category a name, "dressy casual."

From its own research, the company already knew that its typical customer was married with children, and had a median household income of about $69,000. While many shopped the chain for their homes and families, they still tended to go elsewhere for many of their own fashions. Penney's past efforts to court them -- by going more upscale -- failed when high-end brands balked at the retailer's pedestrian image and refused to let Penney carry their clothes.

Beginning in January of last year, Penney conducted an in-depth research blitz to better define its target and understand her needs. The first step was a telephone survey of 900 women that asked them about casual clothes. To drill down further, Penney researchers videotaped interviews, lasting up to six hours, with 30 women, recording everything from their feelings about fashion to what is hanging in their closets as well as a shopping trip at J.C. Penney and a competitor. The women also clipped words and images from magazines and glued them to posters to express their feelings about what casual clothing meant to them.

During the interviews, which took place in the women's homes, the participants delivered on-camera, heartfelt soliloquies about their posters. Pointing to a photo of Sponge Bob SquarePants, with his typically strung-out expression, one woman told the camera, "This is me, my stress with shopping." Explaining a cluster of words glued to her poster, she continued, "These are the things to stop -- short shorts and skirts, exposed midriffs or cleavage, spaghetti straps on tank tops."

But the women said that being alluring is still important -- to a degree. "You could still be a mom, but you still want to be cute and a little bit hip," another subject said. "You're not dead yet, and you're not a grandma -- you still want to be in the game."

Two big no-nos: matronly and sex-kitten looks. Even though they are beginning to feel their age, these women say they want to look stylish and crave options that hint at sensuality, without being too tight. Quality also is crucial, and something for which they are willing to pay a premium. Participants in the Penney survey study told the chain that they study clothing labels and feel garments to assess fabric and construction. They prefer a touch of Lycra, interesting buttons, good stitching and styles that let women make a personal statement.

Armed with this information, Penney approached designer Nicole Miller. While Ms. Miller is best known for her cutting-edge fashions, working with Penney offered a chance to tap a huge market and build her brand into more of a household name. To prepare, Ms. Miller and Bud Konheim, CEO of Nicole Miller Ltd., watched the videotaped interviews.

"We neglect these people because they're not flashy or celebrities," Mr. Konheim says. "This is about the democratization of design."

Ms. Miller, whose new nicole by Nicole Miller styles range from $26 camisoles with "bra-friendly" straps to $100 coats, notes that inexpensive apparel need not be poorly made. "With resources today, you can make good quality clothes at a good price," she says.

Penney also is launching a private-label brand called "W -- Work to Weekend," catering to the same audience. Private-label brands make up 40% of Penney's sales.

In another bid to differentiate its new looks, Penney will market Ms. Miller less as a designer/celebrity and more as a working woman. The Nicole Miller section of the stores features a photo of her face with no-nonsense quotes from her, such as "Great designs shouldn't be limited to those who can afford it." Indeed, one of the reasons why Liz Sweney, Penney's executive vice president and general merchandise manager for women's apparel, chose Ms. Miller for the line revolved around the fact that Ms. Miller would be directly involved in designing it, rather than just lending her name to it. "She's a mom, too, and leads a busy lifestyle," says Ms. Sweney. "It was clear she understood what this woman needed."

Kmart Files Amended Form 10-K
PRN Newswire-FirstCall
February 11, 2005

TROY, Mich., Feb. 11 /PRNewswire-FirstCall/ -- Kmart Holding Corporation today filed with the Securities and Exchange Commission (SEC) an amendment to its Form 10-K for the year ended January 28, 2004 and amendments to its Form 10-Q filings for fiscal 2004.

The amendments restate the accounting for a $60 million convertible note that was issued upon Kmart's emergence from bankruptcy and is no longer outstanding. The changes made by the restatements are non-cash charges and do not impact cash flows from operations. The impact of the restatement reduces previously reported diluted earnings per share for the 39-week period ended January 28, 2004 by $0.01 per share to $2.51 per share. There will be no impact on diluted earnings per share for fiscal year 2004.

The restatements result from a change in the date on which the value of the $60 million Convertible Note is allocated between the value of its conversion feature and the value of the debt instrument. The restatements use the date Kmart emerged from bankruptcy (May 6, 2003) and the original filings used the date investors agreed to purchase the note (January 24, 2003). As a result, the initial carrying amount of the debt on the restated financials is lower than originally reported and the Company incurs an increased non-cash interest charge reflecting the amortization of the resulting higher debt discount. The restatements result in a non-cash charge to interest expense of $22 million for the 39-weeks ended January 28, 2004 and $9 million for fiscal year 2004.

In conjunction with the SEC's review of Sears Holdings Corporation's registration statement on Form S-4 in connection with the pending merger between Kmart and Sears, Roebuck and Company ("Sears"), the SEC reviewed Kmart's Form 10-K for the year ended January 28, 2004. As a result of this review, the SEC disagreed with the date selected by the Company as the date it was committed, for accounting purposes, to issue the note. The Company believed it was committed as of the date it had agreed to issue the note to investors and accounted for the note accordingly. The SEC took the position that until the date that the Company emerged from bankruptcy the amount, if
any, of the note to be issued was not determined and therefore the commitment date should be the emergence date. After discussions with the SEC, the Company agreed to restate its financial statements to reflect a commitment date coincident with the date it emerged from bankruptcy.

About Kmart Holding Corporation
Kmart Holding Corporation and its subsidiaries (together, "Kmart") is a mass merchandising company that offers customers quality products through a portfolio of exclusive brands that include Thalia Sodi, Jaclyn Smith, Joe Boxer, Kathy Ireland, Martha Stewart Everyday, Route 66 and Sesame Street. For more information visit the Company's website at http://www.kmart.com.

Cautionary Statement Regarding Forward-Looking Information and Other Matters

Registration Statement
Sears Holdings Corporation has filed a Registration Statement on Form S-4 with the SEC (Registration No. 333-120954) containing a preliminary joint proxy statement-prospectus regarding the proposed transaction involving Kmart Holding Corporation and Sears, Roebuck and Co. Investors are urged to read the definitive joint proxy statement-prospectus regarding the proposed transaction when it becomes available, because it will contain important information. Stockholders will be able to obtain a free copy of the
definitive joint proxy statement-prospectus, as well as other filings containing information about Sears Holdings Corporation, Kmart Holding Corporation and Sears, Roebuck and Co., without charge, at the SEC's Internet site (http://www.sec.gov). Copies of the definitive joint proxy statement-prospectus and the SEC filings that will be incorporated by reference in the definitive joint proxy statement-prospectus can also be obtained, without charge, by directing a request to Kmart Holding Corporation, 3100 West Big
Beaver Road, Troy, Michigan, 48084, Attention: Office of the Secretary, or to Sears, Roebuck and Co., 3333 Beverly Road, Hoffman Estates, Illinois, 60179, Attention: Office of the Secretary. Information regarding Sears Holdings' proposed directors and executive officers, Kmart's and Sears, Roebuck's directors and executive officers and other participants in the proxy solicitation and a description of their direct and indirect interests, by security holdings or otherwise, is available in the preliminary joint proxy
statement-prospectus contained in the above-referenced Registration Statement on Form S-4.

Statements or reports made by or on behalf of Kmart which address activities, events or developments that we expect or anticipate may occur in the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect, when made, Kmart's current views with respect to current events and financial performance. Such forward-looking statements are based upon assumptions concerning future conditions that may ultimately prove to be inaccurate and involve risks,
uncertainties and factors that could cause actual results to differ materially from any anticipated future results, express or implied, by such forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, factors relating to Kmart's internal operations and the external environment in which it operates; Kmart's ability to successfully implement business strategies and otherwise fund and execute planned changes in various aspects of the business; marketplace demand for the products of Kmart's key
brand partners, as well as the engagement of appropriate new brand partners; changes in consumer spending and Kmart's ability to anticipate buying patterns and implement appropriate inventory strategies; Kmart's ability to reverse its negative same-store sales trend; competitive pressures and other third party actions, including pressures from pricing and other promotional activities of competitors, as well as new competitive store openings; the resolution of allowed claims for which Kmart is obligated to pay cash under the Plan of Reorganization; Kmart's ability to properly monitor its inventory needs in order to timely acquire desired goods in appropriate quantities and/or fulfill labor needs at planned costs; Kmart's ability to attract and retain customers; Kmart's ability to maintain normal terms with vendors and service providers; Kmart's ability to maintain contracts, including leases, that are critical to its operations; Kmart's ability to develop a market niche; regulatory and legal developments; general economic conditions; weather conditions, including those which affect buying patterns of Kmart's customers; other factors affecting business beyond Kmart's control; Kmart's ability to attract, motivate and/or retain key executives and associates; and other risks detailed in Kmart's Securities and Exchange Commission filings. Kmart undertakes no obligation to release publicly the results of any revisions to these forward-looking statements to reflect events or circumstances after the date such statements were made.

SOURCE Kmart Holding Corporation

Kmart Restates for Accounting Change
By Jennifer Waters – Marketwatch
February 11, 2005

CHICAGO (MarketWatch) -- Kmart Holdings Inc. said late Friday that it will restate most of its fiscal 2004 financial results to cover an accounting change related to a $60 million convertible note.

The discount retailer, which is in the process of purchasing Sears, Roebuck & Co., said the change will result in noncash charges and will not impact cash flows in certain statements from fiscal 2004.

The note was used when the company emerged from bankruptcy earlier last year.

Kmart's restatement will shave $22 million, or 1 cent a share, to $2.15 a share off the profit for the 39-week period that ended Jan. 28, 2004. The change also cost the company $9 million in fiscal 2004 that did not affect per-share earnings.

The restatement was made after negotiations between Kmart and the Securities and Exchange Commission.

Shares of Kmart were in near-rally mode on Friday, ending the session higher by $2.96 to $102.70 to recover most of the losses suffered earlier in the week.

Kmart said it will pay about $11 billion to acquire Sears and restructure the organization under the Sears Holdings Inc. name.

Shares of Sears also tracked higher Friday to close at $52.30, up $1.27.

Wal-Mart Chief Defends Closing Unionized Store
Scott Says Labor Costs Guided Quebec Decision
By Michael Barbaro – Staff Writer - Washington Post
February 11, 2005

The chief executive of Wal-Mart Stores Inc. yesterday defended the retailer's decision to close a Canadian store after its employees voted to form a union, saying demands from negotiators would have forced an already unprofitable store to hire 30 more people and abide by inefficient work rules.

"You can't take a store that is a struggling store anyway and add a bunch of people and a bunch of work rules that cause you to even be in worse shape," H. Lee Scott Jr. said.

In his first interview since Wal-Mart announced it would close the store in Jonquiere, Quebec, Scott said Wal-Mart saw no upside to the higher labor costs and refused to cede ground to the union for the sake of being "altruistic."

"It doesn't work that way," he said.

Wal-Mart's decision has infuriated the United Food and Commercial Workers union, which was negotiating a contract for the Quebec store's 190 employees. If it had succeeded, the store would have become the only Wal-Mart store in North America with a union contract.

"Wal-Mart is trying to send a message to the rest of their employees that if they join a union the same thing could happen to them," said Michael J. Fraser, the union's national director in Canada. Fraser said the union plans to file unfair labor practice charges against the chain with the Quebec Labor Relations Commission.

In a 90-minute discussion with Washington Post reporters and editors, Scott said Wal-Mart's strategy for growth is to be "everywhere we are not." In the United States, that means edging closer to major cities, such as Los Angeles, New York and Washington, where the chain is likely to find less land, higher costs and stiffer resistance from labor unions and neighborhood activists.

Wal-Mart abandoned plans in August for its first store in the District because the chosen site in the Brentwood neighborhood of Northeast proved to be too small. But it has expressed keen interest in building a store in the city.

Scott characterized the performance of the chain's handful of urban U.S. stores as "okay" and said its failure to win approval for stores on the South Side of Chicago and Inglewood, Calif., last year received an inordinate amount of attention, given that Wal-Mart opens as many as 60 U.S. stores a month. Nevertheless, he said, the chain made a strategic error in Inglewood when it attempted to circumvent what it expected to be an unfavorable city council vote on a new store by seeking a voter referendum instead.

"In doing that, I think we came across as a bully who would get their way regardless," Scott said. "Our size causes us, when we do something inappropriate, which is usually done out of stupidity, to come across as being done out of arrogance. And people just won't stand arrogance."

Scott said Wal-Mart has been slow to reach out to its critics, which include individuals with Web sites and petitions as well as national unions with million-dollar budgets and strong political ties.

Three weeks ago, Wal-Mart began a campaign to tell community and elected leaders about its operations and policies. The initiative, which began last month with full-page advertisements in more than 100 major U.S. newspapers, will even extend into Wal-Mart's stores.

Scott said he has asked managers to take state leaders on tours of their local stores with the goal of "humanizing" the chain. But while Wal-Mart ramps up its public relations machine, it is taking pains to avoid appearing "slick," Scott said.

"We don't want to be used-car salesmen," he said. "We want real people who can tell the Wal-Mart story. If people don't like us, they don't like us, but at least they have heard the story."

Scott, who has worked at Wal-Mart since 1979 and became chief executive of the 3,000-store chain in 2000, said he has studied how major companies in the tobacco, beer and petroleum industries have weathered intense criticism.

Wal-Mart has fought efforts to unionize its stores in the United States and Canada, and Scott yesterday said that third-party representation of workers is unnecessary.

"If you are listening to your associates and you are doing the right thing, I'm not sure why people would want someone to represent them," he said.

The union at the Quebec store was certified by Quebec Labor Relations Commission last year after the UFCW submitted union cards signed by a majority of the store's workers. Negotiators from the chain and the union met over three months to discuss a contract, but reached as impasse last week. The UFCW sought binding arbitration.

One major sticking point in the talks, according to both sides, was how many full-time employees Wal-Mart would have to hire to operate the store.

Scott yesterday said that it was the union, not Wal-Mart, that walked away from the negotiations. He said Wal-Mart had planned to continue the talks.

Fraser said the labor commission granted the union's request for arbitration shortly before Wal-Mart said it would close the store and thinks Wal-Mart feared a decision. "We were simply following the normal process," Fraser said. "The final collective agreement would be up to the arbitrator, not us."

Sears CEO's Option Haul
Chicago Sun-Times
February 10, 2005

Sears, Roebuck and Co. CEO Alan Lacy is expected to amass as much as $50 million by exercising up to 1.1 million of his stock options before Sears' takeover by Kmart Holding Corp.

Lacy got permission to exercise the options gradually rather than receive a cash payment for the entire amount on the day of the Kmart-Sears merger, according to a regulatory filing.

Lacy intends to hold shares valued at $10 million, including those in his pay package, after Kmart takes over Sears in March.

Wal-Mart Will Close a Store In Canada Amid Union Efforts
By Ann Zimmerman and Andy Georgiades – staff reporters
The Wall Street Journal
February 10, 2005

Wal-Mart Stores Inc. said it plans to close a Canadian store whose workers were seeking to become the first ever to win a union contract from the world's largest retailer.

Wal-Mart said it was shutting the store in Jonquiere, Quebec, because it is losing money and demands from union negotiators would make it impossible for the location to become profitable. Wal-Mart's decision comes less than a week after the United Food and Commercial Workers union, saying negotiations had reached an impasse, ended contract talks and filed a request with Quebec's Minister of Labour for binding arbitration.

The union at the Jonquiere store, located north of Quebec City, had been certified by the Quebec Labour Relations Commission last year after the UFCW submitted union cards representing a majority of the store's 190 employees.

"Despite nine days of meetings over more than three months, as well as a conciliator who was added to the process at our request, we have been unable to reach an agreement with the union that in our view would allow the store to operate efficiently and profitably," said Andrew Pelletier, spokesman for Wal-Mart Canada, a unit of the Bentonville, Ark., retailer.

He added that five additional meetings with the union and conciliator were scheduled through March 15, but the UFCW requested arbitration and "walked away from the bargaining process."

Union officials weren't available to comment.

Wal-Mart, which has vigorously fought efforts to unionize its stores across North America, previously had said publicly that the store wasn't profitable -- and hasn't been since it opened. Wal-Mart added that the union demands, which it said would have required increasing workers' hours and the hiring of at least 30 more people, would- make it even less likely that the store could turn a profit.

In 1997, Ontario's Labor Board imposed union certification on a Windsor, Ontario, Wal-Mart after it found that the company had intimidated workers. Three years later the store voted to decertify. In the U.S., a group of Wal-Mart butchers voted to unionize in February 2000. Several weeks later, the company announced that it no longer would use butchers at any of its stores, saying it would stock prepacked beef instead.

The UFCW has stepped up its campaign to unionize Wal-Mart in the past year, claiming victories in the Quebec towns of Jonquiere and Saint-Hyacinthe, the latter receiving automatic union certification last month. In addition, the UFCW has other applications pending in Quebec, as well as Saskatechewan and British Columbia. Wal-Mart Canada is contesting the automatic certification of the Saint-Hyacinthe location.

Wal-Mart Canada, which operates 254 stores in Canada, never has closed a Canadian store without relocating it since entering the country in 1994. In recent years, Wal-Mart closed stores in Oklahoma, Argentina, Germany and Mexico for economic reasons.

The Jonquiere store will shut down in May and its employees will receive severance packages, Mr. Pelletier said.

Sears CEO Lacy Sets up Plan for Selling His Shares
MARKET WATCH
February 9, 2005

WASHINGTON (MarketWatch) -- Sears, Roebuck & Co. (S) said Wednesday that its top executive adopted a pre-arranged stock trading plan under which he can sell up to 1.14 million shares from the exercise of options prior to the company's merger with Kmart Holding Corp. (KMRT).

In a filing with the Securities and Exchange Commission, Sears said the trading plan of Chairman and Chief Executive Alan J. Lacy is intended to allow him to "exercise options prior to the consummation of the merger, and all transactions under the plan will be effectuated prior to the merger."

The filing said Lacy can receive a cash payout for the options he hasn't exercised at the time of the merger, which is expected to close early next month.

The transactions under Lacy's stock-trading plan will be executed only if Sears' stock price exceeds the exercise price of the options, which wasn't disclosed in the filing.

Sears said Lacy adopted the trading plan last month.

Under the deal with Kmart, Sears stockholders can swap each share for either $50 cash or 0.5 share of the newly formed company, called Sears Holdings. At the close, 55% of Sears stock will be converted into Sears Holdings stock, while 45% will be converted to cash.

Shares of Sears closed trading Wednesday at $51.55 each.

Insiders use written stock trading plans so they can buy or sell their company's stock legally, even if they later acquire inside information.

Sears CEO Lacy Adopts Written Stock Trading Plan
Dow Jones Newswires – Wall Street Journal Online
February 9, 2005

WASHINGTON -- Sears, Roebuck & Co. (S) said Wednesday that its top executive adopted a pre-arranged stock trading plan under which he can sell up to 1.14 million shares from the exercise of options prior to the company's merger with Kmart Holding Corp. (KMRT).

In a filing with the Securities and Exchange Commission, Sears said the trading plan of Chairman and Chief Executive Alan J. Lacy is intended to allow him to "exercise options prior to the consummation of the merger, and all transactions under the plan will be effectuated prior to the merger."

The filing said Lacy can receive a cash payout for the options he hasn't exercised at the time of the merger, which is expected to close early next month.

The transactions under Lacy's stock-trading plan will be executed only if Sears' stock price exceeds the exercise price of the options, which wasn't disclosed in the filing.

Sears said Lacy adopted the trading plan last month.

Under the deal with Kmart, Sears stockholders can swap each share for either $50 cash or 0.5 share of the newly formed company, called Sears Holdings. At the close, 55% of Sears stock will be converted into Sears Holdings stock, while 45% will be converted to cash.

Shares of Sears closed trading Wednesday at $51.55 each.

Insiders use written stock trading plans so they can buy or sell their company's stock legally, even if they later acquire inside information.

Retirement Turns Into a Rest Stop as Benefits Dwindle
By Eduardo Porter and Mary Williams Walsh
New York Times
February 9, 2005

LITTLETON, Colo. - For John A. Lemoine, retirement has been hard work. Forced to take an early pension package at AT&T three years ago, Mr. Lemoine, 54, a former building manager who once made more than $70,000 a year handling the operations of several AT&T sites, soon found that retirement was something he just could not afford.

To supplement the greatly reduced pension he received upon his retirement, he first took an $11-an-hour job as a maintenance worker at the Sam's Club up the road from his home here. He retrained as an X-ray technician, and began earning $17.50 an hour as a part-time radiology technician for several clinics. Still unable to make ends meet, he also took a full-time job as a security guard for an hourly wage of $10.50.

"I put in for other jobs, too," Mr. Lemoine said. "You'd be surprised who won't hire you because of your age."

Employers had better get used to seeing older people's résumés.

As numerous companies across the country withdraw retiree medical and dental benefits while others switch to less generous retirement plans, many aging workers who had expected to ease comfortably out of the labor force in their 50's and early 60's are discovering that they do not have the financial resources to support themselves in retirement. As a result, a lot more of them are returning to work.

Since the mid-1990's, older people have become the fastest-growing portion of the work force. The Labor Department projects that workers over 55 will make up 19.1 percent of the labor force by 2012, up from 14.3 percent in 2002.

Until recently, most economists said that older people were being lured back into the labor force largely because of opportunities growing out of the vibrant economy of the 1990's. But these days, they say, many such Americans are being drawn to work out of necessity rather than choice.

As the nation gears up for a fundamental debate over the future of Social Security, these circumstances hint at potential changes in the federal program that supports more than 40 million elderly Americans.

Just as companies are seeking ways to reduce their roles in financing former employees in retirement, many economists say that the Social Security program should also scale back in response to the aging of the population.

Some have pointed out that continuing to raise the official retirement age in step with increases in Americans' average longevity could probably guarantee Social Security's solvency forever.

"Policies promoting longer working life could ameliorate some of the potential demographic stresses," Alan Greenspan, the Federal Reserve chairman, told a conference of economists and policy makers in Jackson Hole, Wyo., last year. "Early initiatives to address the economic effects of baby-boom retirements could smooth the transition to a new balance between workers and retirees."

To some extent, that transition is already under way - although not in the way Mr. Greenspan, 78 himself, proposed. As they stay longer in their jobs or peruse the help-wanted ads for post-retirement employment, Americans are reversing what had been a nearly century-long decline in the participation of older people in the work force.

"Everyone that I talked to is looking at working part time," said Jim Drummond, 59, a 37-year veteran of US Airways in Pittsburgh who retired on Jan. 1 and whose pension plan recently failed and was taken over by the federal government. "The pension is not enough unless you are single and living alone."

Gerald Fronek, 62, an electrician for Lucent Technologies  in Lockport, Ill., now plans to retire in April, five years after his original plan was thwarted by the collapse of Lucent's stock in 2000, which took most of his lifetime savings with it.

"I was dealt a bad card," Mr. Fronek said. "I just have to forget about that and move   ahead."

Necessity, Not Choice

Made to carry more of the burden of their retirement, many retirees say they feel that a social compact between workers and employers - a set of expectations established over the second half of the 20th century - is being dismantled.

Not only are many discovering that they cannot afford to retire, they are also finding themselves in a labor market in which companies facing tough competition seem intent on controlling costs, partly by ridding themselves of higher-earning older workers.

"I spent 25 years with this company," Mr. Lemoine said. "When we were hired at Ma Bell there was this premise that the more dedication you gave the company, the more they would take care of you."

The steepest turnaround in labor participation has occurred among older men. The percentage of men 55 to 64 years old in the work force fell steadily from 87 percent in 1950 to under 65 percent in 1994. Then it began inching back up, reaching 69 percent last year, according to the Labor Department. Among men 65 and older, the participation rate rose from 15 percent in 1994 to 19 percent last year.

For older women, who entered the labor force at increasing rates through the 1950's and 1960's, the change has been less pronounced. Nevertheless, the rate of participation for women over 55, after declining from around 26 percent in the late 1960's to nearly 21 percent in the mid-1980's, has rebounded over the last two decades, to 31 percent.

A big factor keeping people in the work force later is Social Security itself, which until recently provided relatively generous benefits for people retiring as early as 62 and discouraged work after 65.

But in 1983, to deal with Social Security's first financial crisis, Washington approved a law to raise the normal retirement age from 65 to 67 and increase the benefit paid to people who kept working for additional years. That law only began to bite for those retiring after 2002.

Many economists say that older Americans under 65, and therefore not yet eligible for Medicare, are being forced to accept work they might have disdained earlier so they can afford health insurance and pay for other necessities.

"In the recessions through the 1980's and even in the early 1990's, the biggest drop in participation rates was among people in their 50's and 60's," said Gary Burtless, an economist at the Brookings Institution who studies retirement issues.

But "that has not been true since 2000," he said. "My gut feeling is that what changed is the persistence and willingness of older workers to accept a job that would not have been to their liking 15 or 20 years ago."

Joe Janson, for example, retired three years ago, when he was 55, from an $83,000-a-year engineering job at Lucent to a $35,000 pension. But now he is looking for work again to pay for his family's health insurance, which Lucent cut last year.

And he is not setting his sights high. In January, he and his wife, Mary, made $140 in two days delivering phone books for Qwest. "If I have to," he said, "I will drive a school bus."

Working Older and Longer

Among the most vulnerable workers are those who made their careers at some of the titans of yore - companies like United Airlines, AT&T and Bethlehem Steel <http://www.nytimes.com/redirect/marketwatch/redirect.ctx?MW=http://custom.marketwatch.com/custom/nyt-com/html-companyprofile.asp&amp;symb=BHMMQ> .

In the labor-abundant baby boom era, large companies could offer generous benefit packages and valuable incentives for early retirement. Big unions like the Teamsters and the United Automobile Workers promoted early retirement, too, to clear the way for new hiring.

Today, after rounds of downsizings, many companies have sharply cut their work forces to survive intensified competition from home and abroad, only to be left with large pools of retirees collecting benefits far longer than predicted.

Lucent, for instance, has only 20,000 active workers in the United States to generate the business needed to help support nearly 120,000 retirees, whose health care last year cost about $775 million, an amount equal to 70 percent of Lucent's net profit. So the company has been aggressively paring the health insurance it offers its retirees, prompting older employees to rethink their retirement plans.

"We simply cannot afford to absorb U.S. retiree health care costs at this level and remain a sustainable, competitive company," Lucent notified its management retirees last September in explaining a new round of health benefit cuts.

As companies have whittled away at benefit packages, they have pushed their retirees back to work.

The first step was the dismantling of many traditional pensions: the defined-benefit plans that offer a predetermined monthly income after retirement, and usually offer incentives for early retirees.

Companies have been steadily replacing such plans with defined-contribution plans in which workers save a portion of their pay for retirement tax-deferred, and companies contribute a partial match.

As recently as 1979, the Center for Retirement Research at Boston College found more than 80 percent of the workers covered by a company retirement plan had a defined-benefit pension. By 2001, the percentage had dropped to a little over 40 percent.

The dismantling of traditional defined-benefit pensions left many older workers - who had accumulated pension credit under the old system - feeling short-changed. "They did us wrong," said Mr. Lemoine, who says that a realignment of AT&T's pension plan in 1996 slashed his benefits. He joined a retiree organization that is supporting a lawsuit against AT&T over the changes.

According to Stephen Bruce, a lawyer for the plaintiffs, Mr. Lemoine's final pension - valued by the company at $135,000, which he took as a $70,500 lump sum plus $402 a month - was less than half of what he would have been due under the previous defined-benefit system.

Citing the lawsuit, an AT&T spokesman said the company could not comment on the matter.

Health Benefits Hold Sway

Even more critical has been the collapse of company-paid health insurance for retirees, prodding growing numbers of workers to hang on to some job, almost any job, to keep their health coverage until Medicare kicks in at 65.

In 1988, two-thirds of all large employers offered health benefits to retirees; last year only about one-third did. And employers who offer coverage are forcing workers to shoulder more of the cost. In 2004, 79 percent of them increased their retirees' premiums. A survey by Watson Wyatt, a corporate-benefits consulting firm, found that the absence of company-financed retiree health insurance increased the average retirement age by two years for women and 1.5 years for men.

"In this day and age," said Jonathan Gruber, a professor of economics at the Massachusetts Institute of Technology, "retiree health insurance is perhaps the biggest single determinant of retirement."

Mr. Janson, the former Lucent engineer, agrees with that. Even though he has two teenage daughters at home and his wife, Mary, does not work outside the home, he could afford to stay retired, he said, as long as Lucent kept paying for his family's health insurance. But last year Lucent stopped paying for his dependents' coverage. That left him with an extra monthly bill of about $500.

"We were making it before they took medical away," Mr. Janson said. "It's kind of like the company pulling the rug out from under me now."

Mr. Janson is also suffering because he put most of his retirement savings into Lucent stock. Shares he bought at $80 are now trading at less than $4 and his nest egg - worth about $700,000 in 1999, he said - is now less than $150,000.

For Americans heading into retirement, the contrast to the previous generation is stark. The typical household headed by a 47- to 64-year-old is poorer today, in constant dollars, than a similar household was in 1983. The main reason is the disappearance of the traditional pension, according to Edward N. Wolff, a New York University economist who analyzed Federal Reserve wealth data.

Mr. Lemoine is lucky that AT&T still offers health insurance that covers his family, even though the monthly premium of $421.52 is more than his pension check. A head injury in a car accident in August ended his stints as a security guard and part-time X-ray technician.

That shifted the financial burden of a four-teenager household onto his wife, Susan, 41, who draws a modest salary as a paralegal. Mr. Lemoine's 80-year-old mother also pitches in, lending the family money.

The ordeal has profoundly changed Susan Lemoine's outlook on the future.

"I will work," she said, "until the day I die."

Eduardo Porter reported from Littleton, Colo., for this article, and Mary Williams Walsh from New York.

Sears Shares Out of Step with Kmart's
By Susan Chandler - staff reporter - Chicago Tribune
February 9, 2005

Premium price for Sears raises much conjecture

The stocks of Kmart Holding Corp. and Sears, Roebuck and Co. should have been joined at the hip for months now.

Kmart is using stock to pay for 55 percent of its proposed $11 billion takeover of Sears, which was announced in mid-November. Under the deal's formula, Sears shareholders will receive half a share in the new, combined company. Kmart shares will be exchanged one for one.

Do a little math, and that makes a Sears share worth half a Kmart share.

Yet the stock market isn't behaving that way.

Sears stock is trading at a premium to Kmart's, which implies that investors think Sears is worth more now than it will be if and when the Kmart deal goes through.

"Since the announcement, there hasn't been a single day when Sears hasn't been worth more than Kmart, relatively speaking," said Mel Schultz, a retired Sears executive who has been tracking the daily stock price of the companies. "I don't think it's a good deal for Sears shareholders."

In late January, the discrepancy grew larger. For instance, Kmart stock closed at $86.40 a share on Jan. 24, which should translate into a price of roughly $43.20 for Sears.

But Sears stock closed that day at $48.20, 11.5 percent higher than the expected price.

The price gap narrowed last week, virtually disappearing on Friday, but then widened slightly again this week. Sears stock closed at $52.20 a share Tuesday, while Kmart finished the trading day at $102.36 per share.

What's going on?

Stock market experts have several possible explanations for the discrepancy.

The first is that the market is betting the deal won't go through, and that Sears would be better off not being tethered to Kmart, which continues to lose sales at double-digit rates to nimble competitors such as Wal-Mart Stores Inc. and Target Corp.

Prospects of bidding war

The second is that some investors are optimistic that Sears might attract another suitor, sparking a bidding war that would yield a higher price for the Hoffman Estates-based retailer.

The speculation ran hot in early December, when a Citigroup analyst suggested Vornado Realty Trust might make a higher bid for Sears based on the value of its real estate.

That hope appeared to be waning after a month passed, and no other company stepped up to the plate. But the conjecture was revived Jan. 26 when Vornado announced plans to raise as much as $7.5 billion through stock sales and issuing debt.

Vornado left unanswered the question of what it planned to do with the cash. And while anything's possible, ending the proposed Kmart-Sears marriage would come with a hefty price: a $400 million breakup fee.

Robert Steiner, a professional money manager with Rothschild Investment Corp. in Chicago, suspects he knows who is determining prices for Sears and Kmart stock.

It's arbitrageurs, those mysterious traders who simultaneously buy and sell in separate markets to take advantage of price discrepancies.

In this case, Steiner believes the arbs may be selling Kmart short while buying Sears shares, figuring that when the deal closes, Sears shareholders who wanted to be paid with as much cash as possible will dump their Kmart shares, forcing the price down.

"At this point, it's all in the hands of the professionals," said Steiner, who is not personally involved in Sears or Kmart stock although his firm has a very small position in Sears. "There's a lot of arb money around, and it has to go somewhere."

The arbitrageur theory appears to be bolstered by the more than 10 million shares of Kmart that were sold short as of Jan. 5, the latest information available. That figure represents almost 20 percent of Kmart's float. (When selling short, investors borrow shares they don't own and sell them in the hopes of buying more later at a cheaper price, generating a profit.)

Whatever is going on, some people doubt that the market is being fooled. When prices don't align, it usually means something is up.

For example, back in the mid-1990s, Microsoft planned to acquire Intuit, the maker of the popular Quicken and Turbo Tax personal finance software, for $1.5 billion in all-stock deal.

After the deal was announced, Microsoft's stock price soared, increasing the price of the merger to $2 billion. Intuit's stock price moved up also, but not nearly as much as one would expect given what was happening to Microsoft stock.

The market's hesitancy turned out to be justified. The Justice Department blocked the acquisition on antitrust grounds in 1995, and Intuit's stock price plummeted.

Kmart value questioned

Still, some market veterans aren't convinced that the stock market is as rational or efficient as theorists would have us believe.

Kmart's stock shouldn't be trading for anything like $100 a share based on its retail performance, said David Livingston, principal with DJL Research in Pewaukee, Wis.

"Most Kmart stores are nothing more than retail zombies," he said. "The lights are on, but there are no cars in the lot and no customers in the store."

Given that, Livingston doesn't even try to explain why Kmart's stock is trading for as much as it is, or why Sears isn't trading in tandem with it.

"My gut feel is that it's all based on hype and hope and the pumping of analysts who want to get [Kmart Chairman Edward] Lampert's blessing."

Sears Announces New Store Format - Sears Essentials
PRNewswire
February 8, 2005
 
Twenty-five Previously Acquired Kmart and Wal-Mart Stores to Open in Spring

HOFFMAN ESTATES, Ill., Feb 08, 2005 /PRNewswire via COMTEX/ -- Sears, Roebuck and Co. (NYSE: S) announced today the launch of the company's newest off-mall format - Sears Essentials. This new mid-sized store format, which will leverage the best of Sears along with convenience-inspired items, is a result of the acquisition of 50 Kmart and six Wal-Mart stores finalized in the third quarter of 2004. The first 25 Sears Essentials stores are scheduled to open this spring (see list below).

"Sears Essentials will lead the way as we embark on the most aggressive growth initiative in company history," said Sears Chairman and CEO, Alan Lacy. "This new store format enables Sears to grow its brand off-mall and better meet the everyday needs of our customers."

Based on customer response to the merchandise assortments at Sears Grand, Sears Essentials will offer Sears' product categories that are integral to home and family life, such as appliances, lawn and garden, tools, electronics, apparel, and home fashions along with routinely purchased convenience items, such as health and beauty, pantry, household and paper products, pet supplies, and toys. The name Sears Essentials, which resonated with customers in research conducted during the name selection process, conveys the important role that Sears plays in homes and families across the country, as well as the everyday solutions the store will provide.

Following the proposed business combination with Kmart, Sears expects that the new off-mall stores will leverage Kmart's strengths including the retailer's experience, knowledge, infrastructure and scale, particularly in such categories as pantry, health and beauty, household goods, and pharmacy. Sears Essentials will also leverage Sears' strengths including expertise in appliances, lawn and garden, tools and apparel and strong brands like Kenmore, Craftsman and Apostrophe.

Upon the business combination's finalization, Sears Essentials will offer customers the "best of both," meeting the everyday needs of our customers as Kmart does now, while offering more destination-focused purchase categories that Sears traditionally offers. Sears Essentials will be a one-stop shopping destination for home and family needs from everything from back-to-school, backyard living and birthdays to appliances, apparel and soft drinks.

Retaining several off-mall attributes, the stores will feature a one-level racetrack design, exit cashiering and a centralized customer service center. The stores are primarily located in large, densely populated markets with home, family and income demographics that are attractive to Sears.

The stores expected to undergo the transition over the coming weeks and months, will remain open during the process to best serve customers and will convert to the Sears Essentials nameplate this spring.

Store Locations
Arizona
10140 N. 91st Ave. Peoria AZ

California
3610 Peck Rd. El Monte CA
2505 El Camino Real Tustin CA
12080 Carmel Mountain San Diego CA
5405 University Ave. San Diego CA
7655 Clairemont Mesa San Diego CA
935 Sweetwater Rd. Spring Valley CA

Florida
1363 NW St. Lucie W B Port St Lucie FL
3020 SE Federal Hwy. Stuart FL
5750 NW 183rd St. Hialeah FL
4560 Forest Hill Blvd. Rd. Palm Beach FL
9500 9th St. N. St Petersburg FL

Illinois
13200 S. Cicero Crestwood IL
537 N. Hicks Rd. Palatine IL
840 Plainfield Willowbrook IL

Kentucky
4915 Dixie Hwy. Louisville KY

Maryland
8827 Woodyard Rd. Clinton MD
6411 Riggs Rd. Hyattsville MD

Michigan
1100 Rochester Rd. S. Rochester MI

New Hampshire
375 Amherst St. Nashua NH

New Jersey
6801 Hadley Rd. South Plainfield NJ
235 Prospect Ave. West Orange NJ

Pennsylvania
3843 Linden St. Bethlehem PA

Tennessee
482 McBrien Rd. East Ridge TN

Virginia
141 West Lee Hwy. Warrenton VA

Sears Launches 'Sears Essentials' Format for Acquired Kmarts
Detroit Free Press
February 8, 2005

CHICAGO (AP) -- Sears, Roebuck and Co. disclosed plans Tuesday to switch
dozens of recently acquired Kmart stores to a new mid-sized store format called Sears Essentials, providing more detail of what the combined Kmart-Sears retail behemoth will look like.

Clearly devised with discount giants Wal-Mart Stores Inc. and Target Corp. in mind, the new concept will combine select Sears products such as appliances, tools, home electronics and clothing with convenience items such as health and beauty items, snacks and pet supplies.

It effectively will be a smaller version of Sears Grand, the big-store concept the company introduced in 2003.

The announcement comes with Sears and Kmart Holding Corp. awaiting regulatory approval of their merger, which will create the nation'sthird-largest retailer, Sears Holdings Corp. The deal is expected to close early next month.

"This is a first look at how we hope to combine these companies," Sears spokeswoman Corinne Gudovic said.

Sears bought 50 Kmart and six Wal-Mart stores several months before the Nov. 17 merger was announced, saying the acquisitions would aid its strategy of moving away from malls into more appropriate locations.

Twenty-five of the acquired Kmarts are to adopt the Sears Essentials format this spring. Each will be on one floor and 90,000 to 100,000 square feet in size, compared with a typical Sears full-line store that averages about 150,000 square feet over two floors. Those with existing pharmacies will retain them.

"Sears Essentials will lead the way as we embark on the most aggressive growth initiative in company history," said Chairman and CEO Alan Lacy. "This new store format enables Sears to grow its brand off-mall and better meet the everyday needs of our customers."

The company has not yet disclosed plans for all the other new stores. Gudovic said Sears doesn't intend to close any.

The Hoffman Estates, Ill.-based company said last summer that three of the Kmart stores would be turned into Sears Grand stores -- 150,000- to 200,000-square-foot freestanding sites that mimic the Wal-Mart format of selling a wide variety of products. Two of the acquired Wal-Marts are in the process of being converted into Sears stores.

Analysts were skeptical.

George Whalin, president of Retail Management Consultants in San Marcos, Calif., said management should be focusing more on making Sears work and less on announcing new formats and names.

"They've got Sears Grand and they've got Sears -- why do they need Sears Essentials?" he asked. "You can have different kinds of stores and different size stores, but the smart thing is to use one brand. They have to market these differently, and there are lots of other issues."

Whalin also suggested that the announcement is the first writing on the wall that Kmart's brand name will disappear under the merged company, likely within two to four years.

Morningstar retail analyst Kim Picciola said the move is a natural progression of Sears' off-mall strategy, which shows that it intends to take on the big discounters.

"We think they're going to have a very tough time going up against Wal-Mart and Target, who are much more established at selling everyday essentials off the mall," she said. "We have yet to see Sears provide consumers with a compelling reason to buy consumables from them, and to shop at their off-mall locations."

The first Sears Essentials stores will be in 12 states, including six in California, five in Florida, three in Illinois, two each in Maryland and New Jersey, and one each in Arizona, Kentucky, Michigan, New Hampshire, Pennsylvania, Tennessee and Virginia.

The company said they are located primarily in large, densely populated markets and will retain several off-mall attributes, featuring a "racetrack" design, exit cashiering and a centralized customer service center.

Sears shares rose 10 cents Tuesday to close at $52.20 on the New York Stock
Exchange, up 2 percent this year after last year's 12 percent rise.

Area's Sears, Kmart Stores in Uncomfortable Positions
By Becky Yerak – Inside Retailing – Chicago Tribune
February 8, 2005

As Sears and Kmart prepare to merge, one issue is how many overlapping stores could be relegated to the sales bin for other retailers to pick over.

The implications could be bigger for Chicago than other cities. That's because northeast Illinois has the greatest concentration of the duo's stores within a two-mile radius, a study shows.

In 20 major markets, Sears, Roebuck and Co. and Kmart Holding Corp. have a total of 660 stores, according to an analysis by Chain Store Guide.

Of those, about 90 are within two miles of each other, the analysis found.

Chicago, where Sears and Kmart have 69 stores and where the merged Sears Holdings Corp. will be based, has 10 overlapping locations, more than any other market.

"My sense is Sears Holdings will concentrate on the Chicago market first because of the high density of overlapping units, its proximity to the combined headquarters, and the relatively high median income," said Mark Bond, the guide's research editor.

Whether Sears Holdings unloads stores will hinge on more than proximity, a former Kmart executive said.

"If there's a Wal-Mart, and a Sears and a Kmart, they may close the Sears store at the mall and make the Kmart into a Sears," said Gary Ruffing, senior director of consulting firm BBK Ltd. and a former Kmart marketing vice president.

"If there's no Wal-Mart, they might keep both open and add different lines," such as a Martha Stewart line at Sears.

Ruffing doesn't expect a wholesale sell-off of Kmart sites because they're "profitable and cheap to run. What you'll see is an influx of Kmart brands and the Kmart way of operating into Sears."

Kmart, for example, closed a high-volume store in Dearborn, Mich., because "the waste was horrific," Ruffing said, citing theft, damaged goods and worker turnover.

Shop online: Crate & Barrel did the best job of servicing online holiday shoppers, according to a study by Change Sciences Group Inc. Rounding out the top three were Red Envelope Inc. and Home Depot Inc.

Sears ranked 10th of 15 sites tracked by the consultant, which gauged the ease of helping shoppers find gift ideas and check shipping options.

Laggards included Best Buy Co., Federated Department Stores Inc.'s Macy's unit and Amazon.com Inc.

Ticker Scrabble: When Sears divulged plans to move to the Nasdaq exchange, suggestions for a new ticker symbol flew fast and furious.

On the New York Stock Exchange, Sears uses "S," but Nasdaq requires four letters.

A cheap-and-easy choice is Kmart's current KMRT. An obvious alternative is SEAR.

Other ideas: SEAK, KEAR, KMSE, MART, SART, SEKM and SMRT. Stein Mart Inc., however, has dibs on SMRT.

One person who thinks the merger is not so smart likes SKID: "Sears-Kmart Investment Debacle."

Yet another is for EDDY, for Kmart Chairman Edward Lampert. He'll hold the same job at Sears Holdings.

Aviator plugs Sears: "The Aviator," the Oscar-nominated Howard Hughes biopic starring Leonardo DiCaprio, has a scene in which the tycoon can't decide where to buy his clothes.

Initially, he orders his business manager to shop at J.C. Penney Co. "No, make it Woolworth's," Hughes reconsiders. Then, "no, Penneys.

"Did I say Penney's or Woolworth's? Make it Sears."

'Sears Centre' Selected as Name for New Arena in Hoffman Estates
Press Release
February 7, 2005

HOFFMAN ESTATES, Ill., Feb. 7 /PRNewswire/ -- Sears has selected "Sears Centre" as the name for the new arena planned for development in Hoffman Estates.

Sears and the Chicago office of Ryan Companies US, Inc. last Fall announced plans to build an 11,000-seat multi-purpose family entertainment, cultural and sports center within Hoffman Estates' Prairie Stone Business Park. The arena is expected to attract 750,000 visitors to more than 135 events annually and be a significant boon to the local economy. Sears secured the naming rights for the arena as part of a 10-year agreement.

"We're proud to have Sears as part of the name of the new arena, because we believe the 'Sears Centre' will provide area families with new and exciting ways to spend time together," said Robert J. O'Leary, Sears' senior vice president of public relations and government affairs. "We also think the Sears Centre will be an economic catalyst, not only for Prairie Stone, but for Hoffman Estates and the surrounding areas, and we are very encouraged by the interest shown in the facility so far."

The naming of the arena follows the announcement by the United Hockey League that it plans to expand its league and will add a team that will call the "Sears Centre" its home beginning with 2006-2007 season. With pre-season and playoff games, a UHL franchise can expect to play 40-46 home games per year.

"The naming of the arena, the announcement by the United Hockey League, the appointment of Steve Hyman as executive director of the facility and our ongoing design work, all are further shaping the identity of and creating positive momentum for the project," said Jeff Smith, president of the Midwest Division of Ryan Companies US, Inc.

Ryan Companies will serve as the General Partner of the partnership and own a 75 percent interest in the partnership. Ryan Companies also will provide design, development and construction services. Sears will hold the remaining 25 percent interest and contribute the land for the development.

Seating capacity for the "Sears Centre" will be up to 6,000 for theater productions, 9,000 for hockey and soccer games, 10,000 for basketball and 11,000 for "center stage" concerts. Parking for the arena will accommodate 2,500 vehicles. The arena will feature 40 conference suites and 1,000 club seats with the balance being "general admission" seats. The facility will feature a private club, with complete restaurant service, and six locker and dressing rooms.

Events the partnership expects to host include family entertainment shows, concerts, ice shows, family programs, hockey games, arena football games, college basketball tournaments, tennis matches and tournaments, boxing matches and exhibitions.

S&P: Junk Status on Sears/Kmart
By Jennifer Waters – MarketWatch
February 3, 2005

CHICAGO (MarketWatch) -- The surviving entity of Kmart Holding Corp.'s purchase of Sears Roebuck & Co. will find itself in junk status at Standard & Poor's.

The agency said Thursday that it will slap a "BB+" credit rating on Sears Holding Co., what the combined companies will be named.

S&P called its outlook for the company "negative."

At the same time, the agency said it is trimming its rating on Sears' financing arm, Sears Roebuck Acceptance Corp., to "BB+," its highest level of junk status.

Shares of Sears was up $3.38 to $99.90.

Snow Didn't Deter January Shopping
By Jennifer Waters – MarketWatch
February 3, 2005

CHICAGO (MarketWatch) - Shoppers bundled up and took to the stores in uncharacteristic fashion in January to cash in gift cards, take advantage of post-holiday sales and get a first take on fresh merchandise.

The early results show that last month the nation's largest retailers rang up sales at stores open longer than a year - a key industry benchmark - that were 3.5 percent higher than the previous year, according to the International Council of Shopping Centers.

But, like most months, the results were choppy. "I can point to some really good performance and really weak performance in the same sectors," ICSC Chief Economist Michael Niemira said.

Consider the numbers. Wal-Mart Stores Inc. the world's largest retailer, rolled out a 2.5 percent gain in same-store sales, slightly below the average expectation of analysts reporting to Thomson First Call. The biggest culprit among its concept was Sam's Club.

Target Corp. , Wal-Mart's closest rival, cranked out a 9.4 percent jump in comparable-store sales - notably ahead of the 6.6 percent forecast at First Call.

BJs Wholesale Club, competitor to Wal-Mart's Sam's Club also missed the mark with sales that climbed 1.9 percent instead of the 6.4 percent anticipated.

Urban Outfitters Inc. turned out results that were a tad under expectations with a 13-percent gain vs. the 13.7-percent forecast by First Call. American Eagle Outfitters, on the other hand, churned out January sales that were a whopping 22 percent higher compared with the 17.3 percent increase expected.

And Sears Roebuck & Co. surprised Wall Street with an increase, albeit a small one, of 0.8 percent for the month. The expectation, however, was for a drop of 2.6 percent.

J.C. Penney Inc., on the other hand, blamed the heavy snow and freezing temperatures for a meager 0.4 percent increase that missed the 2.7 percent gain projected.

Marshal Cohen, chief industry analyst for NPD Group, said the better results came from the retailers who didn't rely on the picked-over holiday stuff to fuel sales.

"We're seeing good numbers from the stores that actually put out new merchandise rather than trying to get rid of the leftovers from the holidays," he said. "People come out with gift cards and they feel like its free money. They can't wait to spend it."

And Cohen balks at retailers who blame inclement weather for their sales woes.

"Didn't we have snow in January last year? If I need a new pair of shoes, the snow doesn't stop me from needing a new pair of shoes," he said. "The weather only defers the purchase."

Jennifer Waters is the Chicago bureau chief for MarketWatch.

You'll Find Sears In the Nasdaq Aisle After Kmart Merger
By Gaston F. Ceron – Wall Street Journal – Dow Jones Newswires
February 3, 2005

Move Frees Up 'S' Symbol
In NYSE Alphabet Soup; Want to Buy an 'H' or 'J'?

NEW YORK -- After nearly 95 years on the New York Stock Exchange, Sears is leaving the Big Board and heading to Nasdaq Stock Market Inc.

The merger of Sears, Roebuck & Co. and Kmart Holding Corp. will produce a retailer to be known as Sears Holdings Corp. The combined company has applied to list its stock on Nasdaq under a yet-to-be-announced stock symbol, the two companies said in merger documents filed Tuesday.

The NYSE noted that Nasdaq-listed Kmart is the acquiring company in the deal and that the decision to list on Nasdaq "was expected." Still, the Sears name has long been a fixture on the Big Board and a person with knowledge of the situation said the listing was fought over by both markets.

In losing Sears, the NYSE will say goodbye to a familiar American brand that listed its shares on the exchange in March 1910, many decades before Nasdaq was even born.
The move frees up Sears's unique one-letter NYSE stock symbol, "S." The rare one-letter symbols have traditionally been prized by NYSE companies, but there are now several that are available.

 Eight alphabet letters aren't currently in use as NYSE symbols: H, I, J, M, P, U, W and Z. Others may free up as well: Gillette Co. -- which trades under the symbol G -- is being acquired by Procter & Gamble Co.; SBC Communications Inc. is buying AT&T Corp., which goes by the symbol T. Whether all these are temporary vacancies or an indication that the one-letter symbols aren't as coveted as some think they are is unclear.

The symbols I and M have long been thought as reserved for Intel Corp. and Microsoft Corp., but the two technology giants have resisted the NYSE's pitch over the years and remain listed on Nasdaq.

"Listing on Nasdaq was the right choice for the new company," said Sears spokesman Chris Brathwaite. "We've had a longstanding and proud relationship" with the NYSE "and upon completion of the merger we look forward to a new and growing relationship with Nasdaq." A spokesman for Kmart had no comment beyond confirming that the company will list on Nasdaq.

"We are proud to welcome Sears Holdings Corp. to the Nasdaq and to our family of companies," said Nasdaq Chief Executive Robert Greifeld, in a statement.

"The exchange has enjoyed a long and outstanding relationship with Sears and we wish them well," said NYSE spokesman Christiaan Brakman.

NYSE to Lose its S(ears)
By Paul Tharp - New York Post
February 3, 2005

The New York Stock Exchange got a slap in the face yesterday when one of its iconic members said it's leaving the Big Board after 95 years.

Sears Roebuck & Co. is giving up its coveted single-letter symbol of "S" to find a home at the rival Nasdaq market once its merger with retailer Kmart Holdings takes place.

The combined giant retailer ˜ to be known as Sears Holdings ˜ will trade at the Nasdaq, where it will pay cheaper listing charges, said insiders.

The NYSE and Nasdaq have battled fiercely for several years to win listings ˜ and their added revenue and prestige ˜ often using perks and negotiated fees.

 "The NYSE was fighting very hard to keep Sears and bring in the new company, but it didn't happen," said one market source. A NYSE spokesman had no details on the battle but said, "It should be understood that Kmart, a Nasdaq-listed company, was the acquiring company in this transaction.

Sears' application for a Nasdaq quotation was expected. We wish Sears well."

Nasdaq chief Robert Greifeld took a shot at the Big Board's recent troubles, such as its floor trader scandals. "Sears joins industry leaders who value a transparent marketplace and who seek to redefine their respective industries," he said.

S stands for Sears, but not much longer
The retailer's ticker symbol on the Big Board since 1910 will vanish after its merger with Kmart is completed
By Becky Yerak - staff reporter – Chicago Tribune
February 2, 2005

After 95 years, shareholders of Sears, Roebuck and Co. should get ready to say goodbye to the letter S.

When the Hoffman Estates-based retailer merges with Kmart Holding Corp. in an $11 billion deal expected to close next month, the new company plans to trade shares on the Nasdaq stock exchange, according to a regulatory filing.

That means Sears will give up the single-letter ticker designation that it has used on the New York Stock Exchange since 1910.

The new Sears Holdings Corp. hasn't chosen a trading symbol, but in a filing Tuesday with the Securities and Exchange Commission, the company said it has applied to become a Nasdaq member.

"We're proud of the 95 years we've had with the New York Stock Exchange, but we look forward to a new and growing relationship with Nasdaq," a Sears spokesman said.

Nasdaq, where Kmart trades under the symbol KMRT, requires companies to use four letters, an exchange spokesman said. Other Nasdaq companies include Microsoft Corp. and Intel Corp.

Besides S, other single letters that might be coming up for grabs soon include T, belonging to AT&T Corp., and G, for Gillette Co. In the past week, those companies have announced merger plans with SBC Communications Inc. and Procter & Gamble Co., respectively.

Chrysler Corp. dropped its C symbol when it merged with DaimlerBenz AG. The letter was taken over by Citigroup Inc.

Currently, eight of the alphabet's 26 letters are available as ticker symbols on the NYSE, which was founded in 1792 and originally met under a buttonwood tree at what's now 68 Wall Street.

The unattached letters are H, I, J, M, P, U, W and Z. The previous holder of U was US Airways Group Inc., which left the NYSE after it filed for bankruptcy in 2002.

Single-letter stock tickers have been called the vanity plates of the New York Stock Exchange.

It has been speculated that the Big Board is reserving I and M for Intel and Microsoft, respectively, in case they ever leave Nasdaq.

Sears' announcement about joining Nasdaq follows the recent disclosure that the merged company will end Sears' practice of paying dividends. Since at least 1993, Sears has paid regular quarterly cash dividends, and records show stock splits and dividends dating to 1911.

In 1999, Home Depot Inc. replaced Sears as one of the 30 blue-chip companies in the Dow Jones industrial average.

Sears and Kmart last week received antitrust clearance to merge.

Ticker symbol ABCs

For years, a single-letter ticker symbol on the New York Stock Exchange meant power and prestige. But recent merger mania could force a pair of old-line companies in addition to Sears to drop their symbols. Below are symbol assignments:

Sears to Speed up Converting Kmarts
National Jeweler
February 1, 2005

New York -- In a regulatory filing with the Securities and Exchange Commission (SEC), Sears, Roebuck & Co. said it will pursue a "fast-track conversion" for 25 of the 50 Kmart stores it gained through the merger the companies announced in June.

That pushes its timetable up from the March 15 or April 15 conversion it had previously projected. The name of the newly formatted stores will be announced in "the coming weeks," the company told the SEC in its filing, reports Women's Wear Daily (WWD).

Incorporating Kmart customers' everyday needs with added destination-type categories characteristic within Sears' outlets, the converted sites will feature a mid-size format that Sears hopes will retain the "existing customer base in these stores and meet more of their shopping needs, while attracting new customers to the store with the expanded offering," WWD reports.

Should Kmart Holding Corp.'s $11 billion offer to buy Sears not take place (the deal is expected to close in March), the stores would still be converted, but would adhere to the original timetable, according to the company's SEC filing. The required waiting period for the companies expired last week, clearing the way for the merger expected to yield the nation's third largest retailer.

The new entity, Sears Holdings Corp., will be based in Hoffman Estates, Ill., where Sears is currently headquartered. Annual revenues are expected to reach $55 billion for the retailer, post-merger, and the new company will have 2,350 full-line and off-mall stores, along with 1,100 specialty stores in the U.S.

May-Federated Deal Snags on Price
By Dennis K. Berman and Ellen Byron – Staff Reporters – The Wall Street Journal
February 1, 2005

CEO Search Is Wild Card As Tie-Up Talks Advance;
No Pact Seems Imminent

Price is emerging as the primary sticking point as Federated Department Stores Inc. explores the possible acquisition of May Department Stores Co. to create a national department-store behemoth.

Federated Chief Executive Terry Lundgren and May acting Chief Executive Officer John L. Dunham met last Wednesday in St. Louis to discuss a possible deal, according to people familiar with the discussions. The tone of the talks was described as "cordial," with some progress being made, though there is no sign suggesting a deal is imminent.

The two differ over the price May would accept for a takeover offer, these people said. May's stock price has risen almost 22% in the past couple of weeks to a total market capitalization of about $9.8 billion, raising the cost of an acquisition substantially. It isn't clear how far apart the two sides are on price.

The talks are complicated by May's search for a new CEO, being led by search firm Spencer Stuart. May's board is assessing potential candidates to see if their turnaround plans can offer more value than a Federated offer, says one person familiar with the matter. Should the board not feel comfortable with the candidates' proposals, it is likely to move ahead with a sale, this person says.

May's board also is concerned that rejecting Federated's overture runs the risk that a buyer may not come around again, this person says. A May spokeswoman declined to comment. A spokeswoman for Federated declined to comment.

Stocks of both companies rose yesterday amid increasing speculation about a deal. May shares were up 1.5%, or 50 cents, to $33.90 at 4 p.m. in New York Stock Exchange composite trading, while Federated shares rose $1.58, or 2.9%, to $56.80, also on the Big Board.

While May shares have soared during the past few weeks, Federated's haven't moved much. As a result, the stock market now is valuing May at about $500 million more than Federated. Federated is considering paying largely in stock but adding a cash component to ensure it controls more than half of the combined company, according to people familiar with the matter.

The resilience of Federated's shares demonstrates the market's belief that Federated won't overpay for May, a notion reinforced by Federated's restraint in last summer's bidding against May for Marshall Field's, an upscale department-store chain that would have given Federated a much-wanted presence in the Midwest. Analysts have criticized May's purchase price of $3.2 billion as too high.

Federated, Cincinnati, is the parent company of Macy's and Bloomingdale's. St. Louis-based May's department-store chains include Marshall Field's, Lord & Taylor and Hecht's.

Penneys on Prowl for Sears, Kmart Workers
By Becky Yerak – Chicago Tribune
February 1, 2005

J.C. Penney Co. is advertising for help in Chicago and Detroit--and not for sales clerks and stock boys.

Poaching for white-collar workers in the back yards of merging Sears, Roebuck and Co. and Kmart Holding Corp., Penneys recently ran an ad in the Chicago Tribune positioning itself as a safe harbor for those serious about a retail career. It ran a similar ad in Detroit.

"Are you looking for a career with a stable retail company on the road to success?" asked the Texas merchant.

Penneys is growing. And unlike Sears and Kmart, it is not the subject of speculation about being more valuable as a real estate play.

Penneys is putting out a call for buyers, designers, product development managers and Internet planners. Interviews will be conducted in Chicago in February, a month before Kmart and Sears are expected to complete a merger that will likely result in layoffs.

A dozen teams consisting of both companies' workers are integrating the two retailers, Sears Chief Executive Officer Alan Lacy said last week.

The new company will be based in Hoffman Estates, but that doesn't mean Sears' brass will run the show, retail observers say.

Where are they now? Among the speakers at the recent National Retail Federation convention in New York was Dorrit Bern, chairman and chief executive officer of Charming Shoppes Inc.

From 1987 until her arrival at Charming in 1995, Bern worked at Sears as vice president of women's apparel and group vice president of women's apparel and home furnishings.

At Charming, she heads an apparel retailer serving mostly plus-size women through its Lane Bryant, Fashion Bug and Catherines Plus Sizes chains.

More than 60 percent of U.S. women are size 14 or larger and their ranks are growing, Bern told the crowd.

To foster empathy with shoppers, Bryant won't employ saleswomen who are, say, size 2, said Bern, who herself is fit and trim.

Asked afterwards for her opinion about the proposed merger between her old employer and Kmart, Bern replied, "I'm scratching my head."

New mission: In its 2003 annual report, Sears made prominent use of mushy-sounding mission statements.

Page 3, for example, consists entirely of a sentence about how the retailer's vision is to be the "most trusted resource for the products and services that enhance home and family life."

In the wake of its plans to merge with Kmart, however, it's stated raison d'etre is no longer worthy of a Hallmark card.

In a Jan. 14 memo to workers, Sears shared its "early insights" on how the new Sears Holdings Corp. will operate.

"The new company will be strongly focused on making money for shareholders," the company said. "Sears Holdings will be focused on efficient spending and ensuring every dollar counts."

The new culture, it concluded, will be "driven by speed and a willingness to accept appropriate business risk."

A Sears' spokesman said the statement reflects the need to cut costs to remain competitive. The companies' chief focus "is pleasing our customers with the merchandise and service they want," he said.

T, G -- and Maybe S -- Will Disappear as NYSE Ticker Symbols
Bloomberg Columnists
January 31, 2005

Jan. 31 (Bloomberg) -- The letters T and G may lose their meaning to traders on the New York Stock Exchange. The letter S may also become a memory.

T stands for AT&T Corp., whose shares have been listed under the one-letter ticker symbol on the NYSE since 1930. G represents Gillette Co., which changed its symbol from GS in 1991.

Both companies' days of independence are numbered because of acquisition offers by SBC Communications Inc. and Procter & Gamble Co., respectively. Sears, Roebuck & Co., whose shares have traded under the ticker S since 1928 on the NYSE, is being bought by Kmart Holding Corp., listed on the Nasdaq Stock Market.

Once the purchases are completed, as many as 11 letters of the alphabet will be available for stock symbols. There were two in 2000: I and M, which former NYSE Chairman Richard Grasso once joked about setting aside for Intel Corp. and Microsoft Corp. in case they moved from the Nasdaq.

“You're going to see symbol changes,'' said Robert Stovall, global strategist at Wood Asset Management in Sarasota, Florida, which oversees $1.2 billion. ”People just haven't thought about it seriously enough to make applications yet.''

SBC agreed today to acquire AT&T, its former parent company, for $16 billion in cash and stock. SBC said in a statement that it expects to complete the purchase in the first half of 2006. AT&T, based in New York, is the largest U.S. long-distance company.

Three days ago, P&G agreed to pay $52.4 billion in shares for Gillette, a Boston-based company that produces the world's best- selling line of men's razors. In a statement, P&G estimated that it would complete the transaction by December.

Six Vacancies

The $11 billion takeover of Sears, the largest U.S. department-store chain, by Kmart won U.S. antitrust clearance last week. Kmart said it expect to close of the purchase of the Hoffman Estates, Illinois-based company in early March.

Shares of Kmart have traded on Nasdaq since June 2003, a month after the company emerged from Chapter 11 bankruptcy. There hasn't been an announcement on a listing for the combined company, Sears Holdings Corp., said Stephen Pagnani, a Kmart spokesman.

G and T, and maybe S, would join six one-letter tickers to lapse since 2001. Three of the companies that used the symbols -- Harcourt General Inc., Liberty Financial Cos., Phillips Petroleum Co. and Westvaco Corp. -- gave them up after takeovers or mergers.

US Airways Group Inc. had to leave the NYSE after filing for bankruptcy. J Net Enterprises Inc., a slot-machine operator turned Internet investor, also was delisted. Foot Locker Inc. changed to FL from Z, its ticker when the company was F.W. Woolworth & Co., Woolworth Corp. and Venator Group Inc.

A seventh, L, was reassigned in January 2002 to Class A shares of Liberty Media Corp., the media investment company run by John Malone. Liberty Financial Cos. gave up the symbol after being taken private the previous month.

By the Letters

The following table shows the status of A through Z as ticker symbols, along with the industries of companies whose shares trade under them. All the companies are listed on the NYSE. The table is based on Big Board data and Bloomberg research.

(1) - Previously used by Astra, bought in 1999.
(2) - Listed as Associated Spring Corp., ticker AAS, in 1963.
(3) - Previously used by Chrysler, bought in 1998. Citigroup's shares previously traded under the ticker CCI.
(4) - Listed as Virginia Electric & Power, ticker VEP, pre-1983.
(5) - Previously used by Transco Energy, bought in 1995.
(6) - Listed under ticker LMG/A in 1999 after spinoff from AT&T and move from Nasdaq. Changed to LMC/A in 2001. Changed to L after Liberty Financial went private in 2001.
(7) - Previously used by Irving Trust, bought in 1989.
(8) - Listed under ticker RDR in 1960.
(9) - Listed under ticker AYY in 1929.

Where They Went

The following table displays the companies most recently listed under one-letter symbols that are no longer used, along with the reason why the ticker was dropped.

Employers Can Get Medicare Subsidies for Lower Benefits
By Robert Pear – New York Times
January 31, 2005

WASHINGTON, Jan. 30 - The Bush administration has touched off a furious debate with new rules allowing employers to collect billions of dollars in federal subsidies for prescription drug benefits less generous than what many retirees were expecting under the new Medicare law.

In theory, those retiree benefits should be at least equal in value to the new Medicare drug benefit. But that will not always be the case, according to Medicare officials, labor unions and specialists in employee benefits.

In comparing retiree benefits with Medicare, the administration said, many employers will be able to ignore Medicare's catastrophic coverage, which helps people with high drug costs and accounts for about one-fourth of the annual value of the standard Medicare drug benefit, $300 out of $1,220.

Final rules for the new program were published Friday in the Federal Register. The new drug benefit becomes available next January.

In issuing the rules, Dr. Mark B. McClellan, administrator of the Centers for Medicare and Medicaid Services, said the federal subsidies would reverse the erosion of retiree health benefits and enable employers to "offer high-quality retiree coverage at a much lower cost." To qualify, Dr. McClellan said, employers must provide coverage "as good as or better than" the standard Medicare drug benefit.

But JoAnn C. Volk, a health policy analyst at the A.F.L.-C.I.O., said, "The rules allow an employer to get the subsidy for a benefit that is less valuable to retirees than what they would receive if they signed up for the Medicare drug benefit and the employer dropped coverage altogether."

Retirees can sign up for Medicare drug coverage if they think it is better than an employer's plan. Employers get no subsidy for such retirees. But it may be difficult for beneficiaries to compare the options available to them, which are likely to have different premiums and co-payments and to cover different medicines.

In the final rules, the administration said it had tried to balance two "potentially competing objectives": maximizing the number of employers who qualify for subsidies and "providing greater protection to beneficiaries."

The new Medicare drug benefit represents the largest expansion of Medicare since the program was created in 1965. Employers are now the largest source of drug coverage for retirees, and Congress wanted to encourage them to continue providing drug benefits, in part because their contributions save money for Medicare.

Accordingly, Congress authorized subsidies for employers who provide a retiree drug benefit at least as generous as Medicare's.

But the value of the standard Medicare benefit, especially the catastrophic coverage, for people with very high drug costs and multiple chronic conditions, is subject to different interpretation.

The Congressional Budget Office estimates that Medicare will spend $71 billion on employer subsidies from 2006 to 2013. The maximum subsidy in 2006 will be $1,330 per retiree. Medicare officials say the average subsidy payment will be $668 per retiree.

The future of retiree health benefits is a huge issue. For more than a decade, employers have been cutting retiree health benefits. Since Medicare already covers doctors' services and hospital care, prescription drugs account for a sizable share of the current cost of retiree health plans, 40 percent to 60 percent, by some estimates.

Congress hoped the new subsidies would give employers an incentive to continue providing retiree drug benefits. Two recent surveys found that many employers intended to do so, at least in 2006.

Also at issue are the standards for use of subsidies and the pivotal role that actuaries will play.

Congress defined the standard Medicare drug benefit. But not wanting to dictate the details, lawmakers will let employers and insurers offer different benefits if an actuary certifies that their value is at least equal to that of the standard coverage.

Under the law, Medicare officials said, they have broad discretion to specify how the value of drug benefits will be measured. Medicare is defining "equivalence" in a way that differs from what many retirees had expected, based on a layman's understanding of the term. Dr. McClellan said that in many cases it would not be a close call, because employers had better drug benefits than Medicare, and in any event, he added, retirees would be better off because the subsidies would enable employers to continue providing coverage.

The Congressional Budget Office estimates that the average cost of providing the Medicare drug benefit will be $1,640 for each person who signs up in 2006. Beneficiaries will pay about one-fourth of the cost in premiums, expected to average $35 a month or $420 a year, and the government will pay the remainder, $1,220.

Kathryn L. Bakich, vice president of the Segal Company, an employee benefits consulting firm, said, "The government share of the Medicare drug benefit is approximately $1,200 a year, but under the new rules, some employers can qualify for the subsidy if they provide a retiree drug benefit worth $900 to $1,000."

About 11.4 million retirees have drug coverage from former employers. In issuing rules for the new subsidy, administration officials said, they wanted to encourage employers to continue providing coverage without allowing them to obtain a windfall at taxpayers' expense.

Under the rules, employers cannot shift all costs to retirees. But Ms. Volk said employers could reduce retiree coverage so it would, in some cases, be less attractive than the Medicare benefit.

Paul W. Dennett, vice president of the American Benefits Council, a trade group for large employers, said the rules gave employers what they wanted: "a lot of flexibility in structuring retiree health benefits." As a result, Mr. Dennett said, "companies will be more likely to continue providing coverage."

Under the new law, the federal government will pay a tax-free subsidy to employers who provide retirees with drug benefits that meet federal standards. The subsidy payable to an employer will be 28 percent of a retiree's drug costs from $250 to $5,000 in 2006.

To qualify for the subsidy, an employer must meet two criteria: the overall value of its retiree drug coverage - the expected amount of claims paid - must be at least equal to that of the standard Medicare drug coverage. In addition, the net value of retiree drug coverage, after subtracting premiums, must equal or exceed the net value of the standard Medicare drug benefit.

In making these calculations, the government said, many employers can "disregard the value of catastrophic coverage" that will be provided by Medicare.

The catastrophic coverage kicks in after beneficiaries have spent $3,600 of their own money. Costs covered by a former employer do not count toward that limit. Under the rules, many employers can assume that retirees have supplemental coverage. Such coverage lowers out-of-pocket costs, reducing the retirees' reliance on Medicare.

If, for example, an employer had a $3,000 limit on out-of-pocket costs, retirees would not have to use Medicare's catastrophic coverage, so the Medicare benefit would be worth less to them.

The administration said this "innovative approach" to analyzing the value of the standard Medicare drug benefit was recommended by several business groups that commented on an earlier version of the rules. The test adopted by the Bush administration is almost identical to one proposed by the American Benefits Council and the United States Chamber of Commerce.

Medicare officials, acknowledging that these calculations could be enormously complicated, said they would issue guidelines to help employers and actuaries understand the "actuarial equivalence test."

Wal-Mart, Your New Banker?
By Wendy Zellner ­ Business Writer ­ Business Week
February 7, 2005 (issue)

It can't be or own a full-fledged bank -- yet -- but its partnerships and in-store financial services are giving the industry jitters Wal-Mart Stores didn't get to be the world's biggest retailer by giving up easily. So despite being twice thwarted by lawmakers in its efforts to buy a bank, it has quietly but tenaciously expanded its foothold in financial services.

In its latest move, announced on Jan. 21, the retailing giant is introducing a no-fee Wal-Mart Discover credit card that offers 1% cash back, which it will launch with GE Consumer Finance in March.

This relentless push into financial services is starting to send shivers through the banking industry. Few believe Wal-Mart will stop with basic services as it applies its low-price, high-volume formula to yet another business category. And while other companies, from Nordstrom (JWN to General Motors, have bank and thrift charters or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies (ILCs) in tow, no one trips alarms like Wal-Mart.

ON THE MOVE. Many community bankers are convinced the behemoth won't rest until it has obtained full banking powers. "It's not a question of if Wal-Mart is going to be a bank, it's a question of when," says D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte.

Clearly, Wal-Mart is on the move. Over the past three years, the giant has steadily built alliances with financial-service providers, such as MoneyGram International and SunTrust Banks enabling it to offer services such as bargain-price money orders and wire transfers. It has bank branches operated by partners in nearly 1,000 of its massive supercenters.

And it has stepped up the pace. SunTru