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Kids' clothing company sues Sears, alleging failure to pay
Dec 30, 2014

Sears Holdings Executive Vice President to Resign
Dec 23, 2014

Sears Bets Big on Technology, but at the Expense of Its Stores
Dec 17, 2014

Sears CEO Lampert explains why he closed 200 stores
Dec 15, 2014

Lampert Has New Blog Post On Sears Holdings Corp 'Moving Forward'
Dec 15, 2014

Vintage Toronto Ads: The Vincent Price Collection of Fine Art
Dec 12, 2014

Can Sears Holdings Survive Its Losses?
Dec 6, 2014

Sears posts another loss as sales fall again
Dec 4, 2014

Sears Reports Wider Loss but Better Liquidity
Dec 4, 2014

Wal-Mart's Chief Merchant Leaves
Nov 26, 2014

Sears's Great Holiday Retail Giveaway
Nov 26, 2014

Sears's U.S. Appliance-Sales Dominance Is Fading: Analyst
Nov 17, 2014

A Perkier Economy Bodes Well for Stocks
Nov 17, 2014

Big Chains Feel Shoppers Pull Back
Nov 13, 2014

Penney's Turnaround Gets Tougher
Nov 10, 2014

Sears Still Can't Call Itself a Store of Value
Nov 8, 2014

Sears Looks to Real Estate to Boost Cash
Nov 7, 2014

Sears Holdings Considers REIT to Raise Cash
Nov 7, 2014

Roderick Hills, ex-Sears exec who aimed to pare SEC regulation, dies
Oct 30, 2014

Sears disputes report of layoffs, store closings
Oct 24, 2014

U.K. 'Cheap Chic' Chain Prepares to Make an Entrance in U.S.
Oct 24, 2014

Sears Seeks New Cash Via Two Paths
Oct 20, 2014

Rehab plan for Sears' old West Side HQ takes shape
Oct 17, 2014

Wal-Mart Warns of Rough Patch for Sales, Profits
Oct 16, 2014

Sears Canada picks CEO from U.S. office
Oct 15, 2014

New Penney CEO Has Strong Background in Operations
Oct 14, 2014

Kmart Stores Hit by Data Breach
Oct 11, 2014

Everyday Low Benefits
Oct 8, 2014

Wal-Mart to End Health Insurance for Some Part-Time Employees
Oct 8, 2014

Sears's Other Big Hit
Oct 8, 2014

Sears to Sell Most of Stake in Canada Unit to Shore Up Liquidity
Oct 3, 2014

Sears: Beware the Postholiday Blues
Oct 3 , 2014

Sears Canada CEO steps down
Sep 25, 2014

Retailers both big and small continue to disappoint Wall Street. Here's what's wrong, and how to fix it.
Sep 22, 2014

Sears lets customers make returns, exchanges from their cars
Sep 19, 2014

Sears Loan Highlights Pressure on Cash
Sep 19, 2014

Sears Borrows $400 Million From Affiliates of CEO Lampert's Hedge Fund
Sep 16, 2014

RIP, Sears?
Sep 12, 2014

Fitch Cuts Sears Ratings on Cash Burn Concerns
Sep 11, 2014

SEARS - Downgrade to double-C
Sep 11, 2014

Can Sears stay afloat past 2016? Fitch doubts it
Sep 10, 2014

GE Exits Kitchen, Narrows Its Focus
Sep 9, 2014

August 28, 2014 - Have the Benefit Bandits Returned?
Sep 8, 2014

Now Might Be the Time for Sears Holdings to Sell Kenmore
Sep 7, 2014

Is It Possible to Lose Money and Rack Up Tax Expenses?
Sep 7, 2014

Sears Should Reorganize Its Operations Along Merchandise Lines Into Separate Subsidiaries
Aug 30, 2014

Sears to cut retirees' $37 monthly health care subsidy
Aug 29, 2014

What Sears Could Do to Fix Things: Borrow, Sell, Spin Off
Aug 25, 2014

It's Still Sears, where America Doesn't Shop
Aug 25, 2014

Sears Eyes Balance Sheet Help as Operations Burn Through More Cash
Aug 22, 2014

Sears Unable to Reverse Slide in Sales
Aug 22, 2014

Sears Loss Widens on 30th Consecutive Sales Decline
Aug 22, 2014

Here's how you finally fix Sears, says Jim Cramer
Aug 21, 2014

Sears Holdings Reports Second Quarter 2014 Results
Aug 21, 2014

Penney Rebound Gains Traction
Aug 15, 2014

Sears picks Tesco exec to be Kmart president
Aug 11, 2014

Shoppers Are Fleeing Physical Stores
Aug 6, 2014

What's Going Wrong At Sears Now?
Aug 4, 2014

Target Picks Pepsi Veteran as New CEO
July 31, 2014

How Warren Buffett Views Mergers and Acquisitions - SHC Example
July 27, 2014

Head of Wal-Mart's U.S. Division Leaving
July 25, 2014

Is Digital Retail the Light at the End of the Tunnel for Sears Holdings?
July 20, 2014

Target Corp. should cut its losses and exit Canada--soon, says Credit Suisse
July 16, 2014

3 Ways Online Retailers Fail Customers
July 16, 2014

Penney CEO Search Drags On
July 14, 2014

Sears Holdings Names Kristin M. Coleman As General Counsel
July 7, 2014

Paul Rogers, retired national fashion director of men's apparel for Sears, dies at 80
June 7 , 2014

Sears Could Drop 50% More as Turnaround Eludes It
May 26, 2014

Sears Catalog of Worry Isn't Getting Thinner
May 23, 2014

Target has lost its cheap, chic edge
May 22, 2014

Sears's Pool of Anaylsts Shrinks as Morningstar Exits
May 22, 2014

Sears Loss Widens on Weak Consumer-Electronics Sales
May 22, 2014

Wal-Mart slumps, Penney recovers
May 16, 2014

Struggling Malls Suffer When Sears, Penney Leave
May 10, 2014

Is Sears Holdings making real progress in transforming itself?
May 7, 2014

Sears chief: Store closings will continue, make company stronger
May 6, 2014

At Sears, 'closing stores is going to be part of our future'
May 6, 2014

Sunny Skies Over Home Depot
April 21, 2014

Director's stock buy gives lift to Sears
April 18, 2014

Wal-Mart Dives Deeper in Banking
April 18, 2014

A Gloomy Outlook for Sears' Latest Spinoff
April 14, 2014

Real estate won't save Sears shareholders
April 14, 2014

Sears CEO Slices Off Assets, Leaves Less for Bondholders
April 7, 2014

Sears' State Street store to close Sunday
April 4, 2014

Is it Time to Bet on a Makeover at Sears Holdings?
April 2, 2014

Sears filing details plan to spin off Lands' End
March 12, 2014

Obama to Delay Obamacare Again to Help Democrats in Midterms
March 4, 2014

Outside Opinion: Brands give Sears hope
March 2, 2014

Sears Game of Chutes and Ladders
February 28, 2014

Retail earnings: Sears, JCPenney see paths diverge
February 28, 2014

Sears Jumps as Loss Narrows to $358 Million on Cost Cuts
February 27, 2014

Sears trims losses despite 'tough to terrible' holiday quarter
February 27, 2014

Sears Canada Reports Fourth Quarter Earnings and Full Year
February 26, 2014

Lampert Seeks Real Estate Sizzle by Shearing Sears Name
February 25, 2014

Wal-Mart's Big Box Formula Comes Under Strain
February 21, 2014

Emory Williams, longtime Sears executive, 1911-2014
February 21, 2014

Mexico Delivers for Wal-Mart
February 20, 2014

J.C. Penney Employee Shares Devastating Photos Of The Iconic Department Store's Demise
February 19, 2014

Emory Williams, Retired Treasurer and CFO of Sears, Dies at 102
February 14, 2014

Penney to Replace Finance Chief
February 14, 2014

Emory Williams, Sr., Former Chief Financial Officer of Sears, Dies at 102
February 14, 2014

Why Wal-Mart and Costco Will Thrive in the Retail Apocalypse
February 10, 2014

Sears Still Missing The Boat: 6 Ways The Brand Can Improve
February 10, 2014

Sears Holdings names chief of pharmacy business unit
February 6, 2014

Penney Posts Weak Sales Growth
February 5, 2014

Penney's Paper Chase Challenge for Investors
February 5, 2014

Sears And JC Penney: Bad Management Or Sign Of The Times?
January 28, 2014

Abercrombie Names Former Sears CEO Martinez Chairman
January 28, 2014

Why Sears Was Doomed in 1978
January 23, 2014

The Incredible Shrinking American Retail Store
January 23, 2014

Sears to close flagship Loop location in April
January 22, 2014

Sears to Close Money-Losing Chicago Store Amid Sales Decline
January 22, 2014

Sears to close flagship State Street store
January 21, 2014

J.C. Penney to Close 33 Stores, Cut 2,000 Jobs
January 16, 2014

Retail Stocks: Smart Shoppers Can Still Find Bargains
January 13, 2014

Low-End Retailers Had a Rough Holiday
January 10, 2014

Sears Needs New Leadership Immediately, if Not Sooner
January 9, 2014

Pressure to Build in 2014 on Some CEOs
January 2, 2014


 

Breaking News

2014

Kids' clothing company sues Sears, alleging failure to pay
By Brigid Sweeney
Crain's Chicago Business
December 30, 2014

Sprockets, a line of children's clothing based in Castro Valley, Calif., has filed suit against Sears Holdings, claiming the retailer owes it nearly $5 million.

The lawsuit, filed yesterday in Cook County Circuit Court, says Sears "routinely and deliberately" canceled parts of its orders after the clothing already had been produced and shipped. The clothing company, which entered an exclusive vendor agreement with Sears in 2010, says in the lawsuit that its contract does not allow Sears any right of cancellation and says Sears' conduct "was not a commercially reasonable practice."

Sprockets claims Hoffman Estates-based Sears owes it just under $4 million for clothing orders.

The brand also alleges that Sears took another $750,000 from it for the purchase of in-store signage and fixtures as part of the development of Sprockets' "store within a store" areas in Sears and Kmart locations. Sears, however, failed to develop and implement the mini-store concept, according to the lawsuit.

Robert Shipley, a partner at Chicago's Shipley Law Group, which is representing Sprockets, called Sears' behavior "a serious breach" of contract. Both the brand and its principals are experiencing "financial difficulty directly attributable to the circumstances described in the lawsuit," Shipley said.

Sprockets, currently doing business as SCI Apparel, is no longer producing clothing, according to Shipley. The company's agreement with Sears was terminated in 2011.

According to the Sprockets website, the brand is more than 20 years old. Its merchandise was sold for years at Mervyns, a department store chain based in Hayward, Calif., that closed in 2008. Sprockets sold more than $1 billion at the chain over two decades, according to a report by industry trade publication Apparel.

Former Mervyns executives brought the Sprockets brand at auction and resurrected it in 2009. The clothing was sold at Sears and Kmart stores, as well as at Bealls department stores in Florida and several other retailers, according to a 2011 story in Apparel.

A Sears spokesman said the company had not been served and that it does not typically comment on active or pending litigation.

Sears, which has burned through more than $2 billion of cash this year, posted a loss of $548 million in its most recent quarter. Reports have surfaced in recent months that suppliers and insurance companies are backing away from the struggling retailer. Converse stopped selling shoes to Sears earlier this year.

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Sears Holdings Executive Vice President to Resign
By Suzanne Kapner
Wall Street Journal
December 23, 2014

Imran Jooma Had Wide-Ranging Oversight of the Retailer's Business

Sears Holdings Corp. said Tuesday that Imran Jooma, one of its senior executives with wide ranging oversight of the company's business, resigned.

Mr. Jooma, an executive vice president, led a hodgepodge of functions that encompassed the retailer's push to integrate online and store operations and included pricing and financial services. His resignation is effective as of Feb. 6.

He was considered a trusted lieutenant of Edward Lampert , Sears's chairman and chief executive, according to former employees.

Mr. Jooma joined Sears in 2007 and was responsible for all aspects of the company's online, marketing, social, mobile and omnichannel operations, according to his Facebook page. He had previously worked as the vice president of e-commerce for Circuit City and OfficeMax, according to Facebook.

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Sears Bets Big on Technology, but at the Expense of Its Stores
By Suzanne Kapner
Wall Street Journal
December 17, 2014

Failure of Mygofer Strategy Shows Retailer's Struggle to Reinvent Stores

JOLIET, Ill.--When Sears Holdings Corp. opened a test store in 2009 called Mygofer in this working class city 45 miles southwest of Chicago, it billed it as a revolutionary combination, one that would meld the convenience of the Internet with the instant gratification of a bricks-and-mortar store.

The company gutted an 80,000-square-foot Kmart--but enticing rows of clothes and electronics wasn't part of the plan. The idea of Mygofer was to have shoppers place their orders at computers at the front of the store, then pick up their goods at a delivery bay out back.

Sears chief executive Edward Lampert , who was chairman at the time, hoped to roll out hundreds of the stores if the experiment succeeded.

But in the four years it was open, Mygofer notched an unusual distinction: On some days, more people returned goods than bought them.

Shoppers were thrown by the format. "You couldn't see and touch things," recalls Joyce Honkisz, a retiree who visited the store once but didn't buy anything.

Internal projections had called for Mygofer to build over four years so that it would eventually generate $8 million in annual sales--on par with a typical Kmart, according to people who worked on the project. Annual sales struggled to top $1 million, these people said.

During an interview, Mr. Lampert acknowledged that "going to a store where there were no products may have been weird for shoppers." He said that the idea was ahead of its time.

Shuttered in 2013, Mygofer might be written off as just another failed retail experiment. But its demise helps illustrate the strategic misdirection that continues to dog the combined Sears/Kmart operations. The ill-fated project, meanwhile, has only fueled Mr. Lampert's desire to ramp up new technologies--even as he curtails some of the mundane investments needed to keep a giant retailer rolling.As the holiday season unfolds, Sears faces some harsh realities. The company reported its 10th consecutive quarterly loss in November, bringing total losses since early 2011 to almost $7 billion.

The company's total revenue has been declining since 2005, in part because it was closing stores and spinning off divisions like Lands' End. Excluding closed stores, sales were essentially flat in the most recent quarter.Significantly, the company once known for its Kenmore washers and ovens has slipped in the key appliance category. As recently as 2002, Sears sold four of every 10 major appliances in the U.S.--far outpacing its rivals. While Sears still holds the top share of retail appliance sales, its lead has narrowed dramatically. As of September, Sears had a 27.4% share by sales, compared with Lowe's 19% and Home Depot's 13.5%, according to research firm The Stevenson Company.

Craig Johnson , president of the retail consultancy Customer Growth Partners, says that experiments like Mygofer are a diversion from Sears's overarching problems: a deteriorating store network and a brand image that doesn't resonate with today's consumers.

"Sears is a pale shadow of its former self," says Mr. Johnson. "They are spending money on things that don't really advance the ball."

Sears is hardly the only retailer struggling to find its way. Department-store chains from Macy's Inc. to Nordstrom Inc. are scrambling to make themselves relevant in a world where shopping has been turned upside down by the Web, and the very brands that department stores carry now compete with them by selling goods in their own retail stores and online. Both of those retailers, however, are profitable, giving them more breathing room.

Macy's, for example, is reconfiguring the back areas of its stores to turn them into distribution centers that can ship products ordered online. Wal-Mart Stores Inc. 's new CEO, Doug McMillon, is betting on smaller format stores as traffic falls at the discounter's giant supercenters.

But few retail chiefs have been as aggressive as Mr. Lampert in limiting investments at physical stores. The company spends nearly $1.90 a square foot on Sears stores and roughly 60 cents a square foot on Kmart stores, according to Matt McGinley, an analyst with Evercore ISI Institutional Equities. That compares with $9.70 a square foot spent by Wal-Mart and $5.75 by Macy's.

"Eddie had two concerns," says Wayne Sales, a former Kmart executive who came back to consult on Mygofer. "How do I repurpose stores to make them more profitable, and what role would technology play in retailing."

The conundrum has been evident here in Joliet. While Sears spent more than $1 million setting up the Mygofer store, the company was starving a profitable crosstown Kmart that would run so short of shopping carts that, on one Black Friday, managers were dispatched to neighboring stores to get more, according to one a person familiar with the matter. A Sears spokesman says that on busy days, company workers retrieve carts faster from its parking lots.

During an interview earlier this year, Mr. Lampert said store investments haven't always paid off. Around 2008, Sears spent $20 million to add new apparel fixtures to 20 stores, but the stores with the new fixtures didn't perform much better than the stores with the older fixtures, a former executive said. A few years later, the company remodeled 20 Sears Canada stores at a cost of several million dollars per store. But sales at the remodeled locations barely budged, the person said.

Mr. Lampert is currently focusing on projects that he hopes will help turn the tide--bearing in mind that shoppers are less likely to browse and buy in stores. One new service lets Sears customers browse for shoes and apparel online and then reserve items to try on in store. The company is also rolling out digital displays for certain products that it hopes will engage customers with reviews, instructional videos and ratings from Consumer Reports.

Under another program, called Shop Your Way, Sears tracks shoppers' behavior and then sends customers coupons for specific items. The program rewards shoppers with points redeemable for future performance.

One recent initiative, In-Vehicle Pickup, lets customers save time: They can order goods online and have them delivered to them while they wait in their cars. In-Vehicle Return/Exchange in Five lets them return or exchange purchases in the parking lot, too, with a five minute guarantee.

Taking a page from Amazon.com Inc., Sears has also been hosting third-party merchants to sell luxury items like Rolex watches, Prada sunglasses and Zac Posen dresses directly on its own site. While the high-end offerings represent just a tiny fraction of the 140 million items sold by third parties on Sears's website, the company collects a commission that ranges from 8% to 20% of sales plus a $39.99 monthly fee.

Some analysts give kudos to Sears for being among the first retailers to tap into consumers' changing habits. For example, Sears began testing a service that lets shoppers buy online and pick up their goods in stores in 2001--well ahead of competitors. By contrast, Wal-Mart Stores launched store pick up in 2007 and Target Corp. in 2013. Sears has also been out-front with the introduction in 2011 of a service that lets shoppers reserve goods online and pay cash for them in store; in 2012 it launched online layaway.

Despite such foresight, "the execution is where they've had problems," says Gary Balter, an analyst with Credit Suisse. "They didn't invest enough in systems to make sure all these ideas worked properly, and they are not attracting younger customers who want to shop this way."

Mr. Lampert says he isn't averse to failure. "I'm comfortable trying things and having them not work as long as I learn from them and they lead to something successful," Mr. Lampert said.

Sears, in fact, maintains that Mygofer, conceived with the help of McKinsey & Co. consultants, spawned ideas that are still in use today--including technology that powers Sears's loyalty program and a website and kiosks in Sears stores that let customers order items they don't find on the shelves, according to Imran Jooma, a Sears executive vice president of online, marketing, pricing and financial services. Mygofer also inspired another program, now available in limited markets. If Kmart doesn't carry a particular item, employees, under the initiative, are allowed to go so far as to find it at a competitor. A spokesman for McKinsey declined to comment.

Mr. McGinley, however, says there is no getting around the fact that the company retains roughly 1,700-odd stores which still account for about 95% of its sales. Even if store investments don't generate a positive payback, they are necessary for brand maintenance.

"If you have a poor in-store experience, that will translate to fewer people wanting to shop with you online," posits Mr. McGinley.

A Sears spokesman said the company has invested hundreds of millions of dollars on new initiatives and has seen online and mobile sales grow strongly.

At the moment, analysts have little confidence that the technological tinkering will stop the chain's long downward spiral. Its debt is rated triple-C-plus by Standard & Poor's, one of the firm's lowest rankings, and the company's shares have lost about 22% of their value this year. They were poised for deeper declines before Sears said in November that it might take the long awaited step of spinning off some of its valuable real estate.

Shoppers load goods into the back of a car, taking advantage of a new order and pickup service. Sears/Associated Press More experiments are in the pipeline. Consumer electronic departments are being recast as Connected Solutions shops that sell devices like a Craftsman garage door that can be opened or closed remotely with a smartphone and a basketball that gives digital feedback on the arc and spin of a throw, as well as cameras, thermostats and baby monitors that can connect to the Internet. The shops are being tested at three Chicago stores before being rolled out more widely.

Sears is also piloting radio-frequency tags in 15 stores. Industry experts say the technology will allow retailers to increase sales and margins by giving them a more accurate picture of the merchandise they have in stock. At Sears's annual meeting in May, a store manager told attendees that he was able to scan 400 pairs of Levi's Jeans in a few seconds and could scan all the jeans the store had in stock in 10 to 15 minutes.

Sears said this fall that initiatives like digital signs and radio tags on inventory could bring in $500 million a year.

So far, though, it isn't clear the investments are having a big enough impact.

The company this year bought itself some time by raising about $2.2 billion--much of it from Mr. Lampert's hedge fund--after nearly running out of cash this fall. Still, Sears is on track to burn through about $1 billion in cash, according to a recent Sears blog post.

Mr. Lampert, Sears's biggest shareholder, with nearly half the company's stock, is well aware of the risks.

"Executing on new ideas is harder than having new ideas," he says.

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Sears CEO Lampert explains why he closed 200 stores
Fortune
December 15, 2014

Sears has closed 200 or so stores this year because they were still not viable after years of efforts by the retailer, CEO Lampert said on his blog.

In 2014, Sears Holdings has closed some 200 of the 1,900 Sears and Kmart stores it had at the start of year to stanch big losses stemming from chronic sales declines.

Many observers see the shrinking of the store fleet, which followed closings in previous years and that looks set to continue, as indicative of a declining retailer that has lost billions of dollars in recent years (and according to Bloomberg, reported 31 quarters in a row of sales declines) and that this year, raised $2.2 billion in liquidity by selling off assets such as the Lands' End activewear brand to bolster its financial cushion.

But Sears CEO Eddie Lampert, also its top shareholder with a 48.5% stake in the company, has been arguing that the company is in the process of funding Sears' transformation of itself into a membership-based, e-commerce-centric retailer anchored on its Shop Your Way program and far less reliant on brick-and-mortar stores.

Still, closing more than one-tenth of a retailer's stores in a single year does not exactly scream out "booming business."

The press-shy Lampert took to his blog on Monday to explain why Sears Holdings has closed so many stores: Sears gave those locations a chance, and the changing face of retail means the company doesn't really need them anyway.

"Most of these stores were losing money, some for a long time," Lampert wrote. "We have experimented with different formats, different levels of investment and different processes to bring about a better result. Given changing circumstances, both in the retail industry and in our company, we can no longer afford, nor justify keeping these stores open."

Stripping out weak stores is also a key way retailers can improve their comparable sales numbers: Indeed, Sears Holdings recently reported quarterly results that showed a narrower loss and comparable sales actually up at Kmart and only slightly down at Sears. (Macy's M 0.06% and Kohl's KSS 0.41% each reported a decline last quarter as well.)

While some analysts will quibble with how much effort Sears really put in in recent years to improve its stores, the fact is that the retailer will likely continue to shrink physically.

Sears has been trying to extract the value of its real estate this year. Last month, it revealed an idea for shoring up its pressured finances: possibly forming a real estate investment trust (REIT) for 200 to 300 of the stores it owns that it said could generate "substantial proceeds."

And in October, it said it was leasing space at seven of its most desirable locations to up-and-coming British retailer Primark, a strategy Sears has pursued in the last five years, and is likely to continue to.

"In some places mall owners and developers have approached us with the opportunity to reposition our stores for other uses and are willing to compensate us. When they've offered us more money to take over a location than our store there could earn over many, many years, we've accepted offers."

(Sears has done similar deals with chains such as Whole Foods Market, Dick's Sporting Goods, Nordstrom Rack, Forever 21, Corner Bakery, West Elm (which is owned by Williams-Sonoma), and German grocer Aldi.)

"We have a very flexible real estate portfolio which gives us time to try to turn around underperforming locations, without the potential burden of long-term losses that would otherwise prevent us from taking these risks."

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Lampert Has New Blog Post On Sears Holdings Corp 'Moving Forward'
December 15, 2014

At our most recent Town Hall meeting with our associates, I explained that I want us to operate our stores both profitably and with excellence. Both, not just one or the other.

This is the background behind our decision to close more than 200 Kmart and Sears Holdings Corp stores in 2014. Most of these stores were losing money, some for a long time. Because of the impact on our dedicated associates and our Shop Your Way members, these decisions were not taken lightly, or without our working to improve the performance of these stores over many years. Going into 2015, we will have approximately 1,700 Sears and Kmart big box stores in operation, representing about 200 million square feet of space.

I am proud of the work associates contribute to serve our members in all of our stores and believe that the decision to keep some of our worst performing stores open in the past, despite their low or negative levels of profit, was the right one because we kept people employed and served our members.

We have experimented with different formats, different levels of investment and different processes to bring about a better result. Given changing circumstances, both in the retail industry and in our company, we can no longer afford, nor justify keeping these stores open.

Many of our stores operate profitably and serve our members with excellence. We will continue to integrate our stores with our online and mobile capabilities, to improve our service and our relationships.

In addition, we are continuing to evaluate and execute on options to adjust the size of our stores by partnering with mall owners and other retailers. By improving the productivity of our stores, we believe that we will build a sustainable footprint to serve our members, both in the number and size of the stores we operate.

For all of the focus on holiday shoppers in stores, most people -- and especially our Shop Your Way members -- are buying gifts on multiple platforms, at all hours, even on their phones while they're also in line at a store.

Adapting for the future has been the major focus of our company and our Sears Holdings Corp and Kmart formats, as customers are shopping in ways that were inconceivable not very long ago. We've put an enormous amount of work into changing how we do business today, but the improvements we are making are more than cultural and technological. The number and size of our stores matter a lot as well.

How much retail floor space do we need to deliver great experiences that meet or exceed our members' expectations? Are our locations where they need to be? With more and more of our sales and member engagement happening online or via mobile and shipping straight to home, do we need the same kinds of stock rooms and warehouses?

Sears Holdings Corp is far from alone in tackling these questions. To take just one example, in virtually every city across the country, real estate owners and communities are trying to figure out what to do with large, windowless buildings that once held essential -- now useless -- telephone equipment to make landlines work.

Some developers are trying to convert them into offices or apartments. Other entrepreneurs think the solid construction and robust electric power could support data centers for new generations of businesses. None of these transformations are simple.

Similarly, some of our stores are simply too large for our needs, given that populations shift, new roads are built and new retail areas open constantly. Restoring them to profitability has been a challenge. At the same time, many of our stores are in some of the most attractive mall locations in the country.

Though we expect most of them to stay open for the foreseeable future, in some places mall owners and developers have approached us with the opportunity to reposition our stores for other uses and are willing to compensate us. When they've offered us more money to take over a location than our store there could earn over many, many years, we've accepted offers.

We've used this funding to invest more in our transformation. We have also adjusted the size of our stores by partnering with retailers like Whole Foods Market, Inc., Dicks Sporting Goods Inc., Forever 21, Primark, and others. In these cases, we continue to operate in the same location, in a smaller (but still large) space, leasing out the rest to retailers who will drive traffic and who compensate us for that space.

The good news is that our analyses show that when we close a store we can retain a relationship with Shop Your Way members who visited the store -- because we can now communicate with them and meet their needs in other ways on other platforms. As a result, we can keep serving them, whereas in the past, before changes in technology impacted consumer behavior, we might have lost these members forever.

Closing non-productive stores results in reduced expenses, improved cash flow and enhanced productivity of our space -- which together end up strengthening our company. By closing money-losing stores, we reduce future losses as well as capital needs, providing us a path to restore profitability sooner for our company, and funding our transformation. We have a very flexible real estate portfolio which gives us time to try to turn around underperforming locations, without the potential burden of long-term losses that would otherwise prevent us from taking these risks.

Few of the old landline equipment stations I mentioned above are still in the hands of the Baby Bells or their successors. In fact, the only surviving descendants of “Ma Bell” are the companies which realized early that mobile and data represented the future of their industry as opposed to Plain Old Telephone Service -- and invested and readjusted their portfolios accordingly.

Armed with more information than ever about how, where, and when Sears Holdings Corp and Kmart members want to shop, we are using this additional data, and the accompanying insights, to adapt to a future where integrated retail and member experience will be paramount.

We're not only thinking several steps ahead to the future, we're moving to get there with the right kind of stores, space and experiences for our members' needs.

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Vintage Toronto Ads: The Vincent Price Collection of Fine Art
By Jamie Bradburn
Toronto Star
December 12, 2014

In the 1960s, the horror icon promoted Canadian artists by selling their work through Sears.

The Toronto Star dubbed it "the biggest shot in the arm" the Canadian art world had ever experienced. Four hundred paintings, worth over $100,000, were purchased by Hollywood horror icon Vincent Price in August 1963 to be sold as part of the retail art collection he curated for Sears, Roebuck and Company.


Advertisements, (left) the Globe and Mail, March 27, 1965, (right) the Globe and Mail, March 20, 1965.

Sears vice-president of merchandising George Struthers approached Price in the early 1960s as part of the department store chain's attempt to boost sales through celebrity advisors (its sporting goods committee included baseball great Ted Williams and mountaineer Edmund Hilary). Price, whose lifelong passion for fine art expressed itself through books, media appearances, and lecture tours, was assigned to purchase works from around the world. Besides rising talents, artists represented included the established (Salvador Dali, Man Ray, Andrew Wyeth) and the historical (Albrecht Durer, Francisco Goya, Rembrandt).

Launched in Denver in October 1962, the collection allowed Sears customers to buy the paintings and sculptures for as little as $5 down and $5 per month. The works were sold via catalogue and touring exhibitions at stores across the United States. Though not profitable, the collection provided Sears with prestige and publicity. Rivals such as Macy's launched their own art programs, but they lacked the cachet associated with Price.

The program appealed to Price's populist philosophies about fine art, a realm he believed most people found as terrifying as his film roles:

"I've been a collector all my life and never having been a very rich one or interested in terribly expensive paintings for myself, I've learned to buy extremely well. I think 90 percent of the people I know around the country are scared to go into a gallery. They seem to be awed by it, which is nonsense of course, but that's the attitude we've had in America for decades."

In June 1963, Simpsons-Sears invited Price to bring his collection to Canada, with the caveat that he include homegrown artists. Price hired Toronto gallery owner Arnold Mazelow to select appropriate works. Mazelow took two weeks to assemble a list of 600 pieces, which Price then narrowed down to 400. Though historical works were chosen, many were produced by contemporary artists such as A.J. Casson, William Kurelek, Jean-Paul Riopelle, and Harold Town. Simpsons-Sears planned to display half of the works at three stores during the fall of 1963, and the remainder were added to the 20 roadshows touring the United States.

"Thank you for letting me in on the genius of Canada," Price wrote to Mazelow, whom he instructed to line up another $100,000's worth of art within six months.

Price appeared at the CNE Coliseum in April 1965 to promote an exhibition at the National Home Show. Of the 1,000 pieces displayed, the priciest was an 1861 Cornelius Krieghoff painting of the Caughnawaga tribe ($7,850).

Globe and Mail art critic Kay Kritzwiser described the show's set-up:

"Visitors to the collection tread through an exciting maze of panels and blocks holding the sculptures. No attempt has been made to present the work in schools or by country. At the entry, a Riopelle hangs in harmony with a Toronto street scene by Albert Francks. Inside the entrance the Krieghoff shares the same panel with a Harold Town, his "Radar Detecting Fall," priced $975. Because of the Catholic pattern of the panels, the collection represents a voyage of discovery. This is deliberate. Only by prowling from panel to panel will viewers come upon a little gem of an etching by Whistler, or discover the original Albrecht Durer, "The Agony in the Garden.""


Source: the Toronto Star, September 23, 1963.

When Struthers died in 1966, his replacement, former Simpsons-Sears CEO James W. Button, demanded stronger profit margins. The touring exhibitions gave way to plans for permanent galleries in selected cities, starting with Sears's base in Chicago. "I became a middleman for the arts," Price later lamented. "And it just fell apart in the greed of modern business."

One of the final hurrahs for Canadians associated with the collection was a Harold Town exhibition held in Chicago in January 1967. Opening-night patrons were unimpressed by the Ontario red wine that was served--Price requested bourbon after a sip, while the Star's Robert Fulford remarked that people responded to the plonk "with a kind of horrified fascination." Town received better notices. "I think he's a great draftsman," Price noted. "And it's always visible in all his work, even in his most abstract things--there's always this marvellous taste, which I think only great draftsman have."

Although Price remained a spokesperson for Sears through the early 1970s, the collection faded away. Price later criticized management's belief that they could sell work schlockier than his campiest movies: "It ended up very unhappily. Actually, I've found that most art things end up unhappily because people are dealing with a product that shouldn't be merchandised."

Besides helping local artists earn money, Price had an impact on the Golden Horseshoe arts scene in at least one other way: he appeared in the CanCon kids classic The Hilarious House of Frightenstein.

Additional material from Vincent Price: A Daughter's Biography by Victoria Price (New York: St. Martin's Griffin, 2000); Simpsons-Sears: The First Twenty-Five Years (Toronto: Simpsons-Sears, 1979); the April 2, 1965 edition of the Globe and Mail; and the September 23, 1963, and January 28, 1967, editions of the Toronto Star.

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Can Sears Holdings Survive Its Losses?
WallStreet.org
December 6, 2014

Sears Holdings Corp. has always been in the news for the woes it has inflicted upon itself. Since day one, it has been drenched in losses. It has been trying to stay afloat by closing down its stores to avoid further losses. It's run by a hedge fund, which knows nothing about the retail business. It was formed by two malfunctioning retail companies. It was expected that nothing good was going to come out of it. Still it's afloat, though in murky waters.

J.C Penny will also be closing down some stores, but not as many as Sears. The holiday season will be a blessing for the successful retailers, but for Sears), it will be a disastrous epoch because Sears will be neglected completely. Who would want to buy from a retailer that is faltering? RadioShack wanted to close 1,100 stores, but the creditors are not supporting the move.

Sears will be getting rid of 235 stores, and that won't be enough to slow down its downfall. The decision was made to save itself from total demolition. But the truth is that the company faces tough competition from rivals such as Wal-Mart, Target Corp and the mighty Amazon.com. All of these retailers live in the shadow of Amazon, except that Sears is amongst those hitting the rock bottom. It's being eclipsed by rivals in almost every area. Sears Holdings Corp. will look to move its locations to real estate investment trust fund to save some money for itself but doom is imminent.

Sears Holdings Corp. lost a whopping 548 million in the last quarter, slipping by 1.1 billion to 7.1 billion. Sears is drenched in debt that is in billions, which obviously it won't be able to pay back. The only way we see it is that Sears will end up selling all its stores and at the end file for bankruptcy.

Sears Holdings Corp. will have to restructure the whole operation from scratch because the holiday season will turn out disappointing. Shareholders will go running, dumping the stock for nickels and dimes. The stock price will hit rock bottom and Sears Holdings Corp. will be forced to forfeit the game totally. The only way out can be perhaps the trust funds. Sears Holdings Corp. might stuff the money from the closed stores into trust funds. If that works out, perhaps there is a chance Sears Holdings Corp. might see the light of the day in future.

Analysts ran the numbers down for Sears and they didn't look too good. In fact, rumors are afloat around that Sears Holdings Corp. is done for good, that it will be totally overshadowed by the rivals in about a couple of years. We don't know what strategy Sears Holdings Corp. is employing to fight the pull of the quick sand but we'd suggest it devise a strategy if it hasn't already.

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Sears posts another loss as sales fall again
Crain's Chicago Business
December 4, 2014

(Bloomberg) -- Sears Holdings posted its 10th straight quarterly loss as sales continued to decline.

The third-quarter net loss widened to $548 million, or $5.15 a share, from $534 million, or $5.03 a share, a year earlier, the Hoffman Estates-based retailer said today.

Revenue in the three months ended Nov. 1 slid 13 percent to $7.21 billion. Online sales climbed about 9 percent from a year ago.

Sears stock was down 4.2 percent in early trading this morning.

Edward Lampert, the retailer's chairman, CEO and largest shareholder, has been selling and spinning off assets to raise cash amid more than three years of losses and 31 straight quarterly sales declines.

The plan to revive profitability entails shrinking the chain's store base while boosting sales online and through its shopper-loyalty program. Sears said last month that it may raise money by selling and then leasing back as many as 300 of its stores.

"It doesn't solve anything for them," Matt McGinley, an analyst at Evercore ISI in New York, said before the results were released. "It just buys time."

In addition to a $400 million short-term loan from a hedge fund run by Lampert in September, the chain has undergone a dramatic contraction, from 3,523 stores five years ago to less than 2,000 today.

LAMPERT: STORES IN WRONG PLACES, TOO BIG

"Our stores are often in the wrong place and are often too large for our needs," Lampert said in a prerecorded conference call for investors early today.

Sears will need about $4 billion in new capital to avoid running out of cash in 2016, Fitch Ratings said in a September report.

McGinley, whose firm recommends selling Sears shares, estimates that the retailer could bring in about $1.9 billion from the sale-leaseback transaction. He said he expects the company's cash consumption to accelerate next year.

Sears had $326 million in cash at its domestic operations as of Nov. 1, compared with $384 million a year earlier.

The quarterly sales decline was due in part to continued store closings and the spinoff the Lands' End clothing unit in April. Sales at stores open at least a year, considered a key gauge of performance, rose 0.5 percent at Kmart and declined 0.7 percent for domestic Sears stores.

Sears said last month that it would report a third-quarter net loss of $590 million to $630 million and unchanged comparable-store sales. The company has posted only one quarterly comparable-store sales gain since Lampert merged Sears Roebuck and Kmart Holdings in 2005.

The Associated Press contributed to this report.

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Sears Reports Wider Loss but Better Liquidity
By Chelsey Dulaney
Wall Street Journal
December 4, 2014

Retailer Continues to Dismantle Itself, Close Stores as It Tries to Shore Up Finances

Sears says it has raised $2.2 billion so far this year.

Sears Holdings Corp. stressed Thursday that it has enough money to meet its financial obligations, citing recent improvements to its balance sheet, including inventory reductions and plans to close about 235 unprofitable stores by the end of the year.

But shares fell about 3.7% Thursday morning as Sears also reported a wider loss for the November quarter on a 13% decline in revenue.

In recent years, Eddie Lampert , Sears's chairman and chief executive, has sought to refocus the retailer's operations, spinning off business lines like Lands' End and assets like a big stake in Sears Canada to the company's shareholders. Mr. Lampert is working to transition Sears from an asset-heavy, store-focused retailer to a more profitable integrated business model.

Sears has also recently turned to a spate of financing moves that leaned heavily on Mr. Lampert's hedge fund in an effort to raise much-needed cash.

The efforts came as Sears worked to reassure vendors that have been rattled by its financial performance ahead of the holiday season, when retailers typically spend heavily securing inventory for the key selling season. Euler Hermès Group SA, which insures suppliers against nonpayment from retailers, told policyholders that it would cancel coverage on Sears, and vendor finance providers have tightened terms, vendors have said.

Sears said Thursday that it has raised $2.2 billion so far this year, in part from a loan from Mr. Lampert's hedge fund and the sale of some of the company's stake in Sears Canada. In November, Sears said it was also weighing whether to spin off up to 300 of its 712 company-owned stores into a separate entity in which Sears shareholders would be entitled to buy stakes.

"The transaction would result in substantial liquidity to Sears Holdings and would enable us to accelerate our transformation to a more asset-light, member-focused business," said Mr. Lampert on the company's pre-recorded earnings call Thursday.

In all, Sears said it had about $4.6 billion of liquidity that could be converted into cash at the end of quarter, including $326 million in cash, which is down from $599 million a year earlier.

Sears said its domestic inventory was down $1.1 billion as of Nov. 1 from a year earlier, excluding the Lands' End business, driven in part by improved productivity and store closures. Sears said Thursday that it expects to close about 235 stores in total this year.

"The fact of the matter is that a number of our stores are simply in the wrong place and are often too large for our needs," said Mr. Lampert on the call. "Restoring these locations to profitability is unlikely."

For the quarter ended Nov. 1, Sears posted a loss of $548 million, or $5.15 a share, compared with a loss of $534 million, or $5.03 a share, a year earlier. Excluding costs of closing stores, certain tax matters and other items, the company's per-share loss was $2.71.

Revenue fell to $7.21 billion. The spinoff of Lands' End accounted for $384 million of the decline, Sears said.

Analysts polled by Thomson Reuters had recently expected a loss of $3.31 a share on revenue of $6.88 billion. Sears had said last month that its top and bottom lines would be little changed from a year earlier.

Gross margin slipped to 22.2% from 23.3%, while total expenses fell 12%.

Overall, sales at existing locations fell 0.1% at domestic stores. Sears full-line domestic sales fell 0.7%, but the company noted they would have grown 1% excluding the impact of consumer electronics. The company's Kmart stores posted a 0.5% uptick in sales, led by strength in apparel and outdoor living items.

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Wal-Mart's Chief Merchant Leaves
By Shelly Banjo
Wall Street Journal
November 26, 2014

Executives in Charge of Food, Apparel, General Goods to Report Directly to U.S. Head

Wal-Mart Stores Inc.'s chief merchandising officer is leaving the retailer just days before the annual Thanksgiving shopping frenzy known as Black Friday, causing a broader shake-up in the company's namesake U.S. division.

Greg Foran, chief executive of Wal-Mart U.S., told employees in a memo Tuesday that Duncan Mac Naughton decided to leave the company "to pursue new opportunities," effective immediately. Mr. Mac Naughton confirmed the move through a spokeswoman.

The departure allowed Mr. Foran to restructure the U.S. operation as Wal-Mart tries to fix a problem that has dogged it for years: stocking products that will attract more shoppers into its stores. As a result, Wal-Mart won't name a new chief merchant at this time and executives in charge of food, general merchandise, apparel and several other business lines will report to him directly.

"I would like to use this opportunity to get closer to the merchandising organization," Mr. Foran said in the memo.

Wal-Mart's U.S. business, which makes up nearly 60% of the company's $476 billion in sales, has been struggling to boost sales during two straight years of declining shopper traffic. Chief Executive Doug McMillon is rethinking the retailer's U.S. strategy more broadly. To that end, he is slowing the expansion of its giant supercenters and moving into e-commerce and smaller-format grocery stores.

And the company has started to see a glimmer of improvement. In the most recent quarter, the retailer posted its first U.S. sales increase since 2012, with a 0.5% gain excluding newly opened or closed stores, helped by lower gasoline prices.

The chief merchant plays a key role at any store chain, deciding on retailing strategy and choosing which products to promote to drive sales. This year, Mr. Mac Naughton led a strategy to forgo the traditional one-day Black Friday frenzy in favor of hosting more than a week of deals around Thanksgiving to encourage consumers to shop early and spend their dollars at its stores.

The company also announced it will replace Wal-Mart's head of grocery, Jack Sinclair. Grocery makes up 56% of the U.S. business and has been struggling to improve performance on its fresh products in the dairy, meat and produce aisles. It has also been trying to ensure items are in stock and on the shelves when customers want them.

Steve Bratspies, who had led Wal-Mart's general merchandise division, will take over as executive vice president of food, with "a strong focus on fresh," the memo said. Mr. Sinclair will be taking another role within Wal-Mart to be announced at a later date.

The most immediate hole will be the loss of Mr. Mac Naughton right before the all-important holiday season, when retailers typically bring in a fifth of their annual sales. Wal-Mart said the holiday strategy has been in place for months and that the operations team, not the merchants, are now primarily in charge of carrying out the plan.

"We feel confident in operators and merchants to execute the holiday plan and take us on to next year," spokeswoman Deisha Barnett said.

Mr. Mac Naughton joined Wal-Mart in 2009 as chief merchandising officer of Wal-Mart Canada and moved over to the merchandising operations at the U.S. business in 2010.

According to people familiar with the matter, one of the reasons he left was because he was passed over for the top U.S. job in July by Mr. Foran, a New Zealander who had been running Wal-Mart's Asia division and had never run a U.S. retailer.

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Sears's Great Holiday Retail Giveaway
By Justin Lahart
Wall Street Journal
November 26, 2014

Home Depot, Lowe's Could Pick Up Retailer's Lost Markets

The greatest gift of all this holiday season may be the business that Sears Holdings is ceding to other retailers.

The holiday shopping season is only just getting started, but one thing seems certain: Sears will sell less than it did last year. This isn't so much because of how its stores are performing but of how many stores it has left.

As of the end of its fiscal second quarter in early August, the retailer ran 1,870 domestic Sears and Kmart stores. That was 110 fewer than it had in the fiscal fourth quarter that ended in early February. News reports show Sears having closed, or in the process of closing, more stores since the summer.

Earlier this month, the company reported that preliminary same-store sales at sites that have been open at least a year fell 0.1% in the fiscal third quarter ended Nov. 1. So when Sears reports third-quarter results next week, its overall sales, excluding those from the now spun-off Lands' End, will be well shy of the $7 billion reported in the same period a year earlier.

What's more, third-quarter numbers may have been flattered to some degree by liquidation sales Sears has been holding at closing stores. That benefit could fade in the fourth quarter.

That these declines are happening even as overall retail sales are growing points to a sharp deterioration in the company's market share. Moreover, Sears is still big enough that its lost share can provide a potent boost for other retailers.

Indeed, excluding drug and grocery stores (but not Amazon.com or Apple's retail arm) Sears rang in as the 10th largest retailer by sales in the country last year, according to National Retail Federation figures. Away from car dealers, drugstores and gasoline stations, about a penny of every dollar of U.S. retail spending goes to Sears--which is a lot in a fragmented market.

The clearest beneficiaries from Sears's woes may be Lowe's and Home Depot . Credit Suisse analyst Gary Balter estimates that if by 2016 the two retailers each capture one-quarter of appliance and tool market shares Sears held in 2013, Home Depot would see a 0.79% boost to same-store sales and Lowe's a 1.15% boost.

But the hardware chains aren't the only ones benefiting. Sears said that the decline in same-store sales in the third quarter was driven by a drop in consumer electronics. The company says it is changing its focus from selling televisions to "connected solutions" like smartwatches and connected baby monitors. That may have played a role in the better-than-expected sales that Best Buy reported for the fiscal third quarter ended Nov. 1. And apparel and soft home goods such as towels account for about one-third of Sears merchandise sales. Wal-Mart Stores pointed to strong apparel sales earlier this month when it reported its first quarterly sales increase since 2012.

Meanwhile, until Sears figures a way to generate stronger sales and return to profitability, it may be destined to keep closing stores and losing market share. For other retailers, this could be the gift that keeps on giving.

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Sears's U.S. Appliance-Sales Dominance Is Fading: Analyst
By Matt Townsend and Lauren Coleman-Lochner
Bloomberg News
November 17, 2014



Sears Holdings Corp., America's top appliance seller for decades, may lose that title in about two years, another casualty of Chief Executive Officer Eddie Lampert's plan to remake the department-store chain.

Sears had 28 percent of the major appliance market in the U.S. last year, and that share may plummet to 10 percent by the end of 2016, Gary Balter, an analyst at Credit Suisse Group AG in New York, said in a report. If Lowe's Cos. picks up a quarter of the share Sears loses, it would be the top appliance seller by the end of 2016, Balter said.

"Investors shouldn't underestimate the opportunity that market-share gains from Sears represent," wrote Balter, who recommends selling Sears shares while buying Lowe's and Home Depot Inc.

Sears, known for brands such as Kenmore appliances and Craftsman tools, has been shutting stores while focusing on strengthening its online operations and loyalty program. The chain has posted just one gain in quarterly same-store sales since Lampert, also the company's largest shareholder, merged the retailer with Kmart in 2005. More recently, Lampert has been selling Sears's assets to generate cash amid persistent losses.

The decline at Sears has benefited Home Depot and Lowe's, which both report third-quarter results this week. Lowe's share of U.S. appliance sales may expand to 23 percent by the end of 2016 from 18 percent now, Balter said. Atlanta-based Home Depot may increase its take of that market to about 16 percent from 11 percent. Tool Sales

Sears also is ceding sales in tools, with its market share expected to fall to 10 percent by 2016 from 25 percent last year, Balter wrote.

By 2016, Sears's loss of market share in appliances and tools may boost annual same-store sales at Mooresville, North Carolina-based Lowe's by 1.15 percentage points and at Home Depot by 0.79 percentage points, Balter said.

Sears, which led the appliance market with a 42 percent share as of 2002, also has lost sales to Best Buy Co., said Matt McGinley, an analyst at Evercore ISI in New York. While McGinley recommends selling Sears shares, he said he doesn't expect its appliance-market share to plunge as much as Balter does.

"There is a customer who still values the Kenmore brand," McGinley said in a phone interview. "That just tells you that they're not completely irrelevant in this particular category."

He estimates Sears's appliance-sales share may de a range of about 17 percent to 21 percent in the next two years, depending on how many stores it closes.

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A Perkier Economy Bodes Well for Stocks
By Jacqueline Doherty
Barrons
November 17, 2014

A swing through the nation's heartland inspires optimism about Wall Street. Also, Sears Holdings' real estate plans raise questions

It's always good to venture beyond the bubble that is New York, and a recent trip to the Midwest was no exception. We took four flights altogether, all full; had a lengthy wait for a restaurant table, and spoke with the head of a large company about the many U.S. and foreign firms building manufacturing plants in the nation's heartland, spurred by the availability of low-cost energy.

Our optimism was only bolstered by last week's many positive economic reports. One standout: September's Job Openings and Labor Turnover survey. Job openings remain near a 13-year high, and voluntary separations climbed to 57.5% of total separations, signaling workers' confidence in the ability to find other jobs. "That's our 'take this job and shove it' indicator, and it is resolutely positive at the moment," the folks at Convergex report.

Could things get any better? If the drop in oil and gasoline prices holds, the answer is yes. Crude oil below $80 a barrel and gasoline prices below $3 a gallon could encourage consumers to spend a little more this holiday season. Lower gas prices likely contributed to the 0.3% month-to-month rise in October's retail sales, reversing September's 0.3% decline.

The market reflects much of today's positive economic news, with the Standard & Poor's 500 index having gained 10% so far this year. The S&P's September selloff was a fading memory as stocks logged new highs last week. "We are in day 22 of what we're calling a buying stampede," says Andrew Adams, a market strategist at Raymond James Financial.

That stampede could warrant some near-term caution. Longer-term, however, the positive trends in the economy, and easy-money policies in the U.S., Europe, and Japan, are beneficial. Too, the market isn't excessively valued at 15.7 times next year's expected earnings.

"We're in pretty good shape through the end of the year and into January," says Tim Hayes, chief global investment strategist at Ned Davis Research, which has a 65% weighting in equities.

The market's rally since the October low has been broad-based, with the Russell 2000 keeping pace with the Dow and the S&P. If you needed more reasons for optimism, 2015 is the year before a presidential election and it ends with a 5—two factors that historically have coincided with positive returns for stocks.

News that Sears Holdings is exploring the formation of a real estate investment trust sent its shares up about $10, to $42.81, on Nov. 7. By last week the stock was returning to earth's orbit, and closed Friday at $37.31. Perhaps investors are starting to ask a critical question: How will the retailer, which is expected to lose $11.10 a share this year, pay the rent on any stores it sells to the REIT and leases back?

Presumably, Sears could sell up to 300 stores to the REIT and lease those stores back. Sears would get a large sum of money for the sales, but would also need to start paying rent on the leases. That would be a new expense for the retailer, and potentially could lead to larger losses.

Lease payments for a big-box retailer can run anywhere from 4% to 6% of the retailer's revenue, says Alexander Goldfarb, a REIT analyst at Sandler O'Neill. The additional cost often dissuades retailers from selling and leasing back stores. Target

was pushed several years ago by activist investor William Ackman to put some of its real estate into a REIT, but the board balked and a transaction never occurred. Ackman ultimately sold his Target shares.

Sears also announced plans recently to convert its real estate in Aventura, Fla., into an open-air development that includes a Sears store and restaurants, a hotel, and offices. The company didn't say how it plans to fund this conversion. A project of this size could cost well north of $100 million, according to Green Street Advisors, a real-estate research firm.

Sears is controlled by investor Edward Lampert, who serves as CEO and owns 48.5% of Sears' stock. The company provides little information about its real estate. According to its real estate Website, shcrealty.com, Sears has 190 closed locations, including stores, around the country, that are now available for purchase, lease, or sublease. How much does it cost to hold these properties? What does the company plan to do with them?

When ESL Investments, Lampert's investment vehicle, made a $400 million loan to the retailer in September, it was secured by 25 stores. Which stores were they, and how much are they worth? A Sears spokesman declined to share more details about the company's real estate, or provide additional information about the retailer's plans for the REIT or the Aventura project.

Understanding the value of Sears' real estate would seem to be essential to investing in the stock.

It's time for more disclosure.

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Big Chains Feel Shoppers Pull Back
Wall Street Journal
November 13, 2014

Macy's, J.C. Penney Post Lower Sales; Retailers Temper Growth Forecast

Department store operators Macy's Inc. and J.C. Penney Co. reported weak sales Wednesday, as American shoppers held back spending this fall.

Executives at the department store chains said the quarter got off to a strong start but petered out through September and October. Macy's cut its profit and sales forecasts for the year.

The results bore out warnings from across the retail industry of weakness this fall. Gap Inc. reported sluggish sales in October, and Kohl's Corp. and Ann Inc. have warned that their sales won't meet expectations in their latest quarters. Even Michael Kors Holdings Ltd. , one of retail's better performers, said recently it was feeling the pinch from a reduction in mall traffic.

"We were disappointed with our sales," said Karen Hoguet , Macy's chief financial officer. "We found that we were not immune to the weaker-than-anticipated consumer spending."

Macy's total sales declined to $6.2 billion in the three months through Nov. 1, compared with $6.3 billion a year ago, leading the retailer to cut its sales forecast for the second time since August. Sales excluding newly opened or closed stores declined 1.4% in the period. Both the number of transactions and the units per transaction declined, but the average ticket was up slightly.

Penney, meanwhile, reported a 0.5% drop in revenue to $2.76 billion. For the year, the company now says it expects same-store sales to increase 3.5% to 4.5%, having previously forecast an increase in the "mid-single digits."

"August was our strongest month of the quarter with a solid start to the back-to-school season," Penney Chief Executive Myron E. "Mike" Ullman III said. "However, like many other retailers, we saw considerable slowdown in September."

Penney's sales were hurt by 30% less clearance merchandise in the recently completed quarter, compared with a year ago, when the chain was getting rid of goods purchased under its previous management. While clearance goods drove sales a year ago, the lower levels of such items this year enabled Penney to improve its gross margin to 36.6% from 29.5% a year ago.

Macy's, too, was able to hold its gross margins steady at 39.2%, even in what analysts describe as a highly promotional environment.

Despite the sales shortfall, Macy's profit rose 23% to $217 million for the period helped by some asset sales. The company has been cutting costs, closing stores and eliminating jobs as it attempts to save $100 million a year.

Penney's bottom line had been hurt by an ill-fated overhaul that did away with discounts and private brands. Mr. Ullman reversed those strategies and the moves have helped the company narrow its quarterly loss to $188 million from $489 million a year earlier.

Macy's Ms. Hoguet said she was hopeful improvements in the economy, including lower gas prices, falling unemployment and a healthy stock market will benefit the retailer going forward. But she noted that increases in discretionary spending were directed toward things like cars, health care and electronics, which aren't carried by department stores like Macy's.

Both Macy's and Penney expressed optimism about the current quarter, which includes the key holiday-shopping season.

Penney's Mr. Ullman said he was pleased with sales in the first 10 days of November. Sales of fall merchandise like coats and sweaters have picked up as the weather has turned colder, he said.

Penney expects sales to increase between 2% and 4% in the fourth quarter. And while the company expects shopper traffic to be down in the fourth quarter, it expects the rate at which it converts browsers into buyers to be up.

Ms. Hoguet said Macy's holiday merchandise assortment and new strategies, which include in-store pickup services at its Macy's and Bloomingdale's stores, should help drive sales. Consumers who buy online and pick up in store tend to spend more than those who just buy online, she said.

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Penney's Turnaround Gets Tougher
By Jack Hough
Barron's
November 10, 2014

The retailer's ambitious financial goals may not be realistic. A miss on sales growth and the stock could go down 35%

Shoppers can get a jump on Black Friday bargains by visiting J.C.Penney stores starting at 5 p.m. Thanksgiving Day, the retailer announced on Twitter this past week. Stock buyers, meanwhile, should pass up the 22% markdown put on Penney's shares since the end of September. A first-half sales bounce appears to be fading, and the company's chances of hitting its long-term financial goals look wobblier than canned cranberry sauce.

Falling well short could present a cash problem. Its high debt reduces both operating flexibility and takeover appeal. And Penney, with about 1,060 stores, or 220 more than thriving its Oct. 8 analyst day, Penney set a goal of $1.2 billion in Ebitda, or earnings before interest, taxes, depreciation, and amortization, by 2017. That's close to four times this year's estimate. The path for getting there includes lifting sales at longstanding stores by 5.4% a year, boosting gross margins, and holding spending flat.

But at the same meeting, Penney said same-store sales for its October quarter, which it will report this Wednesday after the market closes, would likely rise at a low-single-digit pace, versus earlier guidance for mid-single-digit growth and reported growth of over 6% during the first half. Management cited warm weather and fewer clearance deals as culprits.

IF PENNEY REPORTS 3% same-store sales growth for the quarter--Wall Street's current estimate--it won't be far behind the 3.8% reported so far by retailers excluding drug chains, as tallied by Thomson Reuters. But few chains are set up for easier comparisons than Penney. Its same-store sales in last year's third quarter fell 4.8%. The year before, they plummeted 26.1%.

Sales estimates for future quarters have been coming down, too, suggesting more than weather is at play. Wall Street now expects 4.3% same-store sales growth next year, down from a 4.7% prediction in September and 5.8% at the beginning of this year. Those numbers make the 2017 vision appear more like a mirage. For one thing, how can Penney drive a re-acceleration in sales growth and boost margins if pulling back on discounts is already stifling growth?

For another, management last month pointed to no "wholesale change in the store base." Penney, with recent yearly revenue of just over $12 billion, has lost nearly $6 billion in revenue since 2010 but removed only $1.2 billion in selling, general, and administrative expenses, making its cash burn rates highly sensitive to small changes in same-store sales growth, according to UBS analyst Michael Binetti, who lowered his rating on Penney shares to Sell from Neutral last month and cut his price target in half to $5.

One complication to store closings could be that Penney collateralized much of its real estate last year when it borrowed $1.75 billion. Another could be that on leased stores, the malls most likely to let Penney out early at little cost are ones with healthy traffic. Penney declined to speak with Barron's, citing a quiet period ahead of earnings. In public comments, management has said the company enjoys low rent at many longstanding locations, making widespread closings unnecessary.

When Sears Holdings said on Friday that it is considering selling then leasing back real estate, its shares rose 31%. A halo effect gave Penney shares a 4.6% boost, to $7.82. This seems as good an opportunity as any for Penney shareholders to sell.

FROM HERE, THE TURNAROUND won't get easier. Penney's primary competitors have added about $12 billion in sales and 880 U.S. stores since 2010, calculates Binetti. These include department stores; off-price merchants like T.J. Maxx and Ross Stores; and "fast fashion" specialists like H&M and Forever 21, which have invested vast sums in technology to change fashions quickly at stores and sell garments cheaply.

Penney's investment seems light by comparison. The retailer's capital spending is less than half its depreciation. Management says it can sell more higher-margin items like cosmetics and accessories in the center of stores while raising "omni-channel" sales, a term for the marriage of online and in-store capabilities.

The problem: Pretty much every chain has a similar plan. is looking to win that business, too," says Wells Fargo Securities analyst Paul Lejuez. "And going tost sit by."

Penney's chief executive, Myron Ullman III, deserves credit for stabilizing the company following its sales implosion under Ron Johnson, ousted last year.

Last month, the company named a new chief, Marvin Ellison, who comes from Home Depot with plenty of experience in store operations but little in fashion. He takes the helm in August 2015. That sets up a long wait for investors to see whether Ellison will stick with the current plan or set a new one. A slip into negative same-store sales numbers, meanwhile, could put Penney in a cash crunch well before 2017, says Lejuez.

We wish incoming chief Ellison the best of luck. He'll need it.

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Sears Still Can't Call Itself a Store of Value
By Justin Lahart
Wall Street Journal
November 8, 2014

In its latest move to raise cash, the struggling retailer is considering putting 200 to 300 of its stores into a real-estate investment trust that it would then sell to its shareholders through a rights offering. Sears would then lease back its stores from the REIT.

The REIT idea follows on the roughly $300 million it raised by the start of Friday from selling the bulk of its 51% stake in Sears Canada, as well as the $500 million dividend it received when it spun out Lands' End earlier this year. In 2011 it spun off its Orchard Supply hardware stores, and in 2012 it separated from its franchised and outlet stores.

Sears stock jumped 31% on Friday, pushing it into positive territory for the year. But this latest round of imaginative financial engineering, while offering a reprieve, doesn't solve its fundamental problems of unprofitability.

Sears also said that in its just-ended fiscal third quarter, sales at stores open a year or more fell 0.1%. When it releases results next month, it expects a loss before interest, tax, depreciation and amortization--after a number of adjustments it says makes the figures more reflective of its operations--of between $275 million and $325 million. Over the prior four quarters, it lost more than $1.8 billion on a net-income basis.

The REIT spinoff would provide Sears with additional cash as it tries to right its business. Assuming an average of $56 a square foot, analysts at Evercore ISI estimate the REIT might be worth $1.9 billion. Sears might see $1.4 billion of that--enough to fund operations for another year at the rate it is burning cash. But the REIT's real worth won't be known until the stores are graded and valued.

In the annual report it filed in March, the company said it owned 517 of the 828 U.S. Sears stores it operated and 195 of 1,152 Kmarts. The remaining stores were leased. The company has since closed more than 100 stores, with local news reports suggesting it plans to close many more.

Much of the value in the company's real-estate portfolio probably rests on Sears stores owned in prime locations. Of the 622 malls it tracks that are anchored by a Sears store, Green Street Advisors only gives 240 a rating of B or higher. "There is little to no value for the real estate at the lower end of the quality spectrum," says analyst Daniel Busch.

Some of the Kmart stores the company owns are valuable as well. But Kmarts, on average, are in more thinly populated, lower-income areas than are Sears stores. So if Sears puts its better properties into a REIT, as it likely must if it wants to raise a large amount of cash, the ones that remain likely won't be worth that much--especially as, with other retailers retrenching, interest in less-productive retail locations is low.

What assets would Sears have left to sell? It still has its brands--Kenmore appliances, Craftsman tools and Diehard batteries--and these still have enough cache to be worth something. There is also its Sears Auto Centers chain, which the company first said a year ago it was considering splitting off. Where its leased stores are in locations other retailers are itching to get in, its leases are probably also worth something. But this must be balanced against leases in less-desirable locations that could be costly to get out of.

Raising money through a REIT would buy Sears some more time to figure out how to run its stores profitably again, but it would also leave it with little left to sell if losses continue to mount and it needs to raise cash again. Shareholders who didn't pay to play in the REIT and were left holding a stake in the remaining entity would look very exposed. Sears shares ticked higher on Friday, but the clock is ticking down.

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Sears Looks to Real Estate to Boost Cash
By Suzanne Kapner and Chelsey Dulaney
Wall Street Journal
November 7, 2014

Retailer, Which Could Lose $630 Million Last Quarter, Mulls Move to Spin Off 300 Stores

When Eddie Lampert merged Sears and Kmart nine years ago, the move was heralded less for its retail prospects than as a shrewd real-estate play. Now, the hedge-fund manager has signaled he's ready to make his move.

Sears Holdings Corp. on Friday said it was weighing whether to spin off up to 300 of its 712 company-owned stores into a separate entity in which Sears shareholders would be entitled to buy stakes. The move would raise much-needed cash for the struggling retailer, which warned it lost as much as $630 million in its most recent quarter.

It also would be a big step toward one possible endgame for the company: somehow tapping the value of its vast property holdings. Sears's shares jumped 31% on the news to $42.81, as investors welcomed the idea of getting their hands on those assets.

"By playing the REIT card, Sears is using what the bulls on the stock have long argued is the real value in the company, its real estate," Credit Suisse analyst Gary Balter wrote Friday in a note to clients.

Mr. Lampert, Sears's chairman and chief executive, has been slowly dismantling the company over the past three years, spinning off business lines like Lands' End and assets like a big stake in Sears Canada to the company's shareholders. That has meant spinning much of the assets off to himself and his hedge fund, ESL Investments Inc. Mr. Lampert controls about 48.5% of Sears's stock. Another 24% is controlled by investment manager Bruce Berkowitz.

Sears has long said it would look for ways to boost value for its shareholders as it works to turn around its retail operations. The company's retail plans include a membership program called Shop Your Way and experiments like letting customers buy online and have their purchases brought out to them in their cars. A number of companies are splitting off business lines to better focus on their core operations.

Sears said Friday it expects its debt load to decline this year. The spinoffs, however, could reduce the margin of safety for creditors in an extreme, hypothetical event in which the company is liquidated to pay its debts.

Friday's filing shows how tight things got for Sears in the quarter that ended Nov. 1 before a spate of financing moves that leaned heavily on Mr. Lampert's hedge fund. Sears said it ended the quarter with $564 million in cash and available credit. That's after having raised $568 million primarily from Mr. Lampert's hedge fund in the same period, via a loan and the sale of some of the company's stake in Sears Canada. The company also brought in another $90 million in cash during October by selling its full-line store in Cupertino, Calif.

Sears said it has as much as $212 million more coming in from the sale of its Sears Canada shares and is planning to raise another $625 million in a debt offering that will largely be covered by Mr. Lampert and his fund. All told, the company said it has moved to raise as much as $2.2 billion this year and has plenty of financial firepower and assets to cover its obligations to its creditors and vendors.

"We believe we have financial flexibility, particularly as we enter the holiday season, and we expect it will provide confidence to our vendors and other constituents that we can generate the liquidity needed to invest in our business," spokesman Chris Brathwaite said.

Many of the assets Sears could use to raise cash are tied up in its real estate. In a securities filing Friday, the company said it is actively exploring a plan to sell 200 to 300 properties to a real-estate investment trust. Sears's shareholders would have the right to buy stock in the REIT, giving them a direct stake in an asset that many analysts believe holds most of the company's value.

Analysts at Credit Suisse said the company would likely put its best-performing stores into the REIT, which would need to be strong enough to stand on its own. Sears said it would lease the stores back from the REIT and continue to operate them.

Sears said the deal would produce a substantial infusion of cash. Analysts, however, are skeptical that the company can continue to raise the funds it needs unless its operations turn around. Fitch Ratings concluded in an analysis earlier this year that the company could likely only raise enough money to last through 2016 if it doesn't stop bleeding cash.

So far, that isn't happening. Sears said in the filing that its earnings before interest, taxes, depreciation and amortization--a rough proxy for its cash flow--would come in at a loss of at least $275 million for the quarter that just ended, better than a year earlier but still deep in the red. The company said its sales for the period, excluding newly opened or closed stores, were flat and that it would book a net loss of $590 million to $630 million.

The results would add to the $6.4 billion in red ink Sears has piled up since early 2011. The company reports earnings for the period on Dec. 4.

Sears has been working to reassure vendors that have been rattled by its financial performance ahead of the holidays, when retailers typically spend heavily securing inventory for the key selling season. Euler Hermès Group SA, which insures suppliers against nonpayment from retailers, told policyholders that it would cancel coverage on Sears last month, and vendor finance providers have tightened terms, vendors have said.

Sears's real-estate portfolio has been a key asset for the company, which has sold stores over the years, including some of its most profitable. Sears has about 1,870 full-line and specialty stores in the U.S. operating under the Kmart and Sears names. The company said in its annual report filed in March that it owns 712 of its stores, excluding Sears Canada. Mr. Brathwaite, the spokesman, didn't provide an updated figure.

The company said in October that it would lease space in seven stores to European fashion retailer Primark.

REITs were created by Congress decades ago as a way to let ordinary Americans buy shares in skyscrapers or shopping malls just as they could buy stock in a company or mutual fund. The basic rules are simple: REITs have to have most of their assets and income tied to real estate, and they pay no tax on income distributed to their shareholders as long as they pay out at least 90% as dividends.

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Sears Holdings Considers REIT to Raise Cash
Reuters
November 07, 2014

Struggling retailer Sears Holdings Corp (SHLD) said it was exploring the conversion of 200-300 stores to a real estate investment trust (REIT) and offer it to shareholders through a rights offering to raise cash.

The company was looking to monetize a portion of its real estate through a sale-leaseback transaction, it said in a regulatory filing.

Sears has been trying to raise cash to get it through the build-up to the year-end shopping season and it has repeatedly turned to Chief Executive Eddie Lampert and his hedge fund, which together own 48.5 percent of Sears.

The company has been closing stores, slashing inventory and selling off assets to generate cash after a decade of falling sales and dwindling margins. It has booked losses for nine straight quarters.

Sears said on Friday it sold a full-line store in Cupertino, California for $102.5 million in October. Sears full-line stores are mall-based locations averaging 136,000 square feet.

The company said it raised about $300 million from selling a part of its stake in Sears Canada through a rights offering, as of Nov. 6. It had planned to raise up to $380 million.

The company said it would not add results of Sears Canada from the third quarter.

Sears estimated flat comparable sales and an adjusted loss before interest, taxes, depreciation, and amortization of $275 million to $325 million in the quarter ended Nov. 1.

The company will report results on Dec. 4.

As of Nov. 1, the company had about $330 million in cash and $234 million under its credit facility.

(Reporting by Sruthi Ramakrishnan in Bangalore; Editing by Don Sebastian)

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Roderick Hills, ex-Sears exec who aimed to pare SEC regulation, dies
Crain's Chicago Business
October 30, 2014

(Bloomberg) -- Former Sears Roebuck & Co. executive Roderick M. Hills, who led the U.S. Securities and Exchange Commission under President Gerald Ford and concluded that investment companies needed more freedom from regulation, has died. He was 83.

He died yesterday at Johns Hopkins Hospital in Baltimore, said his wife, Carla Hills, a former U.S. secretary of housing and urban development and U.S. trade representative. The cause was surgical complications following heart problems, she said.

Hills was a corporate lawyer and a White House counsel to President Ford before becoming SEC chairman in October 1975, just months after the SEC did away with fixed brokerage commission rates. Ford selected him to succeed Ray Garrett Jr., who had resigned.

He "had a brilliant legal career and was a man of great character," current SEC Chair Mary Jo White said in a statement. "Chairman Hills was a true champion for America's investors. The SEC has lost a strong leader and friend."

In a speech in March 1977, as he was preparing to step aside at the start of Jimmy Carter's presidency, Hills said his achievements included reducing paperwork and case backlogs and leading the SEC into the computer era.

Also in that farewell speech, delivered at a conference of the Practising Law Institute, he endorsed a new approach to regulating investment funds.

'MAJOR CHANGE'

"I must state that I am far more convinced today than I was 16 months ago that a major change in our approach to investment companies is due," he said. "Disclosure, competition and independent directors must be substituted in wholesale doses for regulation."

Under Hills, the SEC in 1977 approved, for the first time, trading in put options -- the right to sell shares at a future date at a specific price, a way to bet on a stock's price going down -- on certain securities. Less than a year later, under Hills's successor, Harold Williams, the agency halted expansion of the booming options market pending new rules and procedures to protect investors. The moratorium was lifted in 1980.

In a 2002 interview with the SEC Historical Society, Hills flashed a sense of humor about what he had been able to accomplish in 16 months.

"We had a division called Division of Investment Management Regulation, and I tried very hard with that division to kind of loosen it up, and, to my knowledge, the only thing I accomplished was to take the word 'regulation' out of the division title," he said. "But people thought about it."

POWER COUPLE

Hills served in the Ford administration along with his wife, who was secretary of housing and urban development. She later was trade representative in the administration of President George H.W. Bush.

The couple had four children.

Roderick Maltman Hills was born on March 9, 1931, in Seattle. He earned his undergraduate degree in 1952 and his law degree in 1955 from Stanford University. After serving as a clerk to U.S. Supreme Court Justice Stanley F. Reed, he went into private practice in Los Angeles, where, in 1962, he formed Munger, Tolles, Hills & Rickershauser -- now Munger, Tolles & Olson -- with his wife and three other lawyers.

In 1971, he went on leave to become chairman of the board of Republic Corp., a film processor and manufacturer of home appliances based in Beverly Hills, California. During his four years there, the company reached an agreement with its bank lenders to avert bankruptcy.

PUBLIC SERVICE

He joined the Ford administration in April 1975 as deputy to the White House counsel, Philip W. Buchen. In October, Ford named him to head the SEC.

After leaving the SEC in 1977, Hills served for less than a year as chairman of St. Louis-based Peabody Coal Co.

He was founder and chairman of the Hills Program on Governance at the Washington-based Center for Strategic and International Studies, and founder and former chairman of the U.S.-ASEAN Business Council, a trade group for U.S. companies active in Southeast Asia. Hills was a partner at the Washington law firm Hills Stern & Morley LLP.

SEARS CAREER

Mr. Hills in the early 1980s chaired Sears World Trade Inc., an ill-fated diversification by the Chicago-based retailer under Chairman Edward Telling into merchant banking. It ended up losing some $60 million before Sears shut the Washington-based operation down in 1986 after a four-year effort.

Mr. Hills was forced out in 1984 and succeeded by future U.S. Secretary of Defense Frank Carlucci. Initially, the unit, top heavy with Washington insiders, was positioned as sophisticated global trading company. After Mr. Hills departed, it was scaled back to focus on buying and selling products for Sears and other retailers. It still lost money.

-- Steven R. Strahler contributed to this report.

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Sears disputes report of layoffs, store closings
By Alexia Elejalde-Ruiz
Chicago Tribune
October 24, 2014

Sears: Report of thousands of layoffs, 100 store closings is wrong.

A published report Thursday said Sears Holdings is laying off about 6,000 workers as it closes 110 stores within the next few months, many before Christmas, according to Seeking Alpha, a content service for financial markets.

Hoffman Estates-based Sears disputed the report and said it would provide an updated store count when it releases third-quarter earnings in November.

Sears announced in August that it was in the process of closing 130 stores during the fiscal year that closes at the end of January, and may close more. It closed 96 stores in the first half of the year.

The Seeking Alpha report, which cited liquidation notices, news reports and employees, in an updated post Thursday afternoon listed 55 Kmart stores, 30 Sears department stores and 31 Sears Auto Centers that are slated to close between September and mid-January. Together they employ 6,067 employees, according to the report. .

Five Illinois stores were on the list, including Kmarts in suburban Forest Park, Peoria and Bloomington, and Sears and Sears Auto Centers in Danville and Forsyth.

Spokesman Howard Riefs said "the reported store count and list of closures isn't accurate." He specified that one of the stores on the list of closings, a Sears and Auto Center at Washington Square Mall in Evansville, Ind., is not slated to close. Seeking Alpha reporter Mitch Nolen, who wrote the report, said in an email that he has corrected that entry and that the Sears at Washington Square Mall in Indianapolis is closing, not in Evansville.

Riefs did not say if there were other inaccuracies in the report.

Sears, which is struggling to reduce costs as its sales dwindle and it attempts to transform into an asset-light, membership-driven retailer, has closed several hundred stores in recent years.

Sears also has been leasing out its real estate to other retailers. It said last week that it would lease out seven stores, including the one at Pennsylvania's King of Prussia Mall, to discount fashion chain Primark for an undisclosed amount.

Sears had 1,077 Kmart stores and 793 Sears stores in the United States as of Aug. 2. At the same time last year, the retailer had 1,195 Kmart stores and 841 domestic Sears stores. The company had 226,000 U.S. employees as of Feb. 1, down from 246,000 a year earlier and 290,000 in 2010.

Sears shares closed Thursday at $35.95 up, $1.53, or 4.45 percent.

Reuters contributed

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U.K. 'Cheap Chic' Chain Prepares to Make an Entrance in U.S.
Wall Street Journal
October 24, 2014

Primark, Vowing Lower Prices Than Rivals, Will Repurpose Sears

LONDON -- Primark, the U.K. fast-fashion chain that sells T-shirts for a couple of pounds and doesn't believe in online retailing, wants to make it big in the U.S.

Don't expect it to play by the rules.

Jokingly nicknamed "Primani" after the expensive Italian fashion house Giorgio Armani, Primark is a long way from being a luxury retailer. Dresses sell for the equivalent of $18, chinos for under $20 and boots go for $25.

Able to respond rapidly to changes in fashion tastes, especially among young shoppers, Primark has built its success on similar foundations to Hennes & Mauritz AB's H&M chain and Inditex SA 's Zara. Only Primark does it cheaper. In August, Primark's clothes were priced 48% below the market average in the U.K., according to research from B

Primark signaled its intent to make its mark in the U.S. earlier this year with plans to open on the site of the now-defunct Filene's Department Store in Boston. It stepped up its U.S. expansion plans Monday by striking a deal with Sears Holdings Corp. to lease space in seven stores across the Northeast.

It will open its first store by the end of next year and will be operating in all seven within 18 months, according to the company. The Boston store is expected to open in late 2015.

Primark has conducted "extensive research" on the U.S. market, including "very detailed benchmarking of prices" against likely competitors, according to John Bason, chief financial officer of parent company Associated British Foods PLC. Although many of its fashion lines will remain unchanged, Primark will cut back on some items, such as American-college-themed fashion prints popular in Europe.

Its big selling point to America will be price.

"Let me put it this way: The price position of Primark in the U.S. will be every bit as good as it is in Europe," Mr. Bason said.

The space leased from Sears--520,000 square feet in total--will be operated by Primark autonomously with separate entrances and exits, and not as concessions within existing Sears stores. Among the spaces Primark is leasing from Sears will be a store in the King of Prussia Mall near Philadelphia, considered one of the top malls in the U.S.

Although Primark will initially focus on the Northeast, the company has ambitions to expand throughout the U.S. if the first stores are a success. Mr. Bason wouldn't give further details on growth plans. Associated British Foods, or ABF, has said previously it expects to open up to 10 stores in its first round of expansion in the U.S.

The main challenge for Primark in the U.S. is that it has almost zero name recognition. The company, which rarely advertises in Europe, says it will overcome the problem by locating in the busiest malls and not as "stand-alone boxes." It also expects young consumers to spread the word on social media.

Fast-fashion retailer Primark's ability to charge lower prices is based on rigid control of its supply chain.

ENLARGE Fast-fashion retailer Primark's ability to charge lower prices is based on rigid control of its supply chain. Reuters

ABF is a sprawling conglomerate that includes sugar trading, food processing and agriculture businesses. Primark accounts for around 36% of its £13.32 billion ($21.42 billion) in annual revenue.

Since opening its first store in Dublin in the late 1960s, Primark has defined itself by going against the grain.

At a time when most big retailers in the U.S. and Europe are tightening up store space and pouring cash into expanding their online presence, Primark plans to open a series of enormous city-center stores across Europe, adding a further one million square feet over the next year.

Despite selling clothes at bargain-basement prices, Primark invests heavily in its stores. Most are located in prime urban sites and have around 100,000 square feet of selling space, in chic, modern buildings with high ceilings and wide aisles. Some have in-store coffee shops.

Emma Palmer, a 21-year-old student shopping in a Primark store on Oxford Street in London, said she spends up to an hour in Primark on each visit.

"Sometimes it's hard to find, but if you get a good buy here, it feels really good," she said.

Primark's ability to charge lower prices is based on rigid control of its supply chain. The company is known for its tough negotiations with its manufacturers, which are based mostly in Asia. Suppliers are often willing to lower their prices for Primark because of the enormous volume the company purchases.

The drive to cut costs in its supply chain has put Primark under fire for relying on cheap labor. The retailer was one of many that made clothes in the Rana Plaza factory in Bangladesh, which collapsed last year, killing more than 1,100 workers. Primark has since paid more than $12 million in compensation to victims and families affected by the disaster.

A Primark spokesman said the company shared a large proportion of its suppliers with other retailers and takes "the ethics of its supply chain very seriously." He added, "Primark's prices are the result of its business model, not cheap labor."

At first, Primark will ship garments to the U.S. from its existing suppliers, but it plans to look at establishing links in Central America, Mr. Bason said.

Another reason Primark is able to keep its clothing prices low: It doesn't have an online store. With low average spending per customer and high return rates, Primark executives say it isn't viable to offer online or mobile shopping.

Primark operates 278 stores, almost all in Western Europe. It had annual sales of £4.27 billion its most recent financial year, up 22% on the previous year.

ABF has forecast a 17% sales increase at Primark this year and expects to have opened 1.4 million square feet of selling space.

By taking on the U.S., Primark is attempting to succeed where many of the biggest British retailers have failed. Tesco PLC and Marks & Spencer Group PLC have both tried and failed to crack America.

Still, Primark is likely to be encouraged by the recent success of H&M in the U.S., according to Maureen Hinton, global research director at retail analysis firm Conlumino.

"I would be extremely surprised if they didn't succeed in the U.S.," she said.

Comments

Daniel Herkes -- I'll bet this will do really well in the US. All people want is junk, and that's all they have been able to buy for the past thirty years.

Steven Ferre -- The British do retail very well, but do we really need another store full of cheap disposable clothing? Aren't we sated with H&M, American Apparel, Forever 21, etc.? What am I saying? In today's culture, people can never get enough "junk". They'll probably make a fortune.

Barrie Harrop -- It will be a winner in the USA

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Sears Seeks New Cash Via Two Paths
By Suzanne Kapner and Michael Calia
Wall Street Journal
October 20, 2014

Struggling Retailer Offers New Debt Rights/Warrants, Leases Mall Space to Primark

Sears Holdings Corp. is again turning to billionaire Chief Executive Edward Lampert for funds, as the struggling retailer shores up its balance sheet ahead of the holiday season and seeks to reassure vendors worried about its health.

Sears said Monday it will sell $625 million in debt to owners of the company's stock--48.5% of which is controlled by Mr. Lampert. It is the third time in a little more than a month that Sears has turned to Mr. Lampert for cash. In September, his hedge fund provided the retailer with a $400 million short-term loan backed by 25 of the company's properties. Last week, it provided the company with an additional $169 million by buying some of the 51% stake that Sears owned in Sears Canada .

Together with the spinoff of Sears's Lands' End unit to its shareholders earlier this year and the sale of some real estate, the measures have the potential to raise as much as $2 billion, providing that other shareholders fully participate in the Sears Canada and debt offerings.

Sears also said Monday it would raise more money by leasing space in seven stores to European fashion retailer Primark. Financial terms weren't disclosed. Under the deal, Sears is giving up some space in top-rated malls, and opening the door to a competitor that has been highly successful in Europe by selling fashion at deeply discounted prices.

With the seven Sears leases plus a store to open in Boston on the site of the now-defunct Filene's Department Store next year, Primark will go from having no U.S. stores to eight locations in a matter of months. With shirts selling for roughly the equivalent of $13, shoes for $20 and dresses for $24, Primark is taking on Forever 21 and Hennes & Mauritz AB's H&M chain in the "cheap and chic" category of retailers.

Amid its fundraising efforts, Sears continues to hemorrhage cash and report losses that have rattled its supplier base. The company's losses totaled nearly $1 billion in the six months through Aug. 2, and vendor financers and insurers are tightening terms on the company's suppliers.

"This rights offering provides Sears Holdings with additional long-term flexibility and we expect it will provide confidence to our vendors and other constituents that we will continue to generate the liquidity needed to support our business," the company said in a blog post Monday.

Sears said it expects to raise at least $303 million from the hedge fund run by Mr. Lampert in the rights offering, which will give shareholders a chance to buy notes that come due in 2019, carry an interest rate of 8% and give them the right to buy Sears stock for $28.41 a share. The company's shares gained 23% to $34.96 on Monday.

Fairholme Capital Management LLC--the investment firm run by Bruce Berkowitz that owns about a quarter of the company's stock--has advised Sears that it expects some of its clients to participate in both offerings.

Mary Ross Gilbert, a credit analyst with Imperial Capital, said the 8% yield on the unsecured debt is less than the 10% yield on some of Sears secured debt, which is backed by its inventory. Ms. Gilbert added, however, that the debt offering is good for Sears shareholders, because it elevates their position in the company's capital structure.Primark, which is owned by Associated British Foods PLC, will lease about 520,000 gross square feet of retailspace over the next 12 to 18 months in mall-based Sears locations in the northeastern U.S., Sears said. To make room, Sears said it would leave one mall and cut back to smaller-store formats of up to 100,000 square feet of sales areas at the rest.part of the agreements, Sears will no longer have a presence at the Simon Properties Group-owned King of Prussia Mall near Philadelphia, which is considered one of the top malls in the country. Real-estate research firm Green Street Advisors rates the mall "A++," its highest rating based on sales per square feet. Dick's Sporting Goods already leases space in the upper floor of the Sears space, and Primark will operate on the lower level.

In the Staten Island Mall, another prime location rated an "A" by Green Street, Sears expects to take on Primark as a roommate. Sears will continue to operate about 70,000 square feet of selling space, while Primark will lease about 70,000 square feet, including space for back offices and warehouses, joining former Sears unit Lands' End as a tenant. The Primark location at the mall, which is operated by General Growth Properties , is expected to open in 2016, Sears said."We're picking up great locations with high foot traffic," said John Bason, the chief financial officer of Associated British Foods, Primark's parent.

The other five locations in the deal will be announced later, Sears said

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Rehab plan for Sears' old West Side HQ takes shape
By Mary Ellen Podmolik
Chicago Tribune
October 17, 2014

On Chicago's West Side, massive structures that once housed Sears, Roebuck & Co.'s headquarters remain reasonably well-preserved but empty since redevelopment efforts a decade ago fell victim to the housing crash.

Now, a financing agreement approved last week by the Chicago City Council is moving forward a $55 million plan to redevelop one of the stately brick buildings in part of the North Lawndale neighborhood known as Homan Square.

Mercy Housing Lakefront, which is undertaking the project with financing partners, hopes to begin construction early next year to turn Sears' former printing facility and product testing lab into Sterling Park Apartments, 181 affordable, one- to four-bedroom apartments, of which 66 would be set aside for Chicago Housing Authority residents.

Once completed, nonprofit Mercy hopes to then tackle a rehab of the adjacent Sears administration building to create a sustainable, mixed-income neighborhood along West Arthington Street, just east of South Homan Avenue.

"Frankly, the properties on the east side of Homan have been a challenge," said Mark Angelini, president of Mercy Housing Lakefront. "We feel the natural repurposing here is to complete what Homan Square started. (The buildings) are beautiful, they're built like forts, and they're well-suited to transportation. It's really in the path of growth."

Built between 1905 and 1907, Sears' headquarters campus and mail order plant included four buildings, a park with a pergola and its own power plant. A year after its opening, the campus was bustling with more than 9,200 employees. When Sears moved to the Sears Tower in 1973, most of the facility was vacated.

In the early 1990s, Sears and developer Charles H. Shaw teamed up to revitalize the neighborhood by developing affordable, mixed-income, for-sale and rental housing, community services and education facilities. To date, 350 homes have been built, and a sixth and final phase of more than 50 mixed-income apartments is expected to go before the City Council for approval this fall.

Also, a renovation of the 14-story tower that was once attached to the now-demolished Merchandise Building is expected to be completed in June. It will be used for arts programming, job training and events..

"I hope it's the beginning of fixing up that end," said Kristin Dean, president of the Foundation for Homan Square. "We fixed up our end."

In 2004, the foundation, which previously operated as the Homan Arthington Foundation, sold the complex of buildings that also included the former Allstate offices, a parking garage, parking lot and vacant land to Royal Imperial Group, which planned a 1,200-unit residential development of market-rate apartments and condominiums over a five-year period. Then the housing market crashed and nothing materialized.

Mercy, working with Royal Bank of Canada as the financial partner, is under contract to acquire the printing building at 3301 W. Arthington that has been vacant since 1999, although Royal Imperial will continue to have a small interest in it. Last week, the City Council approved $17.8 million in low-income housing tax credit equity and will cede up to $30 million from bond sales to the CHA to help with construction financing costs.

The CHA has been working with Mercy on the proposed development but it still needs the approval of the agency's board and it is expected to be considered later this year, according to CHA spokesman Matthew Aguilar.

If Mercy's anticipated timetable stays true, residents will be moving into the historic building, with its arched windows and terra cotta insignia of European printing houses, by mid-2016. It then would like to develop market-rate housing in the administration building, which has terrazzo floors and marble wainscoting.

Angelini, who worked on the Homan Square development as a vice president of The Shaw Co. earlier in his career, hopes that as the eastern fringe of Homan Square gains more people, it will attract more retailers to the area. Residents hope so, too.

Paula Pacalso and her family were renters in Chicago's West Town neighborhood and never thought of Homan Square until she was in the neighborhood to watch a swim meet at an Olympic-size indoor swimming pool that's part of Homan Square's community center.

In June, the family bought a four-bedroom, 3 1/2-bath home in the neighborhood that was sold as a short sale for $140,000. It last sold in 2006 for $380,000.

Those kinds of rock-bottom home prices -- the area has seen a fair amount of foreclosures and short sales -- is causing other first-time buyers to consider the area, according to Josh Kirchner, a real estate agent at Re/Max Vision 212. "It's good to see people investing in the community," he said. "It's kind of on the edge of where development ended. Everything on Arthington right there is really beautiful. A lot of people don't know it's there."

In the four months since moving to the neighborhood, Pacalso has found the neighbors friendly and the homeowner association active and vigilant. But there are downsides. She considers the area a food desert, so she drives back to West Town for groceries. Also, the lack of activity on the eastern part of the neighborhood is obvious.

"It's empty and dark during the night," Pacalso said. "I was really hoping that eventually that area would be developed and more people would be there and more facilities and more shopping."

That is Mercy's hope as well. "This is an opportunity to re-energize retail," Angelini said. "Basic staples are needed."

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Wal-Mart Warns of Rough Patch for Sales, Profits
Wall Street Journal
October 16, 2014

Retailer Scales Back Plans for Superstores, Shifts More Spending to E-Commerce Operations

Wal-Mart Stores Inc. appealed to investors for patience Wednesday, as it tries to retool its operations for shoppers who are buying more online and in smaller stores closer to home.te two new warehouses to handling Web orders.

The world's largest retailer unveiled plans to slash the number of massive supercenters it plans to build in coming years in favor of investing more in e-commerce, which represents the fastest-growing part of its business but continues to generate operating losses.

The company said its yearly e-commerce sales could approach $35 billion by early 2018, up from $10 billion last year. But it warned of a rough stretch for sales and profits as it plows ahead with its overhaul.

Wal-Mart cut its forecast for sales growth in the current fiscal year to between 2% and 3% from a previous range of 3% to 5%, citing lower food-stamp payments and a stronger dollar, which eroded overseas gains when translated into its home currency.

"We have the tolerance to think long term and to be patient," Chief Executive Doug McMillon told investors. "It will put short-term pressure on the company, but we believe you and others will support it as long as you understand the strategy."

Citing what it called a tougher-than-expected sales environment, the company said it hadn't witnessed any change in the general weakness of the economy or its customer base, and that it doesn't foresee much improvement next year.

"Everywhere I travel, I see tough economies and stretched consumers, and that hasn't changed through the course of the year," Wal-Mart International Chief Executive David Cheesewright said Wednesday. The company expects sales to grow 2% to 4% next year.

Wal-Mart's shares fell 3.6% to $75.20 Wednesday, a rough day for markets overall. The Dow Jones Industrial Average fell more than 173 points on the day on mounting concerns about sluggish global growth.

The giant retailer has found itself on the wrong side of trends in the U.S., as shoppers favor smaller and more conveniently located stores or making purchases online. In response, Wal-Mart said Wednesday it would build only about half as many supercenters next year as this year and would shift investment dollars to e-commerce.

"We will change the mix of our capital spend through reductions in areas we have invested in historically to fund investments in new growth opportunities," Mr. McMillon said. "Overall capital range will be slightly lower than last year with a mix difference toward more e-commerce dollars."

Wal-Mart said it plans to build 60 to 70 supercenters and between 200 and 220 smaller stores next fiscal year. It aimed to build as many as 300 smaller-format stores this year, but said it would miss that target and now intends to complete 240.

Meanwhile, the company plans to spend between $1.2 billion to $1.5 billion on e-commerce investments next year, up from $400 million last year. It said it will build two new 1.2 million-square-foot warehouses next year dedicated to handling Internet orders and speeding up shipments.

The two distribution centers, in Atlanta and Bethlehem, Pa., add to the three warehouses it built this year to process Web orders.

The retailer hasn't booked sales growth in the U.S., excluding newly opened or closed stores, since 2012, as its crowds of shoppers have dwindled.

The company has posted much better results for its 400 Neighborhood Markets, where sales rose by 5.6% in the quarter ended July 31, excluding newly opened or closed stores.

Sales at its 3,400 supercenters fell by 0.3% during the same period.

Wal-Mart's Sam's Club unit also will cut its store openings in half next year, planning to open nine to 12 stores next year, down from 20 this year.

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Sears Canada picks CEO from U.S. office
The Canadian Press
October 15, 2014

TORONTO -- Sears Canada is bringing in an executive from the ranks of its U.S. parent to replace outgoing CEO Douglas Campbell while it hunts for a more permanent candidate.

Ronald Boire will step in as CEO of the Canadian retailer, moving from his job at Sears Holdings Corp., where he served as chief merchandising officer and president of Sears and Kmart Formats.

Boire replaces Campbell, who said last month he would be leaving the company by the end of the year for personal reasons and returning to the United States.

Sears Canada says it continues the search for a permanent replacement and considers Boire to be a leading candidate.

Boire joined Sears Holdings nearly three years ago after serving as president and CEO of retailer Brookstone Inc. and, before that, Toys R Us, where he was president of the North American division.

Earlier in his career, he worked as global merchandise manager at Best Buy and spent 17 years at Sony Electronics in several senior management positions. He also serves on the board of U.S. advocacy group the Retail Industry Leaders Association, based in Washington.

"I look forward to building on the work done by Doug Campbell and his team… in the core retail operations and aligning the size of the organization with the size of the business," Boire said.

"Creating value for all of our stakeholders will be my mission and the mission of all of us at Sears Canada."

Sears Canada has been undergoing dramatic changes after looking for prospective buyers and failing to find sufficient interest.

Earlier this month Sears Holdings announced it would reduce its stake in Sears Canada and raise as much as US$380 million for its own operations in the process.

The U.S. parent company could sell up to 40 million shares of Sears Canada through a rights offering to its shareholders, which include U.S. chairman and CEO Edward Lampert and ESL Investments Inc., a private company that he controls.

Under the offering, the parent company will lower its ownership in the Canadian retailer to 12 per cent from 51 per cent, after having already cut its stake several years ago.

Sears Canada has been struggling in an increasingly competitive market dominated by discount retailers.

Over the past few years, the company has dramatically reduced its workforce and also sold off leases to several department stores, including its prominent location at Toronto's Eaton Centre, a popular tourist destination.

In the late morning, Sears Canada shares were ahead 15 cents to $8.75 on the Toronto Stock Exchange.

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New Penney CEO Has Strong Background in Operations
By Suzanne Kapner, Shelly Banjo and Joann S. Kaplan
Wall Street Journal
October 14, 2014

Marvin Ellison, a Retail Veteran From Home Depot

This time around, J.C. Penney Co. is playing it safe, picking a new chief whose strength is in the nuts and bolts of retailing rather than flashy merchandising.

The struggling retailer on Monday named Home Depot Inc. veteran Marvin Ellison as its next CEO, opting for an executive who is known for his strong operational skills and giving him a long transitional period to come up to speed.

The caution contrasts with Penney's riskier and ultimately disastrous bet three years ago on former Apple Inc executive Ron Johnson, who upended its pricing strategy and offerings in an effort to make the chain more hip but ended up blowing a $4 billion hole in the company's sales.

The appointment also reflects a broader shift in retail in which some big companies have favored detail-oriented operators over executives mainly lauded for brilliance in merchandising, as the industry faces giant new challenges in managing its supply chains and keeping customers from defecting to the Web.

Brian Cornell, a former PepsiCo Inc. executive who recently became CEO of Target, and Art Peck, incoming CEO of Gap Inc., are valued more for their ability to run large operations than for their gut instinct about the next hot trend. Penney will need those sorts of skills as it maps out the next steps of a recovery.

The department-store chain has fended off a cash crunch and reversed a steep drop in sales and traffic. The company's loss for the six months that ended Aug. 2 narrowed to $524 million from $934 million a year earlier, as sales grew 6% to $5.6 billion. Yet questions remain about where Penney--heavily exposed to the discount-driven apparel business, the traffic-challenged world of shopping malls and the beleaguered middle-class consumer--fits in a changing retail landscape.

Last week Penney cut its sales forecast following a weak showing during the end of the back-to-school shopping season. Penney shares fell 29% last week.

Still, Mr. Ellison isn't leaning toward major surgery.

"The last 18 months have proven that turning the company upside down and shaking it a couple of different ways was not necessary," Mr. Ellison said in an interview.

The 49-year-old Mr. Ellison is joining Penney on Nov. 1--three years to the day after Mr. Johnson took the helm--but he won't become CEO until next August. In the meantime, he will hold the title of president and be mentored by Chief Executive Myron "Mike" Ullman III, who will stick around an additional year as chairman after turning over the top job. Mr. Ellison will also join Penney's board.

Some analysts questioned whether Mr. Ellison could make the leap from paint and plywood to apparel and cosmetics. Walter Loeb, the president of consulting firm Loeb Associates Inc., said the CEO-to-be lacks a merchandising background, but is a safe choice.

"Marvin is a strong leader and he has a good background in operations," Mr. Loeb said.

Mr. Ellison worked at Target for 15 years before joining Home Depot in 2002. There he ran areas including loss prevention and global logistics before ultimately taking the job of executive vice president in charge of the do-it-yourself chain's roughly 2,000 U.S. stores. Mr. Ellison was the first African-American to join the company's executive team and was considered a possible successor to Chief Executive Frank Blake until the company named Craig Menear as its next CEO in August.

The future Penney CEO grew up in a segregated rural Tennessee town with four brothers and three sisters. His parents were sharecroppers before joining together with their children in the 1970s to form the Ellison Family Gospel group, which recorded four albums. He graduated from the University of Memphis and got his M.B.A. from Emory University.

Mr. Ellison helped lead Home Depot's transformation from a cluttered big-box store with antiquated operations and employees who spent the majority of their time unpacking boxes and restocking shelves to a retailer that devoted nearly two-thirds of its labor hours to serving customers on the sales floor.

Bonnie Hill, Home Depot's lead independent director until this spring, said Mr. Ellison simplified the marching orders given to stores, made sure items stayed in stock and installed better signs to make the chain's cavernous stores easier to navigate.

This spring, Mr. Ellison spearheaded an initiative called Project Simple. For two months beginning March 31, the head office had to get permission from Mr. Ellison and his operations team before exchanging emails with store managers and employees. The goal was to eliminate distractions, "to protect stores and keep them focused on what's important"--their customers--Mr. Ellison told The Wall Street Journal in April.

Mr. Ellison, who sits on the board of FedEx Corp, was also tasked with figuring out how to integrate Home Depot's e-commerce operations with its brick-and-mortar stores. He ushered in the ability to buy items online and pick them up in stores, as well as training programs for employees on how to help customers order goods online when they weren't available in stores.

Home Depot's sales-per-square-foot jumped to $334 in its last fiscal year from $279 in 2009.

Penney's stock rose initially on the news of the new CEO Monday, but closed down slightly at $7.09 amid another broad rout for the stock market.

Ms. Hill, the former Home Depot director, said Mr. Ellison will look for answers by spending time getting to know Penney executives and the company's culture.

"Marvin's not a person who will go in there and say, 'I know what's best,' " she said.

Mr. Ullman said in an interview that the leadership transitions that work the best are ones "when you work as a team and try to get someone up to speed." He added, "Marvin's been in retailing for about 30 years. I don't need to teach him retailing."

The extended transition period planned for Mr. Ellison is in contrast to the way Penney handled the arrival of Mr. Johnson. Then, Mr. Ullman stepped down as executive chairman just three months after the arrival of Mr. Johnson, who without first testing his ideas in a limited number of stores set about shaking up the company by eliminating discounts and replacing popular house brands with edgier designers, moves that alienated customers.

Mr. Ullman was brought back as CEO in April 2013 and quickly shored up the company's finances by raising billions of dollars and reversing many of Mr. Johnson's initiatives. Penney's sales have started growing again, but they are in a deep hole, having ended 2013 at $11.9 billion after running above $17 billion for years before Mr. Johnson took over.

Penney's board began moving in earnest to line up a successor to Mr. Ullman this summer, once the bulk of his initiatives to pull the company back from the brink were in place and operations had started to improve, Mr. Ullman said. Negotiations with Mr. Ellison became serious in the past few weeks, and a deal was reached late last week, a person familiar with the situation said.

The 67-year-old Mr. Ullman has suffered from a neurological muscular ailment since 1988 that makes it difficult for him to walk and underwent surgery this summer for the condition, according to a regulatory filing by the company. During the company's analyst day in New York last week, Mr. Ullman took the stage riding a Segway, his preferred method for getting around.

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Kmart Stores Hit by Data Breach
By Maria Armental and Suzanne Kapner
Wall Street Journal
October 11, 2014

Sears Holdings Corp. said the payment systems at its Kmart stores were breached by malicious software, the latest in a string of major retailers that have been successfully attacked by hackers.

The breach, believed to have started in early September, was discovered Thursday, Sears said, noting some debit and credit-card numbers of customers who shopped at Kmart were compromised.

Based on its investigation so far, no personal data--such as emails or Social Security numbers--were taken, Sears said in a filing Friday with the Securities and Exchange Commission.

Chris Brathwaite, a Sears spokesman, declined to say how many credit and debit cards were affected. Mr. Brathwaite said the breach didn't affect kmart.com or Sears stores or websites.

Kmart is the latest retailer to report data breaches. A massive hack at Target Corp in September reported as many as 56 million cards may have been affected in an attack that ran for five months beginning last spring.

In August, the Department of Homeland Security warned more than 1,000 businesses in the U.S. had been hit by so-called "Backoff" malware, which targets cash-register systems in stores. Neiman Marcus Group, and other stores have reported similar incidents. On Thursday, International Dairy Queen Inc. reported a similar data breach.

The attacks underscore the vulnerability of retailers' payment systems, which hackers are targeting with software designed to slip into the systems and capture data when it is unencrypted as cards are swiped. The software that attacked Target, for example, was introduced through a portal used by a vendor.

Mr. Brathwaite said the malware found in Kmart's payment systems was undetected by current antivirus software. He said it had since been removed and the virus contained. He declined to say how the malware was installed or detected.

Mr. Brathwaite said Sears is working with the U.S. Secret Service and private security firms. He didn't identify the firms.

Sears has set up an information page on its website and is offering free credit monitoring to customers who used a credit or debit card at Kmart stores through Thursday. Shoppers generally aren't liable for fraudulent purchases on their cards.

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Everyday Low Benefits
Wall Street Journal - Editorial
October 8, 2014

Wal-Mart dumps 30,000 part-timers onto the ObamaCare exchanges

Wal-Mart endorsed ObamaCare in 2009 and helped drag the bill through Congress, and so far it hasn't recanted. By holding back economic growth and incomes, perhaps the law is expanding the retailer's customer base. Another plus--at least for management--is that Wal-Mart can jettison its employees into the ObamaCare insurance exchanges.

The Associated Press reported Tuesday that the largest U.S. private employer is dropping health benefits for some 30,000 workers, or about 5% of its part-time workforce. Earlier health-plan eligibility triage in 2011 had removed tens of thousands of Wal-Mart workers from the balance sheet, so this latest purge was probably inevitable.

Wal-Mart cites its inability to manage higher-than-anticipated health expenses. Perhaps--though wasn't ObamaCare supposed to bring those costs down? Obviously the company is also responding rationally to ObamaCare's incentives. With a subsidized government alternative now open for business, and since corporations aren't liable for a penalty for not covering people who work fewer than 30 hours a week on average, cost-control logic says to send such coverage ballast over the side. Other retail and grocery chains including Target, Home Depot and Trader Joe's have already done the same.

ObamaCare's critics predicted that such insurance dumping was inevitable, and the only question now is how many and how fast other companies partake of the new all-you-can-eat entitlement buffet. Get whatever you like, the bill's on taxpayers. The disruptions will be concentrated in industries with large numbers of low-skilled and low-income workers, like restaurants, hospitality and, yes, retail.

The irony is that even as Wal-Mart drops insurance because it is too costly, President Obama is claiming credit for lowering health costs. He boasted the other day that the law gave every U.S. family "a $1,800 tax cut" by supposedly reducing the rate of employer-sponsored premium growth. ObamaCare had nothing to do with that, and it surely won't be any consolation to Wal-Mart's latest health-plan diaspora.

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Wal-Mart to End Health Insurance for Some Part-Time Employees
By Shelly Banjo, Anna Wilde Mathews and Theo Francis
Wall Street Journal
October 8, 2014

Cutback to Affect 30,000 Who Work Fewer Than 30 Hours a Week

Wal-mart Stores Inc. is cutting health insurance for another 30,000 part-time workers and raising premiums for its other employees, as U.S. corporations push to contain costs in the wake of the federal health-care law.

Autumn is typically when U.S. companies unveil changes to employee insurance plans. This is the first such enrollment period since employers could assess the full financial impact of the federal health-care overhaul, and it is a key moment as companies work to lower their spending ahead of looming taxes on the most generous plans.

Many businesses are continuing to shift more costs to workers. Phoenix-based technology distributor Avnet Inc., for example, is paring back its traditional plans in favor of high-deductible options. Other companies are reducing coverage for spouses, according to consultants at Towers Watson & Co.

Still others are going further, ending their traditional coverage for employees who will instead get a fixed sum of money to buy their own insurance on private exchanges. PLC's Aon Hewitt is set to announce that enrollment in its exchange will grow to around 850,000 workers and dependents next year, as another 15 employers sign up.

Several facets of the health-care overhaul are driving concerns about costs: one is the coming tax on so-called Cadillac plans, which carry high premiums and offer rich benefits, and another is the individual mandate that requires most workers to obtain coverage or else face a penalty.

For Wal-Mart, that push from the individual mandate contributed to an influx of workers who signed up for coverage, jacking up costs. Wal-Mart, the country's largest private employer, with about 1.4 million employees, forecasts that its health-care costs will rise by $500 million more than it had expected in the year ending Jan. 31, 2015.

"We can't take our eyes off costs," said Sally Welborn, senior vice president of global benefits at Wal-Mart. Ms. Welborn declined to say how much Wal-Mart will save from the plan changes.

Private-sector employers spent $446 billion on health insurance premiums in 2012, the most recent year for which the federal Medicare agency has published figures, and they were expected to pay $483 billion this year, up 22% from 2007. Households spent $284 billion on premiums in 2012. They are expected to spend slightly less this year to $282 billion, but it is still up 20% from 2007.

Under the Affordable Care Act, large companies beginning in 2015 must offer coverage to most employees working 30 hours a week or more or pay a penalty starting at around $2,000 per worker. Most individuals, meanwhile, must show that they have health insurance or pay an individual penalty.

Critics of the law have been concerned that companies would drop coverage and force workers onto government exchanges.

Several other retailers already have moved away from providing health insurance to part-time workers. Target Corp. earlier this year said it would stop offering such benefits, citing options available through public exchanges. Home Depot Inc. last year ended health-care coverage for almost 20,000 part-time workers, while United Parcel Service Inc. cut coverage for workers' spouses who had access to insurance through their own employers.

Not all companies are gravitating toward exchanges, though. Appliance-maker Whirlpool Corp. considered shifting its employees to public exchanges this year, despite the potential for financial penalties. Whirlpool calculated that the move would save millions of dollars, but ultimately decided against it for nonfinancial reasons, according to Ed Mohr, a human-resources executive at Whirlpool.

Twenty-four percent of all companies that provide health benefits offer them to part-time workers, according to a 2014 study by the Kaiser Family Foundation and Health Research and Educational Trust, down from 25% last year.

Wal-Mart, which at one point offered health-care coverage to all part-timers, has been paring back such coverage in recent years. In 2011, it cut coverage for new employees who worked fewer than 24 hours a week. The following year, it stopped insuring new workers who worked fewer than 30 hours a week.

On Tuesday, Wal-Mart said it would drop coverage beginning Jan. 1 for existing workers who were grandfathered into the company's health plan. Now, only those part-timers working 30 to 34 hours a week will qualify for the company's health coverage.

Wal-Mart also is raising premiums for all workers next year. About 40% of enrolled workers are on its least expensive and most popular plan and will now pay $21.90 per two-week pay period, a 20% increase, starting Jan. 1. Across all three plans, Wal-Mart said it estimates workers will pay an additional $10 a pay period. The average Wal-Mart hourly worker earns $11.81 an hour.

"Half of my paycheck is gone before I even get the money," said BJ Marhefka, 49 years old, who works about 40 hours a week in the Wal-Mart automotive department in Southport, N.C., and makes $10 an hour.

Despite the increased costs, she said she won't drop Wal-Mart's health-care program because her son has asthma and has to see a doctor regularly. She said she would cut back on other things instead.

Elsewhere, the tax on higher-priced plans, set to take effect in 2018, is already playing into employers' benefit decisions. A survey released in August by the National Business Group on Health found that, to minimize the impact of the tax, 57% of employers were planning to implement or expand high-deductible plans, while 42% were boosting employees' cost-sharing.

Employers with higher-cost plans are extremely concerned about the tax, said Randall Abbott, a senior consultant at Towers Watson. FedEx Corp. and JetBlue cited the tax when they moved their workers into high-deductible plans.

Avnet, the technology distributor, added two new high-deductible offerings this year, and for next year it will keep them and pare down to one traditional plan from two. All of Avnet's plans next year will have at least a $1,500 deductible for a single worker, but the company will also contribute as much as $500 to individual employees' health-savings accounts.

Concern about the 2018 tax "was driving it," said MaryAnn Miller, chief human resources officer at the company, which has around 6,000 U.S. employees. The company had estimated that without changes, the tax would cost it $1.4 million in 2018.

JetBlue replaced its four traditional health-care plans with two high-deductible plans last year. With the new plans, the discount airline operator also agreed to make fixed contributions to employees' health-care spending accounts with a twist. For employees who engage in healthy activities, JetBlue will increase how much it contributes. Run a marathon, double the contribution, said Harry Spencer, the airline's vice president of compensation and benefits.

Wal-Mart has retained a third-party benefits adviser to help affected workers find coverage on public and private health exchanges or by using a spouse or partner's health insurance.

"We can't predict where they will go, but we are going to help them find affordable health care," Ms. Welborn said.

-- Stephanie Armour contributed to this article.

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Sears's Other Big Hit
By Justin Lahart
Wall Street Journal
October 8, 2014

Sears Holdings has moved to raise a slug of cash ahead of the holidays. Yet investors are still worried.

The retailer announced last month that its chief executive, Edward Lampert, and his hedge fund would lend it $400 million through the critical holiday season. Then, last week Sears said it expected to raise as much as $380 million by selling most of its 51% stake in Sears Canada to Mr. Lampert and other shareholders in a rights offering.

But Sears stock dropped sharply Wednesday anyway following a Bloomberg report that a vendor had halted shipments to its stores, and that some credit insurers to cancel coverage was reported last week in The Wall Street Journal.

Even a response from Sears labeling the Bloomberg article "misleading" did little to ease the pain.

Sears suffers a confidence deficit. After all the assets it has shed over the past several years, it is hard to see what the company might do to raise more money in a hurry. So while Sears appears to have raised more than enough cash to meet its bills ahead of the busy holiday season, any hint that its suppliers and their insurers and creditors are worried has a pronounced effect on its stock.

Asked what Sears would do if needed to quickly raise cash, spokesman Howard Riefs said in an email that over the next six to 12 months the company "intends to work with its lenders and others to evaluate its capital structure with a goal of achieving more long-term flexibility, and may take other actions as appropriate."

After the hit Sears took on Wednesday, investors likely want more clarity than that--and soon.

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Sears to Sell Most of Stake in Canada Unit to Shore Up Liquidity
By Suzanne Kapner
Wall Street Journal
October 3, 2014

Retailer Expects to Raise Up to $380 Million Ahead of Holidays

Sears Holdings Corp. once again turned to the deep pockets of its chief executive, as suppliers grew increasingly concerned about its finances ahead of the crucial holiday shopping season.

The company said Thursday it plans to reap as much as $380 million by selling the bulk of the 51% stake it holds in Sears Canada to its own shareholders. Of that amount, $168 million is expected to come from CEO Edward Lampert and his hedge fund, ESL Investments Inc.

Mr. Lampert, who controls a 48.5% stake, is Sears's largest shareholder. The cash infusion follows a $400 million short-term loan that his hedge fund made to Sears in September. The loan spooked suppliers because it was backed by 25 Sears properties. In the past, Mr. Lampert had provided the company with short-term financing that was unsecured.

Sears had tried to find a buyer for Sears Canada, but that effort didn't bear fruit, people familiar with the matter said. The Canadian company lost the equivalent of about $90 million in the six months through Aug. 2, as its revenue fell by 11.5%. Late last month, Douglas Campbell resigned after a year as CEO.

The U.S. company's performance has deteriorated despite Mr. Lampert's efforts to turn it around with steps like rolling out a loyalty program and giving iPads to sales staff. Sears lost nearly $1 billion in the six months through Aug. 2, and its operations burned through $747 million in cash, as sales fell 8%. Group SA, a firm that insures suppliers against nonpayment, is canceling policyholder coverage on Sears effective Oct. 6, according to an Euler Hermes letter reviewed by The Wall Street Journal. It wasn't clear how much Sears inventory was covered by the insurer, which said it continues to monitor the situation closely.

Euler Hermes says it insures nearly $1 trillion of business transactions world-wide.

Sears spokesman Chris Brathwaite declined to comment on the developments by Euler Hermes or the company's relationship with its suppliers, but said there has been no disruption in the flow of goods.

The infusion of cash from Mr. Lampert's purchase of Sears Canada stock will come in mid- to late October, the company said. The rest of the funds are expected in November. The move helped calm suppliers, people familiar with the matter said.

Sears's stock rose 7.5% to $27.07, but has lost about a third of its value so far this year.

Mr. Lampert took over Kmart about a decade ago then merged it with Sears in 2005, in a deal seen as a savvy real-estate play and an opportunity to rework two storied retailers. But the chains have suffered due to what critics say has been a persistent lack of investment.

The company has lost about $6.4 billion over the past three and a half years, and Fitch Ratings says its operations don't generate enough cash to cover what it needs to spend on pension contributions, interest payments, and investments in its stores and website.

Sears can borrow more money and continue to sell assets like its Sears Auto Centers chain, but it could run out of cash after 2016 unless things turn around, Fitch says.

Mr. Brathwaite, the Sears spokesman, said the company has enough financial flexibility to fund its operations through the holidays, meet all of its obligations and continue funding its turnaround efforts.

The company has raised $1.4 billion this year, including the sale of some real estate to Sears shareholders. It has been exploring ways to cash in on its stake in Sears Canada for the past year. The private-equity firms Sycamore Partners and KKR & Co.were among the firms that studied potential bids, but the process broke down, people familiar with the situation said.

Fairholme Capital Management LLC, the investment fund run by Bruce Berkowitz, which controls nearly a quarter of Sears's stock, expects some of its clients to participate in the offering of Sears Canada stock, Sears said. Mr. Berkowitz's firm also bought $25 million of the $400 million loan provided by Mr. Lampert, according to regulatory filings.

Sears Canada said it agreed to amend its licensing deal with Sears Holdings. The Canadian retailer said it would continue to use the Sears and other brand names as long as Sears Holdings maintains a 10% stake, down from a previous trigger of 25%.

Sears Canada also said it would continue to have rights to trademarks on a royalty-free basis for five years after the licensing agreement terminates, up from three years.

The offering would leave Sears with 12 million shares in the Canadian retailer, down from 52 million shares.

--Mike Spector and Michael Calia contributed to this article.

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Sears: Beware the Postholiday Blues
By Justin Lahart
Wall Street Journal
October 3 , 2014

Sears Holdings looks well on its way to having more than enough cash to pay its bills through the holidays. But to make it through next year it may have to raise even more. And from where exactly isn't clear.

Sears on Thursday said it plans to sell most of its majority stake in Sears Canada in a rights offering, and expects to make as much as $380 million on the sale. This comes on top of the $400 million short-term loan it received from Chief Executive Edward Lampert 's hedge fund, ESL Investments, last month

Sears was described last week by credit analysts at Moody's Investors Service as a "loss-addled" retailer. And it has been burning through cash to the point that some suppliers, and the firms that finance them, were reportedly becoming worried.

So were investors. They sent Sears stock last month to its lowest levels since the company was hit by liquidity concerns in early 2012. At the same time, they also sent the cost of insuring Sears's bonds against default to the highest level since then.

Thursday's announcement allayed some of those concerns, and Sears stock rose. Shares are still down by about one-third this year, and are about 80% below their 2007 peak.

But Sears's ability to raise needed money through asset sales and loans isn't the same as running a business that can fund its obligations through its operations. ISI estimates that even with the Sears Canada stock sale, Sears will be out of cash by the middle of 2015, absent more asset sales or financing measures.

Sears spokesman Howard Riefs, in an email, says: "We have proven that we are an asset-rich enterprise with multiple levers at our disposal to generate financial flexibility, while creating shareholder value."

The retailer has fewer assets to sell than it used to, though. In addition to the planned sale of the majority of its Sears Canada stake--it owns 51% of that company--Sears earlier this year spun off its Lands' End business. It has also sold a number of real-estate assets, shed its franchised and outlet stores in 2012, and spun off its Orchard Supply hardware stores in 2011.

Sears still controls, through outright ownership or long-term leases, a number of valuable store locations. The catch: many of these probably represent Sears's most profitable stores. So without them it will be even harder for it to generate cash. The company's less-desirable locations will be much harder to dispose of. It could also sell its Sears Auto Centers.

But given the experience they have been through this year, suppliers may want to see a fair amount of cash on Sears's balance sheet before they agree to produce inventory for the 2016 holiday season. Unless it turns its operations around, Sears will have to keep breaking its piggy banks.

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Sears Canada CEO steps down
By Marina Strauss - Retailing Reporter
The Globe and Mail Toronto
September 25, 2014

Struggling Sears Canada Inc., whose U.S. parent has put it up for sale, is looking for a new chief executive officer after announcing its current one is leaving.

The company said on Thursday that Douglas Campbell, who took the top spot a year ago, is leaving to return to the United States to tend to personal family issues. He plans to continue as CEO until Sears Canada names a replacement, although no later than Jan 1, 2015.

Mr. Campbell replaced Calvin McDonald, a seasoned retail executive who had spearheaded transformation initiatives at the department-store retailer. Sources have said Mr. McDonald's departure was sparked over differing views with parent Sears Holdings Corp., whose controlling shareholder is Edward Lampert. The disagreement was tied to the pace at which capital was being used to keep up the transformation efforts, a source has said.

Since then, Mr. Campbell has cut more jobs, outsourced more operations and sold leases of key stores, including the flagship in the Toronto Eaton Centre, back to landlords to help raise cash.

In a statement on Thursday, Sears Canada said it "remains committed to continue the strategy of optimizing productivity, realizing value from desirable assets and creating a highly relevant retailer in Canada with a focus on rural and suburban locations."

William Crowley, chairman of Sears Canada who works closely with Mr. Lampert, said: "Doug brought a focus on creating value for shareholders while taking the cost efficiency and investment steps necessary to produce a viable and profitable Canadian retailer."

Sears Holdings continues to explore "strategic alternatives" for its 51 per cent interest in Sears Canada, including a possible sale.

Keith Howlett, retail analyst at Desjardins Securities, said his view is that the sale and other strategic alternatives process "is taking more time that had been expected by Sears Holdings."

Last week, Mr. Lampert's hedge fund, which is the largest shareholder of Sears Holdings, advanced $400-million (U.S.) to the retailer, secured by 25 U.S. properties, raising questions about why Mr. Lampert is using some of Sears' best store locations as collateral. In the event of more financial troubles, Sears would get first dibs on some valuable real estate assets which suppliers had counted on if the business deterorated further, Gary Balter, an analyst at Credit Suisse, said in a note last week.

Sears Holdings had set an objective of raising $1 billion of cash in 2014. "Sears Canada had been one potential source of cash, via special dividends and/or sales," Mr. Howlett said on Thursday. But the majority of the $1 billion cash target had been raised through Sears' move to spin off its Lands' End division.

On Thursday, Sears Canada said it will review "the appropriate level of cash for the company, and any potential return of capital to shareholders, based on the performance of the company during the holiday season and the prospects for the business going forward."

Mr. Howlett said he thinks Sears Canada will not declare a special dividend until it releases its fourth quarter results early next year. Sears Canada effectively has no debt.

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Retailers both big and small continue to disappoint Wall Street. Here's what's wrong, and how to fix it.
Fortune
September 22, 2014

Something has gone missing in American commerce. The passion for outsize consumption that helped drive the world's largest economy for decades--one nation, indivisibly united by an addiction to malls, supercenters, and retail therapy--appears to have waned. After years of slow to stagnant growth, some experts worry that the entire retail sector is now shifting into a fundamental decline. Could the long American love affair with shopping finally be on the rocks? "I talk to retail executives every day in this country, big, medium, and small," says Robin Lewis, an industry expert and the author of the widely followed The Robin Report, "and they all say things are damn slow."

Damn slow, indeed. At a time of year when U.S. retailers should be riding the annual wave of back-to-school spending and gearing up for the bonanza of the ever-expanding holiday season, they are instead gloomily explaining continued lackluster results to Wall Street. Companies from Target to Kohl's to Coach have reported disappointing sales for several quarters running. Wal-Mart, the world's largest retailer, with $279 billion in sales in the U.S. alone, has seen a drop in store traffic in each of the past seven quarters. Once-shining brands such as Staples and Abercrombie & Fitch are closing stores--a reversal from the "build it and they will come" mentality that formerly served as a strategy. Even Apple, the king of sales per square foot, has seen a decline in same-store sales this year, according to Customer Growth Partners. Overall, according to eMarketer, retail spending in stores is expected to grow just 3.7% in 2014--a fairly anemic rate some five years past the depths of the Great Recession. No wonder Kip Tindell, CEO of the Container Store, while reporting yet another quarter of poor numbers in early July, complained that the retail business was in a "funk."

What are the reasons for this malaise? Industry analysts and executives describe a perfect storm fueled by an unfettered addiction to promotions and discounts, continued economic instability, and the fact that there is simply too much store space for the current population. The result, says Mark Cohen, director of retail studies at Columbia University and former CEO of Sears Canada, will be a "Darwinian struggle for survival," which may ultimately take down some of the best-known brands. Yes, e-commerce continues to grow rapidly, now accounting for an estimated 6.4% of sales, or $304 billion in 2014. But the bigger e-commerce gets, the more it is disrupting the industry as we know it.

There are, of course, winners as well as losers in this new world--not only the obvious online powers, such as Amazon, which continue to siphon off market share, but also more traditional brick-and-mortar plays like Dollar General and T.J. Maxx. And there are lessons in those success stories. U.S. shoppers haven't gone away altogether. But there is a "sea change in how people are shopping," says Daniel Busch, an analyst with real estate analysis firm Green Street Advisors. Retailers must change dramatically to reach future customers. To better understand how the business is evolving, we identified four major (and interrelated) trends that are roiling retail--as well as possible solutions to each.

PROBLEM NO. 1: Death by Discount

It's the oldest strategy in merchandising: offering shoppers an artificial price lower than "retail" to spur our primal desire for landing bargains. But over the past decade, say analysts, things have gotten way, way out of control. Virtually every retailer--at both the high and the low end--has fallen so deeply into the trap that discounting has become an expectation of customers rather than a bonus. "There's price deflation caused by ever-increasing discounts and price competition, which lowers the average transaction value," says Columbia University's Cohen. "That means you have to sell more things just to stay even." This phenomenon has been spurred in recent years by the ability of shoppers to "showroom," or compare prices on the web.

The most obvious beneficiaries of the discount trend are the off-price retailers, which sell designer fashion and home goods at lower prices than customers typically find at department or specialty stores. A star pupil in this class is TJX, which runs the T.J. Maxx and Marshalls chains and is likely to overtake Macy's in revenue this year. There are now about 2,000 T.J. Maxx and Marshalls stores, compared with 1,680 just five years ago.

In an attempt to win back some share, the department stores that the off-price chains have squeezed are getting in on the action. Saks Fifth Avenue, a part of Canadian retail conglomerate Hudson's Bay Co., now operates 39 department stores--compared with 53 five years ago--but has boosted the number of its OFF 5th outlet stores from 55 to 75 over the same period. And Nordstrom, long known for its high-end quality, expects that by 2016 it will have twice as many Nordstrom Rack outlets as full-service department stores.

While mall traffic overall continues to fall--some 15% of malls are expected to close or convert to other uses in the next decade, according to Green Street--outlet malls are booming. According to the International Council of Shopping Centers, there are now 340 outlet centers in the U.S., up from 311 in 2007. Developers like Tanger Factory Outlet Centers and Simon Property Group say they have plans to build many more in the coming years. That will only exacerbate the downward pressure.

SOLUTION: End the Race to the Bottom

Finding a way out of the discount trap has been elusive. The most daring attempt to do so--former J.C. Penney CEO Ron Johnson's decision in 2012 to abruptly end most sale pricing in favor of "everyday low pricing"--was an unmitigated disaster. Johnson, who uncovered the shocking statistic that 72% of Penney's products were sold at 50% off or more, sought to do away with what he called "the disease." There was just one problem: If you're the only one trying to change things, it doesn't work. In the first year of Johnson's experiment, Penney's revenues dropped by a stunning $4.3 billion. Those sales were eagerly scooped up by the likes of Macy's and Kohl's, who responded to Johnson's move with--you guessed it--even more discounting. Macy's recently lowered its 2014 sales forecast, and Kohl's is struggling to post consistent gains. Johnson, who was forced out in 2013, may have failed on execution. But the big retailers would be wise to study his analysis of the discount dilemma.

At least one expert sees a "Darwinian struggle for survival," which may ultimately take down some of the best-known brands.

PROBLEM NO. 2: Too Much Space

Who would ever have imagined the decline of the supercenter? For much of the past three decades it was a no-fail concept. Pick a location with cheap real estate and a large nearby population, build a giant box with a vast supply of shelf space, and wait for the shoppers to show up in droves. Wal-Mart rode the supercenter strategy to No. 1 on the Fortune 500. Target and Best Buy followed suit and blossomed as well. But the era of megastore dominance may be coming to an end.

A big reason is that today the U.S. has far too much shopping square footage for its population--52.4 square feet per capita, compared with, for example, 16.4 square feet in Germany, according to data from research firm CoStar and the International Council of Shopping Centers. It's not just supercenters either. The number of shopping centers with more than 50,000 square feet in the U.S. has doubled in the past 30 years, though growth has flattened recently. The first principle of U.S. retail has seemingly always been "more and bigger." But given the ease of buying anything from a stapler to a toilet online, a continually growing footprint only adds up to empty parking lots.

SOLUTION: Shrink to Grow

Home Depot CEO Frank Blake recognized the square-footage dilemma earlier than most. When he decided in 2008 to stop opening new stores (with exceptions for certain demographically shifting areas, such as North Dakota), most analysts and employees alike thought he was nuts. Wasn't the point of any public company to actively grow its business? "It was the right decision for us," Blake says, "but it was painful. All the muscle memory in the organization was around building new stores." Instead, Home Depot has invested that capital in both improving its existing stores and in building a better online presence. Under Blake, who is stepping down Nov. 1 after seven years in the job, Home Depot's stock doubled, showing Wall Street that there may be another way to think about growth.

Other retailers are slowly getting the message. Two years ago Gap returned to same-store sales growth after closing dozens of U.S. stores. And growth in store counts at the 100 largest retailers by revenue has slowed to less than 3% from more than 12% three years ago, according to a recent Moody's report.

PROBLEM NO. 3: The Nonrecovery Recovery

It should surprise no one that lower-income shoppers continue to be price-sensitive. Why? The economy, stupid. Yes, the U.S. is growing again after the trauma of the Great Recession. But not everyone is feeling it. The bottom 20% of Americans in terms of income saw their real income grow only 19.5% between 1967 and 2012, while the top 5% earned 88% more. What's more, the way people use their disposable income has changed. For instance, think about the "smartphone effect." With $100 or more per month going to service plans, apps, and music, consumers have less money for a new pair of shoes.

Those economic trends help explain the ongoing stagnation at the likes of Target, which posted negative comparable sales for 2013 and has followed that up with two worrisome quarters this year. Not only are there too many big-box stores (see problem No. 2), but they are also mostly located in places that require a long drive--an increasingly troublesome proposition in an era of high gas prices and food-stamp-benefit cuts.

SOLUTION: Assume This Is the New Normal

A morose economy has been a boon to Dollar General. Over the past five years the ultra-discount retailer has opened 2,500 new stores (for a total of 11,388), while its same-store sales have risen consistently. It succeeds by being hyper-local with fixed, low prices. Most of its stores are in municipalities with fewer than 20,000 people, and many are within walking distance of population centers.

Much of the rest of the retail world, meanwhile, spent precious time waiting for customers to come back to them. Few are counting on that anymore. Wal-Mart, for instance, is now trying to counteract the success of Dollar General and other dollar-store chains by speeding up the rollout of its own small-format stores in population-dense locations: Its goal is to have 700 by February, compared with around 400 at the beginning of 2014.

In an environment of perpetually yo-yoing consumer confidence, retailers must either win clearly on price and convenience, or wow shoppers with such an innovative product or unique buying experience that they can't help opening their wallets. That leads us to...

PROBLEM NO. 4: Stunted Evolution

If any single trend in retail is crystal clear, it's this: Online sales will continue to boom. E-commerce sales should leap 61% by 2018, according to eMarketer, reaching $491.5 billion. Brick-and-mortar sales, still a vastly larger number, are expected to grow a decidedly more modest 12.8% to about $5 trillion, from $4.43 trillion, over the same period.

Adapting to this brave new world has proved difficult for many in the sector. While virtually every retailer participates in online sales, not all do it well. And the long tail enabled by the web means that a growing portion of overall sales is going to retailers with no physical stores. The digital experience is changing shopping habits in other ways too. Even when customers do choose to purchase items in a store, they frequently do research online first and then go straight for the item without stopping to browse. That reduces spontaneous purchases and harms retailers without great inventory controls.

SOLUTION: Blend the Old With the New

Malls are particularly vulnerable to the ease of online shopping. Busch of Green Street Advisors estimates that about 15% of items typically stocked in malls are now regularly purchased online. Some mall operators have grasped that reality, investing in their "A" malls, which cater to the high end, and adding new features and services such as gyms and wine bars. "You can't have a salad and a glass of wine online," says Michael Glimcher, CEO of mall REIT Glimcher Realty Trust.

That's the right idea. To thrive in an online world, retailers must enhance the excitement of the physical shopping experience while at the same time smothering customers with convenience. Happily, some major chains have lately been making better use of the very asset naysayers say condemns them to irrelevance: their stores. For instance, Wal-Mart's online business is now growing faster than Amazon's, thanks to big investments it has made to enable customers to place orders online and pick them up in many of the 3,300 or so Wal-Mart supercenters that dot the country. And Macy's uses most of its 810 stores to help it fill e-commerce orders more quickly and not have to move as much unsold, extra merchandise on clearance. Getting better at this "omnichannel" approach is essential for any retailer planning to succeed with physical stores.

Is there hope yet for U.S. retail? Only if retailers themselves understand that the classic assumptions about the way people shop are no longer valid. "People haven't stopped wanting things, and they won't stop wanting things," Cohen says. "The economy will eventually repair itself. But where are they going to transact? That is the question."

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Sears lets customers make returns, exchanges from their cars
By Alexia Elejalde-Ruiz, Tribune reporter
Chicago Tribune
September 19, 2014

Why go into Sears when Sears will come to your car?

Sears has expanded its in-vehicle pick-up service to include exchanges and returns, giving shoppers an added convenience -- and, less optimistically, another reason not to leave their cars and walk into a store.

Available to members of Shop Your Way, Sears' loyalty club, the free in-vehicle service guarantees that an associate will be at the customer's car within five minutes of the customer arriving to take back or exchange the unwanted item.

It is an expansion of the service, launched in February, that lets online shoppers pick up their purchase at a nearby store without leaving their car. The customer arranges for the car-side service on sears.com and then lets the store know he or she has arrived at the designated pick-up/exchange/return lane via the Shop Your Way

"Buying what you really want should be easy -- that's why we continue to make it more convenient to pick-up, return and exchange items that you have purchased right from your car," Leena Munjal, senior vice president at Sears Holdings, said in a press release. "We're all living busy, on-the-go lives, and this latest expansion to Sears integrated retail conveniences means that you can spend less time making a return or exchange and more time shopping."

Asked if it might be counterproductive to give shoppers the option to not go inside a store where something might catch their eye, Sears spokesman Brian Hanover said, "Our focus is on providing shopping convenience to our members, letting them shop whenever, however they choose."

Though he declined to provide metrics quantifying the success of the in-vehicle pick-up service over the past six months, he said members have given the service among the highest marks of any service Sears has introduced, and the positive feedback led to the decision to expand it to returns and exchanges.

"It's a change and it's about doing what works for our members and giving them what they want," Hanover said.

Sears was among the pioneers when it first launched its buy-online-pickup-in-store option, now widespread among retailers, 13 years ago.

While the in-vehicle service is only available at Sears full-line stores, the company is looking closely at bringing it to Kmart, Hanover said.

If Sears exceeds the guaranteed five-minute window, the customer gets a $5 coupon good for his or her next in-store purchase, he said.

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Sears Loan Highlights Pressure on Cash
By Suzanne Kapner
Wall Street Journal
September 19, 2014

Even if Sales Go as Planned, Analysts Say, It Could Come Up Short by End of 2016

The limits of Sears Holdings Corp.'s cash are coming into sight.

The struggling retailer is selling off assets to raise money as its operations continue to produce red ink. But even if those sales go as planned, credit analysts say, the company could find itself short of funds by the end of 2016.

Sears's troubles were underscored Monday, when the company said it had agreed to borrow $400 million from the hedge fund run by Edward Lampert, the company's CEO, chairman and biggest shareholder. Mr. Lampert's ESL Investments Inc. has made short-term loans to Sears in the past by buying the company's commercial paper, but those loans were unsecured.

This time the loan--which will come due in just over three months and is aimed at helping the company get through the holidays--is backed by 25 Sears properties.

"It's significant that Eddie is taking less risk, whereas before he was willing to take more risk by providing unsecured financing," said Mary Ross Gilbert, a managing director at Imperial Capital, a boutique investment bank.

Chris Brathwaite, a Sears spokesman, said that Mr. Lampert continues to have a lot at stake in the company, which has plenty of assets. That gives "us great flexibility in ensuring that we can continue to invest in our transformation while meeting all of our financial obligations," Mr. Brathwaite said.

In a filing Thursday, hedge fund investor Bruce Berkowitz said an affiliate is in talks about participating in the loan with an investment of up to $100 million. Mr. Berkowitz and his funds own 24% of Sears, according to the filing.

ESL held $285 million and $250 million of Sears's commercial paper in early 2013 and 2012, respectively, but it held none on Feb. 1. Mr. Brathwaite said the new loan was at favorable terms and a more predictable source of funding than commercial paper. The company is working on a longer-term solution to address concerns about its cash, he said.

Among those concerned are Sears's suppliers. Some are dealing with limits on how much inventory they can finance as creditors cut back, according to a person who provides suppliers with financing. One said he was troubled that Sears had to pledge properties to secure the loan from Mr. Lampert's fund.

"As a vendor, one has to ask if cash flow is that tight that ESL needs to lend the money. And why is it taking first dibs on so-called valuable real estate if that is what the vendors had counted on if things further deteriorate?" Gary Balter, a Credit Suisse analyst, wrote Thursday in a note to clients.

The company's shareholders and bond investors appear to be skittish, too. Sears's shares have dropped since Mr. Lampert's new loan was disclosed, and at $28 they are down nearly 30% so far this year. Meanwhile, the cost of insuring some of Sears's bonds has increased by 65% since the beginning of the year, reaching levels not seen since January 2012, according to Diana Allmendinger, a director of Fitch Solutions.

Mr. Brathwaite, the Sears spokesman, pointed out that the 25 properties are a small portion of Sears's roughly 1,900 stores, a majority of which are leased.

The new loan could be extended until Feb. 28 if Sears doesn't violate the terms. It will give a near-term boost to the company, which burned through $747 million in the first half of the year. But Sears needs to reverse a drop in sales and start generating more cash if it is to remain viable.

Sears's operations currently don't produce enough cash to cover what the company needs to spend on pension contributions, interest payments on its debt, and investments in its stores and website, according to an analysis by Fitch Ratings.

The company has plugged the gap by spinning off its Lands' End unit to shareholders, selling some real estate and obtaining the loan from Mr. Lampert's hedge fund. All told, those activities will have brought in about $1 billion this year.

More money will be needed unless the company can turn around its Sears and Kmart stores. Losses have totaled about $6.4 billion over the past 3½ years, including a loss of nearly $1 billion in the six months through Aug. 2 as revenue in the period fell more than 8%.

Observers have been predicting the demise of Sears for years, but the company isn't out of options yet. It is evaluating possibilities for its 51% stake in Sears Canada as well as Sears Auto Centers. And it could raise more debt backed by its inventory and real estate. Those measures, along with closing more stores, could put $4 billion to $6 billion into Sears's coffers, enough to see the company through 2016, according to Monica Aggarwal, a senior director at Fitch.

"What happens after 2016 is the big question," Ms. Aggarwal said. "The chance of a restructuring is high."

Analysts said that Sears, which is paying an annual interest rate of 5% plus an upfront fee of 1.75% on the new loan, likely received terms at least as favorable as it would have from an unaffiliated lender. Mr. Brathwaite said the loan was approved by the company's board and complied with its code of conduct governing monetary arrangements between directors and the company.

Still, Mr. Lampert's presence on both sides of the deal raised concerns.

Erik Gordona clinical assistant professor at the University of Michigan Ross School of Business, said: "You can understand how some investors could suspect that it's an early step in Lampert's endgame."

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Sears Borrows $400 Million From Affiliates of CEO Lampert's Hedge Fund
By Suzanne Kapner
Wall Street Journal
September 16, 2014

Sears Holdings Corp. is borrowing $400 million from Chief Executive Edward Lampert's hedge fund, giving the retailer an infusion for the holidays after it burned through cash over the summer.

The loan is being made by entities affiliated with Mr. Lampert's ESL Investments Inc. and secured by 25 of the company's properties, Sears said in a securities filing on Monday.

The loan will mature on Dec. 31, though that could be extended until Feb. 28, assuming Sears doesn't violate the terms of the loan.

The arrangement underscores the deep and unusual relationship between the hedge fund and the brand. Sears has shed sales, staff and market value amid what critics say has been a lack of investment by Mr. Lampert.

Sears recorded a loss of nearly $1 billion in the six months through Aug. 2, extending a string of losses, as revenue fell more than 8%. The retailer said it planned to work with its lenders and others to evaluate its capital structure. The company also is closing stores and selling assets to raise cash.

The company continues to explore options for two of those assets--Sears Canada and Sears Auto Centers--said spokesman Chris Brathwaite. "The timing of those transactions are uncertain," he said. "This short-term loan provides us with a more predictable source of funding through the holidays."

Sears had said it planned to raise $1 billion this year, a goal that it has now met with the $400 million ESL loan plus $665 million that the retailer had raised by spinning off its Lands' End division to shareholders and selling some real estate.

Sears has turned to Mr. Lampert's hedge fund for financing before. But as recently as Feb. 1, the fund didn't hold any of the company's commercial paper, according to a regulatory filing.

The loan pays an annual interest rate of 5%, and Sears has to pay an upfront fee of 1.75% of the amount borrowed. Half was funded Monday, and half will be funded Sept. 30 if Sears meets certain conditions.

Sears shares fell 75 cents, or 2.2%, to close at $33.52 Monday on the Nasdaq Stock Market.

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RIP, Sears?
By Joe Cahill
Crain's Chicago Business
September 12, 2014

Only two more years for Sears?

That projected time of death surprised even those of us who see little long-term hope for the money-losing retailer. But that's essentially what credit ratings service Fitch Ratings meant when it said this week that Sears Holdings Corp.'s "funding options may not be enough to support operations beyond 2016." The warning came as Fitch downgraded the company's debt to "CC," a junk-level rating that means "default of some kind appears probable."

Until now, Sears watchers have focused on 2018 as the likely reckoning point for the Hoffman Estates-based retailer, which has been desperately selling off pieces of itself to cover rising losses. That's when big chunks of debt come due for Sears.

But Fitch is the first to go on record as believing the end is nearer. Of course, a lot of variables will determine if and when Sears might have to take shelter in Chapter 11. What's interesting isn't so much the chronological accuracy of Fitch's forecast as its willingness to put an expiration date on the 121-year-old company.

As a credit rating agency relied upon by investors in corporate debt, Fitch is obliged to call it like it sees it. Sometimes that means squarely addressing the likelihood and probable timing of a bankruptcy filing. Hence the statement that "Fitch expects that the risk of restructuring is high over the next 24 months." In credit-market speak "restructuring" means "Chapter 11."

In an emailed statement, a Sears spokesman says: "We don't agree with their action, given our demonstrated history of honoring our financial commitments while continuing to invest in our transformation."

CASH BURN

Fitch's conclusions are grounded in an analysis of the challenge Sears faces in raising enough cash to cover its operating expenses and other obligations between now and the end of 2016.

Sears' woebegone store operations are consuming roughly $1 billion to $1.5 billion in cash annually. On top of that, Fitch figures Sears needs about another $1 billion a year to cover interest on its debt, maintain its stores and pay legally required contributions to its pension plan.

Sears has tried to tamp down worries by reciting a list of potential cash sources. Execs say it could sell off its stake in Sears Canada and maybe the Sears Auto Centers. It also could tap the value of its real estate by selling or mortgaging more stores. Altogether, Sears estimates it could raise $5.2 billion in cash.

Still, Fitch concludes Sears won't have enough cash to make it past 2016. Fitch estimates the retail chain will burn $2 billion or more in cash annually between 2014 and 2016, for a total of $6 billion.

"We're saying that even if they can do all this, we're still talking about two or three more years," says Fitch Senior Director Monica Aggarwal, the company's primary analyst on Sears.

And doing all that will take some doing. Sears' estimate of its cash-raising potential is a trifle optimistic. Take Sears Canada. Sears Holdings' 51 percent stake is worth about $830 million, based on the Canadian company's stock market value. But Sears can't just sell those shares on the open market — doing so would tank the stock price. It has to find somebody willing to buy its whole stake. But who wants to pay full prices for a majority stake of a foundering Canadian department store chain?

WHAT VALUE?

Estimating the sale value of the auto centers is difficult, because Sears doesn't disclose the unit's profit. But auto center sales declined in the second quarter, according to Sears's most recent quarterly report.

Then there's Sears' revolving credit line. True, the revolver provides for up to $3.28 billion in borrowing. But there's less there than meets the eye. Outstanding balances and borrowing restrictions written into the deal had reduced availability under the line to $240 million as of Aug. 2, according to the company's quarterly filing with the Securities and Exchange Commission. That number will rise as Sears adds inventory in advance of the holiday selling season but drop again when inventory reductions resume.

When it comes to real estate, remember that the value of retail real estate in a sale or as collateral for a loan hinges on the viability of the retailer occupying the stores. With Sears closing stores left and right, how much value will a buyer or lender see in its real estate?

All of this underscores the reality that hocking or selling off assets to keep afloat is a losing battle. As Fitch notes, Sears's core problem is declining sales, which causes deeper losses even as the company shuts down its worst-performing stores.

Maybe Sears will scrape together enough cash to cover its expenses a little beyond 2016. Cash consumption at its stores may slow, asset sales may fetch more than expected, lenders may advance a few more dollars.

But one of the conclusions I draw from Fitch's analysis is that Sears will be pretty well out of options if sales haven't picked up enough to cover operating expenses by then. A company that's still burning cash after tapping out its credit sources and unloading all its salable assets doesn't have much of a future.

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Fitch Cuts Sears Ratings on Cash Burn Concerns
Wall Street Journal
September 11, 2014

Credit Ratings Of Sears Holdings Cut To Double-C From Triple-C

Fitch Ratings cut its credit ratings of Sears Holdings Corp. on Wednesday to double-C from triple-C, citing the company's steep drop in profibility and its cash burn.

In the latest quarter ended in August, Sears burned through more cash as its losses mounted, prompting the retailer to say it is weighing additional steps to shore up its balance sheet. The company lost $573 million during the quarter, while revenue slumped more than 9%.

On Wednesday, Fitch warned that it expects Sears' revenue to contract 9% to 10% in 2014 because of a 1% to 2% decline in same-store sales, the loss of the Lands' End business and continued store closings.

Sears spun the Lands' End brand off to its shareholders earlier this year as the struggling retailer seeks to focus on its core assets.

Fitch added that the company needs to generate a minimum Ebitda of $1 billion annually between 2014 and 2016 to meet various expenses, including capital expenditures and pension plan contributions. However, it expects an Ebitda of negative $1 billion in 2014.

The ratings firm warned there could be further negative rating actions if Sears is unable to inject the liquidity to fund ongoing operations. However, it pointed to possible asset sales, working capital and certain debt issuance as potential sources of liquidity.

Still, the risk of Sears restructuring is high over the next 24 months, it added.

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SEARS - Downgrade to double-C
Chicago Sun-Times
September 11, 2014

Credit-rating agency Fitch Ratings on Wednesday (September 10, 2014) downgraded its rating for Sears Holdings to double-C from triple-C citing the retailer's declining profits and negative cash flow.

The rating agency said Sears' funding options might not be enough to support the company operations beyond 2016.

In August, Sears Holdings reported a hefty second-quarter loss on another sales slump. The company, which operates Sears and Kmart, said it plans to do more cost-cutting to right the ship. That includes closing more stores beyond the 130 that it had announced earlier this year.

Sears lost $573 million, or $5.39 per share, for the period ended Aug. 2. That's more than double the loss of $194 million, or $1.83 per share, a year earlier.

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Can Sears stay afloat past 2016? Fitch doubts it
By Brigid Sweeney
Crain's Chicago Business
September 10, 2014

Fitch Ratings today downgraded Sears Holdings Corp.'s credit rating to CC from CCC, a move driven by the retailer's continuing decline in profitability and the rate at which it's burning through cash. The agency warned that Sears may not have enough funding to support operations beyond 2016.

The New York-based credit rater expects revenue at Hoffman Estates-based Sears to shrink 9 to 10 percent this year, due to negative same-store sales, ongoing store closures and this year's spinoff of Lands' End, which had been responsible for more than 4 percent of the retailer's 2013 sales.

In the most recent quarter ended in August, Sears lost $573 million, while revenue dropped more than 9 percent.

Meanwhile, the rate at which Sears is burning through cash is a mounting concern for Fitch. The agency said Sears needs to generate at least $1 billion in earnings before taxes, interest and other items each year between now and 2016 to meet its expenses. Fitch, however, expects Sears to be $1 billion in the hole this year.

Given that projection, "cash burn...is expected to be around $2 billion or higher annually," Fitch wrote in a report today. "In addition, Sears needs an estimated $600 million to $700 million in liquidity to fund seasonal holiday working capital needs."

SEARS EXECS' VIEW

Sears long has defended its liquidity. Over the past several years, the company has slashed costs and inventory and sold off stores and business segments to fund its operations.

When asked to comment on the Fitch downgrade, a Sears representative wrote in an email: "We don't agree with their action, given our demonstrated history of honoring our financial commitments while continuing to invest in our transformation."

The Sears spokesman also disputed that any factors point to a specific doomsday in 2016. The company has $5.2 billion of assets that could be converted into cash in the near-term and no long-term debt maturities until 2018, when it must repay $2.1 billion.

On earnings calls, executives repeatedly have said the company has sufficient liquidity. On the most recent call, Chief Financial Officer Robert Schriesheim reiterated that thought, adding that Sears also has "the benefit of access to a rich portfolio of assets." He did, however, add that Sears would take steps over the next year to shore up its balance sheet, and said that more asset sales likely will be necessary if operations don't improve.

Sears ended the quarter with $829 million in cash, up from $671 million in the year-ago period. This year's cash, however, includes the roughly $500 million the company received for its Lands' End spinoff. Overall, Sears has raised $665 million this year. The company, which plans to raise $1 billion in 2014, is trying to sell its 51 percent stake in Sears Canada and its Sears Auto Centers. It also plans to close 130 stores this year.

Gary Balter, a New York-based analyst at Credit Suisse, is skeptical that these efforts will work in the long-term and thinks they could affect the company's ability to work with its suppliers.

Sears' "efforts to sell assets to stay afloat...(are) leading to more store closures, implying overall sales will continue to decline," he wrote in a note last month. "The company may lose its relevance with key vendors."

Last month, Crain's reported that Converse Inc. stopped selling its shoes at Sears stores.

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GE Exits Kitchen, Narrows Its Focus
By Ted Mann
Wall Street Journal
September 9, 2014

Further Away From Consumers With Sale of Appliances Unit

General Electric Co., which commercialized the electric toaster and self-cleaning oven, said it would sell its appliance business to Sweden-based Electrolux AB for $3.3 billion.

The sale will leave the U.S. conglomerate almost entirely focused on finance and big-ticket industrial equipment like power turbines and aircraft engines.

The shift is the work of Chief Executive Jeff Immelt, who in his 14th year as CEO is adjusting to competitive pressures and trying to boost a long-sluggish stock price by focusing on the question: What is GE?

The answer isn't insurance, plastics, media, consumer finance or appliances--businesses Mr. Immelt has been shedding. Increasingly, the company founded by Thomas Edison is again an energy company.

Mr. Immelt has spent around $14 billion buying oil-and-gas service companies over the past several years. Energy and related activities last year accounted for about one-third of the company's revenue and more than 40% of operating profit

The company also remains a big bank, with GE Capital accounting for about one-third of its revenue and around half its profit. It is also a leading maker of aircraft engines and medical devices like CT scanners.

While Electrolux will continue to use the GE name, Mr. Immelt is cutting one of the company's few remaining ties to the American middle-class consumer--the division that stocked homes with GE dishwashers, radios and toasters.

"GE is a high-tech infrastructure company, that's who we are today," Mr. Immelt said in a recent interview, referring to the continuing discussion about the fate of the appliance unit. "We're not really a consumer-products company."

So far, the stock market hasn't cooperated. GE's share price fell below $6 during the financial crisis and hasn't returned to $30 since. The company's shares are off 7% so far this year, and were down slightly on news of the appliance deal, falling two cents to $26.08 on the New York Stock Exchange, while Electrolux climbed 5% to $55.44 in over-the-counter trading in the U.S.

Board members and executives including Mr. Immelt say the stock doesn't account for the value of the businesses the company has assembled.

They expect investor interest to revive as some of the portfolio-shifting moves Mr. Immelt has championed are completed next year, including the split-off of Synchrony Financial, GE's recently renamed consumer credit business that provides store-branded credit cards and financing plans.

The moves are finding some converts on Wall Street. GE had been a lightning rod for investor criticism, Steven Winoker, an analyst at Bernstein Research, wrote last month.

But Mr. Winoker said the company was poised to do better than its peers, saying GE's portfolio was as centered on industrial business as it had been in a quarter century, the midpoint of Jack Welch's tenure as CEO.

The sale of the appliances business--expected to close next year--would pull GE out of an industry in which it was once a dominant presence and a household name, beginning with the introduction of the model D-12, its first electric toaster, in 1905.

Electrolux is paying an annual royalty for the right to use the GE Appliances brand for some 40 years.

For decades, GE's home appliances formed a link between American consumers and one of the country's oldest and largest industrial companies. GE stoves, clock radios and microwaves featured in the company's TV ad campaigns promised to "Bring good things to life." The business also helped spur GE's move into lending. During the Depression, the company created GE Credit Corp. to help finance the sale of its appliances.

But the appliance business has long been out of step with Mr. Immelt's plans for the company, which focus on complex machinery and the long-term service contracts that go with it.

GE's appliance business is profitable, but it brought in just $5.7 billion in annual revenue last year--a small part of GE's $146 billion total and dwarfed by the company's energy, aviation and finance operations. The $381 million profit from the conglomerate's appliances and lighting division, of which the appliance business represents the lion's share, represented less than 3% of GE's net earnings in 2013.

GE has faced continual pressure to invest in new products and compete with other manufacturers in the appliance business, which lacks the long tail of service and maintenance revenue that investors prize in the power and aviation businesses. The company poured $1 billion into renewing its product lines after failing to sell the appliance and lighting business in 2008, but its products haven't impressed analysts in recent years.

"They were playing a defensive game," said David MacGregor, an analyst with Longbow Securities. By contrast, Mr. MacGregor said, Electrolux could use its GE acquisition to compete with industry leader Whirlpool Corp. in the U.S. and Brazil, especially for customers who aren't willing to shell out for Electrolux's premium name brand.

GE has about 12,000 workers in its appliance business, including 6,000 at Appliance Park, its historic manufacturing campus in Louisville, Ky.

Benefits for Whirlpool from GE Appliance Sale Sterne Agee backs its buy rating on Whirlpool following the sale of GE's appliance business to Electroluxl;"In the short term, we believe WHR could benefit from dislocation in the global appliance market as Electrolux and GE merge operations and presumably reset their combined offering," the firm writes. "Longer term, we anticipate the removal of a large competitor from the US market may give WHR more leverage with customers."

The disposition of the appliance business is the latest in series of efforts by Mr. Immelt and GE management to cleave off underperforming industrial units and shrink the company's overall dependence on its massive finance arm.

This year, GE sold shares in its North American consumer credit business in advance of the 2015 split-off. Meanwhile, the company has plowed money into new industrial businesses, including its $17 billion deal to buy the energy operations of French conglomerate Alstom SA ALO.FR in Your Value Your Change Short position this summer.

The efforts have served a pair of critical purposes for Mr. Immelt and GE executives.

The company is seeking to reduce its exposure to financial services in the wake of the 2008 financial crisis and expand the share of earnings from industrial operations.

If completed, the sale of the appliance unit would leave GE with seven industrial business lines in addition to its GE Capital arm, including two that are expected to undergo restructuring or partial divestment in the future: the energy-management business and the lighting business.

Several people who follow the company said in recent weeks that they expect GE to shed the Cleveland-based lighting unit in the near future. But others said that the business, while small compared with other parts of the company, still has value.

It also isn't a purely consumer business, one of those people said, noting that some 70% of its sales are to "professional" customers--like contractors and building companies--as opposed to consumers pulling light bulbs off the shelf.

Mr. Immelt, in the interview, said that "interesting opportunities" could lie ahead for the lighting business.

GE's largest industrial unit, according to its most recent annual filings, continues to be its power and water business, with $24.7 billion in sales and earnings of just under $5 billion in 2013. GE Aviation, maker of jet engines for commercial and defense aircraft, earned $4.3 billion on sales of $21.9 billion last year, and its health-care unit reported earnings of $3.0 billion on $18.2 billion in 2013 revenue.

GE's oil-and-gas business earned $2.2 billion on $17.0 billion in sales, and its transportation business, which makes freight locomotives, earned $1.2 billion on $5.9 billion in sales.

GE now aims to reap 75% of its earnings from industrial businesses by 2016. In recent years, the company has relied on its finance arm, GE Capital, for roughly half its profit.

-- Jens Hansegard and James R. Hagerty contributed to this article

Comments

Charles Heimerdinger -- GE's stock price continues to suffer from an "Immeltdown."

Robert Arnold -- Hmmm core businesses now are some that are government funds sourced like subsidized/rewarded energy and aerospace sales plus 'banking' of sorts. To hell with those pesky consumers! Hello crony capitalism? Perhaps.

Oscar Bishop -- Immelt is a disaster for GE Corp.

RONALD AFARIAN -- Thank God I never knew a soul who had a good ownership experience with GE appliances.

Paul Daffinrud -- I bought GE common stock after Immelt took the realms. Biggest financial mistake I ever made. It is only going to get worse if the Alstom deal goes through.

William Ford -- That $380 million in profit will look pretty good when the quagmire in France starts draining this company.

Matt Lechner -- NOTICE OF COMPLAINT // To: United States Department of Defense / Secretary of Defense / Defense Industrial Security Command (dsspa@dss.mil) // Re: General Electric / Alstom merger // Complaint is hereby directed to the Defense Industrial Security Command in regard to GE's proposed merger with / acquisition of Alstom, substantially representing the French nuclear engineering apparatus.

Matt Lechner -- The risk to the security of America's nuclear weapons programs is overwhelming, presented by the GE/Alstom proposal. France has, through its actions selling advanced naval warships to Russia, made it clear that it no longer views its obligations to NATO seriously, including with respect to nuclear security. There is no alternative but to assume France's nuclear engineering apparatus is peppered with Russian agents - if the two countries as friendly enough to be exchanging advanced warships, clearly they are friendly enough to exchange nuclear engineers. Pasting this group onto General Electric presents extremely serious security risks to America because it will place the Russian agents in immediate proximity to the nuclear engineering department of America's leading nuclear weapons contractor: General Electric.

Matt Lechner -- If GE thinks it can "manage" the associated security risks of deeply embedded Russian agents in the nuclear company it is acquiring (Alstom), that is profoundly foolish. GE is not set up to manage that kind of risk. It is in fact an unmanageable risk. The Russian agents in Alstom will be getting far "too close" to the nuclear departments at GE which deal with America's nuclear weapons program. The GE Board should be reprimanded for presenting this risk to America's nuclear weapons programs, and the transaction should be dissolved. We can not allow the Russian agents at Alstom to gain access to the most highly classified nuclear weapons information in GE's possession, through this misguided transaction.

Felix Wyss -- General Electric isn't very much of either anymore.

Robert J. Sacino -- It's been quite painful holding GE common for these many years when you compare its performance to its peers (e.g. Honeywell, etc.). As shareholders, we can only hope that Mr. Immelt's strategy to transform GE into "high-tech infrastructure company" will work and eventually payoff. Maybe there's some truth left to the old saying "no pain, no gain." Only time will tell...

BENJAMIN SCHOEN -- I've been disappointed in their consumer appliances for some time now. It still seems foolish to take a business with the #1 position in the #1 high end consumer market in the world and shed it because the margins don't support your bonus goals. Short term thinking, that's the ideas that come to life.

Burns Matkin -- So, is it time to sell GE short AGAIN???

Frank Dickof -- Immelt said after Obama was elected that they were shifting big time to government work.....this is just going further down that road. GE has been a disaster since Immelt was elevated to CEO.....a turkey.

GEORGE RASKO -- I guess the next question is: what is GE's lamp business worth?

Ken Deken -- GE needs to be treated as a poisonous snake after they cut their dividend just after promising to keep it. No way in my account, no matter what.

George Hollister -- "focused on finance and big-ticket industrial equipment such as power turbines and aircraft engines." Lots of government business, or government controlled business. Better get to know Capital Hill and the White House more than ever.

Andrew Eppink -- "For decades, GE's home appliances formed a solid link between U.S. consumers and one of the country's oldest and largest industrial companies." Immelt's foolish to throw that link away and all the effectively free GE advertising and goodwill implicit in it. Getting rid of much of the finance arm, which was Welch's baby and nearly sunk the co in 2008, makes sense but this doesn't, at all. Immelt's emphasis on hi value engineering projects makes a lot of sense, much better than Welch's old paper profit/financial manipulation emphasis did, but this doesn't. I can't imagine what he's thinking.

Frank Dickof - @Ken Deken Better check your 401(k) or any ETF/mutual fund you have.....it almost certainly has some GE stock in it.

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August 28, 2014 - Have the Benefit Bandits Returned?
By Ron Olbrysh
Summary of a Conference Call
September 8, 2014

NARSE, specifically myself and one other member of my choosing, was invited to join the Sears Retiree Council call on August 28. This was the first time we were able to participate in such a conference call. I asked Dick Bruce, a member of our Board of Directors, to join me as he is our expert on insurance issues facing retirees today.

Some Council members were concerned why NARSE was included in this call. It was stated that since so many of the local Sears retiree clubs were disbanded, that NARSE was still the only national independent organization representing Sears retiree interests.

Representing SHC on the conference call was Stan Aldis, director of benefits for the company, and also several Aetna insurance personnel.

The shocking news that SHC disclosed was the elimination of the $37 monthly health care subsidy beginning in 2015. This will impact about 14,000 Sears retirees. Only employees who retired before 2000 were eligible to receive the subsidy, which was applied to the monthly cost of health care coverage through Sears-sponsored group benefit plans. According to SHC, the elimination of this subsidy will save the company about $6.2 million annually.

What was SHC's rationale for this change? We were told that Sears is making tough decisions concerning it's infrastructure that should have been made much earlier based on the way customers (who are also being squeezed) want to buy. They said Sears is facing many challenges today and one of its biggest continuing competitive challenges is Amazon who has never reported a profit nor required to pay sales taxes in most locations.

SHC said that its objective is to become a competitive place to shop while realizing this through affordable means. This includes new leadership, emphasis on membership, an integrated retail model, and benefit costs, which are comparable to other companies.

To soften the blow, SHC has negotiated with Aetna, its insurance carrier, to expand to eight, from four, the number of group medical coverage plans it offers to retirees, and its prescription drug plan to seven, from four, so that retirees have the option of choosing a plan with lower premiums.

The Impact on Retirees

We told Sears that the additional medical expense burden, due to the loss of the $37 subsidy per person for the 14,000 affected retirees and their spouses, would be a financial burden for many of these individuals.

SHC's attempt to offset the loss of the subsidy with expanded choices of medical coverage plans and it's prescription drug plan, in order to provide an option of choosing a plan with lower premiums, will only complicate an already confusing decision making process for most of the older population of retirees. The average age of retirees impacted by this loss of the subsidy is 83.

We were told that SHC plans to assist retirees with this complicated decision process by establishing a new Aetna Service Center, staffed with Medicare certified professionals to council and assist retirees in making appropriate decisions concerning their medical, prescription, vision and dental choices. Theoretically, this enhancement could result in better-informed decisions than in the past, and might actually result in an overall cost savings and balanced coverage for some retirees.

However, the timing and effectiveness of getting retirees to transition from the 2014 service center number to the new Aetna Service Center telephone number which will not be in effect until October 20, 2014, presents a major challenge for many of our retirees.

Enrollment materials for 2015 will mail two weeks prior to the November 3 through November 24, 2014 enrollment period. These materials will advise retirees not to call the old service center telephone number. The problem is the timing of the release of the new Aetna Service Center telephone number, and getting retiree calls directed to this new number.

At the conclusion or the conference call, Sears asked the Sears Retiree Council members and NARSE to get feedback from retirees on this loss of the subsidy.

What Do You Think?

So, NARSE wants to know your thoughts about this 2015 major benefit loss. How will such change impact you? Will the additional options Sears is providing for 2015 soften this benefit loss? Are you concerned about the future of your other Sears benefits? Will SHC's action have a positive or negative impact on the company's future?

You can send your comments to me, Ron Olbrysh, at cro922@comcast.net. I look forward to hearing from you.

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Now Might Be the Time for Sears Holdings to Sell Kenmore
By Rich Duprey
The Motley Fool
September 7, 2014

Since chairman and CEO Eddie Lampert has done his darnedest to strip away everything of value from Sears Holdings, now might be the perfect time for him to get a buyer for his Kenmore appliance division.

Reuters reported yesterday that Sweden's Electrolux may unveil a $2.5 billion offer for the appliance business from General Electric. It's no secret the latter was shopping the division and last month Electrolux confirmed it was interested in buying.

Many times one purchase in an industry spurs another, and since Sears' appliance business is causing a huge drag on the company's performance, it could be time for Lampert to strike while the iron's hot and shop the Kenmore brand to someone quick.

Kenmore used to be one of the department store chain's crown jewels, owning a 40% share of the appliance market as recently as 2002. Through a special relationship it's had with Whirlpool in one form or another that dates as far back as 1916, it was Whirlpool that actually made the Kenmore appliances for Sears. Moreover, the agreement required Whirlpool to introduce features on the Kenmore brand first before it offered them on its own products.

Wash, rinse, repeat

Like much else that's been undone at the hands of Lampert, in 2009 Sears dissolved the pact with Whirlpool and instead partnered with LG Electronics and Samsung in a bid to save money. Kenmore's value cratered.

According to a Wall Street Journal story, features consumers looked for no longer appeared on the products and appliance sales are in a period of steady decline. Though Sears still leads the industry, its market share has fallen below 29%. Worse, the Kenmore brand has fallen from the top spot among appliances all the way down to third behind Whirlpool and General Electric.

In its second quarter earnings report Sears said that even though domestic comps sales at Sears rose 0.1% in part because of appliance sales, it wasn't nearly enough to offset the 1.7% drop in comps at Kmart, which was also a result of appliances, even though Kmart's hardline sales are about two and a half times smaller than Sears.

Sharply falling appliance sales in the division were also responsible for last year's near 4% drop in comps at both Sears and Kmart. Before the value of Kenmore drops even more, maybe it's time for Lampert to get what he can.

New global reach

Analysts believe the price Electrolux is likely paying for GE's appliance business represents a high premium.

GE's appliance and lighting division represented 5.7% of the conglomerate's total revenues of $146 billion and selling it to the Swedish company allows Electrolux a much bigger foothold in the U.S., where GE's business is almost exclusively focused. By partnering with an international company, it also gives the appliance division a chance to branch out globally.

Although Kenmore has slipped off its pedestal, it's still valuable. Sears hardlines segment accounted for 46% of its $8 billion revenues. Sure, that segment also includes things like consumer electronics, lawn and garden products, tools, hardware, and automotive parts, appliances remain a key component of it and the Kenmore brand specially so.

Foolish takeaway

Considering the long history Sears has had with Whirlpool, which might now be looking for an acquisition of its own to hold off a bigger, more robust Electrolux.

For a number of years I've been critical of Lampert's reign at Sears Holdings, and lately continuous shedding of assets that's left the company a shell of its former self. But since he's doing so anyway regardless, now might be the best time for him to put Kenmore on the block and reap as much of a premium as he can, while he can.

Rich Duprey owns shares of General Electric Company. The Motley Fool owns shares of General Electric Company. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Is It Possible to Lose Money and Rack Up Tax Expenses?
Chicago Tribune
September 7, 2014

Sears Holdings, which runs Sears and Kmart stores, has been losing money in its last three fiscal years. So the average investor might not expect the Hoffman Estates-based retailer to report any tax expenses, right?

Wrong. Sears filings with the Securities and Exchange Commission have shown effective tax rates for the past three fiscal years, including 14.8 percent in 2013.

Here's one reason:

Some companies with a history of losses can accumulate "deferred tax assets" on their balance sheets. Such assets can be valuable because they can later be used to shelter income from taxes.

But if it becomes clear that those deferred tax assets are unlikely to ever be used -- perhaps because profits aren't materializing--then companies must set up what's called a "valuation allowance."

When companies contribute to valuation allowances as Sears has, that shows as a tax expense on the income statement.

Last year, Sears boosted its valuation allowance by $623 million, to $3.37 billion.

Sears also reported deferred tax assets of $3.65 billion..

"In 2011, and again in 2013, we recorded a non-cash charge to establish a valuation allowance against substantially all of our domestic deferred tax assets," Sears said in its annual report. "Accounting rules generally require that a valuation reserve be established when income has not been generated over a three-year period to support the deferred tax asset."

Sears said the increase in its valuation allowance had a "significant impact" on its effective tax rate, hiking it to nearly 15 percent last year from 4.4 percent in 2012.

That doesn't mean Sears is paying taxes in the traditional sense, said Robert Willens, author of The Willens Report. But accounting rules allow such companies to show effective tax rates, and many with large losses do, he said.

William Henson, a Plant Moran International tax partner, notes that accounting for income taxes can be "counterintuitive."

"You can end up with significant swings in income tax expense that don't reflect taxes" paid, Henson said.

So did Sears pay income taxes? A Sears spokesman pointed to cash flow statement from the company's 2013 annual report. It showed that the company had "income taxes paid, net of refunds," of $21 million, $40 million and $94 million in 2013, 2012 and 2011, respectively.

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Sears Should Reorganize Its Operations Along Merchandise Lines Into Separate Subsidiaries
By Jay Wei, Research analyst, activist investor
Wall Street Journal
August 30, 2014

Summary

  • Sears' current operations are not organized and structured for achieving its best retail business potential.
  • Sears' ongoing asset divestment and other financing maneuvers can't turn around its declining business at the end of the day.
  • Changing the way how Sears organizes its retail business by setting up independent subsidiaries along merchandise lines could help simplify management and promote brand recognition.
Sears Holdings Corporation currently comprises of three operating units, Kmart, Sears Roebuck and Sears Canada. However, they are not totally distinctive from each other, selling a lot of the same merchandises but with many unshared distribution centers among them. Such an operating structure may have undeservedly led to management at different units competing internally against each other. If similar operations from each unit are pulled together, there may be better results for Sears against outside rivals.

On the other hand, the Sears-Roebuck unit has too many lines of operations within it, from clothing to furniture, appliances, tools, outdoors, etc. If broken apart and reorganized along different lines of merchandises, these businesses could each run as separate, independent units for increased efficiency with clearer performance measures. More importantly, such reorganizations would also benefit customers. It's counter-productive to overwhelm customers with different brands of stores for essentially the same things or vastly unrelated merchandises all in one place.

While Sears has been for some time reevaluating its company-wide operations, it's doing so mainly to find a way of financing its troubled retail operations. In addition to closing both Kmart and Sears stores that are underperforming, to raise cash for short-term operating uses, Sears has sold and spun off certain retail and other assets, including interest in Orchard Hardware, its own Hometown dealer stores, Sears Outlet and Lands' End, a mail-order clothing retailer now separately traded.

While Sears has been for some time reevaluating its company-wide operations, it's doing so mainly to find a way of financing its troubled retail operations. In addition to closing both Kmart and Sears stores that are underperforming, to raise cash for short-term operating uses, Sears has sold and spun off certain retail and other assets, including interest in Orchard Hardware, its own Hometown dealer stores, Sears Outlet and Lands' End, a mail-order clothing retailer now separately traded.

However, continually throwing cash at operations that can't seem to ever generate positive cash flows results in only more accumulated losses. Although cash shortage is an ongoing problem for Sears, the underlying issue is how ineffectively the company has been on the business side. Sears can try to line up all the available financing options, but working on raising funds only, however diligently, likely just prolongs its business struggles but helps little in preventing a potential demise of the Sears brand.

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Sears to cut retirees' $37 monthly health care subsidy
By Alexia Elejalde-Ruiz
Chicago Tribune
August 29, 2014

About 14,000 Sears retirees will lose a monthly health insurance subsidy as the languishing department store titan looks for ways to shave costs.

Hoffman Estates-based Sears Holdings Corp. plans to send letters Friday to the 14,000 Sears, Roebuck & Co. retirees and dependent spouses who have been receiving the $37 monthly health care subsidy, informing them that the subsidy will be eliminated in 2015.

Only employees who retired before 2000 were eligible to receive the subsidy, which was reduced in 2006 and is applied to the monthly cost of health care coverage through Sears-sponsored group benefit plans. Anyone who retired after 2000 had their subsidy eliminated in 2006.

The move will save Sears Holdings, which owns Sears and Kmart, about $6.2 million annually. The decision has been in the works for months and was not related to last week's earnings release, when Sears reported its ninth consecutive quarter of losses and 30th consecutive quarter of revenue declines, spokesman Chris Brathwaite said.

There will be no change to pensions or life insurance, he added.

Ron Olbrysh, chairman of the National Association of Retired Sears Employees, said "it came as a shock" when Sears told him the news during a call Thursday afternoon. While his group was expecting that the subsidy eventually would get hit, given Sears' financial performance, he didn't expect it to come so soon.

While $37 per month doesn't sound like a horrendous amount, for some it will be significant," Olbrysh said. Most of the group's members are in their upper 70s and live on pensions and Social Security. It is the biggest change Sears has made to retiree benefits in many years, he added.

The average age of the retirees in this group, which represents one-tenth of all 140,000 Sears Holdings retirees, is 83, said Stanley Aldis, director of benefits for Sears.

To soften the blow, Sears has negotiated with its insurance carrier, Aetna, to expand to eight, from four, the number of group medical coverage plans it offers to retirees, and its prescription drug plan to seven, from four, so that they have the option of choosing ones with lower premiums.

It also is setting up a dedicated call center staffed by Medicare experts to help this group of retirees determine if a less expensive plan could suit their needs and potentially not increase their out-of-pocket cost.

"In many cases we think they may be over-covered or have coverage they don't need," said Mike O'Malley, vice president of compensation and benefits for Sears Holdings.

All retirees would have the option to stay with the current plan but would be paying $37 more out of pocket every month. Under all the new plans, they could keep their same doctors. The expanded offerings include dental and vision coverage for the first time.

Sears has been losing money and revenue as it tries to transform itself from a traditional department store into a members-based shopping service. The decision to eliminate the subsidy was, in part, because "we are looking at opportunities to do the right thing in terms of expenses," said Dean Carter, chief human resources officer at Sears Holdings. "As we move through our transformation, we are looking at ways to invest more on members and services to members and increase our bottom line and improve our transformation. This is one way we could do that."

High health care costs and a competitive retail environment, where many other companies don't offer such a benefit, also drove the decision, Brathwaite said.

Olbrysh questions whether the $6.2 million annual cost savings for a company with annual revenue of $36 billion was worth the negative reaction it would likely receive.

"It would have been a small cost for Sears not to do that," he said.

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What Sears Could Do to Fix Things: Borrow, Sell, Spin Off
By Lauren Coleman-Lochner
Bloomberg
August 25, 2014

As it reported mounting losses, dwindling sales and further evidence it's been burning through cash last week, Sears Holdings Corp. (SHLD) said it was looking for added flexibility in lining up financing.

Here's a rundown of four ways the troubled retailer could raise enough money to keep the lights on:

BORROW MORE -- There's value in its real-estate portfolio, and Sears could take a page out of J.C. Penney Co. (JCP)'s book. When that retailer was strapped for cash last year, and its stock was being pounded, it put some of its properties up to secure a $1.75 billion loan from Goldman Sachs Group Inc. (GS) The liquidity helped J.C. Penney fund a turnaround after sales slid 25 percent under former Chief Executive Officer Ron Johnson, who left in April 2013.

The question is, how much are the more than 2,000 Sears and Kmart stores the company owns and leases worth? Mary Ross Gilbert, an analyst at Imperial Capital LLC in Los Angeles, estimated last year that they could fetch $6 billion -- in a liquidation scenario using what she called "aggressive" assumptions.

"I'm sure they're going to get a number of investment banks pursuing them trying to do real-estate deals," along with lenders interested in making loans backed by real estate or inventory, said Patrick Dalton, chief executive officer of GB Credit Partners, which makes and structures debt investments.

Chris Brathwaite, a spokesman for Sears, declined to comment on any of the possible actions.

HAVE A SALE -- Instead of borrowing against its real estate, Sears could put the portfolio, or some of it, on the market. "For the past several years, there's been a significant gap between what Sears values it at and what the real estate guys who would buy this value it at," said Matt McGinley, managing director at International Strategy & Investment Group in New York. "Perhaps it's coming to a point now where Sears is going to be a little bit more realistic about what the valuations are."

While such transactions have brought in significant cash -- including C$400 million ($366 million) from the sale of five Canadian leases last year -- they can strip the company of some of its best assets. Buyers would only be interested in sites with the most potential for shopping traffic, and if those went, McGinley said, "the free cash flow could decline a lot more."

SPIN IT OFF -- Sears could spin its properties into a separately traded real estate investment trust in a so-called sale-leaseback transaction, where the company would receive cash from the offering and then pay rent on the stores. REITs must derive at least three quarters of their income from rents or interest on mortgages financing real estate. A REIT structure could be a problem for Sears, whose stores "don't generate positive operating cash flow," making paying rent difficult, McGinley said.

In any event, there may be little appetite for a single-tenant REIT. In 2008, Target Corp. (TGT) shareholders rejected hedge-fund manager Bill Ackman's proposal to create such a spinoff that he said would raise $5.1 billion.

TAP WHAT IT HAS -- At the end of the second quarter, Sears had access to $240 million on its revolving credit loan and $829 million in cash on its books, and also the authorization to issue up to $500 million in commercial paper. On a short-term basis, it could put it all to use -- to a point. "Not all of that cash is cash you can actually take and spend," Gilbert said. "Every day you're paying bills." And companies always need to keep a certain cushion untapped on their revolvers. Gilbert said she figures Sears has perhaps $600 million in short-term liquidity from cash and the revolver, a sum that's "not great" for a retailer of its size.

So job one, McGinley said, is for Sears to renegotiate its $3.28 billion revolver, which expires in 2016. Such loans, which allow companies to borrow and then pay down the balance, are crucial for retailers, helping them fund operations as payments ebb and flow. "Without that revolver, it would be very difficult to keep the business going," McGinley said. And financing an adequate replacement could be tougher than before, he said, because "the financial condition is a lot worse than it was two or three years ago."

While operations have deteriorated, and "even a Main Street consumer is hearing about how bad things are," Dalton said he would not to count the company out. "It's a very, very smart management team," he said. "They've survived a lot longer than most people would have."

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It's Still Sears, where America Doesn't Shop
By Jacqueline Doherty
Barron's
August 25, 2014

Latest loss points to continuing operating woes, which show no signs of abating

Sears Holdings might have assets to sell, but unfortunately it's using the proceeds from those sales to fund operating losses. That was certainly the case in the second quarter, and there isn't much evidence the situation will soon change, so we'd continue to avoid the shares.

In the quarter, revenue fell 9.7% year over year, to $8 billion, as the company spun off Lands' End, closed stores, and suffered a 0.8% decline in same-store sales. Gross margins shrank almost three percentage points, to 21.7%, leading to a loss of $573 million, or $5.39 per share.

"Sears has few good options at this point. It's hard to see how they remain a viable operating entity," says Matt McGinley, an analyst with ISI Group who has a Sell rating and a $20 price target on the shares. The retailer (SHLD) could burn through $1.7 billion of cash this year and lose $12.15 per share, he estimates.

Given the high burn rate, Sears is looking for funding beyond its $829 million of cash and equivalents. Earlier this year, it received a $500 million payment from Lands' End prior to the spin-off. Sears laid out a number of options, including selling its 51% stake in Sears Canada, its auto-center operations, or real estate. Another option: issuing commercial paper or second-lien debt.

But none of those moves solve the company's huge problem: Its operations are losing money. Unless that changes, proceeds from asset sales will merely plug operating losses. We noted that last fall, when we warned investors to avoid the shares, despite bulls' arguments that touted the value of the retailer's real estate ("Sears Rally Belies Big Worries," Oct. 14, 2013).

Last week, Sears stock fell 6%, to $33, on the loss. Since our story, it's down 21%, even giving the company credit for the $10.38 a share of value that investors got in the Lands' End spin-off. Until signs of a turnaround appear, we'd still shop elsewhere.

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Sears Eyes Balance Sheet Help as Operations Burn Through More Cash
By Suzanne Kapner and Michael Calia
Wall Street Journal
August 22, 2014

Iconic Retailer, Struggling Through Turnaround, Indicates More Cost Cuts, Changes Coming

Sears Holdings Corp. burned through more cash as its losses mounted in the second quarter, prompting the once venerable retailer to say it is weighing additional steps to shore up its balance sheet.

The owner of the Sears and Kmart chains has been slashing costs and shedding businesses to fund its operations in the face of declining sales and weaker margins. Chief Executive Edward Lampert says he wants to turn the company into more of a digital player, but so far those efforts haven't paid off on the bottom line.

Sears lost $573 million in the fiscal quarter ended Aug. 2, deeper than the $194 million loss it posted in the year-earlier period, as revenue fell 9.7%, to $8 billion.

Sales, excluding newly opened or closed stores, grew 0.1% at Sears in the U.S. but fell 1.7% at Kmart. The company's operations burned through $747 million in the quarter.

Chief Financial Officer Robert Schriesheim said Sears may take steps to bolster its balance sheet. "Over the next six to 12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility, and may take other actions as appropriate," he said in prepared remarks.

Sears may look to refinance some debt, including its revolving credit facility, which comes due in April 2016. As of Aug. 2, the company had $240 million in the revolver. The company also has $1 billion in senior secured notes that come due in October 2018. Additionally, the company could raise another $760 million of second-lien debt under the rules of its $2 billion domestic credit agreement.

Analysts said the company needs to raise more funds. Sears ended the quarter with $829 million in cash, up from $671 million a year earlier, though that included about $500 million from the spinoff of its Lands' End unit to shareholders. The company's shares fell 7.2% Thursday to $33.38, 15% below where they started the year.

"As we have commented, we believe that we have sufficient liquidity to run the business and also have the benefit of access to a rich portfolio of assets," Mr. Schriesheim said.

Mary Gilbert, an analyst with Imperial Capital, said Sears could also issue debt against its real estate, similar to what J.C. Penney Co. did last year when it secured a $2.25 billion loan with mortgages on its property.

Further asset sales will also likely be necessary if business doesn't improve. Mr. Schriesheim said. Sears has about $5.2 billion of liquid assets that could be converted into cash in the near term.

The company has raised $665 million so far this year, in part by the Lands' End spinoff. Sears has said it plans to raise $1 billion in 2014 and may sell its 51% stake in Canada and its Sears Auto Center business.

The company has been cutting costs by closing stores and reducing inventory. Sears plans to close 130 stores this year, bringing closures since 2010 to more than 400. Even after the closings, the company will still have 1,900 Sears and Kmart stores, making it one of the larger U.S. retailers by square footage.

Monica Aggarwal, an analyst with Fitch, said Sears will need to continue to cut costs, sell assets and raise more debt unless sales pick up, a development she considers unlikely. She expects Sears will need $2 billion in cash in 2014 to fund operations and cover pension, interest and other obligations.

"We don't see them having the levers to turn this business around," Ms. Aggarwal said.

The slight gain in same-store sales at Sears' U.S. stores likely came as the result of increased promotions, analysts said. Those promotions weighed on gross margins, which narrowed by 3.3 percentage points at Sears's namesake U.S. chain, dragged down by apparel, home appliances, tools and footwear, the company said.

Gary Balter, an analyst with Credit Suisse, said Sears "was buying sales through discounts and free delivery."

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Sears Unable to Reverse Slide in Sales
By Joe Cahill
Crain's Chicago Business
August 22, 2014

Sears Holdings Corp.'s strategy of shrinking its way to profitability seems to be having the opposite effect.

In its second-quarter financial report yesterday, the long-suffering retailer reported a decline in gross margin – the difference between merchandise costs and revenues –and a much larger net loss from a year earlier.

The rise in red ink came as Sears worked its way through a plan to close 130 underperforming stores this year, including its flagship department store on State Street in Chicago's Loop. Store closings and other cost cuts are central to CEO and majority owner Eddie Lampert's effort to stem growing losses and put the Hoffman Estates-based company back on solid financial ground.

You would think profitability would improve as a retailer shuts down stores that aren't pulling their weight. That's not happening at Sears. Overall gross margin dropped about 12 percent to 21.7 percent in the quarter while its overall loss ballooned to $573 million from $194 million in 2013's second quarter.

Sears shares fell 7.2 percent, to $33.38, even as the S&P 500 stock index closed at a record high.

Sears blamed several factors, including promotions (i.e. discounting) and Shop Your Way, a loyalty program that entitles members to price breaks. It said declines spanned most categories, from apparel and footwear to appliances and tools. Both Sears and Kmart showed lower margins, as did Sears Canada.

PATIENCE PLEASE

"Sears Holdings is embarking on a transformation, from simply being focused on selling products in a traditional store network, to serving our members and bringing our shopping experience directly to them," a spokesman says. "Transformations take time. While we are moving in the right direction, there is more work to be done to get results where we expect them to be and to put other parts of the business on the right path forward."

In addition, he says a shift to a new promotional model means the company currently must "bear the costs of two promotional models, which adversely impacts margins."

The losses exacerbate cash worries at Sears, which is burning through about $1.5 billion annually on an operating basis. To stem the bleeding, Sears has been selling off assets and closing stores.

"During the first half, we generated approximately $665 million in additional liquidity, including the $500 million dividend received from the separation of Lands' End," CFO Rob Schriesheim said yesterday.

Sears also is looking to sell its Canadian operations and possibly its auto centers. Emphasizing its ability to raise cash through various maneuvers, Sears issued a statement yesterday touting a total of $5.2 billion in "availability and financial resources."

That may be true in a technical sense, but as a practical matter Sears' options are narrowing by the day. For one thing, I don't see a line forming to buy Sears Canada. Lampert & Co. have been talking about selling their 51 percent stake for a while now but there has been no deal.

NORTH OF THE BORDER

Perhaps a spirited auction is going on behind the scenes. On the other hand, Sears Canada isn't exactly knocking it out of the park, either. Sales at stores open at least one year – a standard gauge of retail performance – fell 6.8 percent in the quarter, while gross margin dropped 230 basis points.

The spokesman notes Sears has hired Merrill Lynch to find a buyer for Sears Canada, and points out the market value of its stake is about $765 million. As for the auto centers, he says, "we have had discussions with third parties regarding a variety of opportunities, including partnerships."

Even if buyers step up for Sears Canada and the auto centers, it may be too little too late. As the second quarter numbers show, Sears is sinking fast now. Store closings and asset sales are supposed to slow the bleeding and buy time before Sears' debt maturities start kicking in a couple of years from now.

The best way to boost profits is to sell more socks, wrenches and washing machines. But Sears has been unable to reverse a long slide in sales

Mr. Lampert is pinning his hopes on Internet sales and the loyalty program. Neither has had much impact on revenues yet. And as losses mount, Sears is squeezing its only proven source of revenue – stores. Mr. Schriesheim said yesterday the company will close even more. But the second-quarter numbers show that's not the answer.

Comments

D. H.
Sears is just as much a victim of globalization and trickle down economics as the erstwhile middle class of the United States. The past 40 + years of trickle down Reaganomics and the movement of high paying middle class jobs to lower wage parts of the world have decimated Sears' middle class customer base. The United States now has the same socioeconomic structure as most third world countries – namely a barbell shaped distribution on income and wealth with most of the income and wealth being concentrated at the top. The middle class that once shopped at Sears no longer exists and has been replaced by a vast lower class that shops at Walmart, Costco, Target, Amazon, etc. Sears needs to wake up to the fact that its business model just doesn't fit the Third World economy the U.S. now has.

John R.
Just unplug already. I recently walked through the tool department at the Sears in Orland square,wow. They just need to put up the going out of business signs. The clerks were more set on putting up tool clarence displays.

Guy F.
Have you ever witnessed a person continue to sicken even after the most advanced medical care? It will take a miracle to reverse out of this condition and this economic condition and frankly, this economy has banned miracles. I hate to see people lose their means of living, but this ship (Sears) will sink.

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Sears Loss Widens on 30th Consecutive Sales Decline
By Lauren Coleman-Lochner
Bloomberg
August 22, 2014

Sears Holdings Corp. (SHLD), the retailer controlled by billionaire hedge-fund manager Edward Lampert, posted a wider second-quarter loss as sales decreased for the 30th straight quarter.

The net loss expanded to $573 million, or $5.39 a share, from $194 million, or $1.83, a year earlier, as sales fell 9.7 percent, the Hoffman Estates, Illinois-based company said today in a statement. The shares declined the most since January.

Lampert, who is chief executive officer and the largest shareholder, called the results "unacceptable" in the statement.

Sears will reduce costs, close stores and improve pricing and promotions, among other steps, Lampert said. He has been selling and spinning off assets to raise cash as he works to bolster the retailer's digital and rewards programs. Loyalty-program members generated 73 percent of eligible sales in the quarter.

"Second quarter was a little worse than we had expected," Matt McGinle/y, managing director at International Strategy & Investment Group, said in an e-mail. "But, overall, no major surprises -- Sears results are consistently bad." McGinley, based in New York, recommends selling the shares.

Sears fell 7.1 percent to $33.38 at the close in New York. The shares have dropped 16 percent this year while the Standard & Poor's 500 Index has gained 7.8 percent. Exploring Options

Sears's year-earlier results included Lands' End, the clothing retailer Sears spun off in April.

Sales in the quarter ended Aug. 2 dropped to $8.01 billion from $8.87 billion. Revenue has fallen as the retailer closed stores and unloaded businesses, including the spinoff of the smaller-format Sears Hometown & Outlet Stores unit in 2012 and the sale of five leases in Canada for C$400 million ($366 million) last year. The spinoff of Lands' End accounted for $330 million of the revenue decline, Sears said.

Annual revenue has shrunk by almost a third since Sears last had sales growth. The retailer last posted a quarterly gain, when compared to year-earlier figures, during the three months ended February 2007, when annual sales were $53 billion. The retailer generated $36.2 billion in revenue last fiscal year.

Sears also said today the company plans to seek more long-term capital-structure flexibility from lenders in the coming six to 12 months.

In May, the company said it is exploring options for its remaining stake in Sears Canada after years of losses. Sears reduced its share in the Toronto-based retailer to 51 percent from 95 percent in 2012.

Because of previous store sales, the Canadian unit has been "stripped" of its best assets, McGinley said in a telephone interview before the results were released. "It's just really the carcass of a dying retailer." Auto Business

The company today said it has had talks with third parties about options for the Sears Auto Center business, including partnerships. Also on the block is the company's warranty business.

All suffer from the same problem, McGinley said, a tarnished brand.

Sears "just doesn't have the same resonance, it doesn't have the same level of importance to people as it had 30 years ago," McGinley said.

Sales at stores open at least a year fell 1.7 percent at Kmart and rose 0.1 percent at Sears, dragged down by declining electronics sales, for a companywide decrease of 0.8 percent. Online sales climbed 18 percent.

Sears last week named Alasdair James, a former Tesco Plc executive, to head the Kmart business, which has struggled to compete with the larger discount chains that entice shoppers with groceries and lower prices.

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Here's how you finally fix Sears, says Jim Cramer
By Drew Sandholm
CNBC.com
August 21, 2014

Sears posted a wider-than-expected loss for the second quarter on Thursday, with revenue falling short of estimates, much to the dismay of CNBC's Jim Cramer.

Though "retail is about growth," the department store chain has been stubbornly sluggish, Cramer said on "Squawk on the Street."

"This is the exact opposite from what we're seeing from almost every other major retailer," Cramer said. "I am surprised that a Wal-Mart or Target just doesn't say, 'let's go put them out of business.'"

To Cramer, Sears' loss and revenue decline is a serious concern that needs to be addressed.

"It is just bleeding. Sears Canada is now bleeding. I don't know what you do," Cramer said. "If I were running it, I would come in, I would pay the leases. I would say 'Listen, we have all this credit, let's break all these leases. Let's pay them off. Let's get it down to a core group of stores. Let's figure out which Kmart is not doing well.'"

Sears CEO Edward Lampert called the company's second quarter performance "unacceptable" and said steps were being taken to correct the situation.

"That has been a common issue to say 'unacceptable,'" Cramer said. "He just keeps saying 'challenges, challenges.'"

Until Sears makes real changes, Cramer said it will be hard to have even a single bullish thought about the company.

"I don't have anything good to say. I want to say something good. I don't," he said. "It's also the one store that I do not shop at."

We want to hear from you. How can Sears turn things around? Leave your comment below.

DISCLOSURE: When this story was published, Cramer's charitable trust did not own Sears, Target, or Wal-Mart.

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Sears Holdings Reports Second Quarter 2014 Results
PRNewswire
August 21, 2014

Hoffman Estates, Ill, -- Sears Holdings Corporation today announced financial results for its second quarter ended August 2, 2014. Net loss attributable to Holdings' shareholders was $573 million ($5.39 loss per diluted share) for the second quarter of 2014, compared to $194 million ($1.83 loss per diluted share) for the prior year second quarter. Adjusted EBITDA was $(313) million for the second quarter of 2014, compared to $(78) million in the prior year second quarter. As a supplement to this announcement, a presentation, pre-recorded conference and audio webcast are available at our website http://searsholdings.com/invest.

"We have continued to show progress in our transformation, as demonstrated by our year-over-year increase in online and multi-channel sales, and with our member sales now representing 73% of eligible sales," said Edward S. Lampert, Sears Holdings' Chairman and Chief Executive Officer. "However, our second quarter earnings are unacceptable and we are taking steps to address our performance on several levels. This includes reducing costs as we evolve our business model, investing in our Shop Your Way and Integrated Retail customer initiatives, rationalizing our physical footprint and improving pricing and promotions. As we move through the transformation, our new programs are becoming more prominent both in how we run the company and in how we serve our members, and we are pleased with how our members are responding."

Mr. Lampert continued, "As we progress with our transformation by investing in new programs and platforms, we continue to bear the costs of two promotional models, which adversely impacts margins. There is more work to be done to get results where we expect them to be. Like any transformation, we must first overcome the burden of the initial costs before we can enjoy the benefits. We have a large and valuable portfolio of assets that provide us with the flexibility we need to fund our transformation as we proactively work to return Sears Holdings to profitable growth and deliver shareholder value."

Second Quarter Updates:

  • Sears Full-line stores experienced comparable store sales growth of 0.1% for the quarter as compared to a decline of 0.8% in the second quarter of last year, despite the continuing impact of consumer electronics industry trends. Excluding the impact of consumer electronics, comparable store sales growth would have been 1.6%;
  • Kmart comparable stores sales were down 1.7% for the quarter as compared to a 2.1% decline last year, also despite the continuing impact of consumer electronics industry trends, as well as the impact of our grocery & household goods business. Excluding the impact of both, comparable store sales would have declined 1.0%;
  • Sales to Shop Your Way members in Sears Full-line and Kmart stores increased to 73% of eligible sales, up from 71% during the second quarter last year;
  • Online and multi-channel sales grew 18% over the prior year second quarter and 22% over the prior year first half;
  • We continue to evaluate our Sears Auto Center business, as well as our 51% interest in Sears Canada, including a potential sale of our interest or Sears Canada as a whole;
  • Continued with our inventory productivity efforts, with consolidated net inventory down approximately $620 million and domestic net inventory down approximately $510 million year-over-year, when excluding the impact of Lands' End inventory;
  • Reduced adjusted net consolidated debt year-over-year by $301 million, when including our unfunded pension obligation; net adjusted domestic debt on the same basis declined by $220 million;
  • Reduced net domestic short-term debt by $565 million, or 41%, from the prior year second quarter to $808 million;
  • Increased cash on hand on a consolidated basis to $839 million and domestically cash increased by $213 million to $596 million from the prior year second quarter; and
  • Total amount available to borrow under our revolving credit facilities was $486 million on a consolidated basis and domestic availability was $240 million, with net consolidated inventory of $3.9 billion and net domestic inventory of $3.5 billion, providing availability and financial resources of $5.2 billion on a consolidated basis and $4.4 billion on a domestic basis.
Revenues decreased $858 million to $8.0 billion for the quarter ended August 2, 2014, as compared to revenues of $8.9 billion for the quarter ended August 3, 2013. The revenue decrease included the separation of the Lands' End business, which was completed in the first quarter of 2014 and accounted for $330 million of the decline. The revenue decrease also included the effect of having fewer Kmart and Sears Full-line stores in operation, which accounted for $256 million of the decline, as well as a decrease of $140 million at Sears Canada. Revenues for the quarter also declined as a result of lower domestic comparable store sales, which accounted for $47 million of the decline. Finally, we also experienced a revenue decline in our Home Services business during the quarter, as well as a decline in delivery revenues which combined, accounted for the majority of the other revenue decline.

Sears Canada's revenue decline of $140 million was driven by a 6.8% decline in comparable store sales, which accounted for $47 million of the decline, as well as the effect of having fewer stores in operation, which accounted for $35 million of the decline. Sears Canada also experienced declines in the Home Services business which accounted for $13 million of the decline. Revenues also included a decrease of $35 million due to foreign currency exchange rates.

For the quarter, domestic comparable store sales declined 0.8%, comprised of a decrease of 1.7% at Kmart and an increase of 0.1% at Sears Domestic. The decline at Kmart primarily was driven by declines in the grocery & household, appliances and consumer electronics categories. The increase at Sears Domestic primarily reflects increases in the home appliances and mattress categories, which were partially offset by decreases in the consumer electronics and lawn & garden categories, as well as a decline in Sears Auto Centers. Excluding the impact of consumer electronics on both formats and grocery & household on the Kmart format, domestic comparable store sales would have increased 0.4%.

Operating Performance

Gross margin decreased $444 million to $1.7 billion in the second quarter of 2014 due to the above noted decline in sales, as well as a decline in gross margin rate. Gross margin included $126 million from the Lands' End business in the prior year second quarter.

The gross margin rate during the quarter for both Kmart and Sears Domestic continued to be impacted by transactions that offer both traditional promotional marketing discounts and Shop Your Way points. As compared to the prior year, Kmart's gross margin rate for the second quarter declined 250 basis points, with decreases experienced in a majority of categories, particularly apparel, home and grocery & household. Sears Domestic's gross margin rate declined 330 basis points for the quarter with decreases experienced in a majority of categories, most notably apparel, home appliances (partially due to free delivery), tools and footwear. Sears Canada's gross margin rate declined 230 basis points for the second quarter primarily due to reduced margin in home, home appliances, footwear and apparel.

Consolidated selling and administrative expenses decreased $173 million in the second quarter of 2014 compared to the prior year quarter and included significant items such as expenses related to our domestic pension plan, store closings and severance of $52 million and $43 million for 2014 and 2013, respectively. In addition, the second quarter of 2013 included expenses of $103 million from the Lands' End business. Excluding these items, selling and administrative expenses declined $79 million primarily due to a decrease in payroll expense.

The Company reported an operating loss of $514 million and $51 million for the second quarter of 2014 and 2013, respectively. Operating loss for the second quarter of 2014 and 2013 included significant items which aggregated to operating expense of $74 million and operating income of $202 million, respectively. See the attached schedule, "Adjusted Earnings per Share," for a reconciliation from GAAP to as adjusted amounts, including adjusted earnings per diluted share.

The effective tax rate for the second quarter of 2014 was 5.8% compared to 30.9% in the prior year second quarter. The application of the requirements for accounting for income taxes in interim periods, after consideration of our valuation allowance, causes a significant variation in the typical relationship between income tax expense and pretax income. The tax rates in 2014 and 2013 reflect the effect of not recognizing the benefit of current period losses in certain domestic jurisdictions in which it is not more likely than not that such benefits would be realized. The second quarter of 2014 was negatively impacted by increased foreign taxes in Puerto Rico resulting from a new tax law change which became effective during the second quarter of 2014, as well as a tax settlement, but were partially offset by current period losses attributable to Sears Canada.

Financial Position and Retail Strategy Update

Rob Schriesheim, Sears Holdings' Chief Financial Officer, said, "During the first half, we generated approximately $665 million in additional liquidity, including the $500 million dividend received from the separation of Lands' End. BofA Merrill Lynch continues to assist us in exploring strategic alternatives for our 51% interest in Sears Canada, including a potential sale of our interest or Sears Canada as a whole. Our interest in Sears Canada has a current market value of approximately $765 million as of August 19, 2014. We also continue to reduce unprofitable stores as leases expire and in some cases will accelerate closings when it is economically prudent. We have already announced the closure of approximately 130 underperforming stores in fiscal 2014 and may close additional stores during the remainder of the year. As previously indicated, when including the $500 million received in connection with the Lands' End spin-off, we expect to raise in excess of $1.0 billion in proceeds to Sears Holdings in fiscal 2014, creating value and helping to fund our transformation."

Mr. Schriesheim added, "As we have previously disclosed, we are continuing to evaluate strategic alternatives for our Sears Auto Center business. We have had discussions with third parties regarding a variety of opportunities, including partnerships. In addition, over the next six to 12 months, we intend to work with our lenders and others to evaluate our capital structure with a goal of achieving more long-term flexibility, and may take other actions as appropriate."

Merchandise inventories at August 2, 2014 were $6.4 billion, as compared to $7.7 billion at August 3, 2013. Domestic inventory decreased by approximately $1.1 billion to $5.8 billion at August 2, 2014. Excluding inventory from the Lands' End business of approximately $415 million, domestic inventory decreased approximately $710 million driven by both improved productivity and store closures. Sears Domestic inventory decreased in virtually all categories, with the most notable decreases in the apparel, consumer electronics, automotive and jewelry categories. Kmart inventory also decreased in virtually all categories with the most notable decreases in the apparel, consumer electronics, home and drugstore categories.

We had cash balances of $839 million at August 2, 2014 ($596 million domestic and $243 million at Sears Canada), $681 million at August 3, 2013 ($383 million domestic and $298 million at Sears Canada) and $1.0 billion ($577 million domestic and $461 million at Sears Canada) at February 1, 2014.

We had short-term borrowings of $1.4 billion ($1.4 billion domestic credit facility and $7 million commercial paper) at the end of the second quarter of 2014, $1.8 billion ($1.5 billion domestic credit facility and $247 million commercial paper) at the end of the second quarter of 2013 and $1.3 billion ($1.3 billion domestic credit facility and $9 million commercial paper) at February 1, 2014.

At the end of the quarter, the amount available to borrow under our domestic committed $3.275 billion credit facility was $240 million, which reflects the effect of our springing fixed charge coverage ratio covenant and the borrowing base limitation in our revolving credit facility. The total consolidated amount available to borrow was $486 million ($240 million domestic plus, prior to taking into consideration possible reserves, $246 million at Sears Canada) at August 2, 2014. The Company can issue up to $500 million of commercial paper. We had $7 million, $247 million and $9 million of commercial paper outstanding as of August 2, 2014, August 3, 2013 and February 1, 2014, respectively. In addition, we are permitted to incur up to $760 million in second lien debt, subject to borrowing base requirements. As of August 2, 2014, we had domestic cash, availability under our domestic credit facility and incremental capacity under our commercial paper program of $1.3 billion compared to $1.4 billion as of August 3, 2013.

Total long-term debt (long-term debt and capital lease obligations) was $2.9 billion at both August 2, 2014 and February 1, 2014 and $2.0 billion at August 3, 2013.

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Penney Rebound Gains Traction
By Suzanne Kapner and Tess Stynes
Wall Street Journal
August 15, 2014

J.C. Penney Co. took another step away from the brink Thursday, when it reported higher sales, wider margins and a smaller quarterly loss.

Penney, which had lost more than $2.7 billion since early 2012, reported another loss of $172 million. But that result, for the quarter ended Aug. 2, was better than the $586 million loss a year earlier, and the company said its cash flow has improved faster than expected.

Penney shares soared in after-hours trading but eased back to end at $10.05, up 3.2%. Investors welcomed the steady if moderate improvement in sales at the battered retailer. Before the release of the results, Penney shares had risen more than 4% in regular trading Thursday.

Crucially, the department-store chain's profitability improved as it sold less merchandise on clearance. Items sold on clearance carry the biggest markdowns, more even than items sold though planned promotions. Gross margin widened to 36% from 29.6%.

Chief Executive Myron Ullman has put together a string of better quarters at the retailer as it strives to recover from a disastrous overhaul led by former CEO Ron Johnson, a former executive who tried to do away with discounts and stock trendier merchandise but ended up driving away customers.

Penney said Mr. Ullman underwent surgery related to a medical condition he has had for more than two decades, and as a result he wasn't on Thursday's conference call. He suffers from a neurological condition resulting from a microscopic injury to his spinal cord. The condition makes it hard for Mr. Ullman to walk and he is known for using a Segway to get around Penney's headquarters.

Despite Mr. Ullman's efforts to put the chain on firmer footing, it remains badly damaged by its brief stint under Mr. Johnson, who was ousted in April 2013. Revenue increased to $2.8 billion in the quarter from $2.7 billion a year earlier. That is still 28% below the $3.9 billion in revenue the chain brought in for the second quarter of 2011.

Shopper traffic in the second quarter was lighter than it was a year earlier, though it improved from the first quarter.

"It's not as easy as just putting back the merchandise and they will come back," Ed Record, Penney's chief financial officer, said of the challenges in getting customers back into Penney's stores. Customers are spending more at the chain on average, but it still isn't back to 2012 levels, he said.

Mr. Record said Penney was bracing for a cutthroat holiday season. "We will need to be competitive to drive the customers back into the store," he said.

Sales excluding newly opened or closed locations rose 6% in the most recent quarter from a year earlier, and Penney expects gains of roughly that magnitude in the current quarter. Mr. Ullman said in a news release that the company had gained market share. Penney backed its sales outlook for the year.

The company pointed to another positive: Inventory levels dropped 9.7% to $2.85 billion.

Retailers broadly have suffered from a difficult selling environment that has forced them to rely on discounts to drive sales. The Commerce Department said Wednesday that spending at U.S. retailers was flat in July. Also on Wednesday, Penney rival Macy's Inc. cut its sales forecast for the year.

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Sears picks Tesco exec to be Kmart president
By Associated Press
Crain's Chicago Business
August 11, 2014

(AP) -- Sears Holdings Corp. said Monday that Alasdair James has joined the company as president and chief member officer for its Kmart business, a new position.

James, 44, was most recently the commercial director for British supermarket giant Tesco's global business unit. He will be responsible for Kmart's financial performance and merchandising, marketing and price strategies for its free loyalty program, Shop Your Way.

The Hoffman Estates, Illinois-based company, which is controlled by billionaire hedge fund investor Edward Lampert, also operates Sears stores. As it struggles to restore profitability and turn around sagging sales, it is focusing on a loyalty program that includes discounts for its shoppers.

"Alasdair will work closely with me and our business unit leaders to understand the preferences of Shop Your Way members who shop at Kmart," said Lampert, who is CEO and chairman of Sears Holdings.

First-quarter member sales accounted for 74 percent of eligible sales at the parent company, the highest level ever. That's up from 68 percent from the same period a year ago. Sears Holdings is slated to report second-quarter results this month.

Sears' shares slipped 21 cents to close at $37.62 on Monday.

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Shoppers Are Fleeing Physical Stores
Wall Street Journal
August 6, 2014

Shift to Online Sales Is Prompting Retailers to Scale Back More Store Openings

U.S. retailers are facing a steep and persistent drop in store traffic, which is weighing on sales and prompting chains to slow store openings as shoppers make more of their purchases online.

Aside from a small uptick in April, shopper visits have fallen by 5% or more from a year earlier in every month for the past two years, according to ShopperTrak, a Chicago-based data firm that records store visits for retailers using tracking devices installed at 40,000 U.S. outlets. Even as warmer temperatures replace the harsh winter weather this year, store visits fell by nearly 7% in June and nearly 5% in July, according to ShopperTrak.

New data from Moody's Investors Service shows that the shift to online sales has prompted retailers to scale back store openings and will likely lead them to pare back their fleets even more in coming years, as more than $70 billion in lease debt expires by 2018. Growth in store counts at the 100 largest retailers by revenue has slowed to less than 3% from more than 12% three years ago, according to Moody's.

The pressure comes as consumer tastes are changing. Instead of wandering through stores and making impulse purchases, shoppers use their mobile phones and computers to research prices and cherry-pick promotions, sticking to shopping lists rather than splurging on unneeded items. Even discount retailers are finding it harder to boost sales by lowering prices as many low-income consumers struggle to afford the basics regardless of the price.

On Tuesday, Walgreen Co. said customer traffic in the nonpharmacy section of the store fell 2.6% in July. CVS Caremark Corp. said declines in traffic contributed to a 0.4% decrease in front-of-the-store sales, excluding newly opened or closed stores, in the quarter ended June 30, as customers aggregate trips and make fewer store visits. A decision to stop selling tobacco played a part in the declines, CVS said.

"Consumers are still a bit cautious," said Helena Foulkes, president of the pharmacy unit at CVS, noting that its competitors are offering more aggressive promotions this year.

Target Corp. warned investors on Tuesday that its second-quarter financial results would be lower than initially expected after heavy promotions didn't do enough to bring back shoppers following six quarters of declining traffic and lingering fears stemming from last year's credit-card data breach.

One deal at Target gave customers $10 off a $40 online order if they came into the stores to pick it up, which enticed some shoppers to stock up on diapers and other consumables but ended up denting the discounter's profit.

The Minneapolis-based retailer said sales at U.S. stores open more than 13 months were flat for the quarter ended Aug. 2, highlighting the challenges incoming Chief Executive Brian Cornell faces when he takes the helm next week.

"While the environment in both the U.S. and Canada continues to be challenging, and results aren't yet where they need to be, we are making progress in our efforts to drive U.S. traffic and sales," said Chief Financial Officer John Mulligan, who is serving as Target's interim CEO.

The traffic declines are widespread across the industry. Last month, Family Dollar Stores Inc. said traffic declines contributed to a 1.8% drop in sales for the three months through May 31, excluding newly opened or closed stores.

Declining traffic numbers at dollar stores and pharmacy chains are particularly worrisome for the industry as big-box retailers like Wal-Mart Stores Inc make big bets that they can win back shopper traffic by building smaller stores.

Despite the downbeat traffic numbers, overall retail sales have inched up every month since January as job growth and consumer confidence ticks higher. Store chains like warehouse club Costco Wholesale Corp. and T.J. Maxx parent continue to post gains, while retailers like Dollar Tree Inc. and Wal-Mart plan to add hundreds of stores over the coming years.

Online sales now make up more than 6% of total retail sales, according to the U.S. Census Bureau. Internet sales have grown by more than 15% every quarter for the past two years and are having a big impact on the way many companies are looking at their brick-and-mortar stores.

In a response to a request to break out online sales by the Securities and Exchange Commission made public on Tuesday, Best Buy Co. said programs that allow customers to buy items online but pick them up in store, made it "increasingly difficult to distinguish between the performance of online and stores." Its online sales made up 8.2% of total revenue in the quarter ended May 3, from 6.3% a year earlier.

Earlier this year, Staples Inc. CEO Ronald Sargent told investors that stores now "have to earn the right to stay open." With roughly half its sales originating online, the company plans to close hundreds of physical locations over the next two years.

"While we don't take this decision lightly, we know it is the right thing to do for the long-term health of our business as we become more efficient and increase our focus online," he said.

Sears Holdings Corp. closed more than 12% of its stores in the past three years and has closed another 80 stores this year, while RadioShack Corp. plans to close 200 stores this year.

"We're in a transformation where retailers are recognizing the Internet isn't going anywhere and to be competitive, you have to have a more compelling online presence and an efficient store base," said Moody's analyst Charles O'Shea.

The lease obligations set to expire by 2018 provides companies that overbuilt in the past decade with a way to reduce their retail footprints. The change will be particularly apparent at office supply stores, where more than two-thirds of retail leases are set to expire, and specialty retailers and convenience stores, where roughly half of retail leases are primed to expire by 2018.

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What's Going Wrong At Sears Now?
By Brigid Sweeney
Crain's Chicago Business
August 4, 2014

The more merchandise a department store carries, the better. Broad inventory filled with brand names boosts a retailer's chances of "giving the lady what she wants"--the key to success, according to none other than Marshall Field. So it can't be a good sign that Converse Inc. has stopped selling shoes to Sears Holdings Corp.

Nor is it a good sign that companies that insure supplier payments are tightening policies on sales to Sears, or that the cost of credit protection on the retailer's debt has risen to its highest level since 2012.

To be sure, Sears faces no holiday-season money crunch. But these actions suggest a deepening concern about the company's inability to make money from its stores and increasing reliance on asset sales to generate cash.

"When one player starts to get worried (and pulls out), that's something that can potentially spread fast," says Steven Dennis, an independent retail consultant in Dallas and former Sears vice president. "People are very worried about getting stuck with a lot of liability."

Sears dismisses the disappearance of Converse from its shoe departments over the past few months as a non-event. The break was a mutual decision, a spokeswoman for the Hoffman Estates-based chain says. "While the brand name was appealing to carry, it did not represent a significant number of (products), nor was it material to our business," she writes in an email. She adds that consumers still can purchase Converse products at Sears Marketplace, a website it hosts for third-party sellers.

Converse is a wholly owned subsidiary of Nike Inc. The Beaverton, Oregon-based athletic-apparel giant made a similar decision to withdraw from Sears in 2005, when CEO Edward Lampert merged the company with Kmart. At the time, the parting of ways was described as a brand management issue, as insiders speculated Nike did not want its shoes sold at discounter Kmart.

Converse sneakers

Converse, which generated $1.45 billion in sales in fiscal 2013, is expected to nearly double sales to $3 billion by 2017, according to Nike. The company did not respond to requests for comment.

For its part, Sears lost $1.37 billion in the year ended Feb. 1 as revenue slid 9 percent to $36.19 billion. Analysts expect it to lose money through fiscal 2015 and 2016. Its shares closed at $37.27 on Aug. 1, flat from a year earlier.

'SLOW PAY'

A big brand's decision to end its relationship with a retailer--regardless of its impact on the retailer's bottom line--could spring from a number of factors. The biggest cause of worry, of course, would be if the retailer had started to pay its vendors late, an action known as "slow pay." Sears did not respond to a question as to whether it paid Converse on time.

A divorce also may arise from frustration if the retailer stops buying a sufficient breadth of a company's products and cherry-picks only its most popular items.

Finally, a supplier may call it quits if it believes "the manner in which the goods are being sold is unacceptable," says Mark Cohen, director of retail studies at Columbia University's Graduate School of Business and a former president of Sears Canada who was forced out after a power struggle in 2004. "I suspect Converse is simply saying, 'This is not a place we think represents a legitimate platform for our brand.' "

Analysts and retail experts agree that Converse was not a significant seller at Sears and that, despite its continued losses, the retailer is in no short-term danger of being unable to pay its bills.

Sears is relatively flush with cash thanks to a flurry of store closures, real estate sales and asset spinoffs. For the quarter ended May 3, it had reserves of $842 million, down from $1 billion from a year earlier. The company generated about $4 billion in cash altogether in 2012 and 2013, and says it will raise another $1 billion this year by selling its 51 percent stake in Sears Canada and its Sears Auto Centers. Moreover, Sears still can borrow $752 million under its $3.73 billion line of credit.

Even so, the cost of credit protection on Sears' debt has been rising since February, when the company reported its loss for fiscal 2014, according to New York-based Strategas Research Partners. Meantime, insurance companies are tightening the policies they grant Sears suppliers: American International Group Inc. has cut the size of new policies by as much as half, according to Bloomberg News. With less insurance available, companies may cut sales or even stop working with Sears, analysts say.

Gary Balter, an analyst at Credit Suisse in New York, wrote in May that Sears' announcement of the intention to sell its Sears Canada interest just before releasing a $402 million first-quarter loss could be interpreted as "sending a message to suppliers not to worry, as the cash flow deficit will once again be offset by a capital transaction."

One day, however, Sears will run out of assets to sell. "Strategically, Sears is very challenged and hasn't shown any evidence of turning the corner," Mr. Dennis says. "There's a day of reckoning at some point."

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Target Picks Pepsi Veteran as New CEO
By Paul Ziobro and Joann S. Lublin
Wall Street Journal
July 31, 2014

Retailer Turns to an Outsider, Brian Cornell, to Help It Regain Lost Momentum

Target Corp. named PepsiCo Inc. executive Brian Cornell as its new chief executive, turning to an outsider for the first time in its history to repair a battered corporate culture and navigate a sea change in Americans' shopping habits.

Mr. Cornell, age 55, steps into the role vacated three months ago by Gregg Steinhafel, a Target veteran who left after a revolt by key lieutenants who worried the cheap-chic discount retailer had lost its way.

The PepsiCo executive will have to manage those concerns while coming up with a strategy to reverse more than a year of falling store traffic—a drop caused by internal fumbles; a damaging security breach of its customers' credit and debit cards; and a shift in which consumers are making fewer trips to big-box stores and doing more shopping online.

The executive has spent nearly a decade at PepsiCo, where he was an outside contender to succeed current CEO Indra Nooyi. Not all of his years at PepsiCo were consecutive, but over the past two years he ran PepsiCo's Americas Foods business, whose brands such as Quaker oatmeal and Lay's potato chips are found on the shelves of Target. Before that, he spent three years at Target rival Wal-Mart Stores Inc., where he ran the Sam's Club warehouse chain. He also was CEO of arts and crafts chain Michael's Stores Inc. for two years, after it was taken private.

Target, with more than 1,900 stores in the U.S. and Canada and nearly $73 billion in 2013 revenue, has had a difficult year. A massive data breach derailed sales over the holiday season and kept customers away for months. Sales started to improve in March as the weather warmed and after the retailer cranked up discounts, like offering five 12-packs of Coke for $10, but the company forecasts same-store sales will be flat to slightly up in the U.S. for the quarter that ends Aug. 2.

Fixing those problems will require some big decisions. The new CEO is expected to make a call on whether Target should continue a botched expansion into Canada that already has cost the company $1.6 billion. The e-commerce division remains weak, with only about 2% of sales coming via the Internet.

Target is also wrestling with deep-seated cultural issues that factored heavily in the removal of Mr. Steinhafel. Current and former executives have said decision-making slowed down during his six-year tenure, with key decisions frozen in layers of committee meetings.

They also said the former CEO eroded Target's creative flair by focusing more on selling basics like groceries as the country came out of the recession and de-emphasizing the hip housewares that once were central to its appeal. This spring, some top executives told the board that if Mr. Steinhafel didn't go, more talent would leave. Mr. Steinhafel declined previously to comment on those matters. Target had signaled that it would look outside its walls and outside of traditional retailing altogether for its next CEO.

In fact, it is bringing someone with a history in the industry, including a stint at Wal-Mart, whose no frills, operationally focused culture contrasts with the design-conscious image Target projects. His most recent experience is in food, which may clash with the preference of many Target executives to re-emphasize more fashionable merchandise like clothing and furniture. He joined the PepsiCo fold in 1998 after the company acquired the Tropicana orange juice brand, where he worked earlier in his career.

PepsiCo said it looked forward to working with Mr. Cornell at Target and would announce his successor soon.

Target is paying Mr. Cornell $19.3 million in equity grants to make up for what he's giving up at the food and drink giant. The amount of the grant could fall if Mr. Cornell is able to retain any of the PepsiCo money.

Target is currently being steered by Chief Financial Officer John Mulligan, who is serving as interim CEO, and a group of top executives who have been relocated to common quarters on the 26th floor at Target's Minneapolis headquarters.

Mr. Cornell, who has long sought to run a public company, begins his new job Aug. 12. He first started talking with Target several weeks ago after people in the Minneapolis business community mentioned him as an attractive candidate for the job. He has ties to the city as a director at recreational vehicle maker Polaris Industries Inc. He plans to relocate to Minneapolis and will be at Target headquarters Thursday to meet with the company's leadership team in person. Mr. Cornell has already met with some top executives like Mr. Mulligan, who will be returning to his position as chief financial officer.

"Target is full of talented individuals, and Target guests routinely share stories of their personal love of the brand," said Mr. Cornell, who attended University of California, Los Angeles, and its Anderson School of Management. "These are powerful assets."

Meshing with them will be critical after the deep rifts that developed between top managers and Mr. Steinhafel. The animosity escalated after hackers compromised 40 million credit- and debit-card accounts and 70 million personal records around Thanksgiving. Top managers began to meet regularly without Mr. Steinhafel and lobbied Target's board to replace him, people familiar with the matter have said.

Mr. Cornell's appointment does leave some question marks about some executives. Chief among them is the future of Kathee Tesija, Target's chief merchandising officer who has been viewed a strong candidate to one day become the company's CEO. The Pepsi executive will be chairman as well as CEO, but the company is leaving open the president's title that had been held by Mr. Steinhafel.

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How Warren Buffett Views Mergers and Acquisitions - SHC Example
By Adam Levine-Weinberg
July 27, 2014

"[I]nvestors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss a toad, those kisses had better pack some real dynamite. We've observed many kisses but very few miracles. Nevertheless, many managerial princesses remain serenely confident about the future potency of their kisses -- even after their corporate backyards are knee-deep in unresponsive toads." -- Warren Buffett, 1982

Wall Street loves mergers and acquisitions. This type of activity generates lots of banking fees and can provide a shot in the arm to trading revenue. However, it's much less common that M&A activity benefits long-term investors.

That's why Berkshire Hathaway CEO Warren Buffett is suspicious of most mergers and acquisitions activity -- even though Berkshire Hathaway has bought up plenty of companies under Buffett's leadership!

Buffett is particularly wary of companies that acquire underperforming businesses and hope to fix them or improve their profitability through "synergies." The sad corporate history of Sears Holdings shows exactly why Buffett has been wise to focus his own acquisition efforts on strong businesses.

The Frog Prince is just a fairy tale!

In his 1981 letter to Berkshire Hathaway shareholders, Warren Buffett hypothesizes that many corporate executives were captivated by the fairy tale The Frog Prince as children. In the most common modern version of the story, a prince is trapped in a frog's body, but the spell is released when a princess kisses the frog.

According to Buffett, many corporate CEOs seem to believe that they are the princess from the fairy tale. They buy up weak companies, thinking that their "kiss" can turn these apparent frogs (or toads) into princes. Unfortunately, they're just frogs -- and they eventually turn into dead frogs!

Buffett points out that there are typically lots of struggling companies with low stock prices at any point in time. If people want to buy shares in these companies, they can buy shares on the cheap.

However, when these struggling companies are acquired outright, the purchaser almost invariably ends up paying a premium. Why would a CEO pay a premium to acquire a struggling business? This behavior only makes sense if corporate CEOs believe that they can wring profits out of companies that aren't making much money on their own.

Sears Holdings is a perfect example

In late 2004, hedge fund manager Eddie Lampert was featured on the cover of Businessweek in a story touting him as the next Warren Buffett. The story came out shortly after Kmart, which was controlled by Lampert's hedge fund ESL Investments, reached a deal to buy Sears (another big Lampert stock holding) to create Sears Holdings -- which was supposedly destined to be the next Berkshire Hathaway.

Kmart, the smaller of the two, agreed to pay more than $11 billion in cash and stock for Sears. While both companies were struggling, Kmart seemed to be in the midst of a turnaround. Lampert believed he could create revenue and cost synergies by merging the two and selling each retailer's exclusive products at the other. Unfortunately, Lampert hadn't heeded Warren Buffett's advice about paying top dollar for weak businesses. In the ensuing decade, Lampert cut billions of dollars in costs, but that hasn't made Sears a cash cow. In fact, Sears Holdings' market cap is now $4 billion -- less than half of what Lampert paid for the Sears portion of the business, and down almost 80% from the peak in 2007.

Indeed, Lampert's giant bet on turning around two underperforming retailers through a merger has nullified a lot of his victories. Many of his wealthiest clients have pulled money out of ESL investments in recent years. Meanwhile, he has had to step in as CEO of Sears Holdings, which hasn't done anything to stop the bleeding. All told, the Sears Holdings stock price today is lower than its predecessor's (Kmart Holdings) stock price 10 years ago -- shortly before the Kmart-Sears merger and the Businessweek profile. Meanwhile, the market as a whole is up more than 75%.

Foolish bottom line

Deep value investors can occasionally find diamonds in the rough: businesses that appear to be struggling but have good long-term prospects. These stocks can be huge winners. However, some "deep value" investments turn out to be duds after all. As a result, Buffett has been willing to pay a premium at Berkshire Hathaway for high-quality stocks with defensible moats.

However, the worst of both worlds is paying a premium to buy a struggling business in the hope of turning it around or wringing out merger synergies to justify the price. Buffett likens such behavior to hoping you can turn a frog into a prince with a magical kiss. Eddie Lampert's failed strategy at Sears Holdings shows just how dangerous such a strategy can be....

Adam Levine-Weinberg has no position in any stocks mentioned.

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Head of Wal-Mart's U.S. Division Leaving
By Shelly Banjo
Wall Street Journal
July 25, 2014

Bill Simon to Be Succeeded by Asia Chief Greg Foran, Who Has Never Worked in the U.S.

Wal-Mart's U.S. chief, Bill Simon, who struggled to lift sales as it fought off competition from dollar stores and online retailers, will leave the company and Greg Foran, a New Zealander who has never worked in the U.S., is taking over the retailer's biggest division after U.S. chief Bill Simon stepped down.

Mr. Foran, a veteran of Australian retail who joined Wal-Mart three years ago, will take over from the 54-year-old Mr. Simon running the division, which has more than 4,200 stores and $279 billion in annual sales. Mr. Foran's successor will be announced at a later date.

Mr. Foran, 53, steps into the job at a time when Wal-Mart's U.S. namesake stores are stuck in a rut. In May, Wal-Mart's U.S. division reported its fifth straight quarter of negative U.S. sales, excluding newly opened or closed stores, and its sixth straight quarter of dwindling traffic.

The company is fighting to win back customers from dollar stores and pharmacy chains, as well as online competitors like Amazon.com Inc. Shoppers are making fewer trips to the company's signature supercenters and the retailer is trying to figure out a way to draw them back by opening up hundreds of smaller-format stores and pushing online sales.

"We know that our U.S. business is critical to the success of our company and that it can be even stronger," Mr. McMillon said in a letter to Wal-Mart employees on Thursday. "Greg will bring fresh eyes to an increasingly competitive market that is changing rapidly."

Mr. Foran hasn't run a company the size of Wal-Mart's U.S. division, whose sales are bigger than the combined revenue of Kroger Co., Costco Wholesale Corp. and Target Corp.

Mr. Foran joined Wal-Mart in 2011 after being passed over for the top job at Woolworths Ltd. in Australia. He served as president of Wal-Mart China, where he presided over the company's expansion as it tangled with compliance and government regulation. He was appointed head of Wal-Mart Asia in April.

Mr. Simon, a straight-talking outsider who joined Wal-Mart eight years ago, was among the favored candidates last year to succeed former chief executive Mike Duke, but he was passed over for the job, which went to longtime veteran Doug McMillon. The company said the two had discussed Mr. Simon's next career move on and off for the past few months, knowing that his leaving was a strong possibility. A departure arrangement was reached last week. 'This felt like the right time to move on,' said Bill Simon, outgoing head of Wal-Mart's U.S. division.

"This felt like the right time to move on and focus on my next opportunity," Mr. Simon said in a prepared statement. He will leave the company on Aug. 8 and has agreed not to work for a competitor for two years.

On Thursday, Mr. McMillon credited Mr. Simon with pushing Wal-Mart away from its large-format stores in favor of smaller ones, as well as with integrating online sales with physical stores.

Even so, he wasn't able to move the U.S. division fast enough. Despite new products like organic food and used video games, sluggish sales and traffic continue to weigh on the company.

Like Mr. Foran, Mr. Simon didn't cut his teeth at Wal-Mart the way many of its executives do. Before joining Wal-Mart in 2006, Mr. Simon served various roles at Diageo PLC and former Florida Gov. Jeb Bush's administration.

Mr. Simon, who guzzles Monster energy drinks on a daily basis, was an energetic force at the company and notched early wins. He helped push through the adoption of a $4 prescription-drug program and led a turnaround at its U.S. stores after a remodeling plan alienated Wal-Mart's core low income customers.

Wal-Mart--the country's largest private employer--continues to face complaints that it underpays its 1.4 million U.S. employees. The company has said its average hourly wage of $11.81 is in line with, or above, its peers.

Mr. Simon leaves with a retirement package that could be worth roughly $9 million in compensation and stock awards, including a $4.5 million payment that will be paid in installments through July 2016. Wal-Mart will keep Mr. Simon on as a consultant for the next six months, where he will earn about $300,000.

After Mr. Simon was passed over for Wal-Mart CEO, the board approved in January special retention bonuses for him, including a $2.5 million restricted stock award and a $2.5 million cash award contingent on the sales performance of the company's smaller-format stores.

Wal-Mart didn't break out how much of the retention bonus Mr. Simon will end up keeping. Over the past three years, Mr. Simon's compensation totaled $32.7 million, including salary, stock, cash incentives and retention awards.

Mr. Foran will receive an annual salary of $950,000 and will be eligible for performance stock awards on a prorated basis for the remainder of this year. He will be eligible for more than $13 million in performance shares though January 2017.

Mr. Foran also will be reimbursed for costs related to his move from Asia to the U.S. and will be eligible for personal use of company aircraft for "a limited number of hours."

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Is Digital Retail the Light at the End of the Tunnel for Sears Holdings?
By Rich Duprey
The Motley Fool
July 20, 2014

Maybe Sears Holdings is finally learning a thing or two from its recently spun off Lands' End division -- specifically that the path to any future it is going to salvage will be through its online services. The old-line retailer announced last week it will be expanding its in-store pickup service to some 2,000 locations.

The brick-and-mortar retail story of Sears and Kmart continues to be a dismal read, with ever-shrinking sales and traffic, but its digital initiatives have enjoyed far more success and the retailer reports that 60% of its online sales are multichannel transactions. Whereas comparable sales at physical locations maintain the same dreary decline they've experienced just about since chairman and CEO Eddie Lampert fused the two ailing retailers together, online and multichannel sales increased 26% over the prior year.

Last year Kmart highlighted its ship-to-store policy with its fun and award-winning "Ship Your Pants" commercial, and Sears has sought to leverage that with the establishment of its Shop Your Way loyalty program, which seeks to reward consumers for the purchases they make regardless of how they make them, whether in-store or online.

Although there seem to be some problems with the latter in that it serves to siphon off profits at a time it can least afford it, Sears at least recognizes that it can't afford to do business the way it has been doing it. Expanding the in-store pickup policy is another step in the right direction, as it has the chance to drive more traffic to its stores, and, in theory anyway, possibly perk up sales there.

Lands' End is largely online and catalog-based, featuring a mix of clothing, footwear, and home products, although it has several stand-alone stores and several hundred store-in-store shops inside Sears. In its first quarter since being spun off from its former parent, Lands' End said sales rose 3.6% to $331 million, while profits surged 48% to $11 million. Maybe focusing more on online opportunities can help Sears, too.

However, Sears Holdings' biggest problem these days may be Lampert himself. Even as he implements these initiatives, he's working at cross-purposes to the retailer's full potential by steadfastly refusing to invest in upgrading his stores. As he's closed or sold off some of his best real estate -- some investors still maintain it's in Sears' real estate that the real value of the company lies -- increasingly what's left are the tired, urban stores that, as the sales and traffic numbers highlight, fewer people want to shop at.

It's there, though, that Lampert's policies are causing the most problems. By declining to spruce up the stores to make shopping in them a more encouraging experience, he's giving customers little reason to go there other than to get in, pick up their online orders, and get out. The in-store environment only reinforces the preference consumers will have to continue shopping online, but with other retailers also offering ship-to-store policies of their own, consumers have a choice about where they want to make their purchases.

As Sears' footprint shrinks, moving further away from its customer, Wal-Mart is one retailer in particular that is moving closer. It may be investing heavily in smaller-format stores instead of supercenters, but the ability of the consumer to interact with Wal-Mart in some fashion grows considerably.

It, too, has invested heavily in its online marketplace, and while its stores are also suffering from falling comps and traffic lately (though its experience is far more recent than Sears'), the expansion of its presence as an omnichannel retailer increases as it more closely adopts technological advances.

Sears says its Shop Your Way program now accounts for three-quarters of the retailer's eligible sales, and, with nearly two-thirds of its online sales being multichannel, cross-promotion of items across the two may help blunt the impact the decline of its stores creates. Renovating its stores could be the missing ingredient needed to turn the story around at Sears Holdings.

Rich Duprey has no position in any stocks mentioned.

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Target Corp. should cut its losses and exit Canada--soon, says Credit Suisse
Investing
July 16, 2014

Target Corp. needs to make a decision about whether it wants to continue operating in Canada soon.

Sears Holdings Corp.'s recent announcement that it is exploring strategic alternatives for Sears Canada Inc. makes the decision more pressing, as the potential supply glut would dilute the value of real estate in Canada, Credit Suisse said in a report Wednesday.

"Once a permanent CEO takes the helm, they will need to rapidly decide whether an attempt to turn around Canada is worth diverting time and capital away from the U.S. business," analyst Michael Exstein told clients.

"We think it may be more prudent for Target to cut its losses and devote 100% of its resources on the U.S. -- which comprises over 97% of the company's current sales."

If Target exits Canada in 2015, he estimates it will incur US$3.5-billion in charges, but generate US$1-billion in cash proceeds. Target is expected to see a roughly 10% dip in shareholder's equity as a result, and the largest decline in free cash flow since 2007.

By the end of fiscal 2014, Mr. Exstein noted Target will likely have spent about US$6-billion in capex and after-tax losses in Canada. But more spending may be coming if the company wants to turn things around, as the analyst thinks it will be a major effort that takes at least several years to accomplish.

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3 Ways Online Retailers Fail Customers
By Rick Chavie, Vice President of OmniCommerce at Hybris
The Future of Commerce
July 16, 2014

Shoppers are generally happy about the state of today's retail marketplace, but there are signs that their love affair with online retail is beginning to wane--and that's a serious concern for any retailer that sells in the digital space.

The American Customer Satisfaction Index's latest report shares that customer satisfaction with the retail industry grew 1.7 percent in 2013. However, satisfaction with online retail plummeted 4.9 percent, receiving its lowest score since 2011.

Dated websites with poor functionality and insufficient product details caused frustration and disappointment among online shoppers last year, driving them to physical stores.

This year, Internet retailers can improve customer satisfaction by solving some of the common issues that plague online shopping experiences.

1. Restricted Delivery Options: Consumers expect online retailers to provide a range of delivery options. By offering shoppers flexible delivery options (e.g. buy online/pick-up in-store), online retailers enable consumers to browse, purchase and receive items on their own terms, without relying on a third-party delivery service.

2. Disjointed Cross-Channel Experiences: In the omni-channel commmerce marketplace, consumers want to the same high quality customer experience across all touchpoints. Online retailers can eliminate the disjointedness that can result from a siloed channel approach with the help of technology. A robust omni-channel commerce platform can optimize the experience for mobile devices and ensure branding, messaging and customer service are fully integrated.

3. Lack of Product Information: Consumers crave information and content about the products that are important to them. Product reviews generated by other customers make it easier for consumers to make informed purchasing decisions and optimized product content facilitates faster, more accurate product searches for shoppers.

Consumers don't just want exceptional brick-and-mortar or exceptional online shopping experiences--they want both. In fact, most consumers don't recognize a distinction and expect to be delighted by a first-rate customer experience regardless of the mix of channels they use during the course of a single shopping event.

Many omni-channel retailers have focused on reshaping the brick-and-mortar space, and the marketplace has responded by expressing its satisfaction with the changes. To maintain that momentum and business growth, retailers need to also focus on the online experience to fully satisfy consumers.

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Penney CEO Search Drags On
By Suzanne Kapner and Joann S. Lublin
Wall Street Journal
July 14, 2014

Board Works Through Small Slate After HSN's Mindy Grossman Turns Down Job

J.C. Penney Co is having a hard time finding its next leader.

Mindy Grossman, who runs HSN Inc. turned down a chance to become Penney's next chief executive, leaving the retailer to continue hunting for a successor to current chief Myron "Mike" Ullman, people familiar with the situation said. Penney directors are working through a small slate of other finalists, and no appointment is imminent, the people said.

The yearlong search began after activist investor William Ackman, who at the time was a large Penney shareholder and a director, pressured the board to quickly replace Mr. Ullman after it reinstalled him last year on a temporary basis.

Mr. Ullman returned to right the ship after a disastrous 17 months under former Apple Inc. executive Ron Johnson, whose attempt to remake the chain by doing away with discounts and popular in-house brands resulted in a $1 billion loss on a 25% drop in sales during his first year on the job. Mr. Ackman has since left the board and sold his stake.

The enormity of the challenges confronting Penney as it tries to claw back market share have put off several experienced candidates, including other current retail CEOs who have been approached for the job, the people said. Like other retailers, Penney is also grappling with weak store traffic and greater competition from the Internet.

The search is further complicated by the fact that several other major retailers are also looking for new CEOs including Target Corp., Dollar General Corp. and American Eagle Outfitters Inc.

The talks with Ms. Grossman progressed to an advanced stage but broke down about two months ago after the sides couldn't agree on terms, two of these people said. The exact reason is unclear.

The uncertainty caused by the protracted search and Penney's ongoing operational problems have weighed on the retailer's shares, which have lost 50% of their value in the past year.

Representatives for Penney and Ms. Grossman declined to comment.

Ms. Grossman, a former Nike Inc. executive who has run HSN since 2006, is seen as a rising star in the industry. She has been courted by consumer companies looking for new leadership. In early 2012, she was approached by Avon Products Inc. about becoming its next CEO, but the company ended up hiring Sherilyn S. McCoy, a former Johnson & Johnson executive.

Ms. Grossman is credited with crafting a more upscale image for the Home Shopping Network and bringing the company, which also includes the Cornerstone home and lifestyle brand, into the digital age. But her current job doesn't include oversight of any physical retail stores, since HSN has none. Knowing how to run actual stores is a skill that will be critical for the next CEO of Penney, which has more than 1,000 locations.

The trends are improving for Penney. Mr. Ullman has successfully shored up the company's financing and boosted sales by bringing back house brands and discounts.

But all is not yet well. As of May 3, the end of the company's first quarter, sales remained $1.1 billion below where they were in the first quarter of 2011, months before Mr. Johnson took over. Losses for the period widened to $352 million from a year earlier.

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Sears Holdings Names Kristin M. Coleman As General Counsel
PRNewswire
July 7, 2014

HOFFMAN ESTATES, Ill. -- Sears Holdings announced today that Kristin H. Coleman will join the company as senior vice president, general counsel and corporate secretary. Coleman most recently served as Brunswick Corporation's vice president, general counsel and corporate secretary.

Coleman will be responsible for the oversight and leadership of Sears Holdings' Legal business unit that includes a team of attorneys and paralegals as well as Corporate Communications; Environmental Services; Global Compliance; Government Affairs; Internal Audit; and Product Safety. Prior to Brunswick, Coleman served as a vice president and associate general counsel at Mead Johnson Nutrition Company and as an attorney with Sidley Austin LLP in Chicago.

"I am pleased Kristin is joining our leadership team. She is a proven leader with experience managing legal, compliance and corporate governance issues," said Edward S. Lampert, Sears Holdings Chairman and CEO. "Having started her career as a litigator and transitioning into corporate law, she brings a breadth and depth of experience to Sears Holdings in litigation and governance, including mergers and acquisitions and securities, which will serve us well as we continue on our path to transform the company."

Coleman received a bachelor's degree from Duke University in Durham, North Carolina, and a Juris Doctor from the University of Michigan Law School in Ann Arbor.

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Paul Rogers, retired national fashion director of men's apparel for Sears, dies at 80
Chicago Tribune
June 7, 2014

Paul Richard Rogers, 80. Raised by his beloved parents, Paul and Mildred in California, alongside his sister, Phyllis. Paul, US Army veteran, graduate of University of Southern California, retired National Fashion Director of Men's Apparel for Sears. He loved the opera, reading by the lake, and going to dinner with friends. He passed on June 1, 2014. His partner, Gerry Monahan, and his parents precede him in death. Paul is survived by his west coast family: Phyllis Harris, Alan Harris and wife Wendy, Caryl Harris, Randy Harris and wife, Carol and their children Steven, Renee and David, his many dear friends of Chicago and his faithful companion Frango the cat. Services are private. In lieu of flowers, donations may be made in his name to the Treehouse, www.treehouseanimals.org. Arrangements by Cremation Society of Illinois, 773-281-5058 or www.cremation-society.com.

Published in Chicago Tribune from June 7 to June 8, 2014

See more at: http://www.legacy.com/obituaries/chicagotribune/obituary.aspx?n=paul-rogers&pid=171259970&fhid=16222#sthash.qN2Rnn0e.dpuf

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Sears Could Drop 50% More as Turnaround Eludes It
By Jacqueline Doherty
Barron's
May 26, 2014

It's selling assets to fund a nonexistent turnaround

Sears Holdings first-quarter results were the latest reminder that investing in the retailer is a bet on CEO Edward Lampert's ability to sell assets fast enough to plug the company's losses.

Sears could burn through $1 billion this year after paying for capital expenditures, interest expense, and funding its pension obligations, says Scott Tuhy, an analyst with Moody's Investors Service. Matt McGinley, an analyst at ISI, puts the burn rate closer to $1.5 billion. In the first quarter, the company's operations used $560 million in cash.

Funding the company this year shouldn't be a problem. Sears has already raised $500 million from the Lands' End dividend and $79 million from real-estate sales. It still has assets to be sold, including a $730 million equity stake in Sears Canada, Sears Auto Centers, and its real-estate holdings. Almost $850 million of cash and $1.2 billion of available bank credit add to liquidity.

But the problem is twofold. One, proceeds of asset sales are not going directly to shareholders because they're needed to fund operations. And, two, the asset sales will need to continue until an operational turnaround occurs—and there's no sign that's happening.

The company lost $402 million, or $3.79 a share, on $7.9 billion in revenue in the first quarter. For the full year, analysts at Credit Suisse and ISI both expect the retailer to lose more than $8 a share. The stock, now $38, is worth closer to $20, say the analysts. That may be optimistic.

Kmart sales may be suffering because its prices are more than 20% above Target's and Wal-Mart's, according to a Bloomberg Industries' monthly pricing survey, says David Berman, a portfolio manager at Durban Capital. "Their prices are higher than their competitors'. Why would a rational person go there?" he asks.

Sears has started initiatives to boost annual earnings before interest, taxes, depreciation, and amortization (Ebitda) by $1 billion, to $2.4 billion. Plans include shrinking its store base while maintaining customer relationships via the Internet. It also hopes to entice customers to buy at the stores more frequently, reduce the cost of goods sold, trim selling and administrative expenses, and lift inventory turnover.

The shares have fallen 31% since we warned that the company's assets might not be worth as much as the market was expecting ("Sears Rally Belies Big Worries," Oct. 14, 2013). To be fair, $8 should be added to today's stock price to give Sears credit for the Lands' End spinoff, which occurred after our story ran. That's still a 16% loss.

While it's hard to pass up a sale, until there's a reason to believe Sears is enjoying an operational renaissance, we'd continue to avoid the shares.

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Sears Catalog of Worry Isn't Getting Thinner
By Justin Lahart
Wall Street Journal
May 23, 2014

Sears Holdings is a much smaller company than it once was, and it aims to get smaller still. But that may not be enough to take it back into the black.

So far this year, Sears has spun off its Lands' End business and said it is exploring selling off its majority stake in Sears Canada. That follows its 2012 separations of its franchised and outlet stores, and its 2011 spinoff of its Orchard Supply hardware stores. The company now operates 2,363 Sears, Kmart and specialty stores (including 439 held by Sears Canada), compared with 4,035 three years ago. It is in the midst of closing more stores.

Yet for all it has done, the company's financial position has deteriorated. Sears reported Thursday that it lost $402 million in the quarter ended May 3. Net debt--short- and long-term debt minus cash and cash equivalents--came to $33 billion, compared with $2.7 billion three years earlier.

In a prerecorded audio presentation, Chief Executive Eddie Lampert --the billionaire investor who also controls the majority of Sears shares--laid out what he called a "profitability framework." It included items such as "optimizing our store network" and "transforming select business models." But he also said that it was "not intended to provide guidance or predict results." Put otherwise, the company isn't telling investors when they might expect to see actual profits.

Mr. Lampert signaled that the company's store closures will go further--unsurprising, given that it has set up a business called Seritage Realty Trust that boasts a portfolio of more than 200 retail properties. Sears also reiterated that it is considering separating its Sears Auto Centers business. Given all the assets the company already has stripped away, investors might wonder further slimming might accomplish.

The problem facing Sears is that the assets that it can most easily sell to raise cash while it waits for its profitability framework to kick in are often its best ones. It can find ready buyers for stores and long-term leases in A-rated malls, for example, but these are probably its most productive locations.

Meanwhile, getting out from under a Kmart lease in a lower-income area with a declining population isn't so easy. That is especially true at a time when other retailers, such as J.C. Penney, are looking to get rid of underperforming stores.

Moreover, as long as the losses continue, Sears will need to continue reassuring lenders who finance its suppliers that it will be able to pay its bills on time. Sears ran up against such doubts about two years ago, although it was able to overcome the problem then. Keeping ahead of such situations could entail it raising cash through sales of assets that represent its best chance of returning to profitability.

Without a more concrete plan for precisely how and when Sears will reverse its losses, it is hard not to worry that what was once America's pre-eminent retailer has entered such a cycle.

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Target has lost its cheap, chic edge
By Hadley Malcolm
USA Today
May 22, 2014

Target may have been knocked down by a huge holiday season data breach last year, but its most recent quarterly earnings report and continuing replacement of top management show the retailer has other, bigger problems to address.

Target's Canadian expansion has suffered from poorly managed inventory planning and a lack of understanding of the Canadian market. Meanwhile, merchandise even in U.S. stores has lost its gotta-have-it quality, and foot traffic had been slowly declining, even before the breach happened.

"They're behind the curve right now," says Sandy Skrovan, U.S. research director for Planet Retail, a retail research and advisory firm. "It's kind of like they've had blinders on to the changing competitive landscape."

In the first quarter, Target's net earnings fell 16% to $418 million, or 66 cents a share, compared with $498 million in the same period last year, the company announced Wednesday. Sales increased 2.1% over last year to about $17 billion. Earnings related to U.S. stores decreased 13.5% to about $1.1 billion from about $1.2 billion last year.

For the year, Target cut its estimated earnings per share to between $3.60 and $3.90 compared with prior guidance of $3.85 to $4.15. Brian Yarbrough, an analyst with Edward Jones, suspects that's because the chain plans to be highly promotional to try to get customers back in stores, which will eat into profit margins.

The results come as Target continues to try to win back customers wary of shopping after the breach, which Target says cost the company $26 million in the first quarter -- $18 million in net expenses and an $8 million insurance receivable. The number of transactions in U.S. stores fell 2.3%, contributing to a 0.3% decline in comparable store sales.

Brian Sozzi, CEO of Belus Capital Advisors, says that's been a trend for the past two years though. He and Skrovan both say that despite problems in Canada, Target has lost sight of its core market at home.

"They really need to figure out what they can do that's bold and innovative to get some excitement in the stores," Skrovan says. "They can't rely solely on price alone."

In a call with media and analysts Wednesday, interim CEO John Mulligan acknowledged the need to build traffic and sales at U.S. stores and outlined the company's major priorities, including offering customers newer and better products.

"We're still far from where we need to be," he said. "We're committed to moving faster."

Mulligan is just one of several new leaders and internal promotions in recent weeks. Target executives are getting the boot as the company looks for fresh leadership and a new vision to salvage its reputation. CEO Gregg Steinhafel resigned earlier this month, Target hired a new CIO to oversee technology and security as it beefs up both in the wake of the breach, and this week it replaced the head of its Canadian operation.

While the Canadian operation did slightly better than in the fourth quarter, it still operated at a loss of $211 million, compared with a loss of $205 million last year. Target opened 124 stores in Canada last year and plans to open nine more this year. As a whole, the Canadian segment lost $941 million last year.

The slight signs of improvement this year so far are "key," Yarbrough says. He says Target Canada has suffered from empty store shelves of in-demand goods while at the same time having to significantly mark down excess merchandise that isn't selling as well.

"They don't have a good feel or understanding on what the Canadian consumer is about," he says.

As competitors like Wal-Mart often offer better prices and others like Macy's and Amazon offer better digital experiences, Target has lost its "Tar-jay" cachet.

"The insides of competing stores are rapidly changing," Sozzi says, "and there is Target, still trying to live off a cheap chic reputation that it hasn't earned for three years."

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Sears's Pool of Anaylsts Shrinks as Morningstar Exits
By Lauren Coleman-Lochner
Bloomberg
May 22, 2014

Morningstar Inc. (MORN) has dropped coverage of Sears Holdings Corp. (SHLD), leaving only a handful of analysts following a company that was once the largest U.S. retail chain.

Retail analyst Paul Swinand discontinued coverage as of March 18, according to a company note. "We provide broad coverage of more than 1,700 companies across more than 140 industries and adjust our coverage as necessary based on client demand and investor interest," the note said.

Before dropping coverage, Morningstar had rated Sears "no moat," the lowest of three rankings that refer to a company's ability to fend off competitors. The retailer, which operates Sears and Kmart stores, has posted 29 straight quarters of revenue declines including results today in which it reported a wider net loss than a year earlier.

"One of the keys to finding superior long-term investments is buying companies that will be able to stay one step ahead of their competitors, and it's this characteristic -- think of it as the strength and sustainability of a firm's competitive advantage -- that Morningstar is trying to capture with the economic moat rating," according to the Chicago-based company.

Shares of Sears, based in Hoffman Estates, Illinois, fell 2.6 percent to $35.61 at 12:05 p.m. in New York, headed toward their seventh decline in the past eight trading days.

Sears' net loss for the first quarter was $402 million from a loss of $279 million a year earlier, as its sales slump stretched into a seventh year. The company, run by hedge-fund manager Edward Lampert, has invested in online and is shutting stores and may seek buyers for its auto centers and Canadian unit. It spun off its Lands' End apparel business last month.

Kmart merged with Sears Roebuck in 2005 in a $12.3 billion takeover -- a deal that Lampert said would create a company with enough scale to compete with Wal-Mart Stores Inc. Instead, the retailer has suffered from declining shopping-mall traffic and the rise of online competitors such as Amazon.com Inc.

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Sears Loss Widens on Weak Consumer-Electronics Sales
By Michael Calia
Wall Street Journal
May 22, 2014

Retailer in Process of Closing About 80 Stores This Year, Still Considering Splitting Off Auto Centers

Sears Holdings Corp. said its fiscal first quarter loss widened amid falling revenue and weak same-store sales, while the retailer looks to adjust its strategy for the struggling consumer electronics.

Sears, controlled by billionaire hedge fund investor Edward Lampert, has been trying to streamline its operations by shedding businesses and closing locations while moving to a model focused on members rather than stores. In the most recent period, customers who signed up for the "Shop Your Way" free loyalty program accounted for 74% of sales, up from 68% in the same period a year ago.

Sears--which is in the process of closing about 80 stores, and possibly more, this year--said Thursday that it continues to evaluate its options in splitting off its auto center business. It spun off its Lands' End clothing business earlier this year, receiving $500 million in gross proceeds.

Earlier this month, the company said it is considering selling its controlling stake in Sears Canada Inc. as it looks to raise cash and focus more on its U.S. operations. Sears Canada, meanwhile, said earlier this week that its first-quarter loss more than doubled from a year earlier as its sales continued to slump.

Sears domestic same-store sales rose 0.2% in the period ended May 3--its first such growth in more than a year--compared with a 2.4% decline last year, hurt by a continuing slump in consumer electronics. Kmart felt a similar impact from the category, as its same-store sales fell 2.2%.

Without the consumer-electronics impact, same-store sales at Sears would have grown 0.8%, and Kmart's decline would have been 0.4%.

Mr. Lampert said during the company's earnings call Thursday that Sears would shift its focus from selling televisions and instead pursue a "connected living" strategy focusing on appliances, fitness equipment, electronics and auto services.

Additionally, the company is looking to revamp its apparel business, whose higher markdowns weighed on margins in the most recent period, Mr. Lampert said.

Overall, Sears posted a loss of $402 million, or $3.79 a share, compared with a prior-year loss of $279 million, or $2.63 a share. Excluding certain tax matters, the Lands' End spinoff and other items, Sears' adjusted per-share loss was $2.24.

Revenue fell 6.8% to $7.88 billion, reflecting Sears and Kmart store closures, as well as the separation of the Lands' End business and Sears Canada's sales declines, the company said.

Sears' gross margin narrowed to 23.2% from 25.5% even as input costs declined 3.9% to $6.05 billion.

Mr. Lampert said in a release that the company is "continuing to bear the costs of two promotional models, which adversely impacts our margins."

Total costs and expenses declined 5.1% to $8.25 billion.

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Wal-Mart slumps, Penney recovers
USA Today
May 16, 2014

A slew of retail first-quarter earnings announcements Thursday showed Wal-Mart, the country's largest retailer, slumping -- but beleaguered J.C. Penney recovering.

Wal-Mart reported a profit decline of 5% as bad weather, poor sales abroad and cuts to food stamps sent net income down to $3.6 billion from $3.78 billion a year ago. Earnings per share fell 3.5% to $1.10, missing analyst estimates.

"Like other retailers in the United States, the unseasonably cold and disruptive weather negatively impacted U.S. sales and drove operating expenses higher than expected," said Wal-Mart CEO Doug McMillon in a statement.

Meanwhile, J.C. Penney appears to be making a comeback a little more than a year after former CEO Ron Johnson left after an unsuccessful turnaround attempt. The retailer beat analysts' expectations with an earnings per share loss of $1.15 -- analysts expected a loss of $1.26 a share -- and sales up 6.3% to $2.8 billion, from $2.6 billion a year ago.

Penney shares leaped nearly 20% in after-hours trading to $10.03. The company also announced that it took out a $2.35 billion line of credit to increase liquidity during peak times such as the back-to-school and holiday shopping seasons.

"It is clear that our efforts to re-merchandise many areas of the store and revamp our messaging to the customer are taking hold," CEO Mike Ullman said in a company statement. "We expect to carry this momentum into the second quarter as we continue to position the company for long-term profitable growth."

Department stores Nordstrom and Dillard's both reported successful first quarters, with positive sales so far in 2014, the companies said Thursday.

Nordstrom's net sales grew 6.8% to $2.8 billion, compared with $2.65 billion last year. Earnings fell to $140 million from $145 million, which the company attributed to planned investments in technology. Earnings per share were 72 cents, beating the company's own estimates of from 60 to 70 cents.

Same-store sales, or sales at stores open at least a year, grew 3.3%, up from last year's 3.1% growth, thanks to strong performance in accessories, cosmetics and women's shoes.

Dillard's reported a gain of $2.56 per share, vs. $2.50 last year. Net income was $111.7 million, vs. $117.2 million last year. The 2013 first quarter included a net after-tax credit of $4.4 million. Total sales increased 1% to about $1.54 billion from $1.53 billion.

CEO William Dillard said in a statement that the 2% increase in same-store sales marked the 15th-consecutive quarter of positive sales.

While Wal-Mart saw same-store sales fall 1.4%, sales at the company's Neighborhood Markets, smaller stores that compete with drugstores and grocery stores, continue to climb. Sales at the Markets rose 5%, and Wal-Mart reaffirmed plans to open more. In September, Wal-Mart said it would have about 500 Neighborhood Markets by the spring of 2015, up from 290 at the time.

Penney continues to promote heavy sales, especially around holidays such as Valentine's Day and Easter, in an attempt to regain customer traffic. Ullman said that April marked the first time in more than 30 months that Penney's experienced positive store traffic.

Brian Sozzi, CEO of Belus Capital Advisors, says Penney's merchandise assortment has improved and is better displayed in stores.

"J.C. Penney stores looked visually appealing in the first quarter," he says. "Clothing was folded. Merchandise was properly ticketed."

He adds, "I think the consumer saw the old school J.C. Penney back in action, with promotions consistently in the range of 30% to 45%. "(Ullman) is taking J.C. Penney back to what he knows: heavily promoted and well merchandized."

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Struggling Malls Suffer When Sears, Penney Leave
By Suzanne Kapner and Robbie Whelan
Wall Street Journal
May 10, 2014

Loss of Anchor Tenants Can Accelerate Downward

NORFOLK, Va.--With J.C. Penney Co. and Sears Holdings Corp. racing to close stores, America's weakest malls are being pushed to the brink.

Nearly half of the 1,050 indoor and open air malls in the U.S. have both of those struggling chains as anchor tenants, according to real-estate research firm Green Street Advisors. Of those malls, nearly a quarter are struggling with sales below $300 per square foot and vacancy rates above 20%, meaning they will have a hard time finding new tenants if old ones leave.

For an already-weakened mall industry, the negative turn for two once-reliable anchors is promising more stress at a time when the Internet is steadily stealing traffic. And the pressure is only growing. Sears Chief Executive Eddie Lampert this week said he plans to close more stores to help return the company to profitability.

Vacancy rates rose and sales plunged at the Gallery at Military Circle, about 5 miles from downtown Norfolk, Va., after the Sears store closed its doors two years ago. Eventually the mall's owner missed multiple payments on its debt. Remaining retail tenants worry about what will happen when the Penney store closes this month, darkening another corner of Bruce Van, who manages Gent's, a locally owned boutique specializing in men's suits and fedoras and Sunday church clothes, said foot traffic fell by more than half after the Sears closed.

"When J.C. Penney goes out in May, it's going to be bad," said Mr. Van, who is also pastor at Rivers of Life Fellowship in Hampton, Va.

The first U.S. indoor mall opened in Edina, Minn., in 1956, and construction peaked in the 1980s. Only six new malls have been built since 2010, according to CoStar Group, a provider of commercial real-estate information. Meanwhile, the number of "dead malls," those with vacancy rates over 40%, has nearly tripled since 2006 to 74 properties.

The fate of the mall business matters, because even as the industry struggles, it remains an important source of economic activity.

Sales per square foot at the nation's malls grew just 2.6% last year--their slowest pace since 2009, according to International Council of Shopping Centers. Vacancy rates are stubbornly high, at an average of more than 8% at regional malls, not far off a 2011 peak in of 9.4%, according to data company Reis Inc.

"Just because people are making fewer trips to the mall doesn't mean they're spending less," said Jess Tron, a spokesman for the ICSC. Mr. Tron said that malls are trying to reinvent themselves by adding entertainment like indoor golf courses and higher-end restaurants, as well as services such as same-day delivery.

Still, it is tough to reverse such high vacancy rates when large anchor-tenant retailers like Sears and Penney are closing stores and others like Macy's Inc. are opening fewer locations.

Penney, which racked up $2.4 billion in losses over the past two years, plans to close 33 of its stores, most of them in malls. Sears, with losses of $2.3 billion over the same period, has closed 116 of its full-line Sears stores since 2010. Penney and Sears declined to comment.

To be sure, the exit of a troubled retailer can create an opportunity for stronger malls to find healthier tenants. But it is a different situation for struggling malls. And the potential damage from losing an anchor tenant is especially high in malls that have both Penney and Sears as tenants, said Gary Balter, a retail analyst. "If one of them goes, it almost forces the other one out, because the mall just won't get enough traffic," Mr. Balter said.

The exit of an anchor can cause other stores to leave or renegotiate their leases, contributing to a spiral of declining traffic and investment.

At the Gallery at Military Circle, the cavernous, 128,000-square-foot space once occupied by Sears remains empty. "For Lease" posters dot the windows of other darkened storefronts.

The mall's situation is already tenuous. In November, and again in February and April, Thor Equities LLC, its owner, missed payments on a $53 million securitized loan, and Thor is in talks to restructure the debt, according to Trepp LLC, a company that collects data on real-estate debt.

The Gallery is hanging on to its other anchors--Macy's at the north end and an 18-screen movie theater on the south. A Macy's spokesman said the retailer has no plans to leave. Cinemark didn't return calls seeking comment.

At the Southlake Mall in Morrow, Ga., after the Penney there closed in June 2011, a number of national-chain tenants had their rent payments reduced, real-estate executives said. The mall's total sales fell to $58 million in January from $60 million in the year Penney closed as vacancies rose.

Several retailers at the mall said their sales have fallen by 30% since Penney left. "J.C. Penney brought people to the mall," said Joseph Nguyen, who operates a jewelry-repair kiosk near the food court and was one of the retailers whose sales fell off.

Southlake occupied what was considered prime real estate in suburban Clayton County when the property was built just off Interstate 75 in 1976. Housing developments were springing up as the city expanded southward, bringing in new residents and eager shoppers.

Over the past decade, however, Southlake's fortunes have turned. Newer shopping destinations in neighboring Henry County pulled customers away. Clayton County lost jobs when a nearby Ford Motor plant closed in 2006. The mall took a further hit when Clayton County dropped bus service two years ago.

Southlake lost its first anchor in 2003, when Macy's closed one of its two stores at the mall. Unable to find another retail tenant, General Growth Properties, which bought the mall in 1997, turned the space into offices and a convention center. General Growth filed for Chapter 11 bankruptcy protection in 2009 and emerged in 2010. A year later, Penney left Southlake mall.

While the mall's occupancy rate has remained above 90%, Southlake has lost several national players, including The Limited and clothing chains and the Chick-fil-A fast-food restaurant.

"Two anchors aren't enough to draw people to the mall," said Michelle Laidig, who has worked at Southlake for 25 years. "The mall used to be a destination. Now the locals just come here to return items they bought at other malls."

The future may be turning around. Vintage Real Estate LLC, which acquires and redevelops underperforming malls, bought Southlake in April for an undisclosed price and plans to invest $3 million to revitalize the property.

"We talked to every tenant," Vintage Chairman Fred Sands said. "We found out how they are doing and what the facility needs."

Mr. Sands said he is negotiating with new restaurants for the food court and is interviewing tenants to take over the former Penney space.

The chairman disputes the idea that the mall was hurt by Penney's closing. Sales excluding newly opened or closed stores have held steady at roughly $320 per square foot since 2011, according to documents Mr. Sands provided. Lost business from Penney was offset by increased sales from the mall's 16 shoe retailers, including and Athlete's Foot, he said.

RaeQuel Fagin, a 20-year-old-restaurant worker who met a friend at the food court on a recent Tuesday afternoon, said the mall was a good place to come for sneaker releases, but not for much else.

"I wouldn't say this is where I would come if I felt like shopping," Ms. Fagin said.

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Is Sears Holdings making real progress in transforming itself?
By George Anderson
RetailWire
May 7, 2014

Once again Sears' CEO Edward Lampert has spoken and the message is pretty much the same. The company is in the process of transforming into a new type of retail entity that will achieve success in the future. Where others see an ongoing deconstruction of once proud retailers (Kmart and Sears), Mr. Lampert sees something else. What that is may not be clear to retail industry experts and pundits, but Mr. Lampert doesn't much care what others think.

Speaking at the company's annual shareholders meeting, Mr. Lampert said, "Looking back at what used to be doesn't give us a chance to transform."

The past probably isn't where Mr. Lampert wants Sears stakeholders to have their focus considering the company has had 38 straight quarters of declining sales. For those who do, he pointed to Apple and General Dynamics as companies that went through rough periods before achieving successful transformations.

One thing is clear -- Sears Holdings' future will mean fewer stores. "You don't need 2,000 stores to be competitive in the U.S.," he said via The Wall Street Journal. Sears Holdings currently operates 1,152 Kmart stores and 778 Sears stores.

As in the past, Mr. Lampert spoke about pursuing a goal of becoming a fully integrated multichannel retailer, primarily through the company's Shop Your Way rewards program. Members of the program are the biggest driver of sales for the company and its greatest focus.

Part of that attention has included an expansion of Sears' online marketplace. Over the past two years, Sears has increased available products from 40 million items to about 120 million today. "We've been very focused on serving members, providing products they want and very focused on price," Mr. Lampert was quoted as saying by the Chicago Tribune.

Discussion Questions:

Will closing stores make Sears and Kmart stronger retailers? Is integration of digital with brick and mortar environments the key to the chains' success going forward?

Mr. Lampert has had ten years to prove the validity of his vision. And that vision has changed every time the "last strategy" failed to achieve gains in profitability and market share. Meanwhile, a collapsing sales base in outmoded stores makes it very seriously to accept the latest messaging -- whatever it is. The undermining of the Sears and Kmart brands through mismanagement is so thorough that it's naive to think an "online marketplace" can leverage those same damaged brands effectively. An online version of Sears runs a risk of irrelevance compared to stronger, better-managed competitors like Amazon and walmart.com. It's the same pathway that led to Sears's "also-ran" status today. -- Dick Seesel, Principal, Retailing In Focus LLC

Sears is where America used to shop. This latest move appears to be more rhetoric than substance. Sears is very late to the game with little in the way of differential advantage to either bricks & mortar or online retailers. -- Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

Sears may make it with the standalone specialty appliance stores, but as a major retailer the question is not will they, but when will they disappear from the marketplace? -- Mel Kleiman, President, Humetrics

While I am skeptical of Sears being able to pull off anything comparable to Apple's resurrection, I will give Eddie Lampert the benefit of the doubt despite "38 straight quarters of declining sales." I agree that Sears doesn't need as many physical locations and that increases its cost structure. That being said, I also don't know how many is enough. Eliminating the underperforming stores makes sense from a macro perspective, although it causes a great deal of angst in the communities they are in, but Sears needed the surgery if it hopes to survive and regain its relevancy. While I wouldn't bet against him, I am also not investing in his vision as there's been a good bit of shareholder angst in the last 5 years. -- Bill Davis, Director, MB&G Consulting

While integration of digital with brick and mortar seems the key to most chains' success going forward, does anyone else think that when Sears' CEO Lampert says "he doesn't much care what others think," he sounds like Penney's Ron Johnson-misread-his-customers redux? -- Naomi K Shapiro, Market Communications Manager, Upstream Commerce

Every store that closes leaves behind dissatisfied customers; so many customers were dissatisfied in the given market area they had to close the store. Sears has dissatisfied so many customers over the years that I find it challenging to believe people will give them a second or third chance online. Maybe Lampert is thinking of profit over scale with these moves, but is their online segment even profitable now? -- 'storewanderer'

Closing the stores will help cut costs...oh really? So that should help. Sears holds a major retail power torch in its hands, but they need to start waving it more...oh, what is that torch? Their product BRANDS. Craftsman is a trusted brand that other brands are working hard to catch. Kenmore means quality - but it is fading. Lastly, Sears could be in a whole new game if Ed flips the Sears catalog of old onto the web - which is what he is doing with the web store expansion. Make the site simple, fun, fast, and easy to buy from - just like the catalog. Add the new feature called "folded corners" page markers. Remember how you used to fold the top corner of the page in the toy section or tools section to mark pages that had things on it that you HAD TO HAVE? Ed can do it - especially if he lets real retailers run the ship! Ed, do not kill my Craftsman tools!!! -- Tom Redd, Vice President, Strategic Communications, SAP Global Retail Business Unit

I have admired Mr. Lampert for all of the concepts he has tried. Agree or disagree, he gets an A for taking the shot. He has also brought in some bright young talent, however, I don't know how successful he has been in retaining them. Another thing in his favor is that he has kept his eye on the customers who continue to spend money with him. With that said, yes, he is right! In today's shopping environment, one doesn't need 2000 stores to be successful, but I would question why one would also need to increase inventory from 40M items to 120M items over 2 years. This doesn't sound like just another long tail. Am I missing something? I have been keeping my fingers crossed that Mr. Lampert would roll a 7 on one of his trials but alas, it hasn't been in the cards. Can he do it? Based on his tenacity, I would give him a gold star. I'm not uncrossing my fingers just yet and that's my 2 cents.... -- Lee Kent, Brings Retail Executives Together to Meet.Learn.Profit, RetailConnections

Mr. Lampert's main points are spot-on and certainly not on the fringes. Retailers no longer need thousands of stores in order to be competitive, and having a store in every major market is no longer a prerequisite for being a major retailer (though if Walmart pulls off its mega-scale strategy, it may yet prove to be the exception). Marketplace expansion is something that several major retailers are aggressively pursuing (Walmart and Staples for example), and others, including Target, are seriously considering jumping in. I wrote about the potential in a RetailWire article. Mr. Lampert is no merchant prince, but we've seen how those have been faring lately. I wouldn't count him out. -- Carol Spieckerman, President, newmarketbuilders

I spend my days traveling the country, having dinners with retail IT leaders. I have yet to meet even one who claims to understand Mr. Lampert's strategy. This is particularly distressing given the large number of talented people who work for the company. Let's hope he'll provide some clarity so the rest of the industry can understand. -- Cathy Hotka, Principal, Cathy Hotka & Associates

It is not a question of Sears Holdings closing stores, just how long will it take to reach zero. What was viewed as a Real Estate plan does not appear to be working. Walmart has done to Kmart what it did to every other discount mass merchant. Sears does not seem to know what it wants to be. By the time they have transformed the company, it will likely be 10 percent of what it was and maybe show a profit. Yet Amazon is the leader in digital and will likely add some brick and mortar. What Sears Holdings wants to be may not match the consumer's needs by the time they get there. Younger shoppers are digitally oriented and older shoppers are brick & mortar oriented. Sears Holdings' merchandise is older shopper directed, so how does digital work for them? -- W. Frank Dell II, CMC, President, Dellmart & Company

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Sears chief: Store closings will continue, make company stronger
By Alexia Elejade-Ruiz
Chicago Tribune
May 6, 2014

Citing examples of companies that have successfully undergone transformations despite seemingly damning financials, Sears Chairman and CEO Eddie Lampert told shareholders Tuesday that "sometimes you need to go backwards to go forwards."

"We're very focused on the future," Lampert told shareholders at their annual meeting at the company's Hoffman Estates headquarters. "We know we have a storied past. ... Looking back at what used to be doesn't give us a chance to transform."

The $30.8 billion company has had 28 straight quarters of losses as it closes stores and sells or spins off assets. Lampert has been trying to steer Sears toward becoming "the No. 1 integrated retailer," largely through its Shop Your Way loyalty program, which he says represents more than 60 percent of sales at Sears and Kmart.

Sears has closed 305 stores since 2010 and has spun off Orchard Supply Hardware, Sears Hometown and Lands End. As of February there remained 1,152 Kmart stores and 778 full-line Sears stores in the U.S. Closing stores would continue to be part of the company's future, Lampert said, though "we want to make our bigger and better stores bigger and better."

Sears in recent weeks launched a pilot shop called Connected Solutions, a 2,275-square-foot shop within Sears at Woodfield Mall in Schaumburg showcasing "connected living" devices such as fitness watches, heart rate monitors, connected garage door openers and smart locks.

The first of three such shops that will open in the next few weeks, it aims to help people experience the devices and have well-trained associates to explain them.

Other initiatives highlighted were in-vehicle pick-up, which lets customers order online have their product brought to their car so they don't have to get out; mobile checkout so that shoppers can ring items up as they go; a shopping recap summarizing the products a customer had been considering; and member assist, which connects online shoppers to an in-store associate to ask questions.

Shop Your Way has grown to include a rewards program that gives shoppers relevant deals; shopyourway.com to research products and share or seek advice; an online marketplace with 120 million products sold by third-party vendors; and Shop Your Way Max, a shipping program similar to Amazon Prime that charging $39.99 annual fee for "free" two-day shipping.

Lampert, a hedge fund billionaire who merged Sears and Kmart in 2005, said Sears is "building a better mousetrap, we're building a better way for people to manage their lives when they're shopping" that will get to know customers through more than just stores and company products, but also partnerships with other brands.

"Retail has been very controlling," Lampert said. He said he is "inspired by what's happening in the technology industry, more and more you have to be part of a network."

He added: "There are a lot of local small and medium sized business. We can be an advertising platform for them, a fulfillment platform for them."

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At Sears, 'closing stores is going to be part of our future'
By Brigid Sweeney
Crain's Chicago Business
May 6, 2014

Speaking at this year's annual shareholders meeting in Hoffman Estates, Sears Holdings Corp. Chairman and CEO Edward Lampert said the retailer would close stores and look for ways to leverage its real estate while sticking to its focus on integrated retail and its Shop Your Way program. "Closing stores is going to be part of our future," he said. "I'd rather do (fewer closures) rather than more, but the world has shifted."

He outlined a vision of Sears' stores five years from now that will be physically smaller and sell both Sears merchandise and goods from third-party retailers.

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Sunny Skies Over Home Depot
By Avi Salzman
Barrons
April 21, 2014

After spiffing up its own house, the retailer is sitting pretty. Its shares could rally 25% as housing recovers

For much of America, spring means a trip to Home Depot to load up on garden supplies, deck furniture, or perhaps a gleaming new grill. After an unusually harsh winter, the nation's largest home-improvement chain is bracing for an onslaught, and the folks in the orange aprons are ready. Indeed, Home Depot is hiring 80,000 additional workers to man its miles of aisles of warm-weather supplies. The sense of renewal is hard to miss, and it extends well beyond the blooming begonias and jam-packed parking lots.

Much like the stores, Home Depot's shares could come to life in the months ahead, especially if the housing market, a crucial driver of revenue and profit, shows sustained signs of improvement. An uptick in housing, market-share gains at the expense of an ailing Sears Holdings Co, and substantial supply-chain improvements could help lift the stock to $95 in the next 12 months from a recent $77. Add a dividend yield of 2.4%, and investors could see a total return exceeding 25%.

Home Depot's shares are up just 6% in the past year, and off 6% in 2014, underperforming the Standard & Poor's 500 in both periods. The shares sell for 17.4 times this year's expected earnings, slightly less than rival Lowe's Cos. whose results have been less impressive. Lowe's has rallied 25% in the past year as investors have bet its performance will improve.

Home Depot guided Wall Street earlier this year to expect a 16.5% increase in earnings in fiscal 2014, which ends the following January, versus 21% growth in the prior fiscal year. Then again, the Atlanta-based company has a history of projecting caution but beating estimates, as it has done for the past 24 quarters. Despite a sluggish housing market, profits have risen at an average annual rate of 21% in the past five years.

Entrepreneurs Bernie Marcus and Arthur Blank opened the first two Home Depot stores in 1979 in Atlanta, handing out dollar bills as customers walked in. Their warehouse-style stores stood out because they were larger than most big-box outlets, and their employees were trained to guide customers through do-it-yourself home-improvement projects. Today, the company operates 2,263 stores, with units in all 50 states, as well as Canada and Mexico. According to IBISWorld, it controls 54.5% of the U.S. home-improvement market, versus 35.8% for Lowe's.

Blank succeeded Marcus as CEO in 1997, and stepped down from active management in 2000. The next CEO, Robert Nardelli, a veteran of General Electric Co., brought a hard-charging leadership style to a company that had been low-key and decentralized.

Earnings doubled under Nardelli's watch, but customers and investors complained about changes, including the replacement of experienced employees with part-timers, and the shifting of resources to Home Depot's lower-margin wholesale business, HD Supply. The stock price fell 6%, even as Lowe's share price nearly tripled. Nardelli departed in January 2007 under pressure from Relational Investors, an activist investment fund that owned Home Depot shares.

His replacement, Frank Blake, also spent time at GE, and served as a deputy energy secretary under President George W. Bush before joining Home Depot in 2002 as executive vice president for business development and corporate operations. The selection of Blake as CEO was surprising, and expectations were muted -- but not for long. Blake had little operating experience, "but the thing he did well was listen to investors and customers and run the business accordingly," says Brian Nagel, an analyst at Oppenheimer.

Gary Balter, of Credit Suisse, says Home Depot has the best management team he has covered in 29 years as a retail analyst, and investors echo the positive sentiment. Blake, 64, returned Home Depot to its roots, emphasizing customer service and rewarding managers with a bonus program. He also embraced the founders' entrepreneurial spirit, even reading portions of their book out loud to the troops.

Instead of adding new business lines and expanding overseas -- questionable strategies employed by some slow-growing U.S. retailers -- he worked to improve the traditional big-box stores and shuttered underperforming units. In addition, he sold HD Supply, and closed the company's 12 big-box stores in China.

The U.S. housing market crumbled early in Blake's tenure, after a multiyear credit binge. Same-store sales, or year-over-year sales at units open at least a year, turned negative during the ensuing recession at both Home Depot and Lowe's. But the companies adopted differing strategies to get things back on track.

Lowe's relied on promotional sales and kept adding stores, which produced diminishing returns. Home Depot chose to cut costs and worked to improve customer service. Since the middle of 2009, its quarterly same-store sales gains consistently have outpaced Lowe's. Home Depot posted 6.8% growth in comparable-store sales in 2013, its highest level since 1999.

Home Depot emerged from the housing bust leaner and smarter. Sales have risen 10.6% since 2009, but profits have jumped 133% as a result of cost cuts, share buybacks, and tighter inventory management. "They have such great earnings leverage," says David Batchelder, a principal at Relational. "As comp-store sales improve, they get more and more to the bottom line."

Home Depot earned $5.4 billion, or $3.76 a share, in fiscal 2013, on $78.8 billion in revenue. It is expected to earn $6 billion, or $4.43 a share, in the current fiscal year, on $82.7 billion. Analysts are forecasting earnings of $5.12 a share the following year.

Wall Street expects Home Depot to achieve long-term earnings growth of 16.4% is the only component of the Dow Jones Industrial Average with better perceived earnings prospects, face considerable head winds -- among them, declining demand in core markets, weakening production, and changing consumer appetites -- Home Depot has the wind firmly at its back.

There is no "easy" button for success in retailing; Eddie Lampert found that out the hard way at Sears, as did Bill Ackman, at J.C. Penney.

Home Depot simply worked to become a more efficient operator than competitors, with an 11.6% operating-profit margin, versus 7.9% at Lowe's. The company's success hasn't come from raising prices, but rather from selling through inventory at a rapid clip. Its inventory turned over at a rate of 4.7 times in 2013, compared with 3.9 times for Lowe's and 3.8 for Sears.

To achieve such numbers, Home Depot has spent the past few years reorganizing how it gets goods to customers. Before the changes, each store ordered merchandise directly from manufacturers, and often had to overorder due to shipping minimums. Beginning in 2007, the company created 18 "rapid deployment" warehouses around the U.S. to centralize distribution and speed the delivery of high-demand goods.

Additionally, Home Depot gave sales associates hand-held devices loaded with data about products and their availability, which led to big improvements in customer service. The company also put more focus on merchandising, with an eye to local tastes.

Return on equity has shot up to 35.5% since these changes were implemented, compared with 22.2% when Blake became chief executive. In fact, ROE is roughly twice that of competing retailers. And the cash generated from operations -- $7.6 billion last year -- allows Home Depot to annually buy back $5 billion of stock, and to pay a fast-growing dividend, currently $1.88 a share.

As strong as results have been, investors haven't yet seen what an improved Home Depot can do in a more normal housing market. But that could change in the year ahead. Even without expanding its current store base or adding many new products, the home-improvement giant is likely to see a big pop in revenue as the housing rebound accelerates.

So far, there is little to cheer on the housing front. New-home construction stalled during the crash and recession, and has barely gotten up off the mat since. Housing starts totaled an annualized 946,000 in March, compared with two million in 2005.

Prices and sales rose in 2013 at the fastest rate since the recession, but here the news is mixed. Growth has been driven to an unusual degree by investors looking to rent properties and speculate on real estate. First-time buyers -- the sort who invest in cabinets, tile, carpets, and mulch at Home Depot -- accounted for only 28% of existing-home sales in February, versus a more normal 40%, according to the National Association of Realtors. In part, that's because many would-be buyers in the 25-to-34-year-old age bracket still are living with mom and dad. The recession also has curbed the other main drivers of household formation -- immigration and divorce.

Yet, economists are encouraged that the household-formation rate finally popped up to 1.375 million last year, spurred by job growth and pent-up demand. That exceeds the average annual rate of 1.2 million in the 20 years preceding the recession. They estimate that the industry will have to build 1.5 million homes a year just to keep up with U.S. population growth. Indeed, housing starts are expected to rebound to 1.1 million in 2014 from last year's 925,000.

The shares of home-improvement retailers are "the safest way to play this trend," says Chuck Lieberman, chief investment officer at Advisors Capital Management in Hasbrouck Heights, N.J. Home builders also will benefit from the rebound, but their stocks tend to be more volatile.

Even if housing takes longer to come around, Home Depot has other growth levers. Sears, still the leading U.S. appliance retailer, has been losing money and market share for several years. Home Depot gained 1.7 percentage points of share in appliances in 2013, and could grab more while Sears continues to struggle.

Seventy-eight percent of Home Depot's stores were within 10 miles of a Sears location, according to a report released in September by Morgan Stanley. The bank's analysts estimate that Sears sells about $9 billion a year in appliances and home-improvement goods. If its sales decline by 5% in the next three years, Home Depot could add at least $100 million in yearly sales.

"That's a major driver for Home Depot and Lowe's for the next three years," says Balter, of Credit Suisse.

A robust assortment of big-ticket items has helped Home Depot attract higher-income buyers. Transactions for more than $900 now contribute about 20% of annual U.S. sales, and grew more than twice as fast in the fourth quarter as tickets under $50.

Online sales also are climbing at a rapid pace; they rose 50% last year, to 3.5% of total revenue. Home Depot has warded off online competitors by negotiating with some suppliers to carry items exclusively. It also is attempting to integrate online and in-store shopping by offering extensive product information and reviews online, and letting customers pick up or return items in the stores that were bought online. At the same time, more than 10% of online orders are placed at the stores, often after shoppers have worked with Home Depot specialists to customize merchandise, such as patio furniture.

Home Depot customers still want a curated experience, unlike shoppers at Amazon.com, says Craig Menear, president of Home Depot's U.S. retail operations. He defines his goal as ensuring that the company creates "a more seamless connected experience for our customers, no matter how they choose to shop with us."

Home Depot also has opportunities to expand its best-in-class margins. Supply-chain improvements remain a work in progress, and the company expects additional initiatives to lift operating margins to 13% by 2015, from 11.6% now. That alone could boost operating earnings by more than 10%.

Home Depot's progress, and that of its shares, could stall if the housing market flat-lines or heads south again. Credit requirements remain exceptionally high, with an average credit-score requirement of 750 for mortgages sold to Fannie Mae, up from the usual 700, says Mark Zandi, the chief economist at Moody's Analytics. "The difference between 700 and 750 is about 12.5 million potential homeowners," Zandi says. "That credit box has to open. It's starting to happen."

That's all the more reason Home Depot's shares look cheap. Given the company's continued operating improvements and growth potential, investors can buy the house now for the price of the two-by-fours.

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Director's stock buy gives lift to Sears
By Alexia Elejalde-Ruiz
Chicago Tribune
April 18 , 2014

Shares in Sears Holdings got a big bump Thursday, closing up 14 percent after a regulatory filing disclosed that a director had bought 475,000 shares.

Shares ended trading at $38.33, notching their biggest gain in seven months.

Thomas Tisch, a members of Sears' board since 2005, purchased 375,000 shares Tuesday at $33.60 and 100,000 shares Wednesday at $33.40, according to a filing Thursday with the Securities and Exchange Commission.

The buy brings his personal holdings to 1.55 million shares, or about 1.4 percent of outstanding shares. That doesn't include another 2.7 million shares owned by Tisch's family, family trusts and foundations over which he exercises shared voting power, disclosed in a March SEC filing, which would bring his total beneficial ownership in Sears closer to 4 percent.

"Shares are likely up due to the news that a director bought a significant amount of shares personally," said Morningstar analyst Paul Swinand. "The market typically regards insider buying as positive, since arguably a director would have better information about the company than investors."

Swinand does not have a rating on Sears. Both Sears and Tisch declined to comment.

Tisch, a partner in New York City private investment firm Four Partners, is the son of the late Laurence Tisch, who helmed the CBS network and served as co-chairman and CEO of the Loews Corporation.

Hoffman Estates-based Sears lost $1.4 billion last year, part of a three-year slide that has resulted in $5.4 billion in losses since 2011. Chairman and CEO Eddie Lampert, who owns 48.5 percent of the company, has been closing stores and spinning off assets as he tries to reinvigorate the retailer.

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Wal-Mart Dives Deeper in Banking
By Paul Ziorro and Robin Sidel
Wall Street Journal
April 18, 2014

Wal-Mart Stores Inc. is WMT is taking another step deeper into banking, rolling out a new money-transfer service that undercuts rivals including Western Union Inc. and MoneyGram International Inc. The giant retailer on Thursday unveiled the new service, Walmart-2-Walmart, which will allow customers to send and receive up to $900 at a time at more than 4,000 stores. The new service applies only to payments that are sent and received in the U.S.

It aims to take a bite of the roughly $900 billion in so-called person-to-person payments made each year in the U.S., often in the form of cash or checks.

Shares in MoneyGram, which provides money-transfer services in Wal-Mart stores and said it was surprised by the move, fell 17.7%. Shares in Western Union dropped 5%.

The companies began their partnership in 2001, and MoneyGram's service currently is offered in 4,000 Wal-Mart stores in the U.S.

The new service brings Wal-Mart even deeper into the business of providing traditional banking services even though the company technically isn't a bank. The discounter has expanded rapidly in the financial-services sector since it withdrew an application for a special type of bank charter in 2007. The retailer's plan had received stiff opposition from banks and some lawmakers.

Wal-Mart offers check cashing, bill paying, money orders and tax-preparation services, as well as prepaid card programs, to its core low-income customers, many of whom are left out of the traditional banking system. The retailer still doesn't provide other key banking services such as taking deposits or making loans.

"This is a relatively easy service for Wal-Mart to develop, because it fits with the customer base that they already have, and they don't have to spend a lot of money to create, implement or market the service," said Ron Shevlin, a senior analyst at Aite Group, a consulting firm that specializes in the payments industry.

The service launches April 24. Wal-Mart said the service fees--$4.50 for transfers up to $50 and $9.50 for transfers up to $900--are 50% or more below the cost of existing offerings.

In its annual report filed with securities regulators, MoneyGram said Wal-Mart accounted for 27% of its total fee and investment revenue last year.

MoneyGram Chief Executive Pamela Patsley said on a conference call that she only heard about Wal-Mart's plans for the new service late Wednesday. The retailer had the flexibility to launch the product under a renewed contract signed in October 2012.

MoneyGram said Walmart-2-Walmart's service fees are 25 cents lower than what MoneyGram offers through Wal-Mart for transfers up to $50, and $2 less than MoneyGram's fee on transfers between $50 and $200.

MoneyGram said it isn't planning on cutting prices yet, but will keep an eye on how consumers respond.

"We will remain very measured, disciplined and targeted in our response to competition," Ms. Patsley said on the conference call with analysts Thursday.

Walmart-2-Walmart transfers will be capped at $900 and are only available at U.S. stores. That leaves room for MoneyGram to cater to customers who need to send larger sums of money or who need to transfer funds outside the U.S.

"MoneyGram continues to be a very valuable partner for us and our customers," Daniel Eckert, senior vice president of services for Wal-Mart U.S., said on a conference call. "We saw an opportunity to provide a simple and straightforward capability."

Western Union relies less-heavily on money transfers within the U.S.

U.S. domestic money transfers represented roughly 8% of Western Union's revenue in 2013, according to the company. "The company is well positioned in the U.S. domestic money-transfer space, having offered a fee of $5 for $50 since 2009," Western Union said.

For its new service, Wal-Mart is partnering with Euronet's Ria Money Transfer subsidiary.

The money transfer business carries substantial regulatory burdens aimed at preventing money laundering. Wal-Mart has been registered with the Treasury Department's Financial Crimes Enforcement Network as a money-services business since 2011, according to FinCen's public database.

The move also could place Wal-Mart under the scrutiny of the U.S. Consumer Financial Protection Bureau, which was set up after the financial crisis to police the lending industry for abusive practices involving consumers. The CFPB already has proposed supervising nonbank providers of international money transfers.

A CFPB spokesman declined to comment on the Wal-Mart plan. A Wal-Mart spokesman said the company will comply with any applicable regulation issued by the CFPB or other regulatory bodies.

The vast majority of U.S. money transfers involve sending money overseas, according to payments experts. The U.S. is the largest sender of such payments, accounting for nearly one-quarter of the $529 billion in remittances that international migrants sent to their home countries in 2012, according to the World Bank.

In addition to competing with Western Union and MoneyGram, Wal-Mart also is taking on banks that allow their customers to transfer money to other customers. In 2011, J.P. Morgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. formed a joint venture to let people use their checking accounts to send each other money with an email address or cellphone number.

"The banks have failed miserably in capturing the person-to-person payments business," said Mr. Shevlin, the payments analyst.

-- Andrew R. Johnson contributed to this article.

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A Gloomy Outlook for Sears' Latest Spinoff
By Jacqueline Doherty
Barron's
April 14, 2014

Lands' End got off to an inauspicious start as a publicly traded concern. Shares of the sportswear and accessories retailer, which were spun out of Sears Holdings earlier this month, fell 17% last week, to a recent $26. They could head lower in coming months given stagnant revenue, additional expenses associated with the company's stand-alone status, and Lands' End's enduring connection to Sears. Hedge fund manager Edward S. Lampert, Sears' chairman, CEO, and controlling shareholder, owns 48% of both companies' shares.

The drop in Lands' End stock in its first week of regular trading could be due in part to technical forces. Investors who had sold short Sears shares might have purchased Lands' End in when-issued trading to avoid being short the stock, driving up the price, writes Gary Balter, a retailing analyst at Credit Suisse. When Lands' End started trading, buying demand from these investors ceased, while some Sears investors likely sold the shares they received.

A challenging operating environment is apt to keep the pressure on the retailer, which Sears bought in 2002 for $1.9 billion in cash. (It's now valued at $830 million.) Lands' End posted revenue of $1.56 billion in the fiscal year ended on Jan. 31, down from $1.59 billion in fiscal 2013 and $1.73 billion in fiscal 2012. Internet and catalog sales account for 83% of revenue, with Lands' End boutiques in Sears stores, and 16 stand-alone stores, contributing the rest.

Land's End

Sears sales have been declining for several years, and losses have been accumulating, prompting the company to sell or spin off operations to raise cash and unlock shareholder value. Sears lost $1.4 billion in the fiscal year ended on Feb. 1, on a 9% drop in revenue, to $36.2 billion. Evan Mann, a senior credit analyst at Gimme Credit, figures the company will need to generate $500 million to $1 billion annually, via asset sales or equity or debt issuance, if operations don't improve.

The Lands' End spinoff follows the 2011 spinoff of Orchard Supply Hardware and the 2012 spinoff of Sears Hometown and Outlet Stores. Orchard Supply filed for bankruptcy protection last June, and sold most of its stores to Lowe's.

Barron's examined Sears' struggles in a skeptical story last fall ("Sears Rally Belies Big Worries," Oct. 14), when the shares were trading for $54.89. They ended last week at about $33. After accounting for the spinoff of Lands' End and its subsequent performance, Sears investors have lost 25% on their holdings since the story appeared. Sears and Lands' End both declined to comment.

Reworking the Numbers

Lands' End earnings were nearly flat last year after adjusting for costs it will incur as an independent concern. Sales declined.

Chart of revenue and income for Lands' End

Fans of Lands' End say the company will be able to sharpen its focus on operations now that it is independent, making it more likely that operating profit margins, currently 8%, could approach 12% in the future. After all, the company reduced selling, general, and administrative costs by 6.4% last year and 3.6% the prior year. Lower expenses helped produce a 58% jump in earnings in fiscal 2014, to $2.47 a share.

Yet, costs seem set to rise as a result of independence. Lands' End will incur $21 million to $23 million of annual interest expense on the $515 million it borrowed to pay Sears a $500 million dividend prior to the spinoff, says Matt McGinley, an analyst at ISI Group. In addition it will have incremental headquarters expenses of $8 million to $10 million, and $11 million to $13 million in expenses related to Sears' Shop Your Way customer-loyalty program, he figures. If earnings in the latest fiscal year were adjusted for these expenses, Lands' End would have earned $1.63 a share, McGinley calculates.

The shares trade for 16 times the reduced level, above the specialty-retail industry's average of 14.6. Analysts haven't published earnings estimates for the current year.

"So far, we have stayed away from Lands' End because they are still intertwined with Sears," says Ken Murphy, a portfolio manager at Standard Life Investments.

The Bottom Line

Lands' End has fallen 17%, to $26, since its spinoff from Sears. Shares could head lower if revenue and earnings disappoint, as seems likely.

Lands' End warns in its regulatory filings that Lampert's interests may differ from those of other shareholders, and that he is "expected to be able to exert substantial influence over us following the spinoff." His influence could affect the election of directors, the approval of mergers, and agreements between Lands' End and Sears.

Lands' End CEO and director Edgar Huber joined the company in 2011. Three additional directors out of six on the board have ties to Sears or ESL Investments, Lampert's hedge fund. Elizabeth Darst Leykum is a former ESL employee and founding principal of HEG Capital, an investment-advisory firm that provides services to ESL; Josephine Linden is also a director of Sears Hometown; and Jonah Staw is CEO of Staw Entertainment Enterprises, an advisory group with clients including Sears Holdings.

That Lands' End isn't calling its own shots is yet another reason for investors to shop elsewhere.

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Real estate won't save Sears shareholders
By Joe Cahill
Crain's Chicago Business
April 14, 2014

Investors hoping to float away on Sears Holdings Corp. real estate if its stores go under should re-evaluate their emergency exit plan.

Sears' 2,400-plus locations--mostly department stores in mid-tier regional malls and Kmarts in strip malls--are worth more to Sears than anybody else. They won't fetch top dollar if Sears shuts down its money-losing retail operations.

"Few buyers exist for the type of real estate (Sears) holds," analyst Matt McGinley of New York-based International Strategy & Investment Group LLC writes in a new report assessing the breakup value of Sears.

Mr. McGinley pooh-poohs the long-held belief in certain quarters that Sears real estate is a bulging treasure chest that CEO and controlling shareholder Edward Lampert could crack open if he can't keep the stores afloat. A spokesman for the Hoffman Estates-based retailer declines to discuss the report but notes the company raised $1 billion selling 20 stores last year and values its remaining real estate at $5 billion.

More like $4 billion, Mr. McGinley says. On a net basis, he figures Sears' properties and other assets are worth about $20 per share, 33 percent less than the current stock market price of almost $33. And that's only if Sears can fade away over 10 years or more, which would require many of its cash-burning stores to stay open for a long time.

"That, however, is a very unlikely scenario as it is exceptionally difficult to liquidate assets without accelerating the operating losses," Mr. McGinley tells me.

Shareholders could be wiped out altogether if Sears were to shut down abruptly and dump its properties onto the market in a single wave. Mr. McGinley figures the real estate value plunges to $977 million in a "forced liquidation." Combined with other assets, that wouldn't cover Sears' debts, which are increasing as it borrows more to offset losses.

A distress sale can't be ruled out. Sears stores consumed $1.1 billion in cash last year. If that continues, the stores will survive only as long as loans, asset sales and other outside funding sources are available.

Mr. McGinley contradicts rosier valuations, which range as high as $8 billion. But his numbers line up better with conditions in retail real estate generally and the characteristics of Sears and Kmart stores.

Demand for store space is slumping as major retailers such as J.C. Penney Co. and Best Buy Co. close stores and others curtail expansion plans. Real estate data tracker REIS Inc. in New York says regional mall vacancy rates have edged down from recessionary highs but still are up 41 percent over the past 10 years. Vacancies at strip malls like those Kmart occupies are up 44 percent.

"There aren't a lot of people looking to expand," says D.J. Busch, an analyst at real estate research firm Green Street Advisors Inc. in Newport Beach, Calif., which predicts that 15 percent of U.S. regional malls will be closed or repurposed for non-retail uses in the next decade.

Longer-term prospects grow dimmer by the day as shopping shifts from stores to online retailers. Green Street reckons traditional retailers are losing a percentage point of growth annually to the Internet.

Mr. Busch says the value of Sears' real estate is concentrated in about 145 stores located in higher-end "A" malls. He doubts Sears could get much for the remaining mall stores.

Then there's the sheer quantity of Sears properties, which represent about 2 percent of U.S. retail space. Putting all that space on the market "would likely depress retail property prices for years," Mr. McGinley writes.

And swamp shareholders in the process.

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Sears CEO Slices Off Assets, Leaves Less for Bondholders
By Suzanne Kapner
Wall Street Journal
April 7, 2014

Spinoff of Lands' End Is Latest Move in a Pattern That Could Affect Bondholders

Chief Executive Edward Lampert is carving out some of the best pieces of Sears Holdings Corp. for its shareholders, moves that could leave bondholders at risk if its remaining businesses continue to deteriorate.

The latest step in that pattern was Sears's spinoff of Lands' End, one of the crumbling holding company's few bright spots. Shares in the preppy clothing maker were distributed to existing Sears shareholders on Friday. Lands' End had net income of $79 million in the most recent year, compared with a loss of $1.4 billion for Sears Holdings.

All told, in the past 27 months Mr. Lampert, whose hedge fund owns nearly half of Sears's stock, has distributed to shareholders—through various means—assets and divisions valued at roughly $2.3 billion. They include Sears Hometown & Outlet Stores Inc. and a stake in Sears Canada in addition to Lands' End. There could be more to come. Sears is considering alternatives for its auto-repair shops and is looking into ways of cashing in on its remaining stake in Sears Canada.

"Sears is getting rid of all the good stuff and leaving bondholders with the underperforming assets," said Mary Gilbert, an analyst with Imperial Capital LLC, a boutique investment bank.

The retailer said the moves are aimed at unlocking value for shareholders, making it possible for them to pick and choose among the assets they want to hold, while also allowing the company to focus on running its core business.

That core business, which includes the flagship Sears and Kmart chains, has produced $5.4 billion in losses in the past three years. Much of the company's remaining value is tied up in its real estate, and estimates differ widely on what those properties are worth.

The company said it has plenty of resources to cover its obligations to bondholders. "Sears Holdings is an asset-rich enterprise, with significant financial flexibility and multiple resources at our disposal," said spokesman Chris Brathwaite.

The company's secured debt stood at $3.5 billion on Feb. 1. According to Ms. Gilbert, the collateral, which includes inventories and some receivables, has a value of $6.6 billion. (Sears also has $327 million in unsecured bonds, which have no claim on the collateral.)

The company had $1 billion in cash and $885 million in available credit on Feb. 1.

Not all bondholders think the spinoffs are a bad idea. "Sears needs cash, and if they raise money by spinning off assets that don't materially dilute the collateral, that is not something we view negatively," said Christopher Kocinski, an analyst with Neuberger Berman Group LLC, which owns more than $200 million in Sears bonds, according to publicly available information compiled by data provider Ipreo.

Others are less sanguine. "Bondholders should be very worried about what Eddie is doing," said Lesya Paisley, a portfolio manager with Aberdeen Asset Management PLC, who thinks the bonds are likely to fall in value. "Eddie is talking about fixing the company, but in reality he is engaging in financial engineering."

Mr. Brathwaite, the Sears spokesman, counters that, saying, "Our primary focus is on creating long-term sustainable value and increasing the return on assets....We are continuously evaluating our asset structure and whether specific assets and/or businesses are better managed within the current Sears Holdings asset configuration or outside it."

Claims that the company has plenty of collateral wouldn't be tested unless Sears finds itself in bankruptcy court, which no one thinks is imminent. The retailer's performance is getting worse, not better, however, which has invited closer scrutiny of the decisions it makes about its assets.

In a bankruptcy or liquidation, secured lenders get paid first, followed by unsecured lenders who don't have a direct claim on the company's assets. At the end of the line are shareholders, who typically get little, if anything.

The company's secured bonds were trading at around 92 cents on the dollar last week, about even with where they started the year, according to Markit, a financial-data firm. Investors are paying a lot to insure the unsecured bonds against default—about $1 million a year for every $10 million of debt. That is down from $1.1 million on Jan. 1, Markit said.

But the collateral has been shrinking, as Sears spins off assets and businesses and the remaining Sears and Kmart chains get smaller. Over the past two years, the collateral has fallen by $1.2 billion, according to Ms. Gilbert's estimates. The Lands' End spinoff will reduce that further. On Jan. 31, the unit had $370 million in inventory and $34 million in accounts receivables.

Sears's so-called second lien notes have added protection: If the collateral falls below the amount needed to cover the notes for two consecutive quarters, Sears is required to repurchase some of the securities.

Mr. Lampert is both a shareholder and a bondholder. His hedge fund, ESL Investments Inc., owns 48% of Sears. Those shares were valued at $2.6 billion on April 4. Sears stock is down by a third over the past three years. He and his hedge fund also own $95 million of Sears's secured bonds and $3 million of the unsecured notes.

The 51-year-old Mr. Lampert has proved adept at creating value for shareholders in the past. His hedge fund has notched annualized returns of more than 20% a year for 20 years, according to a person familiar with the situation.

Sears will get some benefit from the separation of Lands' End. Lands' End will pay a $500 million dividend when it leaves and will also pay rent on the 275 shops it has in Sears's stores.

Lands' End shares closed on Friday at $31.67, down 13 cents.

—Anupreeta Das contributed to this article

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Sears' State Street store to close Sunday
By Alexia Elejalde-Ruiz
Chicago Tribune
April 4, 2014

Sears will close the doors of its State Street department store on Sunday, ending a long chapter of poor sales for the Loop location and highlighting a growing trend away from brick-and-mortar shopping.

Sears first opened the store in 2001, after an 18-year break from downtown. Sears opened its first store in the Loop in 1932; that store was open for 50 years.

A liquidation sale in place since Sears announced the closure in January has left the store at 2 N. State St. mostly a wasteland. The baby clothes were the first to go, sales associates said. With just three days left before the official closing, a smattering of men's clothes, coffee makers and mattresses remained under bright signs touting discounts of at least 40 to 70 percent. A Craftsman lawn tractor is marked down to $749.99, a Kenmore washing machine is going for $845.99, glass cases full of fine jewelry are 85 percent off.

"I hate that it's leaving because it's part of history," said Tiffany Crusoe, 44, who in one hand carried a plastic Sears bag full of socks and video games she had bought at less than half price, and in the other a paper Macy's bag.

Crusoe, who lives on Chicago's South Side, has long been a fan of Sears for its variety, quality and guarantees, she said.

But Sears' sales have been sinking for years, and the five-level Loop store in particular has lost millions of dollars and performed poorly for most of its existence, spokesman Howard Riefs said.

Hoffman Estates-based Sears Holdings, which also owns Kmart, lost $1.4 billion last year, an even bigger dive than the $930 million it had lost the year prior. Chairman and CEO Eddie Lampert has been closing locations and selling or spinning off assets to raise cash and cut costs.

Sears, which is concentrating its efforts on its "Shop Your Way" loyalty program, will continue to operate on the fourth floor of the State Street building, where more than 150 people work in the online and information technology business units. The company has entered a new lease to occupy about 20,000 square feet of the fourth floor, with the option to build out the 30,000-square-foot balance of the floor for future business needs, Riefs said.

Chicago Public Schools is moving its headquarters into the building and will occupy the entire basement and second and third floors, plus parts of the first and ninth floors. There's no official word yet on who will jump into the rest of the prime first-floor space.

Rafael Rivera is among the 160 employees, most of them part-time hourly workers, who will lose their jobs with the store closing. Eligible associates will get severance and have the option to apply to open positions at other Sears and Kmart stores. Rivera, 43, hopes to get a job at the Sears at North Riverside Park Mall.

Rivera, who has worked as a sales associate in the tools department since the State Street store's opening, remembers the crowd of 50,000 that piled into the 250,000-square-foot store on opening day and the camaraderie that energized the team during its early years before Sears merged with Kmart in 2005.

"It was more of a family type of thing," Rivera said. "Through the years things changed. We still had some great people, but after a while they didn't put much intention into the downtown store."

Three Sears locations remain in the city of Chicago and 27 in the Chicago area. Sears Holdings has more than 2,400 full-line and specialty stores in the U.S. and Canada.

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Is it Time to Bet on a Makeover at Sears Holdings?
By Robert Hanley
The Motley Fool
April 2, 2014

Sears Holdings' management has been pulling a variety of different levers lately in the hopes of finding a winning formula to get the venerable retailer back on the right track. The company has been spinning off units and selling real estate while investing heavily in its Shop Your Way online shopping platform. In its latest gambit, Sears launched in-vehicle pickup at its stores in early February, a service it obviously designed with its online customers in mind. So, is it time to bet on Sears?

What's the value?

Despite the optimism surrounding the 2005 merger of Sears and Kmart, the combined company has generally disappointed investors, which is evidenced by very minimal stock price appreciation over the past five years. Consistent declines in overall sales and less productive stores have culminated in an unending string of operating losses for Sears, which is not a good situation for a company with hefty legacy obligations. While Sears has found some recent sales upside in its online channel, the increase hasn't been enough to offset weakness at its aging physical store base.

In fiscal 2013, Sears held true to the form of the past few years as it reported a 9.2% top-line decline that resulted from a comparable-store sales decline and a further shrinking of its physical store base. More importantly, the company's merchandise margin hit a new five-year low at 24.2% due to the double-whammy of a highly promotional selling environment and the margin-busting effects of its expanding loyalty rewards program. As a net result Sears posted a larger operating loss and weak cash flow, so it had to use financial engineering in order to fund its necessary capital expenditures.

Could Lampert actually be making the right moves?

While controlling shareholder and CEO Edward Lampert has been criticized for the lack of investment in Sears' physical stores, there are two good reasons why the strategy is probably the right move. First, Sears doesn't have the cash flow to fund a major capital improvement plan because it needs lots of funds to make inventory purchases and meet its annual obligations to pensioners. Second, major store upgrades don't always produce the desired outcomes, as indicated by J.C. Penney's recent travails.

As is fairly well-known, J. C. Penney installed a new management team and overhauled its stores in 2011 and 2012, which included the addition of branded shop-within-a-shop boutiques, in a bid to catch upscale department store kingpin Macy's. Unfortunately, the strategy failed miserably, and it led to sharp declines in comparable-store sales and the eventual exit of the architects of the strategy. While J.C. Penney's recent results have been better as the company has returned to its traditional private-label product focus and its highly promotional marketing schemes, the debt pile that J.C. Penney has amassed in its bid to get back on track has severely hobbled the company.

A better way to go

Of course, Sears' current makeover into a smaller, omni-channel retailer that primarily sells goods and services to its Shop Your Way loyalty members has no guarantee of long-term success. As such, most investors should avoid the unfavorable risk/reward proposition at Sears in favor of better positioned broad-line retailers, like Dillard's.

While Dillard's has had to wade through the same challenging retail environment as Sears does, it has been more successful in its store operations. This is evidenced by slight gains in both comparable-store sales and revenue growth in Dillard's latest fiscal year after an adjustment for the extra week in 2012. The company's merchandise margin similarly suffered because of a promotional selling environment during the period.

However, Dillard's maintained a stable margin by refocusing its product assortment on in-demand product categories with pricing power, like women's accessories and shoes. More importantly, Dillard's has kept its footprint confined only to areas where it can operate effectively as it has stores in only 29 states, which keeps a lid on its overhead costs and keeps its operating cash flow running at a level far above its necessary capital expenditures.

The bottom line

Sears' makeover is likely the right strategy for the company, but most investors need to avoid this icon until it finds its way back into the black. A better bet would be Dillard's, a retailer with strong insider ownership and a healthy financial profile, which stands ready to pick up stores from its shrinking national competitors.

Robert Hanley owns shares of Sears Holdings and Dillard's. The Motley Fool owns shares of Dillard's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Sears filing details plan to spin off Lands' End
By Robert Channick and Alexia Elejalde-Ruiz, Tribune reporters
Chicago Tribune
March 12, 2014

Casual clothing retailer will pay parent cash dividend of $500 million before split, will enter lease agreement for its locations

Casual clothing retailer Lands' End has moved one step closer to setting sail as a stand-alone company.

Sears Holdings Corp. filed an amendment with the Securities and Exchange Commission on Tuesday, further detailing plans to spin off its profitable Lands' End business, a relative bright spot in the struggling retailer's portfolio.

Though the spinoff date isn't set, Lands' End will pay Sears a cash dividend of $500 million before the spinoff, financed by a new term loan. Lands' End may also borrow up to $175 million for working capital, according to the filing.

Analysts say the cash dividend will help Sears reduce its debt, but they are skeptical that it will turn around the parent company's fortunes in the long run.

"They're kind of burning their table legs as kindling at this point," said Joe Cornell, principal of Chicago-based Spin-Off Advisors LLC. "It's a way for them to extract some value -- it buys time."

The Hoffman Estates-based Sears has seen its sales decline since billionaire hedge fund manager Edward Lampert combined Sears and Kmart in an $11 billion deal in 2005. In recent years, Sears has spun off Orchard Supply Hardware and Sears Hometown and Outlet stores, among other assets.

Lands' End, founded in 1963 in Chicago to sell sailboat hardware and equipment by catalog, is best known for selling casual clothing and home products to shoppers with an average household income of $104,000.

Sears purchased the company for $1.9 billion in 2002. Preliminary financials detailed in the amendment show that Lands' End revenue was relatively flat in fiscal 2013, coming in at $1.56 billion. Net income rose to $78.9 million for the year, up from $49.8 million in 2012, largely because of reduced payroll and restructuring costs incurred in 2012.

Despite Lands' End taking on new debt, its prospects may be brighter than its parent company's, according to Cornell, increasing its borrowing capacity and inviting investment as it separates from Sears. Lands' End will be publicly traded and will apply to be listed on the Nasdaq exchange, a condition of the spinoff.

After the tax-free distribution, owners of Sears Holdings will have an equal stake in Lands' End. Lampert's hedge fund, ESL Investments, owns 48.4 percent of Sears Holdings and will own the same percentage of Lands' End common stock, according to the filing.

Lands' End generates about 82 percent of its revenues through e-commerce and catalog sales.

The balance of its sales are through retail stores, most of which are located within Sears stores.

As part of the spinoff, Lands' End will enter into a lease agreement, initially paying Sears about $27 million in total annual rent for 253 locations. Most of the leases have four- to six-year terms, with the shop count dropping to about 102 locations by 2019, according to the filing.

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Obama to Delay Obamacare Again to Help Democrats in Midterms
By Melanie Batley
Newsmax
March 4, 2014

The Obama administration is expected to announce another delay to the implementation of Affordable Care Act to allow insurers to continue offering health plans that do not meet Obamacare's minimum coverage requirements.

The move would prolong the one-year "keep your plan fix" so as to avoid another wave of health policy cancellations which could hurt Democrats just weeks before the November midterm elections,The Hill reports.

"The cancellations would have created a firestorm for Democratic candidates in the last, crucial weeks before Election Day," The Hill said. "The White House is intent on protecting its allies in the Senate, where Democrats face a battle to keep control of the chamber."

The fix had been put in place late last year after an uproar erupted when millions of people discovered their existing plans were being cancelled under Obamacare despite the president's repeated assurances otherwise.

The administration has yet to confirm the policy change, but insurance sources told The Hill that a public announcement would be "imminent." The newspaper reports that it is unclear how long the extension would be, but one source believed it could last until the end of Obama's second term and possibly beyond.

This latest move would follow numerous other delays unilaterally decided by the president.

In July, the president announced a one-year delay until 2015 of the employer mandate which would have required businesses to provide health insurance to employees by Jan. 2014 or face a tax penalty.

In February, Obama changed the deadline again, moving it to 2016. The move provoked widespread criticism among Republicans who renewed their criticism that the healthcare law is a "train wreck."

Veteran GOP strategist Karl Rove commented at the time that the decision was a politically calculated strategy to save Democrats in the run-up to the elections.

"The president didn't want another avalanche of cancellations before this fall's midterm election," Rove said, adding that if millions lose their insurance plans shortly before the election, "the consequences would be disastrous for the president's popularity, and that of the congressional Democrats who loyally voted for the Affordable Care Act, sight and text unread."

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Outside Opinion: Brands give Sears hope
By Erik Gordon
Chicago Tribune
March 2, 2014

Retailer needs to get out of malls and into locations that can compete with Home Depot, Best Buy

Sears Holdings on Thursday reported it lost $1.37 billion last year as sales kept falling and the company closed stores. The results raised questions about the historic local company, which runs Sears and Kmart stores and dates its origins to 1886. We asked two professors to analyze Sears' future:

It's obvious that Sears has long-standing, deep problems, and the most recent results do nothing to change that sad reality. What is less obvious is that, in addition to the liability of too many too-big stores in malls that time has left behind, Sears has some valuable assets. Some really valuable assets.

Craftsman tools. That's a brand it would take a fortune to build. Home Depot sells Husky brand tools and Lowe's sells Kobalt tools, but neither name swings the weight Craftsman swings. And yet, market share is shifting to Kobalt and Husky because Craftsman tools are available in inconvenient stores in inconvenient malls.

Who wants to go to the mall to buy a lawn mower or a power drill? If Sears is going to have a bright future, it will have to get the Craftsman brand into outlets that compete with Home Depot and Lowe's for convenience.

Kenmore appliances. Another strong brand whose market share has been eroded by Home Depot and Lowe's, with Best Buy piling in.

When it comes to major appliances, people still trust the Kenmore name. They would buy more Kenmore washers, dryers, ranges and refrigerators if they didn't have to traipse through a mall to get to them.

Sears can get more out of Craftsman and Kenmore, as well as DieHard, by getting more distribution outside the mall. That doesn't mean the Internet. It means out in the neighborhoods where people live, at venues where parking is easy.

It's not just the mall that's clouding Sears' future. It's the stores themselves. They're too big for what does sell, and that means they are filled with stuff that doesn't sell.

Maintaining an inventory of merchandise that doesn't sell is a sure way to rack up losses. Having to staff or even patrol store space that produces low sales and profit per square foot adds to the losses.

Sears could actually make money if it focused on selling what it can sell at decent profit margins, in smaller stores that are more convenient to its core shoppers. That's a better bet than trying to become an e-retailer. Who is going to buy a dishwasher or drill bits over the Web?

Gordon teaches at the University of Michigan's law and business schools and is managing director of the Wolverine Venture Fund.

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Sears Game of Chutes and Ladders
Wall Street Journal
February 28, 2014

Sears Holdings results prompted stock-market cheers Thursday. But the applause may be short-lived.

The retailer said it lost $3.37 a share in the quarter ended Feb. 1, compared with a loss of $4.61 in the like period a year earlier, with domestic same-store sales falling 6.4%. That wouldn't normally count as good news. But after adjusting for a variety of items, Sears's per-share loss wasn't as bad as the two analysts still submitting estimates to FactSet (and who both have the equivalent of "sell" ratings on the company) thought it would be. Furthermore, Sears said February domestic same-store sales have been better than a year ago. Sears shares climbed 6.5% in Thursday's trading.

In considering that jump, it is worth noting just how volatile Sears shares are. Over the past year, they have registered 29 one-day swings in excess of 5%. By a standard volatility metric, Sears's share price has been about three times as shaky as shares of Target over the past three months. This really says something, given that Target was rocked by revelations of a data breach during that period.

There are two main reasons that Sears is so choppy.

First, a decision to buy Sears isn't like a decision to buy, say, in which an investor weighs the current price against the company's future flow of cash. Rather, it is a bet on the company's chances of turning around and surviving.

Sears shares act more like a stock option as a result, with the volatility to match. A handful of other retail stocks have this option-like characteristic: Witness J.C. Penney, which saw its shares shoot up 25% Thursday after reporting a slight profit in its latest quarter.

Second, there are relatively few shares of Sears available for trading. Of the company's 106 million shares outstanding, 53 million are controlled by Sears Chairman Edward Lampert directly or through his hedge fund. Another 24 million are owned by Fairholme Capital Management, the hedge fund run by Bruce Berkowitz. So it doesn't take much buying and selling to send Sears shares skittering.

The result is that Sears stock has become less a thing to invest in than a thing to trade, with plenty of risk therein. Meanwhile, Sears continues to lose money, and the underlying value of its assets remains uncertain. Unless they are thrill seekers, investors would be better off watching the Sears situation than playing in it.

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Retail earnings: Sears, JCPenney see paths diverge
By Corilyn Shropshire, Tribune reporter
Chicago Tribune
February 28, 2014

It's been a rough road for department stores in recent years, as cash-strapped, bargain-hungry consumers cut back spending and increasingly turn to their computers to do their shopping.

Two iconic brands, Sears and J.C. Penney, have been hit particularly hard and are trying to transform from relics to fresher, more nimble retailers that give shoppers what they want -- good prices and merchandise they can buy anytime, anywhere.

But results released this week suggest that while Sears continues to struggle, J.C. Penney is turning a corner.

Plano, Texas-based J.C. Penney posted its first quarterly profit in more than two years Wednesday. And it forecast higher annual revenue and expanded profit margins this year, benefiting from a return to the company's traditional discounting strategy and a revival of popular private-label brands.

Wall Street welcomed the change, sending its shares soaring more than 25 percent to $7.47.

Meanwhile, Hoffman Estates-based Sears Holdings Corp., which operates 128-year-old Sears and its sister chain Kmart, continued its downward spiral, reporting on Thursday a 13.6 percent revenue decline for the quarter that ended Feb. 1 and a $358 million loss even as it continues to build and tout its "Shop Your Way" membership-based rewards program.

"J.C. Penney has had turmoil, but the ship is getting righted and that's not happening at Sears," said Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based retail consultancy. "Sears used to stand like a colossus above the retail landscape and now it's a shadow of its former self."

Both chains cater to discount-demanding, middle-class consumers. But department stores, once a staple of the American shopping experience, are struggling, snaring only 2 percent of total retail sales, Johnson said. Making matters worse, retail spending is growing only 1.5 to 2 percent annually, experts say.

Penney's turnaround is more a matter of returning to its former playbook. Under direction of former chief Ron Johnson, the retailer attempted to reinvent itself by offering everyday low prices in place of discounts. Shoppers rebelled and sales slipped a total of 30 percent from fiscal 2009 to 2013.

To win back shoppers, the retailer in the past year ditched brands that were part of the failed reinvention but didn't catch on, such as Bodum and JoeFresh Kids, and gave more floor space to popular in-house brands such as St. John's Bay. Under direction of CEO Myron Ullman, the company has returned to its strategy of offering select discounts.

In the fourth quarter ended Feb. 1, the retailer reported same-store sales gains of 2 percent. It posted net income of $35 million, or 11 cents per share, compared with a loss of $552 million, or $2.51 per share, a year earlier.

Excluding certain items but including a pension cost, Penney had an adjusted loss of 68 cents per share during the quarter, while Wall Street was expecting a loss of 82 cents.

Sears, on the other hand, is struggling to find solid footing.

Sears on Thursday said it lost $1.37 billion last year as sales continued to fall as it closed stores in its transformation to a membership-based, online retailer.

The retailer's revenue plunged $3.7 billion, to $36.2 billion. The company blamed $1.1 billion of the revenue decline to having 93 fewer Sears and Kmart stores in operation. Another $1 billion of the decline was attributed to lower sales in stores open at least a year. The loss equated to $12.87 per diluted share.

In the all-important fourth quarter, Sears said it narrowed its loss to $358 million, or $3.37 per diluted share. That compares with last year's steeper losses of $489 million, or $4.61 per share. Revenue was $10.6 billion in what CEO Edward Lampert called the "tough-to-terrible" holiday season.

To preserve cash and fund further investment in Shop Your Way, Sears also has been selling off assets.

Last year, it announced plans to separate its Lands' End clothing brand and auto-service centers. Lampert expects those efforts and others to raise $1 billion this fiscal year.

Accordingly, Wall Street gave a positive, yet more tepid response to Sears, whose shares climbed 6.5 percent to $43.01.

In his annual letter to investors, employees and customers, Lampert wrote, "We have been investing hundreds of millions of dollars annually in our transformation and will continue to invest in the future of the company."

It made progress on that front last year, when some 69 percent of sales were generated through the Shop Your Way program, compared with 59 percent a year earlier. Online sales rose 10 percent for the year.

Some retail analysts would like to see more.

"I have great doubt that they will be able to grow Shop Your Way Rewards in a way that's meaningful enough to offset the huge operating declines they are experiencing in their retail operations," said Matt McGinley, managing director at International Strategy and Investment Group.

Credit Suisse analyst Gary Balter wrote in a note that the discounts offered by the Shop Your Way Rewards program have further reduced margins in a company that is already consistently losing money.

"If they'd moved to this type of model a decade ago when they had more cash...they might have offset these declines," McGinley said.

Reuters contributed.

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Sears Jumps as Loss Narrows to $358 Million on Cost Cuts
By Lauren Coleman-Lochner
Bloomberg
February 27, 2014

Sears Holdings Corp. (SHLD), the retailer run by hedge fund manager Edward Lampert, rose 6.5 percent after cost cutting and asset sales helped narrow its fourth-quarter loss.

The net loss in the quarter ended Feb. 1 shrank to $358 million, or $3.37 a share, from $489 million, or $4.61, a year earlier, the Hoffman Estates, Illinois-based company said today in a statement. Revenue fell 14 percent to $10.6 billion.

Lampert, who took over as chief executive officer a year ago, has invested in online capabilities and the Shop Your Way rewards program to reverse a sales decline that has now stretched for 28 straight quarters. He also has sold assets and sought to shrink the company's store base, saying retailers today need less square footage.

"Hope springs eternal that they can turn this thing around," Matt McGinley, a managing director at Institutional Strategy & Investments in New York, said over the phone today. "Anything good that comes out of this company is notable given how bad it's been for so long."

Sears rose $2.61 to $43.01 at the New York close after the company said that it's seeing positive comparable-store sales this month and that fourth-quarter profit in its Lands' End unit grew 43 percent.

Digital Investments

Lampert, who controls about 48 percent of Sears's shares, said in his annual letter to investors that the company's digital investments may pay off this year as customers looking to streamline their shopping take advantage of services such as drive-up merchandise pickup.

"We believe the changes we are making through Shop Your Way and integrated retail will benefit us in the changing retail landscape," he wrote. "Many of the changes that other retailers are making to survive today follow innovations that were either pioneered or significantly advanced in Sears and Kmart locations."

Lampert cited the growing portion of sales from Shop Your Way -- 72 percent in the quarter, compared with 58 percent a year earlier -- as vindication of a strategy to favor investing hundreds of millions of dollars a year in such programs over the "incorrect belief" that those funds should go into physical stores.

Still, other merchants are doing both, Mary Ross Gilbert, an analyst at Imperial Capital LLC in Los Angeles, said in a telephone interview.

"Every well-executing retailer has an omni-channel strategy, but they're not all putting up negative comps," said Gilbert, who has an underperform rating on the shares. She called today's results "more bad news than good news."

Asset Sales

J.C. Penney Co., by contrast, yesterday posted its first quarterly profit in more than two years. It forecast higher annual revenue and expanded profit margins, benefiting from a return to the company's traditional discounting strategy and a revival of popular private-label brands.

Sears's loss was at the wider end of the range of $250 million to $360 million that it forecast last month. Sales at stores open at least a year fell 7.8 percent at U.S. Sears locations and 5.1 percent at Kmart for a companywide 6.4 percent decline. Online sales for the entire year rose 10 percent.

Sears said it cut peak inventory by $620 million for the year, more than its $200 million goal, and reduced expenses by $200 million.

Less Liquidity

Still, the company's liquidity position "is much worse than what we had anticipated," said McGinley, pointing to availability on the company's domestic revolving credit line of $549 million, down from $1.4 billion a year ago.

As operations have consumed cash, Lampert has replenished Sears's coffers through asset sales, including $1 billion in real estate proceeds last year. Cash at year-end was $1 billion, counting the domestic total and Sears Canada, up from $618 million the previous year, the company said.

Actions such as a possible sale of the auto-center business and increasing the value of the Sears Canada investment may provide more than $1 billion in cash proceeds this year, Sears said.

Sears also said today that it expects to complete the spinoff of its Lands' End business this quarter and receive a $500 million dividend from the transaction.

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Sears trims losses despite 'tough to terrible' holiday quarter
By Phil Wahba
Reuters
February 27, 2014

(Reuters) -- Sears Holdings Corp said on Thursday its sales fell in a "tough-to-terrible" holiday quarter but store closures helped narrow its losses and it made progress in generating more sales via the loyalty program it is betting its future on.

The company, which has been trying to transform itself from a traditional store-focussed retailer, said it expects asset sales to generate $1 billion in cash this year, giving it a cushion while it tries to stanch its sales declines.

While overall sales fell 13.6 percent to $10.59 billion during the quarter, it said U.S. comparable sales were positive so far in February at its Sears and Kmart discount stores.

Shares rose 7.3 percent to $43.35 in pre-market trade, although the relatively volatile stock remains well below the 52-week high of $67.50 struck in November.

Sears said its comparable sales fell 7.8 percent at its namesake U.S. department stores, and 5.1 percent at Kmart for the quarter ended Feb. 1.

Gross profit margins at its two main chains shrank as it offered deep markdowns, particularly on electronics and clothing.

Chief Executive Officer Edward Lampert, a hedge fund manager who is also Sears' largest shareholder, acknowledged it was a "tough-to-terrible" holiday season.

ONLINE FOCUS

However, he said the season underscored the importance of his transformation plan to reflect changing shopping behavior.

"We build relationships with our members, anticipate their needs and serve them in the manner most convenient for them," Lampert wrote in a letter on Thursday to investors, employees and customers.

The retailer reported a net loss of $358 million, or $3.37 a share, in the quarter ended Feb. 1, compared to a loss of $489 million, or $4.61 share, a year earlier.

Sears is trying to move away from its traditional model to focus on one based on membership through its Shop Your Way program that also integrates online shopping.

It made progress on that front last year, when some 69 percent of sales were generated through the Shop You Way program, compared to 59 percent a year earlier. Online sales rose 10 percent for the year.

To preserve cash and fund further investment in Shop Your Way, Sears has been closing stores and selling off assets.

Last year, it announced plans to separate its Lands' End clothing brand and auto-service centers.

Lampert said he expects those efforts and others to raise $1 billion this fiscal year.

Rival chain Kohl's Corp reported a fourth quarter profit of $1.56 per share on Thursday, two cents better than expected, as leaner inventory levels limited the damage of deeper discounting during a competitive holiday season.

Kohl's has been trying to improve sales by bringing in new merchandise and improving its loyalty card.

"We're seeing signs these things are starting to work," said Edward Jones analyst Brian Yarbrough.

Kohl's said it expects comparable sales, which include e-commerce and sales at stores open at least a year, to be unchanged or rise as much as 2 percent, an improvement over last fiscal year, when they fell 1.2 percent.

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Sears Canada Reports Fourth Quarter Earnings and Full Year
Dow Jones Newswire
February 26, 2014

TORONTO /CNW/ -- Sears Canada Inc. (TSX: SCC) today announced its unaudited fourth quarter and full-year results. Total revenues for the 13-week period ended February 1, 2014 were $1,182.3 million versus $1,307.2 million for the 14-week period ended February 2, 2013, a decrease of 9.6%. Same store sales for the quarter, including an adjustment for the extra week last year, decreased 6.4%. Total revenues for the 52-week period ended February 1, 2014 were $3,991.8 million versus $4,346.5 million for the 53-week period ended February 2, 2013, a decrease of 8.2%. Same store sales for the year, including an adjustment for the extra week last year, decreased 2.7%.

Net earnings for the 13-week fourth quarter this year were $373.7 million or $3.67 per share versus $39.9 million or 39 cents per share for the 14-week fourth quarter of the prior year. Included in net earnings for the fourth quarter this year were pre-tax gains of $391.5 million related to early lease terminations and amendments, $66.3 million related to the sale of the Company's interest in certain real estate joint arrangements and $42.5 million related to amendments to post-retirement benefits. Also included in net earnings were pre-tax transformation expenses of $51.2 million, related primarily to severance costs incurred during the quarter. In the fourth quarter last year, there were pre-tax gains of $8.6 million related to the sale of the Company's interest in a real estate joint arrangement and $21.1 million related to the settlement of certain post-retirement benefits. There were also pre-tax transformation expenses of $12.6 million related primarily to severance costs. Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) for the 13-week period ended February 1, 2014 was $18.0 million versus $67.5 million for the 14-week period ended February 2, 2013.

Net earnings for the year ended February 1, 2014 were $446.5 million or $4.38 per share versus $101.2 million or 99 cents per share for the 53-week period ended February 2, 2013. Included in net earnings this year were pre-tax gains of $577.2 million related to early lease terminations and amendments, $66.3 million related to the sale of the Company's interest in certain real estate joint arrangements, and $42.5 million related to amendments to post- retirement benefits. Also included in net earnings were pre-tax transformation expenses of $72.9 million, related primarily to severance costs incurred during the year. Included in net earnings last year were pre-tax gains of $167.1 million related to early lease terminations and amendments, $8.6 million related to the sale of an interest in a joint arrangement, and $21.1 million related to the settlement of certain post-retirement benefits. Last year also included pre-tax transformation expenses of $12.6 million, related primarily to severance costs. Adjusted EBITDA for the 52-week period ended February 1, 2014 was $35.7 million versus $73.5 million for the 53-week period ended February 2, 2013.

Commenting on the fourth quarter, Doug Campbell, President and Chief Executive Officer, Sears Canada Inc., said, "The consecutive improvement in same store sales performance that we achieved through the first three quarters of the year and into November was negatively impacted in December, primarily by unusual weather which caused extended power failures and unsafe road conditions. This resulted in either the closure of malls where we operate or a reduction in our customers' ability to get to our stores. We felt the effects of this most notably in the few days leading up to Christmas. In December and January, the store hours we were closed as a result of power failures or weather totalled over 220 versus just under 40 for the same period last year. Despite this, we continued to have a positive quarterly same-store sales increase in our Apparel and Accessories business, but it was not enough to offset the impact felt in our Home and Hardlines businesses. Inventory continues to be a focus for us and we were successful in reducing our year-end inventory by $76.8 million versus the end of 2012 primarily through the management of clearance activity and the flow of receipts."

With respect to the full year, Mr. Campbell said, "This year we established and executed our strategy of creating maximum value through three levers: merchandising value, efficiency value and network value. While the early termination of certain leases brought us substantial gains in net earnings with which we are pleased, the management team is focused on providing Canadians with a value proposition that resonates effectively with customers who are seeking quality products at reasonable prices. We have taken steps to right-size the structure of the organization relative to the size of the business so, as we head into 2014, we can focus on putting into action the priorities we have identified that will help us serve Canadians more effectively, such as being in stock on fashion basics in every store in every size, expanding our online assortment and website capability, and marketing tactically to the customer segments we have identified as important for Sears.

"The Company has been through a significant period of change," continued Mr. Campbell, "and I thank our over 20,000 associates coast to coast for their support as we plan for the future of Sears Canada by taking steps today that will allow us to continue serving customers as a viable national retailer in stores and through our Direct channel now and in the years ahead."

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Lampert Seeks Real Estate Sizzle by Shearing Sears Name
By Lauren Coleman-Lochner
Bloomberg
February 25, 2014

Seritage Realty Trust's homepage seeks to dazzle prospective tenants with illustrations of gleaming retail properties featuring landscaped parking lots filled with cars and shoppers. Seritage promises visitors "the locations you need in virtually every major U.S. market."

It's not immediately obvious that Seritage is connected to Sears Holdings Corp. (SHLD), the department-store chain struggling to attract shoppers and shake off a reputation for dilapidated locations. The 200-plus Sears and Kmart stores listed on the Seritage website are part of an effort by Chief Executive Officer Eddie Lampert to raise cash and turn around the Hoffman-Estates, Illinois-based company.

Lampert has presided over 27 straight quarters of falling revenue, forcing asset sales to shore up cash reserves that have shrunk by more than half since January 2011 to $599 million at the end of November. The Seritage branding may be an attempt to burnish Sears's real estate, said Matt McGinley, managing director at International Strategy & Investments in New York.

"From a real estate standpoint, Seritage may seem to be a better brand than just saying, 'Here's a stodgy old Sears store,'" he said in a telephone interview. Analysts have valued the real estate portfolio at $4 billion to $7 billion.

Sears established Seritage in March as a separate legal entity with headquarters in Greenwich, Connecticut, Delaware incorporation records show. The unit is run by David Lukes, a former mall executive hired two years ago to the newly created role of president of real estate development.

REIT Speculation

Sears declined to say why the website doesn't identify its parent. Another real estate website, set up before Seritage, makes clear that it belongs to the company.

"Sears Holdings' strategy is to use the real estate we occupy productively," Howard Riefs, a Sears spokesman, said in an e-mail. "That means generating enough profit from our operations and, if we can't do that, deriving profit by using it in other ways."

Analysts including McGinley speculate that Sears may be planning to spin off Seritage into a separately traded real estate investment trust. REITs generate at least three quarters of their income from rents or interest on mortgages financing real estate. They pay no corporate income tax in exchange for paying out 90 percent of taxable income to shareholders through dividends.

While setting up the separate entity could be a precursor to creating a separately traded REIT, "there's not a whole lot of appetite" for a company with only one tenant in its portfolio, McGinley said. For example, mall operator General Growth Properties Inc. (GGP) has multiple tenants.

Ackman Proposal

Hedge-fund manager Bill Ackman urged Target Corp.'s (TGT) shareholders to support such a spinoff in 2008, saying an offering would raise $5.1 billion. Shareholders defeated the proposal. Before liquidating in 2008, department-store chain Mervyn's LLC separated its real estate portfolio into a REIT.

Asked if Sears planned to turn Seritage into a real estate investment trust, Riefs said no assets had been transferred to it, which companies typically do when creating a REIT. Lukes and Lampert were unavailable for comment, he said.

The website describes Seritage as a commercial real estate developer offering access to "mature suburban and urban markets." It highlights redevelopment projects such as a 14-acre mixed-use site in St. Paul, Minnesota, and posts fliers for each property showing maps, pictures and key stats such as average auto traffic and available parking.

Unlock Value

When Lampert merged Sears with Kmart in 2005, investors pushed the shares above $180, betting the hedge-fund manager was seeking to unlock value from the department-store chain's property holdings.

Sears owns or occupies about 2 percent of U.S. retail space, a considerable portfolio because the market is very fragmented, said Cedrik Lachance, a managing director at Green Street Advisors, a real estate research firm. By contrast, Macy's Inc. (M) controls about 1 percent, he said.

Lampert missed the opportunity to sell stores when the economy was stronger, McGinley said. The shares closed yesterday at $38.05 in New York, about a quarter of their value in the weeks after the merger. Sears rose 2.4 percent to $38.95 at 9:40 a.m.

Now, potential real estate buyers may simply wait for Sears's situation to get bleaker and prices to get cheaper, said Lachance, who is based in Newport Beach, California.

"They should have really whacked the underperforming stores a long time ago," said Dan Scouler, who runs Scouler & Co., a turnaround consulting firm based in Los Angeles. "They're going to have a tougher time selling their assets at a reasonable price."

Varied Appraisals

Appraisals of Sears's real estate portfolio vary widely. Baker Street Capital last year valued it at more than $7 billion. McGinley says Sears has already sold its best properties and says the portfolio is worth about $4 billion.

The year Lukes came on board, Sears sold 11 locations to General Growth Properties for about $270 million. In October, it announced the sale of five Sears Canada leases to Cadillac Fairview Corp. for C$400 million ($376 million).

The company has also sought tenants to rent parts of its stores, including a deal announced last month to sublease the second floor of its store in Pennsylvania's King of Prussia mall to Dick's Sporting Goods Inc. (DKS) Those properties weren't part of Seritage. Another sublease for a Nordstrom Rack in Thousand Oaks, California, is scheduled to open next year.

Such deals, however, have been scarce, Lachance said, and tend to be in premium spots such as South Coast Plaza in Costa Mesa, California, where Sears sublet to Forever 21. Only 23 percent of the company's Sears stores are located in so-called "A" malls where demand is highest, he said in a phone interview.

"The holy grail is to be able to repurpose the real estate in an orderly fashion, and in order to do that you need to be somewhat viable," Lachance said. "It's just not clear what's the strategic vision in regards to its real estate.

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Wal-Mart's Big Box Formula Comes Under Strain
By Shelly Banjo and Michael Calia
Wall Street Journal
February 21, 2014

Wal-Mart Stores, facing a sustained drop in store traffic, said it would accelerate its spending on its online presence and smaller-format stores meant to be more convenient for short shopping trips.

The company booked nearly half a trillion dollars in sales for its just-completed financial year. But Wal-Mart's big-box formula for success is under strain because of a change in shopper habits, as consumers increasingly go online to buy clothes and electronics, while heading to dollar stores and pharmacy chains to refill on basics.

The ramped-up spending on smaller stores and the Internet comes three weeks into the tenure of Chief Executive Douglas McMillon, who took the reins of the big-box retailer on Feb. 1. Mr. McMillon faces the challenge of turning around a streak of weak sales results in the U.S., as well as falling store traffic in key international markets such as China and Mexico.

The pressure was evident in Wal-Mart's financial results Thursday, when the world's largest retailer by revenue posted its fourth-straight decline in quarterly U.S. sales. The company's profit for its fiscal fourth quarter ended Jan. 31 fell 21% to $4.4 billion from $5.6 billion a year earlier, as revenue rose 1.5% to $129.7 billion. Sales for the full year rose to $476.3 billion.

To counter the reduced store traffic at Wal-Mart's signature superstores and win back shoppers from dollar chains and drugstores, the company plans to build more smaller-format stores that cater to customers making quick trips for food, prescriptions and gasoline. Customers also will be able to use the stores as pickup points for bulkier items such as televisions or trampolines they order online.

"The customer is coming to us for large shopping occasions," said Wal-Mart U.S. President Bill Simon. "Where we've slipped in traffic is the fill-in occasion, the midweek or smaller-basket-size trip, because of increased competition and the availability of products at our competitors."

While U.S. sales fell 0.6% in the year ended Jan. 31, excluding newly opened or closed stores, sales at the company's smaller, neighborhood markets rose 5%.

Wal-Mart also disclosed its online sales for the first time Thursday, saying they rose 30% to $10 billion last year, including acquisitions. "While it's small in comparison to total revenue, it's the fastest-growing part of our business," Wal-Mart Chief Financial Officer Charles Holley said.

The Bentonville, Ark., retailer said it would double the number of small stores it plans to open this year to about 300, bringing the total number of its small-format stores in the U.S. to roughly 650. Still that would account for just 14% of Wal-Mart's planned total U.S. store count of 4,500, and would remain well behind competitors.

Addressing speculation that Wal-Mart could acquire one of the dollar chains and achieve scale more quickly, Mr. Simon said the company currently doesn't see a suitable target. "While we always look at opportunities to acquire, it's hard to find what we need," he said.

Many of the dollar stores aren't equipped with gas stations, pharmacies or the ability to sell fresh and frozen food. "We would have to pay a premium for locations that aren't perfect and plow cash into retrofitting," he said.

Wal-Mart's smaller stores bring in anywhere from four to seven times the sales that dollar stores do, he said, so "we're able to build the sales with fewer physical footprints."

The move to focus on small stores and online sales marks a significant change in strategy by the retailer, which remained wedded to its 100,000- to 200,000-square-foot supercenters over the past decade.

On Mr. McMillon's first call with investors as CEO, he pledged to "invest aggressively in e-commerce" and urged Wal-Mart to be "more nimble and flexible as we operate our businesses to adapt to changes."

Wal-Mart said the investments will weigh on its profit this year. The retailer offered a weaker-than-expected profit forecast and said sales would increase 3%, at the low end of the retailer's earlier projections, because of numerous economic factors including reductions in government benefits, higher taxes, increased health-care costs and tighter credit.

One factor is the company, with 1.3 million U.S. workers, now expects to incur an additional $330 million in benefits costs during this fiscal year as the country's health-care overhaul has caused an influx of workers to sign up for its company health plan.

The CEO also will oversee a continuing internal investigation into possible violations of the U.S. Foreign Corrupt Practices Act in company operations in Mexico, China, India and Brazil. Wal-Mart expects expenses related to federal investigations into alleged violations of the antibribery law, as well as to an overhaul of its compliance systems, to surpass half a billion dollars by year-end.

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Emory Williams, longtime Sears executive, 1911-2014
By Graydon Megan, Special to the Tribune
Chicago Tribune
February 21, 2014

Retirement was about the only thing at which Sears, Roebuck & Co. executive and Chicago civic leader Emory Williams didn't excel.

Mr. Williams, who started at Sears in 1933 as a warehouse clerk, was the company's treasurer and chief financial officer when he retired for the first time in 1975. But he started the next day as head of what was then Sears Bank & Trust, an independent bank in what was then Sears Tower.

He retired from the bank in 1981, but soon after that became chairman of Chicago Milwaukee Corp.

He retired from there in 1985, but within a few years he and his son were at work in China, where they launched several manufacturing businesses.

According to his family, given China's respect for longevity, Mr. Williams was happy to celebrate his 95th and 100th birthdays in Beijing.

Mr. Williams, 102, died of natural causes Tuesday, Feb. 11, in his home in Hobe Sound, Fla., according to his daughter, Bliss Browne. He was a Florida resident but also had a home in Wilmette from 1973 until last year.

Mr. Williams remained active with Chicago-area civic and cultural organizations for many years. He became a trustee at the Ravinia Festival in 1972 and was a life trustee at his death, and had been a board member at the Adler Planetarium since 1969, also putting in a stint as chairman.

He was also a life trustee of Northwestern Memorial Hospital and of his alma mater, Emory University, where he established the Emory Williams Distinguished Teaching Award. He established a similar award at the University of Chicago Booth School of Business, according to his family.

Mr. Williams was born in Alabama and grew up in Mississippi. After graduating from Emory in Atlanta in 1932, he joined Sears as a clerk in Atlanta in 1933.

After serving in the Army Corps of Engineers in Southeast Asia during World War II, he returned to Sears. In 1958, the company transferred him from Atlanta to Brazil to run Sears operations there, according to his wife of 70 years, Janet, who said the next transfer brought the family to Chicago.

"He started Homart Development," Janet Williams said, of the Sears subsidiary that built regional shopping malls for Sears.

In 1975, Mr. Williams left his job as treasurer and chief financial officer of Sears to head the independent Sears bank. After six years there, he moved to Chicago Milwaukee Corp., then the operator of the Chicago, Milwaukee, St. Paul and Pacific Railroad with interests in several other industries.

Mr. Williams made many contributions to Chicago civic and cultural organizations.

"He joined the Ravinia family in the early 1970s," said Ravinia Festival President and CEO Welz Kauffman. Mr. Williams, who joined the board of trustees in 1972, served as board president from 1973 to 1978, then continued as life trustee.

"Very importantly, he -- with another trustee -- was responsible for the creation of our endowment fund in 1973," Kauffman said, adding that while major orchestras had begun to establish such funds, a fund for a festival organization like Ravinia was "rather rare."

"Through his leadership and his wisdom, he had the foresight to instill in our board and the women's board the desire to put this into play, knowing we'd need it, literally, for a rainy day," Kauffman said. The endowment, which began with a single donor's $1 million contribution, is now worth about $70 million.

Mr. Williams provided similar service to the planetarium, sitting on its board for about 40 years. He was also involved with other organizations, including the United Way of Metropolitan Chicago, and was the founding chairman of the board of the Chicago Chamber Musicians.

"He had a special love for music," Kauffman said. "He understood music's power and magic, especially for kids and especially for the underserved. It was very important for him that Ravinia live up to its mission of education and outreach."

"He believed that volunteerism was the keystone of democracy," Bliss Browne said of her father, "and that corporate responsibility was essential to a healthy society."

Other survivors include daughters Nelle Brown, Carol Schroeder and Janet Harrison; a son, Emory Jr.; 15 grandchildren; and 10 great-grandchildren.

Services were held.

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Mexico Delivers for Wal-Mart
By Amy Guthrie and Shelly Banjo
Wall Street Journal
February 20, 2014

Company Cracks Code for Speedy, Same-Day

Wal-Mart's Superama chain in Mexico uses mock stores and cheap labor to offer a service that is still cost-prohibitive in the U.S. -- same-day grocery delivery.

MEXICO CITY -- Wal-Mart Stores Inc. says it has cracked the code for speedy, same-day grocery delivery--in Mexico.

As retailers like Wal-Mart and Amazon.com Inc. AMZN in Your Value Your Change Short position rush to expand home delivery in the U.S. to groceries, the Bentonville, Ark., giant is looking across the border for help: Its high-end Mexican grocery chain, Superama, already delivers groceries in as little as three hours.

Wal-Mart has ramped up its global e-commerce operations over the past few years in hopes of catching up to online rival Amazon.com. Last month, global e-commerce chief Neil Ashe vowed to match Amazon's service offerings within two years. Currently, only about 2% of Wal-Mart's sales come from the Web.

But more than half of Wal-Mart's $466.1 billion in revenue last year came from groceries, which pose logistical hurdles that make them difficult to deliver to customers accustomed to picking out the ripest melon or juiciest tomato in stores.

Staking a claim to the online grocery business is crucial to Wal-Mart, and in Mexico the retailer has a giant head start, says Juan Carlos Garcia, head of e-commerce at Wal-Mart for Mexico and Central America.

"Our big bet at Wal-Mart de Mexico is that this is going to be a detonator for growth--that instead of seeing how to open more stores, we'll look to reach more clients by Web and via smartphone," Mr. Garcia says.

Wal-Mart stands to triple the number of stores offering grocery delivery in Mexico when it expands the Superama service to its Mexican Supercenters in

Online grocery orders are "the next frontier" for retail, says Francisco Chevez, an analyst at HSBC Global Research in New York. "Once you get people hooked, that's it," he adds.

Online groceries already make up a sizable chunk of Wal-Mart's Asda business in the U.K., where grocery delivery began more than a decade ago.

The company has been testing home-grocery delivery in Colorado and California, but it hasn't announced a timeline for taking the service nationwide. It is also experimenting with grocery delivery in such cities as Buenos Aires and Santiago, Chile, on a smaller scale.

Mr. Ashe told investors in October that Wal-Mart is "committed to being the online global leader in grocery delivery."

Mexico, one of Wal-Mart's largest foreign markets, provides $27 billion in annual sales and contributes 6% of the company's global sales. Superama helped Wal-Mart achieve a 92% market share in the home delivery of groceries in Mexico, company officials say.

The Mexican e-commerce team is advising Wal-Mart China on grocery delivery, figuring that practices in Mexico should work well there as both countries have a low wage base, very dense urban areas and low banking-service penetration.

One practice that could be exported from Mexico is the use of portable credit-card terminals for deliveries so customers don't have to enter credit-card information online, Mr. Garcia said.

Superama began home delivery in 1993--its motto is "Superama spoils you"--with managers taking orders for items like large bottled-water jugs by phone or fax. The firm created a call center to handle growing volume, followed by a Web page and a mobile application. Now, about a fifth of its grocery orders arrive via mobile-phone apps, computers and tablets.

The service is strongest in metropolitan Mexico City, where much of Mexico's wealth is concentrated. The capital's snarled traffic and cramped grocery stores make delivery from Superama appealing for the well-to-do. A growing number of dual-income families also opt for delivery to make better use of their limited free time.

"For me, going to the grocery store with three young children is complicated. This one wants this, another wants that. I finish tired and mad. With the delivery service I avoid the fights," says Mariana Marquez, a stay-at-home mom who orders online from Superama at least once a week in the State of Mexico.

Part of what makes the service successful in Mexico is the vast wage gap between wealthier customers and low-paid workers: A typical Superama-ordering household earns at least four times more than the store employee assembling each order, according to company officials.

Plus, most of the deliveries are made by freelance drivers, who get $1.50 per delivery, supply their own motorbikes or cars, and don't receive health or other benefits from the company. In the U.S. and the U.K., Wal-Mart uses its own delivery-truck service.

Superama figures its target market--households with incomes above $3,000 a month--represents at least 35% of the local population. It charges a delivery fee of $3 per order, compared with $5 to $10 in the U.S. and $4 to $8 in the U.K.

The majority of the grocery deliveries in Mexico come from supermarkets that are open to the public. But in the future, Wal-Mart de México plans to deploy more "dark stores"--former stores or other spaces used exclusively to fulfill online orders--as it does in the U.K.

Such stores are closed to customers and are often more efficient: Wal-Mart's inaugural dark store in Mexico City handles the same volume of orders as five Superama grocery stores combined that are open to the public.

Dark stores enable Wal-Mart to use cheaper real estate and forgo the fancy trappings that lure shoppers through the door. Unlike traditional stores, which tuck top sellers in the back to encourage meandering and impulse buys, dark stores place popular products within easy reach for employees gathering orders.

Ruth Juarez is what Superama calls a "picker," or personal shopper, a job that comes with a starting salary of $90 per six-day workweek.

On a recent visit to the Mexico City dark store, she scurried about at breakneck speed, armed with a list of seven items she had to collect within 11 minutes. She dropped a large package of toilet paper into her cart before heading for the fresh produce section, where she shoveled a dozen limes into a plastic bag. The task resembled a game-show challenge or a scavenger hunt.

The kicker came when Ms. Juarez had to inform the customer by phone that mangoes were out of season. Pickers often suggest substitutes and even ask whether customers want ripe avocados to eat that day or hard avocados that will last longer.

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J.C. Penney Employee Shares Devastating Photos Of The Iconic Department Store's Demise
The Huffington Post
February 19, 2014

J.C. Penney, once a powerhouse department store chain that anchored shopping malls across America, has fallen into a state of decay.

The retailer's stores aren't up to par, despite broad changes in recent months under new chief executive Mike Ullman, according to a 17-year veteran employee who spoke on condition he not be named for fear of retaliation by his employer.

The J.C. Penney employee shared a collection of photos with The Huffington Post, snapped in store visits around the nation, that reveal the deterioration of the once-mighty retail giant as it seeks to regain its former glory.

The images are defined by disorganized displays, broken signs, empty shelves and messy departments.

"What you'll see is that the J.C. Penney brand is going down the hill big time," the employee said. "Racks are messy, visual presentation is non-existent and [former CEO] Ron Johnson's 'shops' are not being kept up or filled with merchandise. It's sad to see the brand devalued."

View photos...

J.C. Penney did not respond to a request for comment.

At its peak in the 1970s, J.C. Penney boasted a fleet of more than 2,000 U.S. stores. In January, the retailer announced it was closing 33 stores and cutting 2,000 jobs. J.C. Penney currently has around 1,100 locations.

In recent years, J.C. Penney has endured crushing blows to its business. Ron Johnson, a former Apple retail executive lauded as the retailer's incoming savior, took the reins of J.C. Penney in 2011 and quickly implemented a torrent of new strategies, ridding the store of coupons and revamping physical stores with dedicated individual shops for new brands like Levi's and Joe Fresh. The results were catastrophic, sending J.C. Penney's sales and stock price plummeting, culminating with Johnson's ouster after 17 months at the helm. J.C. Penney reported losing $1.3 billion in 2013.

Ullman, the executive who ran the company before Johnson, was given back his job as CEO in April. Since then, Ullman has rolled back many of his predecessor's initiatives, plugging in old brands that Johnson ignored and reigniting sales and clearance

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Emory Williams, Retired Treasurer and CFO of Sears, Dies at 102
Chicago Tribune
February 14, 2014

Emory Williams Oct 26 1911 -- Feb 11 2014

Emory Williams, a Chicago businessman and civic leader, died in Hobe Sound, Florida on February 11. He was 102.

Mr. Williams, who maintained extraordinary mental acuity and appetite for work until the end of his life, had a career that spanned the 20th century.

He took a job at Sears Roebuck as a warehouse clerk in Atlanta in 1933, the depth of the Great Depression. Forty years later he was Treasurer and CFO of Sears, by then housed in the new Sears Tower. He "retired" from the company in 1975, but started work the next day as Chairman and CEO of the Sears Bank.

Following his second retirement in 1981 he became Chairman of Chicago Milwaukee Corp, from which he retired in 1986. He was a director of eight New York Stock Exchange listed companies.

His forty-year association with Sears coincided with the retailer's era of market dominance. He saw mass consumerism in America roar to life, shifting from mail-order catalogs to suburban shopping malls - many of which he built for Sears. He travelled and lived abroad for significant periods.

During World War II he was a lieutenant colonel under the command of Lord Louis Mountbatten, Supreme Allied Commander for Southeast Asia. He lived for three years on the grounds of a maharaja's palace in New Delhi, facilitating Allied supply chains to Burma and China. From Sao Paolo, he ran Sears's Brazilian operations in the late 1950s.

When he was over 80, he and his son Emory Williams launched a series of manufacturing businesses in China. He celebrated his 95th and 100th birthdays in Beijing, noting his love of a culture that venerates longevity. Mr. Williams' energy and generosity left a mark on the civic life of Chicago.

He served as President of the Ravinia Festival Association, Chairman of the Chicago Metropolitan Crusade of Mercy (now United Way), President of the Adler Planetarium, Chairman of the Chicago Chamber Musicians, and President of the Chicago Community Trust. He was a Life Trustee of Northwestern Memorial Hospital. He was a life trustee of Emory University, his alma mater, where he established the first Emory Williams Distinguished Teaching Award. From officers' messes in Ceylon to fundraising committees in Chicago he charmed any circle he entered.

For family and friends alike, he projected the force of authority with a voice of kindness, respect and wit. He is survived by Janet Allcorn Williams, his wife of 71 years, as well as five children: Nelle Temple Brown, Bliss Browne and Carol Schroeder all of Hobe Sound, Florida; Janet Harrison of Dallas, Texas and Emory Williams of Beijing, China; 15 grandchildren and ten great-grandchildren.

He raised his family in Winnetka, where he was a member of Christ Church. He passed away peacefully with all of his children surrounding him. A full, well-lived life ended with no ailment other than extreme age.

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Penney to Replace Finance Chief
By Suzanne Kapner and Joann S. Lublin
Wall Street Journal
February 14, 2014

J. C. Penney Co. said Kenneth Hannah will depart as its chief financial officer, amid a flagging turnaround effort by the struggling department store retailer. Penney named Stage Stores Inc. Chief Operating Officer Edward Record as his replacement, effective March 24.

Earlier this month, the company reported it failed to meaningfully improve sales in the fourth quarter, renewing fears about its prospects and sending its stock sinking.

The results raised questions about whether the company would be able to climb out of the hole caused by a failed overhaul under former Chief Executive Ron Johnson.

Mr. Hannah was a holdover from Mr. Johnson's team, having joined the company in May 2012. When Mr. Johnson was ousted in April, a number of his appointees left the company, but Mr. Hannah, who was widely respected by the financial community, stayed on.

Penney's shares were essentially flat in midday trading, changing hands around $5.95 a share. The stock has lost 70% of its value in the past year.

Like Mr. Johnson himself, Mr. Hannah commutes from out of state--he lives in St. Louis--to Penney's headquarters in Plano, Texas.

Mr. Record, 45 years old, served as the chief financial officer of Stage Stores, a regional department store chain based in Houston, before becoming COO. His deep retail experience--something Mr. Hannah lacked--makes him an asset in the company's longer term succession planning, a person familiar with the matter said.

Chief Executive Myron Ullman, who had been replaced by Mr. Johnson, returned to helm the chain last year, but he isn't expected to stay in the job for years, and the company has been looking for a successor.

Members of the board's search committee are nearly done screening the three leading candidates for that position, the person familiar with the matter said. But timing for completion of the actual search remains unclear.

Analysts said Mr. Record will almost certainly have to shore up Penney's financial position with additional borrowings this year.

"We believe JCP will need to tap capital markets in the near future," wrote Paul Lejuez, an analyst with Wells Fargo Securities, referring to the company by its stock trading symbol. Mr. Lejuez estimates that Penney will burn through as much as $1.5 billion of its more than $2 billion in available cash and borrowing ability over the next three quarters. "In our view," Mr. Lejuez continued, "JCP would have to raise $400 to $500 million to give themselves adequate cushion."

A Penney spokeswoman declined to comment on the CFO change, or the company's financial position.

Penney could negotiate with lenders to raise the limit on a revolving credit line to $400 million, which would give the company an additional $360 million in borrowing ability, according to Mary Gilbert, an analyst with Imperial Capital, a boutique investment bank.

Ms. Gilbert said the company also has the ability to raise more than $200 million from the sale of assets including joint ventures in some mall properties; a tire, auto and battery business; and 240 acres of land that adjoins Penney's Plano headquarters that the company recently said it would develop. Likewise, Ms. Gilbert said Penney has about $900 million of unencumbered real estate of which a portion could be sold and leased back to the company.

The additional financing is only one part of the equation, however. The company also has to show that it can increase sales that plunged by 25% during Mr. Johnson's first full year on the job and continued to drop until the most recent quarter.

"This year will be critical for them," Ms. Gilbert said. "They have to show traction."

Mr. Ullman has been trying to reverse some of the damage by rolling out discounts and bringing back popular house brands discontinued by Mr. Johnson during a failed overhaul of the struggling department store chain. But Mr. Ullman faces tough odds in a fiercely competitive apparel market, where even strong brands suffered sluggish growth at the end of the year.

In early February, Penney said sales excluding newly opened or closed stores increased 2% in the fourth quarter. The positive numbers were the first since the second quarter of 2011, but they didn't show enough improvement to overcome the deficit seen in the fourth quarter of 2012, when sales, adjusted for an extra week, fell 31.7%.

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Emory Williams, Sr., Former Chief Financial Officer of Sears, Dies at 102
Wikipedia
February 14, 2014

Born: (1911-10-26)October 26, 1911 Falco, Alabama
Died: February 11, 2014(2014-02-11) (aged 102)
Education: Emory University
Occupation: Corporate executive and civic leader
Spouse(s): Janet Williams
Children: Nelle, Janet, Bliss, Carol, and Emory, Jr.

Emory Williams, Sr (October 26, 1911 – February 11, 2014) was an American businessman. He was the former chief financial officer of Sears Roebuck during the 1960s, when Sears was the largest retailer in the world. He went on to become president and chairman of the Sears Bank, a Calicago lender (later acquired by Old Kent Bank), and the president and chairman of Chicago Milwaukee Corp, a railroad and real estate company, before setting up manufacturing businesses in China in the 1990s.

Williams served as a Director of the following New York Stock Exchange companies:

Armstrong Rubber Co. (acquired by Mark IV Industries)
Roper Corporation (acquired by General Electric Co.)
General Portland Cement Co. (acquired by Lafarge)
V.S.I. Corporation
Ft. Dearborn Income Securities (NYSE: FDI)
Chicago Milwaukee Corp. (acquired by Canadian National Railway)
Foote, Cone, Belding Communications, Inc. (acquired by Interpublic Cos.)
Bobbie Brooks, Inc.

Williams served as the President of the Chicago Crusade of Mercy (United Way), President and Life Trustee of the Adler Planetarium, President and Life Trustee of the Ravinia Festival Association, President of the Chicago Community Fund, Chairman of the Illinois Health Education Commission, Chairman-Finance of the Northwestern Memorial Hospital, Trustee of the Charles W. Kellstadt Foundation and as a Life Trustee of Emory University. He established the Emory Williams Awards for Excellence in Teaching at Emory University and at the University of Chicago Graduate School of Business.

Williams was born in Falco, Alabama, and grew up in Quitman, Mississippi. He was a member of the graduating class of 1932 from Emory University, where there is now a teaching award for academic excellence that bears his name. During World War II, Williams was primarily based in the South-East Asian theatre of World War II, working under Supreme Allied Commander for South East Asia Lord Louis Mountbatten.

Williams lived in Wilmette, Illinois and winter in Loblolly Bay, a private club in Hobe Sound, Florida. The youngest of his five children, Emory Williams, Jr., has lived and worked in China since the 1990s and is a member of Young Presidents' Organization and has also chaired the American Chamber of Commerce in China. His grandchildren include Olympic oarsman Jamie Schroeder. He turned 100 in October 2011 and died in February 2014 at the age of 102.

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Why Wal-Mart and Costco Will Thrive in the Retail Apocalypse
By Daniel Jennings, The Motley Fool
Daily Finance
February 10, 2014

Anybody who has taken a look at the financials for companies like Sears Holdings and Best Buy knows that the retail apocalypse is upon us. Large chains with storied histories are collapsing before our eyes.

For the record, Sears Holdings reported diluted earnings per share of -$14.11 and quarterly year-over-year revenue growth of -6.6% on Oct. 31. That was before the dismal Christmas sales figures were published. Best Buy, one of the few retail success stories out there and which achieved quarterly year-over-year revenue growth of 44.6%, saw its stock value collapse after disappointing Christmas sales figures.

These financials show that those pundits who predicted the retail apocalypse wouldn't occur were wrong. It's here, and it might be worse than you might think. As one of the more intelligent retail observers, the Fool's John Maxfield, has noted, the only thing keeping some of these retailers afloat is vendor credit in the form of consignment plans.

Basically, manufacturers give retailers merchandise that hasn't been paid for in the hope it will sell. The problem with such plans is that sooner or later the merchandise must be paid for whether it sells or not. If sales are bad, a company like Best Buy gets stuck with the bills and it can collapse quickly, as Circuit City did in 2009.

Why Wal-Mart and Costco will thrive in the retail apocalypse

The retail apocalypse is bad news for category killers such as Best Buy. These companies make money by being the cheapest place in town to buy one particular item, such as electronics. Yet it is very good news for two other big-box retailers: Wal-Mart Stores and Costco Wholesale.

Wal-Mart and Costco have resources a company like Best Buy cannot tap. They sell many products people cannot live without, such as food, soap, prescriptions, and underwear. People have to shop there regardless of the economy. More importantly, this gives them a steady stream of revenue that keeps coming regardless of the economy.

Another advantage that Wal-Mart and Costco offer is one-stop shopping. Their service is no better than Best Buy's, but a person only has to make one shopping trip. You can pick up your TV set or DVD player, a pair of socks, and laundry detergent at the same place. You don't need to go to Best Buy for electronics.

Part of the problem is that the public has figured out that Best Buy's prices are no better than Wal-Mart's, Costco's, or Sam's Club's (part of Wal-Mart). Better yet, you can get good prices on gasoline and eggs at those places.

Costco and Sam's Club lock customers in with the membership. Those who pay the $45 to $100 a year have an added incentive to shop at those stores.

Perhaps the biggest advantage that both Wal-Mart and Costco have is revenue. Wal-Mart Stores reported revenue of $475.1 billion on Oct. 31, and Costco Wholesale reported revenue of $106.5 billion on Nov. 30. Costco and Wal-Mart have a lot of money to fall back on. Their strategies are apparently working, even with dismal sales figures.

Costco and Wal-Mart will not only survive the retail apocalypse but they'll thrive because many of their competitors are going down the drain. They'll have less competition and be in a better position to wring concessions out of suppliers.

The Amazon.com threat

Okay, the outlook for these two retailers isn't perfect, because there's a big cloud on the horizon called Amazon.com. One of the main reasons why Best Buy's sales are so lousy is that many of its customers have figured out they can buy electronics for good prices at Amazon without having to go to Best Buy. Amazon.com is even mounting a direct challenge to Sam's Club and Costco with its own membership service, Amazon Prime.

Yet Wal-Mart and Costco are well placed to deal with this challenge; both companies have tremendous logistics resources that can easily be applied to online delivery. Sam's Club can ship office supplies to my house in just two days, and it doesn't charge for delivery on them. A Sam's Club membership costs $45 a year, and a Costco Gold Star or Business Membership costs $55 a year while Amazon Prime costs $79 a year.

Wal-Mart and Costco could very well emerge from the retail apocalypse bigger, stronger, and richer than ever before. The massive die-off of competitors will benefit them as traditional retail collapses.

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The article Why Wal-Mart and Costco Will Thrive in the Retail Apocalypse originally appeared on Fool.com.

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Sears Still Missing The Boat: 6 Ways The Brand Can Improve
By Walter Loeb
Forbes
February 10, 2014

Running a department store company is not easy -- as Eddie Lampert, the Chairman and CEO of Sears has found out in the 10 years that he has been in charge. Customer's loyalty is extremely fickle and there has been a major transfer of shopping to the Internet.

To shore up loyalty, Sears has the “Shop Your Way” membership program. It has also enhanced customer service by implementing a faster delivery service. Delivery is now within one to two days. That is what the Chairman feels is the answer -despite the fact that the company continues to lose sales momentum, customer loyalty, and customer awareness. The recent fourth quarter will report an estimated sales decrease of 7.5% which attests to the consumer's shift away from this once powerhouse retailer. It also decries the loss of customer loyalty. Sears reputation was built on service, value and quality. In the past, Sears' exclusive lines such as Die Hard batteries, Kenmore appliances and Craftsman tools were very special merchandise that consumers knew stood for quality. The luster is now gone, since Home Deport, Lowe's and other chains offer the same quality goods in a more updated environment with knowledgeable staff.

I examine here the core problems of the retail industry that Sears is part of. Some of the department stores like Sears and especially Kmart are becoming irrelevant. Irrelevant because they carry merchandise that other stores carry at lower prices; irrelevant because the stores have not been kept up and are unattractive -- some even dirty -- irrelevant because customer service is lacking since many associates have lost pride in their job and are not serving customers with helpful information and smiling.

I believe that the lack of friendly service at Sears and Kmart contrast with many other department stores that have pumped up the attitudes of associates. In addition, customer reward programs abound. Bloomingdale's Loyalist program, Nordstrom's Fashion Awards program and Macy's Rewards program are just some examples of how department stores are trying to keep their best customers coming back, either to stores or the Internet.

Customer traffic in malls has fallen off this year impacting most stores, but some are fighting back with new merchandising ideas. The department stores have an appeal to an older generation ranging from 40 years and older to 55 years and older. Rather than just aging with the customers, department stores are changing their look and making sure they have offerings that appeal to younger customers too. Nordstrom has added Top Shop products, a UK based branded retailer, in 48 stores and is trying some pop-up departments featuring unique specialty items and fashion. Macy's has expanded their shoe departments and added an athletic shoe franchise with Finish Line as a partner. Other stores, like Bloomingdale's are constantly changing their junior and contemporary floor offering the latest hot brands and trends.

Specialty stores in mall lack the momentum of the past because of lack of new fashion message (Lady Gaga does not wear much). Their youthful customer is more strapped, has less discretionary spending power, since electronic gear, school loans, and the occasional vacation have zapped their funds.

I believe that consolidation of department stores will continue in two ways. One will be the closing of unprofitable stores -- we have seen all major department and chain stores like Macy's, Kohl's, J.C.Penney, Saks Fifth Avenue, Nordstrom and Walmart close units. The other way will be the absorption of stores by other retailers. Names like Jordan Marsh, Marshall Field's Arnold Constable, and Montgomery Ward are gone. I believe there are some additional candidates for extinction around today, but perhaps not for long.

I do not believe it has to happen.

There are many ways that customer loyalty can be shored up and stores can survive. Here are some ideas:

1. Develop a strategy that includes satellite stores. These stores will allow for customer pick up and returns of merchandise purchased on the Internet. These more convenient stores should feature an edited assortment of merchandise. This omnichannel approach to business recognizes the need for order fulfillment and faster customer service.

2. Develop a prestige private label program that is featured in stores and on the Internet featuring exclusive higher quality merchandise.

3. Create special events that are not just price driven.

4. Use the loyalty card for special events.

5. Have fun days in stores. Here is an example that went over very well with customers: on opening night of the local opera company, Loeb Department Store (no relation) in Bern, Switzerland dresses associates in costumes. It creates a festive feeling, lifts morale, brings in traffic, and generates business for the local store.

6. Train associates to greet customers -- if possible by name. In the United States it is becoming a standard practice to have a greeter at the door. This is well received by arriving customers. In Germany security officers do not greet new customers--which is an opportunity for change.

Too bad Sears Holding's management is not doing these things. This is still a very large company with 798 Sears stores and 1221 Kmart units. Sales are just under $40 Billion. However, its Chairman Ed Lampert does not get it. The clock is ticking. I see a future for the company that will be even more difficult.

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Sears Holdings names chief of pharmacy business unit
Daily Herald
February 6, 2014

HOFFMAN ESTATES -- Sears Holdings has named Mark Panzer as senior vice president and president, Pharmacy.

Panzer most recently served as president and CEO of Pharmaca Integrative Pharmacy, Inc. In his new role with Sears Holdings, he will be responsible for the oversight and leadership of the company's Pharmacy business under the Kmart format, both in-store and online.

"Mark's breadth and depth of retail store operations, pharmacy and marketing experience make him an ideal fit to lead the Pharmacy business," said Edward S. Lampert, Sears Holdings Chairman and CEO. "Mark is an executive with proven success in blending wellness with innovative strategies to enhance members' healthy lifestyles supported by leading technology, similar to our Shop Your Way platform."

Prior to Pharmaca, Panzer held the position of senior executive vice president and chief marketing officer with Rite Aid Corporation from 2005 to 2008. He was named to the role after serving as the senior executive vice president of store operations from 2001 to 2005 with responsibility for both pharmacy and front-end operating results. Mr. Panzer's career includes 17 years with Albertson's, American Stores and Jewel Companies, serving in senior-level management positions in operations, marketing merchandising and real estate.

Panzer received a Master's of Business Administration in Finance from Loyola University -- Chicago and a Bachelor's in Business Administration from Northeastern Illinois University.

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Penney Posts Weak Sales Growth
By Suzanne Kapner and Ben Fox Rubin
Wall Street Journal
February 5, 2014

J.C. Penney Co. failed to meaningfully improve sales in the fourth quarter, renewing fears about the company and sending its stock sinking to just above $5.

Penney said sales by one key measure rose just 2% in its fiscal fourth quarter. The results, which exclude new and closed stores, fell well short of the 4% gain that analysts had been expecting and raised questions about whether the company would be able to climb out of the hole caused by a failed overhaul under former Chief Executive Ron Johnson.

Current CEO Myron Ullman has been trying to reverse some of the damage by rolling out discounts and bringing back popular house brands discontinued by Mr. Johnson. But Mr. Ullman faces tough odds in a fiercely competitive apparel market, where even strong brands suffered sluggish growth at the end of the year.

A year earlier, Penney's fourth-quarter sales, adjusting for an extra week, fell 32%. The increase reported Tuesday was the first since the second quarter of 2011, but it didn't indicate enough momentum to overcome the previous weakness.

Sales growth appeared to slow as the quarter progressed. Penney previously said sales were up 10% in November. That means December sales probably fell 2% and January sales likely dropped 4%, according to Goldman Sachs analyst Stephen Grambling.

Investors sent Penney's shares down 60 cents, or 11%, to close at $5.08 on the New York Stock Exchange. That left them down 44% this year.

Mr. Ullman did make good on his promise to reverse Penney's long sales slide with a fourth-quarter gain. The company also finished the year through Feb. 1 with cash and borrowing availability of more than $2 billion.

"The steady improvements in our business show that the company's turnaround is on track," Mr. Ullman said.

Analysts said the company would have to show far greater improvement if it is to emerge from its slump.

Charles Grom, an analyst with Stern Agee, called the results "unacceptable," given the weak comparisons a year earlier. Penney "needs the improvement to be much better than currently tracking and it is becoming increasingly critical that the company starts to see meaningful improvement if it is to survive as currently constituted," Mr. Grom wrote to clients.

Mr. Grom said Penney could be forced to raise cash by fall if results don't get better soon, otherwise it may have trouble stocking up on goods for the holiday season.

A Penney spokeswoman said the company's cash outlays would be far less this year than last, which should bolster the company's financial position. The company spent heavily last year to add in-store boutiques and renovate its home division said holiday sales were up but warned of a decline in sales for the quarter, in part because of bad weather in January.

Penney still is dealing with inventory left over from Mr. Johnson's tenure. Citigroup analyst Jenna Giannelli noted that inventory started the quarter up 12%, far outstripping the growth in sales during the period.

Mr. Ullman has warned that margins would likely be under pressure through the first half as Penney gets rid of that extra merchandise.

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Penney's Paper Chase Challenge for Investors
By Miriam Gottfried
Wall Street Journal
February 5, 2014

At J.C. Penney, bad news is worse news.

The retailer said Tuesday that comparable-store sales rose about 2% in the fourth quarter. That was better than the dismal 32% drop registered a year earlier, but not enough to persuade Wall Street that Penney is out of the woods. The stock closed down 11%.

That drop compounds a conundrum for Penney. Every time it reports bad news, it raises concerns about cash burn and the potential for a dilutive share issue. The resulting fall in the share price means that if Penney does ever need to raise money, it will have to issue even more shares to do so, intensifying any dilution.

Penney said it has total available liquidity of more than $2 billion and plans to cut capital spending to $300 million in 2014.

But the latest figures suggest comparable-store sales fell about 1% in December and 3.5% in January, according to Sterne Agee. Unless that trend reverses quickly, they estimate Penney could run short on cash by the third quarter of fiscal 2014.

Assuming a 10% discount to the current share price of $5.08, raising $1 billion before fees would mean issuing 219 million new shares, implying dilution of 42%. And don't forget Penney blindsided investors with a huge share issue only in September.

For Penney, the only sustainable way to restore its fortunes and cash flow is through stronger sales. But bolstering a flagging brand is hard to do when you are cutting investment. And cost savings from the 33 store closures announced last month amount to a wash because they are roughly offset by the gross profit lost from shutting them, according to J.P. Morgan Chase.

The stock may be off by almost half already this year. But this is one discount Penney investors should avoid.

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Sears And JC Penney: Bad Management Or Sign Of The Times?
Peter Andersen Contributor
Forbes
January 28, 2014

By now, institutional and individual investors are completely aware of the stresses that Sears Holding (SHLD) and JC Penney are going through. These icons of America--homegrown retailers--are looking like they may never recover the crowns they once wore.

The companies that once were praised by stock analysts are now greeted with headlines like "Which is Worse: JCP or SHLD?," "The End Might Be Near for JC Penney," and "Sears Treats Customers Like They're Total Idiots."

What happened? How did things get this way?

The popular opinion is that poor management has led to the demise of both companies. For Sears, that would presumably be Eddie Lampert, while Ron Johnson would be credited for running Penney aground. There is much evidence that this indeed could be the case for both companies. One simply needs to google both names and follow the development over the past two or three years. The damning narratives are all there to review, and it's very hard to deny that both executives may have chosen the wrong strategies to lead these companies.

The challenge was certainly there: How to propel a classic, branded company to compete among changing technologies without losing its original identity?

Quite simply, JC Penney tried to be something it isn't: a boutique retailer. That's a little like an astrologist trying to become an astronomer: it's not only too unrealistic, it's downright seeking a totally new identity. In this case the astrologist was Johnson, and it appears that he never conducted consumer surveys to validate his retail instincts. Fast forward two years later and Penney's outcome is very doubtful.

Sears is a little different. While Penney's now former CEO had substantial retail operating experience, Sears' CEO is a hedge fund manager with limited retail experience. Prior to Lampert's taking the title, there had been several other CEO's appointed and dismissed by him. He is similar to Penney's Johnson in that he tends to make strategic decisions based on intuition rather than referencing marketing research data.

I think it is too simplistic to explain away these two companies' current state by solely blaming their CEOs. Something more has to be working against their execution plans than just poor management.

Perhaps a systematic shift in the way consumers make purchases has exacerbated the situation. That is, could customers finally be using the Web more for their shopping needs? Total retail foot traffic, (a proxy for visiting the actual stores) for November and December has steadily decreased from 2010 through 2013. n 2010 ShopperTrak measured about 34 billion retail store visits versus about 18 billion for 2013.

And sales in stores were half of sales made by online transactions, so consumers were still buying--they were finally doing it differently. They are no longer physically going to the stores with the same predictability. The trend may surprise many because we seem to think that consumers are slow to accept Web-based retailing. Our instincts lead us to think that shoppers have to physically see and touch the merchandise before they buy. We have our reasons for this. Remember eToys? Back in the early 2000's most optimists thought Web-based retailers would take off, but wary shoppers eventually lost interest in buying toys through the Internet, and returned to the bricks-and-mortar stores.

It looks like that finally has changed, and the data supports it. New retail space opened last year has decreased sharply from the period 2000 to 2008. True, over recent years the trends are improving, but CoStar Group reports stores opened only about 44 million new square feet in 2013 versus more than 300 million back in 2008.

What does this say about the current state of Sears and Penney? I think that both stores are suffering from poor strategic decision making as well as being at the epicenter of changing shopping habits.

While the CEO's have been the lightning rods for the missteps, the latent new shopping habits have finally emerged and are forcing many retailers to face stressful decisions. This of course creates opportunity. Once upon a time cell phones were never going to replace rotary phones.

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Abercrombie Names Former Sears CEO Martinez Chairman
By Jennifer Booton
Fox News
January 28, 2014

Abercrombie & Fitch (ANF) separated its chairman and chief executive roles on Tuesday, naming former Sears CEO Arthur Martinez chairman, and abandoned its shareholder rights plan, a defense tactic designed to protect the company from unwanted takeovers.

The teen apparel company also appointed three new directors, expanding the board to 12.

Abercrombie CEO Michael Jeffries, who has served as chairman since 1996, will continue to serve as a director. He said he has long supported a "significant corporate governance" overhaul and is "confident" in Martinez's ability to lead Abercrombie as it executes strategic plans.

Martinez brings with him several decades of experience in leadership roles, including serving as CEO and chairman of Sears Roebuck and as vice chairman of Saks Fifth Avenue.

He currently sits on a number of boards, including American International (AIG) and IAC/Interactive (IACI), among others.

"I look forward to working with Mike, the other members of the board, and the management team to build on the company's brand positioning and global appeal, and create long-term value for shareholders," Martinez said.

The other two new directors are former Avon CEO Charles Perrin and Zale Chairman Terry Burman.

Shares of Abercrombie were up 4.65% to $36.21 in recent trade. The company earlier this month raised its full-year earnings guidance citing a smaller-than-expected drop in holiday sales.

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Why Sears Was Doomed in 1978
Business Insider
January 23, 2014

Sears, once America's golden retailer, is closing dozens of stores -- including its flagship location in Chicago -- to try and revive revenues.

The company's sales have been falling since 2005, but its problems may stretch as far back as the late 1970s, when Sears executives characterized the retailer as a reflection of Middle America's "concerns," "problems and faults."

"We are not a fashion store. We are not a store for the whimsical, nor the affluent," Sears executives wrote in an internal 1978 document obtained by Crain's Chicago Business. "We are not a discounter nor an avant-garde department store. We are not, by the standards of the trade press or any other group of bored observers, an exciting store."

The document was part of a forward-looking five-year plan, referred to as "The Yellow Book." Crain's republished its 36-year-old report on the plan this week after the company announced it would be closing its flagship store in Chicago.

When "The Yellow Book" was written, the retailer was in its heyday. Three out of four Americans shopped at Sears annually, according to the company.

Yet the company seemed resigned to let its competition take the lead.

"We are not a store that anticipates," executives wrote at the time. "We reflect the world of Middle America and all of its desires and concerns and problems and faults."

Rance Crain, president of Crain Communications Inc. and editor-in-chief of Advertising Age, wrote in 2003 that "By not anticipating, Sears allowed retailers such as Wal-Mart, Home Depot and Target to carve out gigantic chunks of its bread-and-butter business. By not anticipating, Sears has become an imitator, and one that has ceased to even reflect its once cozy world of Middle America."

Retail consultant Robin Lewis says the company continues to have a self-destructive view of itself today that has been perpetuated by CEO Eddie Lampert, who took over in 2005.

"The recent closing of another Sears store is just another play out of Eddie's long established playbook, the playbook of a brilliant financier on how to manage a company down, and ultimately into liquidation," Lewis said in an emailed statement following news of Sears closing its flagship location in Chicago. Lewis says Lampert has been selling off the company's assets "to generate cash which he can then invest somewhere outside of the retail businesses."

The company said it was closing the store due to its poor performance.

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The Incredible Shrinking American Retail Store
By Krystina Gustafson
Reuters - CNBC
January 23, 2014

Get ready for the next era in retail--one that will be characterized by far fewer shops and smaller stores.

On Tuesday, Sears said that it will shutter its flagship store in downtown Chicago in April. It's the latest of about 300 store closures in the U.S. that Sears has made since 2010. The news follows announcements earlier this month of multiple store closings from major department stores J.C. Penney and Macy's.

Further signs of cuts in the industry came Wednesday, when Target said that it will eliminate 475 jobs worldwide, including some at its Minnesota headquarters, and not fill 700 empty positions. Experts said these headlines are only the tip of the iceberg for the industry, which is set to undergo a multiyear period of shuttering stores and trimming square footage.

Shoppers will likely see an average decrease in overall retail square footage of between one-third and one-half within the next five to 10 years, as a shift to e-commerce brings with it fewer mall visits and a lesser need to keep inventory stocked in-store, said Michael Burden, a principal with Excess Space Retail Services.

"I believe we're going to hear a lot more announcements in the coming months," Burden said. It's "an indication that there is a shift in the retail environment and it's one that will continue."

January is typically a busy month for retailers to announce store closings. According to the International Council of Shopping Centers, 44 percent of annual store closings announced since 2010 have occurred in the first quarter. But this year's closings are likely indicative of a new trend, sparked by more and more shoppers turning to the Web, experts said.

This holiday, online spending increased by 10 percent on desktop devices--a number that will likely grow another 2 percentage points when factoring in the role of mobile devices, according to data tracker comScore. Paired with a compressed holiday shopping calendar and a spate of freezing weather across much of the U.S., online shopping contributed to a nearly 15 percent decline in foot traffic this past holiday season, according to ShopperTrak.

"Stores are making a long-term bet on technology," said Belus Capital Advisors analyst Brian Sozzi. "It simply doesn't make strategic sense to enter a new 15-year lease as consumers are likely to continue curtailing physical visits to the mall."

Sozzi said that after a profitable but below-expectations holiday season, the retail industry will face its second "tsunami of store closures across the U.S.," only a few years after what he called the "fire sale holiday season of 2008." During the recession, the number of shopping center vacancies rose by 5.5 percentage points to 11 percent, according to ICSC data, and has since recovered only 2.1 percentage points.

In addition to J.C. Penney--which announced last week that it will close 33 stores--there are about a dozen retailers that still have too many stores, Sozzi said. Among them: American Eagle, which needs to move some of its aerie lingerie locations into its main stores; Aéropostale, which is on track to close 175 stores over the next few years; and Wal-Mart, which has about 100 stores in the U.S. producing same-store sales declines deeper than 3 percent, Sozzi said.

As for Penney's, Wells Fargo analyst Paul Lejuez said that its store closures are a step in the right direction, but they barely scratch the surface of how many are needed. "With mall traffic trends very challenging and J.C. Penney facing its own significant company-specific issues, we do not believe a 1,000-plus store fleet is appropriate," Lejuez said in a research note. "In our view, the company needs to close several hundred stores to operate more efficiently, but that is not easy to accomplish overnight."

Retailers Need New Approach

That's not to say there aren't a number of young retailers who still have plenty of room to build their store base, Lejuez said. Among them: Lululemon and the fashion-forward Michael Kors and Vince brands, which both recently went public. Kors, which increased its store base by nearly 100 stores last year, is on track to open 50 U.S. stores in 2014.

In a separate note, Lejuez said that the ideal way for young brands to build a retail business today is very different than it was 20 years ago. These days, he said, it makes more sense for a retailer to have half the number of stores they once thought appropriate, and instead concentrate on a small store network and e-commerce business. This will take time to accomplish, however, as the vast majority of store locations are leased and not owned, making them harder to unload, he said.

"There is often a mismatch between the number of stores retailers operate today compared to how many they would choose to operate if they had to do it all over again," Lejuez said.

But it's not just the number of stores that are shrinking--it's also their size, said David Birnbrey, chairman of retail real estate advisory group The Shopping Center Group. As fewer shoppers buy items at the physical store, retailers don't require the same inventory levels to be kept in an attached storage room. By placing more of their stock in fulfillment centers, they can shrink their stores to cut back on commercial real estate expenses, Birnbrey said. Although retail rents are still well below where they were prior to the recession, they have begun to stabilize, and are expected to show a slight uptick in 2014, according to CB Richard Ellis.

"I think stores are typically downsizing right now, and I think they're doing it because they had unsustainable inventory levels," Birnbrey said.

Steering Clear of Traditional Malls

One big shift in store closings has come from retailers shying away from indoor malls, instead favoring outlet centers, outdoor malls or stand-alone stores. Although new retail construction completions are at an all-time low, according to CB Richard Ellis, the supply of new outlet centers has picked up in recent quarters. "There's no question that mall stores are closing quicker than open air, as far as the department stores," Birnbrey said.

Rick Caruso, founder and CEO of Caruso Affiliated, said at the recent National Retail Federation convention that without a major reinvention, traditional malls will soon go extinct, adding that he is unaware of an indoor mall being built since 2006. "Any time you stop building a product, that's usually the best indication that the customer doesn't want it anymore," he said.

But retailers aren't throwing in the towel just yet. Turning brick-and-mortar shopping into a retail experience was one of the main topics discussed at the NRF convention this month, with retailers brainstorming ways to integrate targeted mobile couponing and high-tech gadgets to entice shoppers who may have been lost to the Web.

"They're not giving up at all," Birnbrey said.

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Sears to close flagship Loop location in April
Chicago Tribune
January 22, 2014

Sears Holdings said Tuesday it plans to close its flagship location in the Loop this spring.

The troubled Hoffman Estates-based retailer will start its liquidation sale at the location at 2 N. State St. on Jan. 26 and shut its doors in April.

"The store has lost millions of dollars since opening and we can no longer continue to support the store's operating losses," a spokesman said in an email.

The store has about 160 mostly hourly employees, who will be given severance and the chance to apply for open positions at other Sears or Kmart stores.

The spokesman added that the store's closure is part of the company's ongoing effort to cut costs.

Chief Executive Officer Edward Lampert, the company's largest shareholder, has been shedding assets, selling locations and spinning off the smaller-format stores and part of the Canadian business amid a continuing sales decline. He's also investing in technology in hopes of stemming years of losses at Sears Holdings, which owns both Sears and Kmart.

"We don't make decisions to close stores lightly, and we know just how hard these decisions are on our loyal associates." Lampert said in a letter posted on Sears Holdings' website. "But we've also carefully studied where other retailers went wrong and how they failed to adapt to changes."

Lampert he believes Sears may serve customers better with less space and fewer locations and noted Macy's, Target and J.C. Penney are also adjusting their number of stores and locations.

Last year, Sears announced plans to separate the Lands' End clothing unit and its auto-service centers.

The company has been raising cash by selling stores and leases. Also on the block: the chain's automotive unit, a chain of more than 700 service centers offering repairs and routine maintenance such as oil changes.

While Sears has a storied history tied closely to Chicago's identity as a center of business, the business has been on the decline for years, unable to keep pace with discounters, big box retailers and traditional department stores.

Revenue at Sears Holdings, the retailer's parent, has fallen every year since 2005, when Lampert, a hedge fund manager and billionaire, merged Kmart and Sears in an $11 billion deal.

The company just ended another disappointing holiday season, failing to show the improvement over last year that many of its competitors did.

Sears will report full fourth-quarter results at the end of next month.

"Hopefully this company stabilizes and it can reach the long term strategy (Lampert) put in place," said Neil Stern, senior partner at Chicago-based retail consulting firm McMillanDoolittle. "But as you go though one disappointing year after another and one bad Christmas after another you begin to lose hope."

Michael Edwards, executive director of the Chicago Loop Alliance, said it's disappointing to lose the Sears flagship, but he said he thinks the property will get picked up by another retailer quickly.

"State Street is performing at the highest level that it has in decades," Edwards said. "Retail volume, retail sales, everything's up... There's real demand for retail space on State Street and those corners are even more valuable than the mid-blocks."

Chicago Public Schools is taking space in the building, moving its headquarters from 125 S. Clark St. as a cost-saving measure.

CPS will occupy the entire basement level, part of the first and ninth floors, and the entire second and third floors. CPS said the move to smaller digs will help it save $60 million over 15 years. Sears will keep some back office workers at the site.

The State Street store re-opened in 2001, spanning five floors of the building in the heart of the Loop after an 18-year absence.

The news of the State St. store closing was first reported by Crain's Chicago Business.

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Sears to Close Money-Losing Chicago Store Amid Sales Decline
By Lauren Coleman
Bloomberg
January 22, 2014

Sears will shutter the store at 2 N. State St. in Chicago's Loop business district in April, Howard Riefs, a spokesman, said today in an e-mail. The store employs about 160 mainly part-time staff and those eligible will receive severance and be able to apply for positions in the company's other stores in the Chicago area, he said.

"The store has lost millions of dollars since opening and we can no longer continue to support the store's operating losses," said Riefs.

The closing will end Sears's presence in Chicago's prominent shopping and business district as the retailer sells assets to cut expenses and raise cash. Sears's stock dropped the most in more than a year on Jan. 10, after it forecast a fourth-quarter loss and said sales during the holiday period dropped.

The company's departure from State Street further diminishes Sears's once-dominant presence downtown. The Sears Tower, the city's tallest building, changed its name to Willis Tower in 2009 after insurer Willis Group Holdings Ltd. moved in. The 40-year-old tower once housed the retailer's headquarters before it moved to its current location in Hoffman Estates.

'Fewer Locations'

"We very often need less space to serve our members better and we may need fewer locations as well," Chief Executive Officer Edward Lampert wrote in a blog posting today. "This is true of our competitors too."

Lampert, who is also Sears's largest shareholder, has been selling assets to shore up the company's balance sheet while focusing investments on its digital operations and Shop Your Way rewards program. Last year, Sears announced plans to separate the Lands' End clothing unit and its auto-service centers.

Sears rose 0.7 percent to $37.85 at the close in New York. The shares have declined 23 percent this year.

The company forecast a loss in the fourth quarter of $250 million to $360 million, or $2.35 to $3.39 a share, Sears said Jan. 9. That compares with a net loss a year earlier of $489 million, or $4.61 a share. Sales at stores open at least a year fell 5.7 percent in the current quarter through Jan. 6 at Kmart stores and 9.2 percent at U.S. Sears stores for a companywide decline of 7.4 percent, the company said.

Downtown Store

Sears will report full fourth-quarter results on or about Feb. 27.

The company's first downtown Chicago store opened in 1932 on State Street and 15,000 customers visited on opening day under a 72-foot long electric sign at the entrance, according to the company's website. Merchandise included tractors and tombstones.

The current store on State Street store opened in 2001, Riefs said. Sears will continue to lease space in the building's fourth floor where more than 150 employees work in its online and information technology units. Three Sears stores will remain within the city limits, Riefs said.

The retailer had 2,018 U.S. Sears and Kmart stores as of Nov. 2.

The store closing was reported earlier by Crain's Chicago Business.

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Sears to close flagship State Street store
By
Chicago Tribune
January 21, 2014

Sears will close its flagship store in the Loop in early April, a spokesman said Tuesday.

Most of the store's 160 employees are part-time hourly, but those eligible will get severance and be able to apply for openings at other local Sears and Kmart stores, the company said.

The store, which a Sears spokesman said "has lost millions of dollars since opening," will start liquidating merchandise on Jan. 26. The store opened about 13 years ago, on May 23, 2001, with $13.5 million in city tax increment financing support.

Sears will keep 150 employees who work in e-commerce and information technology on the fourth floor of the building at 2 N. State St., said spokesman Howard Riefs. The lease calls for those employees to occupy 20,000 square feet with an option to expand to 30,000 square feet.

The Hoffman Estates-based Sears, already reeling from years of sales declines and worsening financials, "can no longer continue to support the store's operating losses," according to the company's press release issued Tuesday. Sears said the store's operational performance "has been poor through much of its existence."

The store's closing is part of Sears' efforts to cut expenses and rely more heavily on its web-based sales and operations. The future of the store, which occupies the building's lower level and the first three floors, came into doubt in December when the Chicago Public Schools announced it was moving its headquarters into the building in the Fall to save money. CPS will occupy a ground-floor lobby entrance at 1 N. Dearborn, all of the second and third floors and a portion of the ninth floor for school board offices, for a total of 160,000 square feet, or about one-third its existing space at 125 S. Clark.

Sears Holdings, the parent company of Sears and Kmart, has suffered revenue losses every year since 2005, when company Chairman Edward S. Lampert, a hedge-fund billionaire, merged the two retailers. Lampert's supporters expected him to quickly sell off prime real estate, but he waited and instead sold off assets gradually. Sears' most recent spinoffs are its Lands' End apparel business and a chain of more than 700 auto service centers.

Analyst Gary Balter, in a note to investors titled "Sears Holdings Running Out of Options," again raised the question of Sears' future.

"If the (company's) assets have so much value, why does Sears Holdings continue to operate given it is losing about $1.2 billion per year through operations," he wrote in the Jan. 10 note.

Steve Koch, deputy mayor for economic development, said the city will work with Sears on the retailer's long-term plans and will help "in any fashion possible" as Sears determines the best future for its Chicago stores and its employees.

Marty Stern, board chairman of the Chicago Loop Alliance, said he's "sorry to lose" Sears and particularly sorry for Sears employees who have "lost jobs for the moment."

But Stern categorically denied that the troubled retailer's decision to pull up stakes is a long-term blow to State Street.

"I see this as the natural growth of a retail area. We're getting rid of a weaker retailer and replacing it with stronger ones," said Stern, executive vice-president and managing director of U.S. Equities Realty.

"All of the fundamentals of State Street are strong. Target is new. The Gap has expanded. There's a strong mix of tenants that attract purchasers. Office workers, students, people who live downtown and tourists all have made the State Street shopping district strong. Retailers want to be where the people are. To the extent there is retail space available after Sears vacates, it will be in great demand."

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J.C. Penney to Close 33 Stores, Cut 2,000 Jobs
By John Kell
Wall Street Journal
January 16, 2014

Retailer Sees Annual Savings of About $65 Million Starting This Year

J.C. Penney Co. is planning to close 33 underperforming stores and trim 2,000 positions, moves the department-store retailer said are necessary so it can focus on locations that .said the move to close 33 stores from its base of about 1,100 locations will result in annual savings of about $65 million beginning this year. The closings will result in the elimination of about 2,000 positions, and eligible associates who don't remain with the company will receive separation benefits packages.

The company expects to incur pretax charges of about $26 million in the fiscal fourth quarter and an additional $17 million in future periods due to the store closures

"As we continue to progress toward long-term profitable growth, it is necessary to re-examine the financial performance of our store portfolio and adjust our national footprint accordingly," said Chief Executive Mike Ullman III.

A Penney spokeswoman said the decision followed an analysis of store performance at the close of the year, adding that such reviews are commonly done by retailers around this time.

Penney said remaining inventory at the affected stores will be sold "over the next several months," with final closings to be complete by early May. The store closures don't affect a plan by the company to open a new store later this year in Brooklyn, N.Y.

Penney's moves come after rival Macy's Inc. earlier this month said it was laying off about 2,500 employees as part of a plan to cut costs and generate $100 million in annual savings, which helped Macy's issue an upbeat profit outlook for the new fiscal year.

--Serena Ng contributed to this article

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Retail Stocks: Smart Shoppers Can Still Find Bargains
By Jacqueline Doherty
Barron's
January 13, 2014

Holiday sales rose 3.4%, despite markdowns. Lean inventories can help Dick's, Home Depot, and Lowe's.

The Christmas tree has been dragged to the curb, the kids are back in school, and there are five extra pounds around your waist. Welcome to January, when retailers boast of their successes or confess their missteps. And this year, the stakes are particularly high because many retail stocks had a banner 2013, with the S&P Specialty Retail index, rising 38%.

Last week kicked off a retail roller-coaster ride, with strong holiday results from Macy's (ticker: M) lifting investors' spirits, which then were dashed by a weak fourth-quarter outlook from Target (TGT) and a bombshell from Sears Holdings (SHLD). Overall holiday sales rose 3.4%, year over year, according to Craig Johnson at Customer Growth Partners. That's modestly better than the 2.9% the firm had expected at the start of the season. Customer Growth Partners counts all retail sales--in store and online--except those for automobiles and auto parts, gasoline and fuel oil, and restaurants.

Macy's reported 3.6% sales growth over the holidays, but not all retailers saw gains. While there tends to be little correlation between holiday sales and results for the rest of the year, some trends at 2013's end might continue into 2014. Companies selling cold-weather gear, such as Macy's and Dick's Sporting Goods (DKS), should be well positioned with lean inventories as the year kicks off. And the need to spruce up homes could continue to help Home Depot (HD) and Lowe's (LOW), which were both up sharply last year.

Concerns remain, however. A deceleration in retail-sales growth from the 5% in the 2011 holiday season is worrisome, as is widespread discounting to entice shoppers into stores, and free shipping to get sales done online. Discounts of 40% and 50% weren't unusual, even before Santa Claus made his rounds. Just how many markdowns were planned and how many were driven by panic won't be clear until retailers report earnings in February.

ON THE PLUS SIDE, the cold weather moved hats, coats, and scarves out the door at full price at department stores and sporting-goods retailers. It also prompted runs on snowblowers at the two big home-improvement chains. Likewise, sales of home goods remained strong, up by mid-to-high single digits during the holiday season. The positive momentum should continue. Another plus: Williams-Sonoma (WSM) and TJX (TJX) both trade close to their 52-week highs, but their multiples are only slightly above average, despite their strong performances.

Macy's presumably benefited from demand for both cold-weather gear and home-related goods. So it isn't surprising that the company reported 3.6% sales growth over the holidays, compared with its year-earlier total. Macy's also announced plans to cut costs, which will lead to savings of $100 million per year. By the end of the week, its shares had rallied 4%, to almost $56, but they are still attractive with a multiple of 13, equal to the retailer's earnings growth rate.

Sears is a different story. It should have gotten a lift from home-goods sales, and its Lands' End division should have gotten a boost from cold-weather-gear orders and consumers' proclivity to shop from home. But the big chain stunned the market with a 9.2% decline in U.S. holiday sales. Sears shares fell 20% on the week, to $36.71, fulfilling our expectations that the company would have a tough time ("Sears Rally Belies Big Worries," Oct. 14, 2013).

On Friday, Target cut its fiscal fourth-quarter outlook and estimated same-store sales would fall 2.5%, below prior guidance for flat sales. Target stock fell just over 1% Friday to $62.61.

GAME CONSOLES WERE ON fire, particularly Sony's PlayStation 4 and, to a lesser extent, Microsoft's Xbox One. While that's good news for Sony (SNE) and Microsoft (MSFT), it's only modestly good for electronics retailers. Consoles have slim margins, and falling prices on the TVs they're used with hurt margins, too.

The Bottom Line

Holiday sales were up 3.4%, even in the face of deep holiday markdowns. Cold weather could boost Dick's Sporting Goods, Home Depot, and Lowe's.

Retailers catering to low- and middle-income consumers have had weak results, so their shares are cheap. Yet, if the economy continues to add jobs, these shoppers might benefit and open their wallets a bit.

That could be good for Target. Its shares were pummeled on news that a security breach had left some 70 million of its credit-card customers at risk of having information stolen. But the company "reacted very well and very fast," says Ken Murphy, a portfolio manager at Standard Life Investments, which owns the stock. Well off its high of $73, shares have a price/earnings ratio of 14 times this year's profit estimate.

Investors must be selective when shopping for retail names this year, but some bargains can still be found.

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Low-End Retailers Had a Rough Holiday
By Paul Ziorro and Suzanne Kapner
Wall Street Journal
January 10, 2014

Family Dollar, Sears Struggle as Lower-Income Customers Remain Under Pressure

Retailers such as Family Dollar and Sears had a rough holiday period as their lower-income customers remain under pressure.

Retailers catering to lower income consumers had a rough holiday.

Family Dollar Stores Inc. on Thursday lowered its full-year profit forecast and reversed course on strategy. It pledged to cut prices more deeply to win back shoppers, saying its economically challenged customers are under more pressure than ever.

Meanwhile, Sears Holding Corp. said sales at its Sears and K-Mart chains fell deeply from a year earlier, reflecting weakness in its customer base as well as strategic missteps by executives trying to reshape its business. Sears shares plunged 14% in after hours trading.

At a time when the outlook for the U.S. economy has brightened, the results show that the slightly rising tide isn't lifting all boats. Lower-income shoppers remain under pressure from tepid job growth, stagnant wages, higher payroll taxes and the loss of government assistance programs like food stamps.

More than half of Family Dollar's customers receive some sort of government assistance, and debates in Washington over federal spending are further denting confidence of its struggling customers, the company said.

"All of these factors have resulted in incremental financial pressure and reduction in overall spend in the market," Family Dollar Chief Executive Howard Levine said in a call to discuss earnings Thursday.

Mr. Levine noted a growing bifurcation of American households where higher income homes are enjoying the benefits of rising home and stock prices, while the lower end is just struggling to make ends meet.

Retailers have cautioned that the important holiday sales period was going to be a hard fought, zero-sum game that could hurt profits as rivals used heavy discounts to win market share. In November, Wal-Mart Stores Inc. warned sales would be flat through the end of January after reporting three straight quarters of poor sales and lowering its profit outlook.

Even retailers that target consumers in the middle market have struggled this holiday. Gap Inc., which had been clocking strong sales gains for much of last year, said Thursday that comparable-store sales increased a scant 1% in November and December. L Brands Inc., owner of Victoria's Secret and Bath & Body Works, said December same-store sales rose just 2% and lowered its earnings guidance for the fourth quarter.

Liz Dunn, an analyst with Macquarie Securities, summarized the results in a note to clients titled, "Holiday Nothing to Celebrate." Next week, the government will release retail sales data for December, in essence the final report card on the holiday season.

Sears's holiday results were striking. The company said sales over roughly the past two months, excluding recently opened or closed stores, fell 7.4%. Sales were dragged down by a 9.2% drop in its domestic Sears stores and a 5.7% decline at Kmart with weakness in traditionally strong areas such as tools and home appliances.

The company expects to lose $1.3 billion to $1.4 billion in the fiscal year that ends Feb. 1.

While Sears's customers tend to be lower income, the company is also suffering from self-inflicted wounds as Sears Chief Executive Edward Lampert works to transform the company from a brick and mortar retailer to a digital one.

Mr. Lampert, a hedge-fund manager who bought K-Mart out of bankruptcy in 2003, said in a blog post published Thursday that he was happy with the progress of the company's digital transformation, but noted those results have been overshadowed by the company's overall performance.

Meanwhile, Family Dollar is moving to improve its results by scrapping a promotions program that it says had allowed undiscounted prices to climb higher than what its shoppers could afford. The practice of discounting some items roughly every week also triggered costly logistics such as rearranging stores to better draw attention to items on sale.

"One of the things that is critical to our unique customer, who is absolutely living paycheck to paycheck, is standing for an everyday low price proposition is critically important," Mr. Levine said. "And what I am saying is, we have gotten away from that."

Three years ago, Wal-Mart had a similar realization after trying to implement a strategy of planned promotions. After a move to offer sales specials and discounts turned off customers, the retail company returned to its strategy of pushing down overall prices.

For its fiscal first quarter ended Nov. 30, Family Dollar said profit fell 2.8% to $78 million from a year earlier, while revenue rose 3.2% to $2.5 billion. Sales at stores open more than 13 months fell 2.8%. In December, Family Dollar said declines in same-store sales continued, falling 3%, primarily due to fewer customers.

Family Dollar lowered its forecast for full-year income and sales. Most of the sales growth will come from the opening about 525 new stores in the fiscal year, adding to its existing store count of about 8,000. Sales at existing stores are seen falling in the low-single digits.

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Sears Needs New Leadership Immediately, if Not Sooner
By Robert Weinstein
The Street
January 9, 2014

NEW YORK (TheStreet) -- J.C. Penney was a painful disaster for Bill Ackman and his hedge fund investors in 2013. Ackman had the right idea but the wrong retailer. What if, instead, he had set his sights on Sears Holdings? I think his plan to revitalize a failing retailer would have been genius with the right fit. Sears enjoys many competitive advantages compared to smaller competitor J.C. Penney.

One needn't look any further than each company's products to know that Sears has the greater potential. You probably can't name two principal household brands owned by Penney's, but Sears owns Craftsman, DieHard, Kenmore and others.

It's difficult to imagine now, but it wasn't that long ago that Sears was the largest American retailer, before it surrendered to Wal-Mart. Sears continued its slide towards irrelevance as Target, Best Buy, Ebay and Amazon surpassed the retailer in total merchandise sales.

Sears has the tools, but not the craftsman to get the job done. The company is missing the one element needed most: leadership focusing on customer service. Current CEO and chairman of the board Edward Lampert may have a keen grasp on business finance from his time at Goldman Sachs, but in retail and merchandising, he's a rudderless boat. Since 2010, Sears, a.k.a. the S.S. Going Nowhere, has drifted mostly lower, and losses continue to erode shareholder value.

It's time for new leadership at Sears. Someone with the skill set of Ron Johnson would make an excellent fit. After his time at Target in merchandising and at Apple, Johnson is well prepared to take the reins at Sears. At J.C. Penney, Johnson was fighting with one hand tied behind his back. Simply put, J.C. Penney doesn't have brand pricing power that he can monetize as effectively as he could at Sears. Unfortunately for shareholders and employees alike, Lampert's strategy was to bastardize valuable Sears brands to Kmart (also owned by Sears) in an attempt to increase sales.

There are better Kmarts, but in many locations, they're one small step away from flea market status. And TheStreet's Rocco Pendola and Brian Sozzi recently documented the mess at more than one location of Sears and J.C. Penney.

The problem faced by shareholders is that Sears Holdings isn't a financial company, it's a retailer. It appears this fact is lost upon the leadership. As desperate as the front line staff is to perform; they're not given the tools to succeed.

I highlighted a service issue that demonstrated how far the company is willing to allow a customer to fall through the cracks this summer. Sears's problem wasn't pricing, product knowledge, availability, or location. Sears's defects are logistics, customer service and procedure. It shouldn't take two hours to complete a sale for a storage unit and gas grill, and when the order gets screwed up, it shouldn't take several visits and phone calls to get it right.

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Pressure to Build in 2014 on Some CEOs
By JoAnn S. Lublin and Sara Murray
Wall Street Journal
January 2, 2014

Turnarounds Often Aren't Fast Enough for Investors

In some corner offices, the high-stakes job of CEO comes with even more pressure during the new year.

Shareholders and boards have become less tolerant of slow turnarounds. So, investors likely will turn up the heat on certain U.S. CEOs, demanding improved results. "The leash has been getting shorter every year for CEOs, and for new CEOs in particular," said Paul Winum, who runs the CEO succession practice at RHR International, a leadership advisory firm.

Several top bosses hitting their second anniversary on the job in 2014 may feel squeezed by impatient investors. Among them are Avon Products Inc.'s Sheri McCoy, Yahoo Inc.'s Marissa Mayer and Don Thompson at McDonald's Corp. Other chiefs, such as Michael Jeffries, head of Abercrombie & Fitch Co. since 1992, have had longer to prove their prowess.

Here is a look at six CEOs facing challenges this year:

Sheri McCoy of Avon Ms. McCoy has tried to bolster operations, halt a decline in sales, and resolve a long-running bribery probe since the door-to-door beauty company recruited her in April 2012. Avon's shares plunged 22% in a single day last fall after it disclosed U.S. regulators were seeking larger-than-expected penalties related to that probe and reported a third-quarter loss. In December, Avon pulled the plug on a $125 million overhaul of sales software that was in the works for four years.

"There is always tension around the pace of change in a turnaround," Ms. McCoy said during an Oct. 31 earnings call. But "parts of our business are stabilizing, and we are making progress toward our three-year financial goals,'' she added.

An Avon spokeswoman declined further comment.

Directors still support Ms. McCoy because "she is doing all the right stuff,'' said a person familiar with the company. Yet without strong signs of a turnaround, especially in its crucial U.S. market, investors and key board members may make their displeasure known this year, another informed individual predicted.

Michael Jeffries of Abercrombie & Fitch

Mr. Jeffries's vision for Abercrombie & Fitch--the brand designed for "cool kids"--isn't wearing well.

The clothing retailer's share price tumbled in 2013 as it struggled to keep pace with "fast fashion" rivals such as Forever 21. And Mr. Jeffries's comments about tailoring the brand to attractive people angered some shoppers. Still, the board renewed his contract for at least a year, spurning activist shareholder Engaged Capital LLC's demand that Abercrombie & Fitch replace its veteran leader.

This time, though, his contract comes with succession planning: new leadership slots to manage the Abercrombie & Fitch, Abercrombie Kids and Hollister brands. Analysts think Mr. Jeffries could boost same-store sales--and the stock price--if he cedes some control, lets strong managers diversify important brands and revamps marketing.

Otherwise, the company could become the next retail attraction for private-equity firms. "I wouldn't be surprised if we all wake up one day and someone does have a large stake in the company," said Susan Anderson, an FBR & Co. retail analyst.

"Mike and his team have developed a long-term plan that builds upon past successes, while targeting the specific challenges that the company faces today," commented Craig Stapleton, the board's lead independent director, when the board renewed Mr. Jeffries' contract.

A company spokeswoman declined further comment.

Marissa Mayer of Yahoo

Ms. Mayer is Yahoo's sixth CEO in five years, including two interim leaders, and has been attempting what many believe is an impossible turnaround.

Since she joined the Web company in July 2012, she has done 29 acquisitions, receiving kudos for some of them. She has reinvigorated staff morale. But Ms. Mayer hasn't yet delivered meaningful financial growth in its core advertising business. Yahoo's third-quarter profit dropped 13%. The Internet company lowered the full year revenue and profit outlook--after slashing those expectations three months before.

Yahoo's increased share price in 2013 mostly came from the perceived value of its equity stake in Alibaba Group Holdings Ltd., the China-based e-commerce giant that plans to go public in 2014, as well as its own stock buybacks.

Ms. Mayer "will be on the hot seat with investors over the next year," said Richard Clayton, research director of CtW Investment Group, an arm of labor federation Change to Win. Its union members' pension funds own about two million Yahoo shares, or less than 1% of the shares outstanding.

A Yahoo spokeswoman declined to comment.

Don Thompson of McDonald's

It was the year of Fish McBites, Mighty Wings and sluggish sales at McDonald's.

For a while, investors and analysts mostly blamed that slowdown on the economy. Now, they are taking a closer look at management, according to analysts. Under Mr. Thompson's command since July 2012, the fast-food giant unveiled a spate of new products from Mighty Wings to Egg White Delight McMuffins that not only failed to excite customers, they slowed down service.

The new year is likely to bring demands from Wall Street that Mr. Thompson jump-start sales and introduce hot new products. Intensified competition for breakfast customers could also pose a threat to one of McDonald's strongholds.

Wall Street is pushing for better results, but McDonald's values loyalty and Mr. Thompson's job is unlikely to be in jeopardy, industry analysts said.

"Don is the right leader--with the right leadership team of talented men and women--to drive McDonald's business," said a company spokeswoman.

Irene Rosenfeld of Mondelez

Some big stockholders at Mondelez, maker of Oreos, Cadbury chocolates and Ritz crackers, are eager for improved performance from Chief Executive Irene Rosenfeld.

Mondelez was created after the 2012 breakup of Kraft Foods Inc., which she previously ran. Despite a sie gain in third-quarter earnings, Mondelez tempered expectations for organic revenue growth for the full year. (Organic revenue growth strips out acquisitions, divestitures and foreign-currency effects.)

Relational Investors LLC, which owns 17.1 million shares, is disappointed with Ms. Rosenfeld due to Mondelez's low operating profit margin and other issues, according to someone familiar with the activist investment firm's viewpoint. Relational "is expected to increase its (Mondelez) pressure in 2014," this person said. "If [the CEO] does not hit her numbers during 2014, there will highly likely be calls for management and board changes.''

Activist investor Nelson Peltz in late October accused Mondelez of doing too little to cut costs and said it should be able to boost its operating income margin. His hedge fund, Trian Fund Management LP, began amassing a billion-dollar stake in Mondelez in 2013.

Citing efforts to expand margins and reduce costs, a Mondelez spokesman said, "We're well positioned to create superior shareholder value."

Edward Lampert of Sears

Edward Lampert's big shareholding gives him control of Sears Holdings Corp. but that doesn't mean his moves as CEO of the struggling retailer aren't drawing scrutiny.

Mr. Lampert, a hedge-fund billionaire with scant retail background, formed the company by merging Sears and Kmart in 2005. Having been chairman for years, he became CEO in February. But Sears continues to suffer from falling sales and cash-flow concerns. Sears has already sold off prime stores to raise cash and will spin off its Lands' End unit.

Mr. Lampert, who controls 48% of Sears, hasn't shown much interest in handing over the reins, even as his hedge fund reduced some of its Sears holdings in 2013. For analysts, that leaves little room for optimism.

"I just don't see a place for Sears or Kmart in the future of retailing," said Brian Sozzi, chief executive of Belus Capital Advisors, who has been particularly vocal in his criticism of the CEO.

A Sears spokesman declined to comment.

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